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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2012.
[ ] 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
(Exact Name of Registrant as Specified in Its Charter)
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.
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 May 2, 2012, 47,326,312 shares of Accuride Corporation common stock, par value $.01 per share, were outstanding
See notes to unaudited condensed consolidated financial statements.
ACCURIDE CORPORATION AND SUBSIDIARIES
See notes to unaudited condensed consolidated financial statements.
ACCURIDE CORPORATION AND SUBSIDIARIES
(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 months ended March 31, 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 condensed 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 three months ended March 31, 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 three months ended March 31, 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 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:
As of March 31, 2012, there were options exercisable for 225,922 shares that were not included in the computation of diluted earnings per share because the effect would be anti-dilutive. As of March 31, 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:
As of March 31, 2012, there was approximately $5.7 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 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 International Financial Reporting Standards (“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.
Note 3 - Inventories
Inventories at March 31, 2012 and December 31, 2011, on a FIFO basis, were as follows:
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 March 31, 2012:
The changes in the carrying amount of other intangible assets for the period January 1, 2012 to March 31, 2012, by reportable segment, are as follows:
The summary of goodwill and other intangible assets is as follows:
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 months ended March 31:
As of March 31, 2012, $2.7 million has been contributed to our sponsored pension plans. We presently anticipate contributing an additional $11.9 million to fund our pension plans during 2012 for a total of $14.6 million.
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 March 31, 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 March 31, 2012, we had approximately 3,461 employees, of which 665 were salaried employees with the remainder paid hourly. Unions represent approximately 1,993 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:
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 March 31, 2012 was approximately $322.4 million compared to the carrying amount of $303.3 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 March 31, 2012 and December 31, 2012 equals the carrying value of $20.0 million. As of March 31, 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.
Current and prior period operating results from Bostrom Seating and Fabco Automotive were reclassified to discontinued operations during the three months ended March 31, 2012. Excluded from net sales above, are inter-segment sales from Brillion Iron Works to Gunite, as shown in the table below:
Note 9 - Debt
As of March 31, 2012, total debt was $323.3 million consisting of $303.3 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 SHEET
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and such principles are applied on a basis consistent with the information reflected in our Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim periods. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2012 or any interim period. Except for the historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated by such forward-looking statements.
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 believe that we have number one or number two market positions in steel wheels, forged aluminum wheels, brake drums, disc wheel hubs, and metal bumpers for commercial vehicles. 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, 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 15 strategically located, technologically-advanced facilities across the United States, Mexico and Canada.
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. Although current industry forecasts predict continued improvement in commercial vehicle production in 2012 as compared to 2011, commercial vehicle industry production forecasts have recently abated somewhat for Class 8 commercial vehicles. Based upon the overall commercial vehicle industry production forecasts, we expect results from operations to improve in 2012 compared to 2011 due to increased demand for our product and improved operational efficiencies. We cannot, however, accurately predict the commercial vehicle cycle, and any deterioration of the economic recovery may lead to further reduced spending and deterioration in the North American truck and vehicle supply industries 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. On April 17, 2012, the International Trade Commission determined that the domestic industry has not been injured and is not presently threatened with injury from subject imports, and consequently withdrew all import duties on the subject imports. Accuride Corporation will await the written decision from the International Trade Commission on its negative injury determination and evaluate whether an appeal is appropriate at that time.
Results of Operations
The following table sets forth certain income statement information of Accuride for the three months ended March 31, 2012 and March 31, 2011. Certain operating results from prior periods have been reclassified to discontinued operations to conform to the current year presentation.
Our net sales for the three months ended March 31, 2012, were $269.5 million, which was an increase of 27.8 percent, compared to net sales of $210.9 million for the three months ended March 31, 2011. Of the total increase, approximately $42.9 million was a result of higher volume demand due to increased production levels of the commercial vehicle market and its aftermarket segments in North America. The increased vehicle production is a result of continued increased maintenance and replacement demand of commercial vehicles. The remaining $15.7 million increase of net sales recognized 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 27.8 percent during the three months ended March 31, 2012 compared to the same period in 2011 primarily due to increased volume for all three major OEM segments. Net sales for our Gunite segment rose 15.8 percent due to industry demand and approximately $7.9 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 by 24.2 percent due to higher demand in the industrial and agricultural markets and increased pricing of approximately $3.3 million related to raw material costs. Net sales for our Imperial segment increased by 61.5 percent due to increased volume in Class 8 OEM production.
North American commercial vehicle industry production builds were, as follows:
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.
Cost of Goods Sold
The table below represents the significant components of our cost of goods sold.
Raw materials costs increased by $35.0 million, or 36.4 percent, during the three months ended March 31, 2012 due to increases in sales volume of approximately 26.4 percent and price of approximately 10.0 percent. The price increases were primarily related to steel and aluminum, which represent nearly all of our material costs.
Depreciation decreased slightly during the comparative periods.
Labor and overhead costs increased by 21.6 percent due to increased volume, which is lower than the overall net sales volume increase of approximately 27.8 percent due to the impact of certain of our costs (i.e. salaries, rent, etc.) being fixed in nature, as opposed to variable.
Selling, general, and administrative costs decreased by $0.4 million in 2012 primarily due to fees incurred in 2011 related to the sale of our discontinued operations. Research and development costs increased by $0.3 million due to increases in staff and travel expenses.
Depreciation and amortization expenses were impacted by divestiture and acquisition activities.
Operating Income (Loss)
Operating income for the Wheels segment was 15.8 percent of its net sales for the three months ended March 31, 2012 compared to 12.6 percent for the three months ended March 31, 2011. In addition to higher year-over-year build rates, we continue to see strong demand for aluminum wheels being driven by the need for fleets to reduce fuel and maintenance costs, along with total vehicle weight.
Operating loss for the Gunite segment was 3.2 percent of its net sales for the three months ended March 31, 2012 compared to 2.9 percent for the three months ended March 31, 2011. During the three months ended March 31, 2012, Gunite benefited from steadily improving operational performance and higher pricing, as well as the elimination of customer-required on-site inspections stemming from Gunite’s quality management issues in 2011. These were offset by softening aftermarket demand for Gunite products and the impact of low-cost imports from competitors.
Operating income for the Brillion segment was 7.2 percent of its net sales for the three months ended March 31, 2012 compared to 2.1 percent for same period in 2011. Sales volume for our Brillion segment increased during 2012 as the industrial and agricultural markets continued to gain strength while increased pricing offset rising material costs. The increase in sales volume was the primary reason for improved operating income for Brillion.
The operating income (loss) for the Imperial segment was (1.3) percent of its net sales for the three months ended March 31, 2012 and 4.5 percent for the three months ended March 31, 2011. The Decatur, TX Imperial plant continued to experience operational inefficiencies stemming from its expanded production volume and product portfolio. A new leadership team is instituting changes to stabilize and improve Decatur’s operational and financial performance during the first half of 2012.
The operating losses for the Corporate segment were 4.3 percent of consolidated net sales for the three months ended March 31