XFRA:A6Q Accuride Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-Q

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012.

OR
 
[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from __________ to ___________.

Commission file number 001-32483


ACCURIDE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware
61-1109077
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
   
7140 Office Circle, Evansville, IN
47715
(Address of Principal Executive Offices)
(Zip Code)

Registrant’s Telephone Number, Including Area Code: (812) 962-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o
 
         Accelerated Filer ý
 
Non-Accelerated Filero
 
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ý No o

As of August 1, 2012, 47,385,314 shares of Accuride Corporation common stock, par value $.01 per share, were outstanding.
 
 


 
 
 
 

ACCURIDE CORPORATION









ACCURIDE CORPORATION AND SUBSIDIARIES

             
   
June 30,
   
December 31,
 
(In thousands, except for share and per share data)
 
2012
   
2011
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 35,661     $ 56,915  
Customer receivables, net of allowance for doubtful accounts of $542 and $676 in 2012 and 2011, respectively
    106,352       90,001  
Other receivables
    8,326       8,074  
Inventories
    82,299       72,827  
Deferred income taxes
    7,675       7,675  
Prepaid expenses and other current assets
    5,715       4,657  
Total current assets
    246,028       240,149  
PROPERTY, PLANT AND EQUIPMENT, net
    288,776       271,562  
OTHER ASSETS:
               
Goodwill
    163,536       163,536  
Other intangible assets, net
    175,958       181,349  
Deferred financing costs, net of accumulated amortization of $3,273 and $2,419 in 2012 and 2011, respectively
    7,595       8,449  
Other
    2,399       3,817  
TOTAL
  $ 884,292     $ 868,862  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 83,584     $ 80,261  
Accrued payroll and compensation
    14,556       16,466  
Accrued interest payable
    12,480       12,503  
Accrued workers compensation
    5,388       4,936  
Accrued and other liabilities
    18,245       14,323  
Total current liabilities
    134,253       128,489  
LONG-TERM DEBT
    323,607       323,082  
DEFERRED INCOME TAXES
    22,379       21,001  
NON-CURRENT INCOME TAXES PAYABLE
    7,898       7,898  
OTHER POSTRETIREMENT BENEFIT PLAN LIABILITY
    77,176       76,563  
PENSION BENEFIT PLAN LIABILITY
    46,281       50,863  
OTHER LIABILITIES
    17,639       3,583  
COMMITMENTS AND CONTINGENCIES (Note 6)
           
STOCKHOLDERS’ EQUITY:
               
Preferred Stock, $0.01 par value; 10,000,000 shares authorized
           
Common Stock, $0.01 par value; 80,000,000 shares authorized, 47,380,967 and 47,286,768 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively, and additional paid-in-capital
    436,873       435,368  
Accumulated other comprehensive loss
    (34,461 )     (34,422 )
Accumulated deficiency
    (147,353 )     (143,563 )
Total stockholders’ equity
    255,059       257,383  
TOTAL
  $ 884,292     $ 868,862  

See notes to unaudited condensed consolidated financial statements.


 
 
ACCURIDE CORPORATION AND SUBSIDIARIES


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
(in thousands except per share data)
 
2012
   
2011
   
2012
   
2011
 
                         
NET SALES
  $ 268,783     $ 241,872     $ 538,301     $ 452,767  
COST OF GOODS SOLD
    243,958       219,428       491,376       413,033  
GROSS PROFIT
    24,825       22,444       46,925       39,734  
OPERATING EXPENSES:
                               
Selling, general and administrative
    15,233       13,984       30,097       29,833  
INCOME FROM OPERATIONS
    9,592       8,460       16,828       9,901  
OTHER INCOME (EXPENSE):
                               
Interest expense, net
    (8,658 )     (8,400 )     (17,403 )     (16,740 )
Other income (loss), net
    (436 )     233       (279 )     2,396  
INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS
    498       293       (854 )     (4,443 )
INCOME TAX PROVISION (BENEFIT)
    1,339       (107 )     2,936       392  
INCOME (LOSS) FROM CONTINUING OPERATIONS
    (841 )     400       (3,790 )     (4,835 )
DISCONTINUED OPERATIONS, NET OF TAX
          877             951  
NET INCOME (LOSS)
  $ (841 )   $ 1,277     $ (3,790 )   $ (3,884 )
Weighted average common shares outstanding—basic
    47,376       47,277       47,347       47,259  
Basic income (loss) per share – continuing operations
  $ (0.02 )   $ 0.01     $ (0.08 )   $ (0.10 )
Basic income (loss) per share – discontinued operations
          0.02             0.02  
Basic income (loss) per share
  $ (0.02 )   $ 0.03     $ (0.08 )   $ (0.08 )
Weighted average common shares outstanding—diluted
    47,376       47,442       47,347       47,259  
Diluted income (loss) per share – continuing operations
  $ (0.02 )   $ 0.01     $ (0.08 )   $ (0.10 )
Diluted income (loss) per share – discontinued operations
          0.02             0.02  
Diluted income (loss) per share
  $ (0.02 )   $ 0.03     $ (0.08 )   $ (0.08 )
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
                               
