Transcript Accuride hires: Financial Advisory Firm - Paul Deis

Case Study:
Options for a Middle-Market
Bankruptcy & Restructuring
Presented by
The Turnaround Management Association
Southern California Chapter
October 26th, 2010
Anderson School of Management
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The Cast
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Event Announcer
Patrick Gengoux, UCLA Anderson
School of Management - class of 2011
Accuride CEO
Rob Holland, Creo Capital Partners
Investment Banker/Financial
Restructuring Advisor
Jeff Raithel, Houlihan Lokey (actually
worked on this case).
Attorney for the Secured Lender
Chris Manderson, Manderson Schafer
& McKinlay
Attorney for the Company
John Schafer, Manderson Schafer &
McKinlay
Turnaround Consultant
Paul Deis, Essex of Oak Park, Inc.
Patrick – Kick off
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Case Objectives: To illustrate
the turnaround process
• What a turnaround involves
• Who influences the outcome of a turnaround
• Highlight the different roles necessary to effect a
turnaround including
– Credit Risk Management
– Operational Evaluation/Change Implementation a.k.a. turnaround
consulting
– Financial Advisory/Restructuring
– Legal
– Financing
• Give you a basic sense of the what to expect should your
company find itself in distress
• Value of avoiding a bankruptcy by effective management
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A Turnaround - in 3 Acts
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ACT I :
Making Trouble (2004-2007)
ACT II:
Dealing with Trouble (2007-2009)
ACT III:
The Turnaround (TBD)
Making Trouble: 2004-2007
The Entrepreneur/CEO –
• His company, Accuride was in business since 1986,
• Went public in 2005.
• Accuride summary:
– Automotive industry supplier
– Wheels,
– Chassis & suspension components
– Trucks, commercial vehicles
– Sales tightly coupled to auto industry sales
• And then they over-expanded and the market turned on them.
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Rob – The CEO - Making Trouble
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2008 Revenue by End Market
Heavy-Duty Truck (Class 8)
Trailers, 5.0%
Others, 16.0%
Heavy Conventional
Tandem-Axle Van
Transit Bus
Heavy / Medium
Duty, 49.0%
Military, 3.0%
Medium-Duty Truck (Class 5-7)
Aftermarket, 27.0%
Medium Conventional
School Bus
Walk-In Van
2008 Revenue by Product Line
Truck Body and
Chasis, 12.0%
Recreational Vehicle
Single-Axle Van
Stake
Seating Assemblies,
4.0%
Truck Trailer
Wheels, 42.0%
Wheel End
Components, 23.0%
Van
Flat Bed
Tanker
Light Truck (Class 3-4)
Other Components,
19.0%
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Rob – Industry Overview
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Expansion & Decline
Income Statement
Debt increased from
$488MM to $698MM
1,600.0
1,400.0
1,400.0
1,200.0
1,200.0
1,000.0
1,000.0
800.0
800.0
600.0
600.0
400.0
400.0
200.0
0.0
200.0
(200.0)
0.0
(400.0)
(200.0)
(600.0)
(400.0)
Jan-04
Total Revenue
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EBITDA
Net Income
Jan-05
Total Equity
Jan-06
Jan-07
Total Debt
Jan-08
Jan-09
Total Assets
Income Statement – Key Details
2006 – a “good year”
Net Sales
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$1,408,155,000
COGS
$1,211,258,000
86%
Gross
Margin
$ 196,897,000
14%
Everything
else
$ 131,764,000
9%
Net income
$
65,133,000 4.6%
Cost
improvement
opportunities are
buried here
Buried Opportunities
• 23 separate manufacturing plants, each with its large fixed/indirect
cost structure. 4,661,000 sq ft.
• Common process types – foundry, forging, machining, stamping,
tube bending, polishing, assembly.
• Complex, somewhat top heavy people structure:
– 3,500 total employees
– 927 salaried
– 1,650 unionized – 7 unions); had a lock-out in 2007.
• Multiple (6 major brands); complex entity structure; multiple
subsidiaries. No plant has more than 1 brand.
• Environmental regulations & costs significant (foundries); these
costs are buried in plant indirect costs.
• Not prepared for any downturn in a cyclic industry. High fixed costs
+ high debt = vulnerability
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Act II: 2007 – 2009
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Accuride hires:
– Financial Advisory Firm
– Turnaround Consultant
– Lawyers
Restructuring plan
Actions Taken: Re-negotiate with Labor (including lockouts) 11/07
Management Shakeups 12/07, 2/08, 9/08
Restructuring Plan Announced 9/08
Drawing on its credit facilities 10/08
De-listed from NYSE 11/08
Phase 2 of Restructuring Plan announced 12/08
Restructure of Debt owed to Sun Capital 2/09
Temporary Waiver Signed with Lenders Creditor Steering Committee
Formed 7/09
Second Waiver signed 8/09
Debtors give Accuride until 9/30 to effect financial restructuring (9/25)
Jeff – Financial Restructuring
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Historical and projected EBITDA. Results prior to 2005 are pro forma for the TTI
acquisition.