Foreign currency translation adjustments
    179       (28 )     (39 )     (147 )
COMPREHENSIVE INCOME (LOSS)
  $ (662 )   $ 1,249     $ (3,829 )   $ (4,031 )

See notes to unaudited condensed consolidated financial statements.


ACCURIDE CORPORATION AND SUBSIDIARIES

(In thousands)
 
Comprehensive
Loss
   
Common
Stock and
Additional
Paid-in-
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Accumulated
Deficiency
   
Total
Stockholders’
Equity
 
BALANCE at January 1, 2011
        $ 433,192     $ (8,561 )   $ (126,532 )   $ 298,099  
Net loss
  $ (17,031 )                 (17,031 )     (17,031 )
Share-based compensation expense
          2,397                   2,397  
Tax impact of forfeited vested shares
          (221 )                 (221 )
Other comprehensive loss:
                                       
          Pension liability adjustment (net of tax)
    (25,861 )           (25,861 )           (25,861 )
Comprehensive loss
  $ (42,892 )                                
BALANCE—January 1, 2012
            435,368       (34,422 )     (143,563 )     257,383  
Net loss
  $ (3,790 )                 (3,790 )     (3,790 )
Share-based compensation expense
          1,715                   1,715  
Tax impact of forfeited vested shares
          (210 )                 (210 )
Other comprehensive loss:
                                       
          Pension liability adjustment (net of tax)
    (39 )           (39 )           (39 )
Comprehensive loss
  $ (3,829 )                                
BALANCE—June 30, 2012
          $ 436,873     $ (34,461 )   $ (147,353 )   $ 255,059  

 
 


ACCURIDE CORPORATION AND SUBSIDIARIES

       
   
Six Months Ended June 30,
 
(In thousands)
 
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (3,790 )   $ (3,884 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation of property, plant and equipment
    19,921       19,188  
Amortization – deferred financing costs
    1,379       1,379  
Amortization – other intangible assets
    5,391       6,765  
Loss on disposal of assets
    171       444  
Provision for deferred income taxes
    1,395        
Non-cash stock-based compensation
    1,715       1,280  
Non-cash change in warrant liability
          (2,426 )
Changes in certain assets and liabilities:
               
Receivables
    (16,603 )     (48,594 )
Inventories
    (9,472 )     (16,415 )
Prepaid expenses and other assets
    (1,111 )     (5,388 )
Accounts payable
    7,064       24,121  
Accrued and other liabilities
    (2,663 )     (2,700 )
Net cash provided by (used in) operating activities
    3,397       (26,230 )
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (25,651 )     (22,577 )
Proceeds from sale of discontinued operations
    1,000       7,785  
Payments for acquisition, net of cash received
          (22,381 )
Net cash used in investing activities
    (24,651 )     (37,173 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Increase in revolving credit advance
          20,000  
Net cash provided by financing activities
          20,000  
DECREASE IN CASH AND CASH EQUIVALENTS
    (21,254 )     (43,403 )
CASH AND CASH EQUIVALENTS—Beginning of period
    56,915       78,466  
CASH AND CASH EQUIVALENTS—End of period
  $ 35,661     $ 35,063  
                 
Supplemental cash flow information:
               
Cash paid for interest
  $ 15,905     $ 15,501  
Cash paid for income taxes
    893       839  
Non-cash transactions:
               
Purchases of property, plant and equipment in accounts payable
  $ 4,702     $ 3,185  

See notes to unaudited condensed consolidated financial statements.


ACCURIDE CORPORATION
(AMOUNTS IN THOUSANDS, UNLESS OTHERWISE NOTED, EXCEPT SHARE AND PER SHARE DATA)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, except that the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  However, in the opinion of Accuride Corporation (“Accuride” or the “Company”), all adjustments (consisting primarily of normal recurring accruals) considered necessary to present fairly the condensed consolidated financial statements have been included.  Certain operating results from prior periods have been reclassified to discontinued operations to conform to the current year presentation.

The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.  The unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto disclosed in Accuride’s Annual Report on Form 10-K for the year ended December 31, 2011.

On January 31, 2011, substantially all of the assets, liabilities and business of our Bostrom Seating subsidiary were sold to a subsidiary of Commercial Vehicle Group, Inc. for approximately $8.8 million and resulted in recognition of a $0.2 million loss on our consolidated statement of operations in the six months ended June 30, 2011, which have been reclassified to discontinued operations.  Of the purchase price, $1.0 million was placed into a one year escrow securing the indemnification obligations of Bostrom to Commercial Vehicle Group, Inc.  During the six months ended June 30, 2012, the escrow was terminated and the Company received the full balance of $1.0 million from the escrow.  See Note 2 “Discontinued Operations” for further discussion.

On June 20, 2011, the Company entered into, and consummated the acquisition contemplated by, an Asset Purchase Agreement (the “Agreement”), pursuant to which the Company’s subsidiary, Accuride EMI, LLC (“Buyer”), acquired substantially all of the assets and assumed certain liabilities of Forgitron Technologies LLC (“Seller”), a manufacturer and supplier of aluminum wheels for commercial vehicles.  Pursuant to the Agreement, Buyer purchased the acquired assets for a purchase price of $22.4 million in cash.   This acquisition included an 80,000 square foot forged aluminum wheel manufacturing facility in Camden, South Carolina (“Camden”) and is consistent with the Company’s planned capacity expansion of its core aluminum wheel product line.

The Camden acquisition was accounted for by the acquisition method of accounting.  Under acquisition accounting, the total purchase price has been allocated to the tangible and intangible assets and liabilities of Camden based upon their fair values.  We finalized the fair valuation of net assets acquired, for property, plant, and equipment, intangible assets, and goodwill, during the fourth quarter of 2011.  In connection with the allocation of the purchase price, we recorded goodwill of approximately $1.1 million as shown in the following table:

(In thousands)
     
       
Purchase price (cash consideration)
  $ 22,381  
Net assets at fair value
    21,320  
Excess of purchase price over net assets acquired
  $ 1,061  



The purchase price allocation as of December 31, 2011 was as follows:

(In thousands)
     
       
Customer receivables
  $ 1,289  
Inventories
    816  
Prepaid expenses and other current assets
    101  
Property, plant, and equipment
    17,225  
Goodwill
    1,061  
Intangible assets
    3,400  
Current liabilities
    (1,511 )
Purchase price (cash consideration)
  $ 22,381  

On September 26, 2011, the Company announced the sale of its wholly-owned subsidiary, Fabco Automotive Corporation (“Fabco”) to Fabco Holdings, Inc., a new company formed and capitalized by Wynnchurch Capital, Ltd. in partnership with Stone River Capital Partners, LLC.  The sale concluded for a purchase price of $35.0 million, subject to a working capital adjustment, plus a contingent payment of up to $2.0 million depending on Fabco’s financial performance during calendar year 2012.  See Note 2 “Discontinued Operations” for further discussion.

Management’s Estimates and Assumptions – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Earnings Per Common Share – Basic and diluted earnings per common share were computed as follows:

                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(In thousands except per share data)
 
2012
   
2011
   
2012
   
2011
 
                         
Numerator:
                       
     Net income (loss)
  $ (841 )   $ 1,277     $ (3,790 )   $ (3,884 )
Denominator:
                               
     Weighted average shares outstanding – Basic
    47,376       47,277       47,347       47,259  
     Effect of dilutive share-based awards
          165              
     Weighted average shares outstanding - Diluted
    47,376       47,442       47,347       47,259  
                                 
Basic income (loss) per common share
  $ (0.02 )   $ 0.03     $ (0.08 )   $ (0.08 )
Diluted income (loss) per common share
  $ (0.02 )   $ 0.03     $ (0.08 )   $ (0.08 )

As of June 30, 2012, there were options exercisable for 221,541 shares that were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.  As of June 30, 2011, there were warrants exercisable for 2,205,882 shares that were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.  The warrants were exercisable at an exercise price of $21.00 per share and expired on February 26, 2012 unexercised.

Stock-Based Compensation –Compensation expense for share-based compensation programs was recognized as follows as a component of operating expenses:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
                         
Share-based compensation expense recognized
  $ 967     $ 698     $ 1,715     $ 1,280  

As of June 30, 2012, there was approximately $4.8 million of unrecognized pre-tax compensation expense related to share-based awards not yet vested that will be recognized over a weighted-average period of 1.3 years.
 