Industry Cycle
1996-1999
Cycle Avg. EBITDA: $146.4 million
Company Projected Industry Cycle
2007-2013E
Trough to Peak Avg. EBITDA: $125.7 million
Industry Cycle
2000-2006
Cycle Avg. EBITDA: $148.0 million
$250.0
$239.8
$217.7
$129.2
$118.7
$100.0
$116.4
$113.4
$87.2
$79.6
$79.0
$50.0
2013E
2012E
2011E
2010E
2009E
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
$0.0
1997
$14.8
1996
EBITDA ($ in millions)
$122.2
$152.3
$151.3
$147.9
$143.0
$150.0
$200.9
$196.9
$191.2
$200.0
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Capacity utilization for large commercial vehicles currently remains very low, weighing
on aftermarket component sales.
 In addition, significant cannibalization of parts is occurring from idle vehicles.

U.S. Heavy Truck Capacity Utilization
100%
Quarterly Annualized Change
95%
90%
85%
80%
75%
70%
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
2Q09
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Financial summary of the Company’s projections.
Consolidated Revenue and EBITDA
375,000
$1,400.0
400,000
$300.0
350,000
290,000
$1,200.0
300,000
215,000
155,000
$800.0
103,536
$600.0
$400.0
250,000
200,000
150,000
100,000
$200.0
50,000
$0.0
0
2006
2007
2008 2009E 2010E 2011E 2012E 2013E
Revenue
Company Projected Class 8 Builds
16.1%
15.4%
16.5%
14.9%
18.0%
16.0%
$250.0
14.0%
11.2%
$200.0
12.0%
10.4%
10.0%
8.5%
$150.0
8.0%
$100.0
6.0%
EBITDA Margin
212,391
205,237
$1,000.0
Consolidated EBITDA ($ in millions)
376,448
Class 8 Builds
Consolidated Revenue ($ in millions)
$1,600.0
4.0%
2.7%
$50.0
2.0%
$0.0
0.0%
2006
2007
2008 2009E 2010E 2011E 2012E 2013E
EBITDA
EBITDA Margin
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Who is Doing What?
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Credit Risk Management: Bond Holders are
seeing increased risk in the transaction and
taking action
Unsecured Creditors – committee, negotiations.
Accuride Secures Debtor-in-Possession
Financing
Convert debt into equity rights
Dilution of existing stockholders
10/8 Debt restructuring completed, 10/9 Accuride
files voluntary BK – “Pre-Pack”
Chris – Secured Lender’s Attorney
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Act III: Pre-packaged BK
• Accuride voluntarily files for Bankruptcy Protection and
presents a plan
– Raised $50MM in “DIP” Financing
– Maturities extended to June 2013
– Covenants modified
– Sr. Sub-Debt converted to 98% equity holders
– Sr. Unsecured Notes get refi’ed to be convertible into
60% of common stock
– Unsecured Trade Creditors to be paid in full
– Current Shareholders will now own 2% of common
stock, and receive warrants for 15% of Equity subject
to the above dilution works out to 9%
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John – Accuride Attorney for the Chapter 11 Filing
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Summary of Drivers
• Cash drives everything in business.
• Low margins results in chronic lack of cash.
• Fatal combination –
Low margins
+ High leverage/debt
+ Un-proactive management
= Chronic survival challenges,
• Lack of cash leads to BK and/or a turnaround and restructuring,
“Chapter 22, 33”, etc.
• Once in BK, many others MUST become involved, diluting owners
control and destroying investment principal.
• Outside expertise = become crucial to survival and renewal.
• Value of assets may be determined by others—often with
antagonistic agendas. They are not friends of shareholders.
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Paul – The Turnaround – Alternate “Ending”
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Alternative Ending – The Turnaround
• Focus on fixing main problems/opportunities –
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VERY LOW gross margins – 14-15% in 2006 – “good year” –
Reporting buries almost all cost improvement opportunities
High fixed costs – multiple small plants; 200-300 people each.
Similar processes at separate plants; transportation costs are
hidden.
Each of the 23 plants has high breakeven – below this it
consumes cash
No product rationalization – drop, sell losers.
Significant unionization; potential uncooperative attitudes to
improving productivity & thus margins.
Mexican plants do not appear to be helping profitability
Initial Turnaround Plan
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Replace top & key managers with fresh, success-driven, proactive leaders – not
necessarily from auto supplier industry. These will drive real success;
“The guys who got you into trouble will not get you out of it.”
Develop, implement cash-focused reporting – replace P&L oriented, financial
reporting to drive improvements.
Inventory – complex production, transportation, multiple warehouses = cost
Plant consolidation and/or greenfields to non-union states.
Leverage existing plants temporarily – they are well below capacity to bridge
greenfields.
Get blunt with unions – help or close the plant.
Product rationalization - Drop money-losing products; raise prices where market
strength good.
Cut per-plant fixed cost structure – buried in COGS,
Implement transportation management
Integrate brands, selling forces, to leverage production capabilities at larger, more
efficient plants.
Patrick – It’s a Wrap!
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Conclusions & Observations
• Management focused on sales, not
profitability.
• Inattention to cost details – in COGS
resulted in losing the company’s equity.
• Excessive leverage/debt = inability to
withstand downturns in a cyclic business.
• Annual report reads like a list of problems,
for which no solutions are proposed.
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