Income Tax –Under Interim Financial Reporting, we compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs. Other items included in income tax expense in the periods in which they occur include the cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment in the realizability of deferred tax assets in future years.
 
We have assessed the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Due to our recent history of U.S. operating and taxable losses, the inconsistency of these profits, and the uncertainty of our financial outlook, we continue to maintain a full valuation allowance against our domestic deferred tax assets.
 
Recent Accounting Adoptions

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, Presentation of Comprehensive Income.  The objective of this update is to facilitate convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”).  This update revises the manner in which entities present comprehensive income in their financial statements.  Entities have the option to present total comprehensive income, the components of net income, and the components of other comprehensive income as either a single, continuous statement of comprehensive income or as two separate but consecutive statements.  The amendments of this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The amendments in this update are to be applied retrospectively for all periods presented in the financial statements and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  This guidance amends U.S. GAAP to conform with measurement and disclosure requirements in IFRS.  The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, and they include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  In addition, to improve consistency in application across jurisdictions, some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way.  This amended guidance is to be applied prospectively and is effective for fiscal years beginning after December 15, 2011.  The Company adopted ASU No. 2011-04 effective January 1, 2012 and it did not have a material impact on our consolidated financial statements.
 
 
Note 2 – Discontinued Operations

The Company has reclassified certain operating results and the loss on sale transactions for Fabco Automotive and Bostrom Seating to discontinued operations.  The following table presents sales and income from operations attributable to Fabco and Bostrom Seating.

             
   
Three Months Ended June 30,
   
Six Months Ended June 30
 
(In thousands)
 
2011
   
2011
 
             
Net sales
  $ 6,318     $ 14,262  
                 
Income from operations
    877       1,111  
Income tax benefit
    (2 )     (1 )
Loss on sale
    (2 )     (161 )
Discontinued operations
  $ 877     $ 951  



Note 3 - Inventories

Inventories at June 30, 2012 and December 31, 2011, on a FIFO basis, were as follows:

(In thousands)
 
June 30, 2012
   
December 31, 2011
 
Raw materials
  $ 22,080     $ 18,727  
Work in process
    24,286       18,425  
Finished manufactured goods
    35,933       35,675  
Total inventories
  $ 82,299     $ 72,827  

Note 4 - Goodwill and Other Intangible Assets

The following represents the carrying amount of goodwill, on a reportable segment basis, as of January 1, 2012 and June 30, 2012:

(In thousands)
 
Wheels
   
Gunite
   
Brillion Iron Works
   
Total
 
Balance as of January 1, 2012
  $ 96,283     $ 62,839     $ 4,414     $ 163,536  
Balance as of June 30, 2012
  $ 96,283     $ 62,839     $ 4,414     $ 163,536  

The changes in the carrying amount of other intangible assets for the period January 1, 2012 to June 30, 2012, by reportable segment, are as follows:

(In thousands)
 
Wheels
   
Gunite
   
Brillion Iron Works
   
Corporate
   
Total
 
Balance as of January 1, 2012
  $ 138,575     $ 38,968     $ 2,997     $ 809     $ 181,349  
Amortization
    (3,953 )     (1,100 )     (82 )     (256 )     (5,391 )
Balance as of June 30, 2012
  $ 134,622     $ 37,868     $ 2,915     $ 553     $ 175,958  
 
 
The summary of goodwill and other intangible assets is as follows:

                   
(In thousands)
       
As of June 30, 2012
   
As of December 31, 2011
 
   
Weighted Average Useful Lives
   
Gross Amount
   
Accumulated Amortization
   
Carrying Amount
   
Gross Amount
   
Accumulated Amortization
   
Carrying Amount
 
Goodwill
        $ 163,536     $     $ 163,536     $ 163,536     $     $ 163,536  
Other intangible assets:
                                                       
Non-compete agreements
    2.0     $ 1,023     $ 470     $ 553     $ 1,023     $ 214     $ 809  
Trade names
          33,200             33,200       33,200             33,200  
Technology
    10.0       38,849       9,172       29,677       38,849       7,248       31,601  
Customer relationships
    19.9       129,093       16,565       112,528       129,093       13,354       115,739  
Other intangible assets:
          $ 202,165     $ 26,207     $ 175,958     $ 202,165     $ 20,816     $ 181,349  

We estimate that our amortization expense for our other intangible assets for 2012 through 2016 will be approximately $10.8 million for 2012, $10.6 million for 2013 and $10.3 million for each year from 2014 through 2016.



Note 5 - Pension and Other Postretirement Benefit Plans

Components of net periodic benefit cost for the three and six months ended June 30:

   
For The Three Months
Ended June 30,
   
For The Six Months
Ended June 30,
 
   
Pension Benefits
   
Other Benefits
   
Pension Benefits
   
Other Benefits
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
 
Service cost-benefits earned during the period
  $ 511     $ 385     $ 113     $ 130     $ 1,028     $ 769     $ 228     $ 259  
Interest cost on projected benefit obligation
    2,806       3,015       971       1,079       5,637       6,020       1,945       2,157  
Expected return on plan assets
    (2,957 )     (3,247 )                 (5,945 )     (6,482 )            
Amortization of net transition (asset) obligation
                                               
Amortization of prior service (credit) cost
    11       11                   22       22              
Amortization of (gain)/loss
    266             (8 )           536             (16 )      
Total benefits cost charged to income
  $ 637     $ 164     $ 1,076     $ 1,209     $ 1,278     $ 329     $ 2,157     $ 2,416  

As of June 30, 2012, $5.8 million has been contributed to our sponsored pension plans.  We presently anticipate contributing an additional $8.7 million to fund our pension plans during 2012 for a total of $14.5 million.  On July 6, 2012, The Moving Ahead for Progress in the 21st Century Act, which includes provisions related to pension funding stabilization, was signed into law.  We are currently assessing the impact that this law will have on our pension funding for the remainder of 2012.

Note 6 – Commitments and Contingencies

We are from time to time involved in various legal proceedings of a character normally incidental to our business. We do not believe that the outcome of these proceedings will have a material effect on our consolidated financial condition or results of our operations and cash flows.

In addition to environmental laws that regulate our ongoing operations, we are also subject to environmental remediation liability. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and analogous state laws, we may be liable as a result of the release or threatened release of hazardous materials into the environment regardless of when the release occurred. We are currently involved in several matters relating to the investigation and/or remediation of locations where we have arranged for the disposal of foundry wastes. Such matters include situations in which we have been named or are believed to be potentially responsible parties in connection with the contamination of these sites. Additionally, environmental remediation may be required to address soil and groundwater contamination identified at certain of our facilities.

As of June 30, 2012, we had an environmental reserve of approximately $1.5 million, related primarily to our foundry operations. This reserve is based on management’s review of potential liabilities as well as cost estimates related thereto. The reserve takes into account the benefit of a contractual indemnity given to us by a prior owner of our wheel-end subsidiary. The failure of the indemnitor to fulfill its obligations could result in future costs that may be material. Any expenditures required for us to comply with applicable environmental laws and/or pay for any remediation efforts will not be reduced or otherwise affected by the existence of the environmental reserve. Our environmental reserve may not be adequate to cover our future costs related to the sites associated with the environmental reserve, and any additional costs may have a material adverse effect on our business, results of operations or financial condition. The discovery of additional environmental issues, the modification of existing laws or regulations or the promulgation of new ones, more vigorous enforcement by regulators, the imposition of joint and several liability under CERCLA or analogous state laws, or other unanticipated events could also result in a material adverse effect.

The Iron and Steel Foundry National Emission Standard for Hazardous Air Pollutants (“NESHAP”) was developed pursuant to Section 112(d) of the Clean Air Act and requires major sources of hazardous air pollutants to install controls representative of maximum achievable control technology. Based on currently available information, we do not anticipate material costs regarding ongoing compliance with the NESHAP; however, if we are found to be out of compliance with the NESHAP, we could incur liability that could have a material adverse effect on our business, results of operations or financial condition.



At the Erie, Pennsylvania, facility, we have obtained an environmental insurance policy to provide coverage with respect to certain environmental liabilities.  Management does not believe that the outcome of any environmental proceedings will have a material adverse effect on our consolidated financial condition or results of operations.

As of June 30, 2012, we had approximately 3,474 employees, of which 672 were salaried employees with the remainder paid hourly. Unions represent approximately 2,014 of our employees, which is approximately 58% of our total employees. Each of our unionized facilities has a separate contract with the union that represents the workers employed at such facility. The union contracts expire at various times over the next few years with the exception of our union contract that covers the hourly employees at our Monterrey, Mexico, facility, which expires on an annual basis in January unless otherwise renewed. The 2012 negotiations in Monterrey were successfully completed prior to the expiration of our union contract. In 2012, we extended the labor contract at our London, Ontario facility through March 15, 2013.

Note 7 – Financial Instruments

We have determined the estimated fair value amounts of financial instruments using available market information and other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value.  A fair value hierarchy accounting standard exists for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs).  Determining which category an asset or liability falls within the hierarchy requires significant judgment.  We evaluate our hierarchy disclosures each quarter.

The hierarchy consists of three levels:

Level 1
Quoted market prices in active markets for identical assets or liabilities;
Level 2
Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3
Unobservable inputs developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

The carrying amounts of cash and cash equivalents, trade receivables, and accounts payable approximate fair value because of the relatively short maturity of these instruments.  The fair value of our 9.5% senior secured notes based on market quotes, which we determined to be Level 1 inputs, at June 30, 2012 was approximately $318.5 million compared to the carrying amount of $303.6 million.  The fair value of our 9.5% senior secured notes based on market quotes, which we determined to be Level 1 inputs, at December 31, 2011 was approximately $300.5 million compared to the carrying amount of $303.1 million.  The Company believes the fair value of our ABL facility at June 30, 2012 and December 31, 2011 equals the carrying value of $20.0 million.  As of June 30, 2012 and December 31, 2011 we had no other remaining financial instruments.



Note 8 – Segment Reporting

Based on our continual monitoring of the long-term economic characteristics, products and production processes, class of customer, and distribution methods of our operating segments, we have identified each of our operating segments below as reportable segments.  We believe this segmentation is appropriate based upon operating decisions and performance assessments by our President and Chief Executive Officer.  The accounting policies of the reportable segments are the same as described in Note 1, Summary of Significant Accounting Policies.

             
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
Net sales:
                       
Wheels
  $ 112,881     $ 102,927     $ 229,825     $ 194,436  
Gunite
    67,280       67,093       135,843       126,324  
Brillion Iron Works
    49,326       38,194       93,136       73,454  
Imperial Group
    39,296       33,658       79,497       58,553  
Consolidated total
  $ 268,783     $ 241,872     $ 538,301     $ 452,767  
                                 
Operating income (loss):
                               
Wheels
  $ 16,106     $ 12,136     $ 34,548     $ 23,624  
Gunite
    (1,875 )     3,793       (4,043 )     2,076  
Brillion Iron Works
    7,598       689       10,771       1,422  
Imperial Group
    (302 )     1,762       (821 )     2,891  
Corporate / Other
    (11,935 )     (9,920 )     (23,627 )     (20,112 )
Consolidated total
  $ 9,592     $ 8,460     $ 16,828     $ 9,901  

Current and prior period operating results from Bostrom Seating and Fabco Automotive were reclassified to discontinued operations during the three and six months ended June 30, 2012.  Excluded from net sales above, are inter-segment sales from Brillion Iron Works to Gunite, as shown in the table below: 

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
Inter-segment sales
  $ 8,874     $ 8,589     $ 17,730     $ 17,065  

   
As of
 
(In thousands)
 
June 30, 2012
   
December 31, 2011
 
Total assets:
           
Wheels
  $ 509,701     $ 509,829  
Gunite 
    204,424       188,053  
Brillion Iron Works
    67,818       63,216  
Imperial Group
    51,710       43,581  
Corporate / Other
    50,639       64,183  
Consolidated total
  $ 884,292     $ 868,862  

Note 9 - Debt

As of June 30, 2012, total debt was $323.6 million consisting of $303.6 million of our outstanding 9.5% senior secured notes, net of discount and a $20.0 million draw on our ABL facility. As of December 31, 2011, total debt was $323.1 million consisting of $303.1 million of our outstanding 9.5% senior secured notes, net of discount and a $20.0 million draw on our ABL facility.
 
Our credit documents (the ABL facility and the indenture governing the senior secured notes) contain operating covenants that limit the discretion of management with respect to certain business matters.  These covenants place significant restrictions on, among other things, the ability to incur additional debt, to pay dividends, to create liens, to make certain payments and investments and to sell or otherwise dispose of assets and merge or consolidate with other entities.  In addition, the ABL facility contains a financial covenant which requires us to maintain a fixed charge coverage ratio during any compliance period, which is anytime when the excess availability is less than or equal to the greater of $10.0 million or 15 percent of the total commitment under the ABL facility.  Due to the amount of our excess availability (as calculated under the ABL facility), the Company is not currently in a compliance period and, we do not have to maintain a fixed charge coverage ratio, although this is subject to change.



Note 10 – Guarantor and Non-guarantor Financial Statements

Our senior secured notes are, jointly and severally, fully and unconditionally guaranteed, on a senior basis, by all of our existing and future 100% owned domestic subsidiaries (“Guarantor Subsidiaries”). The non-guarantor subsidiaries are our foreign subsidiaries and discontinued operations.  The following condensed financial information illustrates the composition of the combined Guarantor Subsidiaries:

CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30, 2012
 
(In thousands)
 
Parent
   
Guarantor Subsidiaries
   
Non-guarantor Subsidiaries
   
Eliminations
   
Total
 
ASSETS
                             
Cash and cash equivalents
  $ 33,737     $ (4,717 )   $ 6,641           $ 35,661  
Customer and other receivables, net
    43,319       106,453       20,579     $ (55,673 )     114,678  
Inventories
    27,280       48,993       6,026             82,299  
Other current assets
    5,315       5,807       2,268             13,390  
Total current assets
    109,651       156,536       35,514       (55,673 )     246,028  
Property, plant, and equipment, net
    85,747       158,042       44,987             288,776  
Goodwill
    96,283       67,253                   163,536  
Intangible assets, net
    135,175       40,783                   175,958  
Investments in and advances to subsidiaries and affiliates
    287,190                   (287,190 )      
Deferred income taxes
          7,781       382       (8,163 )      
Other non-current assets
    8,918       830       246             9,994  
TOTAL
  $ 722,964     $ 431,225     $ 81,129     $ (351,026 )   $ 884,292  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Accounts payable
  $ 15,112     $ 55,560     $ 12,912           $ 83,584  
Accrued payroll and compensation
    2,123       8,985       3,448             14,556  
Accrued interest payable
    12,480                         12,480  
Other current liabilities
    59,815       14,931       4,560     $ (55,673 )     23,633  
Total current liabilities
    89,530       79,476       20,920       (55,673 )     134,253  
Long-term debt
    323,607                         323,607  
Deferred and non-current income taxes
    38,440                   (8,163 )     30,277  
Other non-current liabilities
    16,328       104,014       20,754             141,096  
Stockholders’ equity
    255,059       247,735       39,455       (287,190 )     255,059  
TOTAL
  $ 722,964     $ 431,225     $ 81,129     $ (351,026 )   $ 884,292  

   
December 31, 2011
 
(In thousands)
 
Parent
   
Guarantor Subsidiaries
   
Non-guarantor Subsidiaries
   
Eliminations
   
Total
 
ASSETS
                             
Cash and cash equivalents
  $ 51,578     $ (2,770 )   $ 8,107           $ 56,915  
Customer and other receivables, net
    36,736       100,097       12,099     $ (50,857 )     98,075  
Inventories
    26,655       39,555       6,617             72,827  
Other current assets
    4,441       5,771       2,120             12,332  
Total current assets
    119,410       142,653       28,943       (50,857 )     240,149  
Property, plant, and equipment, net
    73,765       150,900       46,897             271,562  
Goodwill
    96,283       67,253                   163,536  
Intangible assets, net
    139,384       41,965                   181,349  
Investments in and advances to subsidiaries and affiliates
    281,552                   (281,552 )      
Other non-current assets
    9,880       8,883       1,649       (8,146 )     12,266  
TOTAL
  $ 720,274     $ 411,654     $ 77,489     $ (340,555 )   $ 868,862  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Accounts payable
  $ 17,615     $ 52,938     $ 9,708           $ 80,261  
Accrued payroll and compensation
    3,079       9,167       4,220             16,466  
Accrued interest payable
    12,503                         12,503  
Other current liabilities
    52,932       13,542       3,642     $ (50,857 )     19,259  
Total current liabilities
    86,129       75,647       17,570       (50,857 )     128,489  
Long-term debt
    323,082                         323,082  
Deferred and non-current income taxes
    37,045                   (8,146 )     28,899  
Other non-current liabilities
    16,635       91,447       22,927             131,009  
Stockholders’ equity
    257,383       244,560       36,992       (281,552 )     257,383  
TOTAL
  $ 720,274     $ 411,654     $ 77,489     $ (340,555 )   $ 868,862  




CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

   
Three Months Ended June 30, 2012
 
(In thousands)
 
Parent
   
Guarantor Subsidiaries
   
Non-guarantor Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $ 119,374     $ 159,890     $ 41,505     $ (51,986 )   $ 268,783  
Cost of goods sold
    103,971       154,919       37,054       (51,986 )     243,958  
Gross profit
    15,403       4,971       4,451             24,825  
Operating expenses
    13,919       1,230       84             15,233  
Income from operations
    1,484       3,741       4,367             9,592  
Other income (expense):
                                       
Interest expense, net
    (8,540 )     (122 )     4             (8,658 )
Equity in earnings of subsidiaries
    7,284                   (7,284 )      
Other income (loss), net
    (996 )           560             (436 )
Income (loss) before income taxes from continuing operations
    (768 )     3,619       4,931       (7,284 )     498  
Income tax  provision
    73             1,266             1,339  
Income (loss) from continuing operations
    (841 )     3,619       3,665       (7,284 )     (841 )
Discontinued operations, net of tax
                             
Net income (loss)
  $ (841 )   $ 3,619     $ 3,665     $ (7,284 )   $ (841 )
                                         
Comprehensive income (loss)
  $ (841 )   $ 3,619     $ 3,844     $ (7,284 )   $ (662 )


   
Three Months Ended June 30, 2011
 
(In thousands)
 
Parent
   
Guarantor Subsidiaries
   
Non-guarantor Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $ 111,793     $ 133,347     $ 40,510     $ (43,778 )   $ 241,872  
Cost of goods sold
    98,258       126,657       38,291       (43,778 )     219,428  
Gross profit
    13,535       6,690       2,219             22,444  
Operating expenses
    12,364       1,554       66             13,984  
Income from operations
    1,171       5,136       2,153             8,460  
Other income (expense):
                                       
Interest expense, net
    (8,185 )     (700 )     485             (8,400 )
Equity in earnings of subsidiaries
    7,528                   (7,528 )      
Other income (loss), net
    407       24       (198 )           233  
Income (loss) before income taxes from continuing operations
    921       4,460       2,440       (7,528 )     293  
Income tax  provision (benefit)
    (356 )           249             (107 )
Income (loss) from continuing operations
    1,277       4,460       2,191       (7,528 )     400  
Discontinued operations, net of tax
                877             877  
Net income (loss)
  $ 1,277     $ 4,460     $ 3,068     $ (7,528 )   $ 1,277  
                                         
Comprehensive income (loss)
  $ 1,277     $ 4,460     $ 3,040     $ (7,528 )   $ 1,249  



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

   
Six Months Ended June 30, 2012
 
(In thousands)
 
Parent
   
Guarantor Subsidiaries
   
Non-guarantor Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $ 241,950     $ 315,682     $ 78,959     $ (98,290 )   $ 538,301  
Cost of goods sold
    206,905       309,960       72,801       (98,290 )     491,376  
Gross profit
    35,045       5,722       6,158             46,925  
Operating expenses
    27,591       2,350       156             30,097  
Income from operations
    7,454       3,372       6,002             16,828  
Other income (expense):
                                       
Interest expense, net
    (17,119 )     (197 )     (87 )           (17,403 )
Equity in earnings of subsidiaries
    7,525                   (7,525 )      
Other income (loss), net
    (216 )           (63 )           (279 )
Income (loss) before income taxes from continuing operations
    (2,356 )     3,175       5,852       (7,525 )     (854 )
Income tax  provision
    1,434             1,502             2,936  
Income (loss) from continuing operations
    (3,790 )     3,175       4,350       (7,525 )     (3,790 )
Discontinued operations, net of tax
                             
Net income (loss)
  $ (3,790 )   $ 3,175     $ 4,350     $ (7,525 )   $ (3,790 )
                                         
Comprehensive income (loss)
  $ (3,790 )   $ 3,175     $ 4,311     $ (7,525 )   $ (3,829 )


   
Six Months Ended June 30, 2011
 
(In thousands)
 
Parent
   
Guarantor Subsidiaries
   
Non-guarantor Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $ 213,116     $ 246,067     $ 78,250     $ (84,666 )   $ 452,767  
Cost of goods sold
    190,489       233,324       73,886       (84,666 )     413,033  
Gross profit
    22,627       12,743       4,364             39,734  
Operating expenses
    25,268       4,421       144             29,833  
Income (loss) from operations
    (2,641 )     8,322       4,220             9,901  
Other income (expense):
                                       
Interest expense, net
    (16,307 )     (999 )     566             (16,740 )
Equity in earnings of subsidiaries
    11,756                   (11,756 )      
Other income (loss), net
    2,870       15       (489 )           2,396  
Income (loss) before income taxes from continuing operations
    (4,322 )     7,338       4,297       (11,756 )     (4,443 )
Income tax  provision (benefit)
    (438 )           830             392  
Income (loss) from continuing operations
    (3,884 )     7,338       3,467       (11,756 )     (4,835 )
Discontinued operations, net of tax
                951             951  
Net income (loss)
  $ (3,884 )   $ 7,338     $ 4,418     $ (11,756 )   $ (3,884 )