ACCURIDE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006 AND FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(AMOUNTS IN THOUSANDS, 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 of normal recurring accruals) considered necessary to present fairly the condensed consolidated financial statements have been included.
The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007. The unaudited condensed 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, 2006.
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.
Derivative Financial Instruments – We use derivative financial instruments as part of our overall risk management strategy as further described under Item 7A of the 2006 Annual Report on Form 10-K. The derivative instruments used from time to time include interest rate and foreign exchange instruments. All derivative instruments are recognized on the balance sheet at their estimated fair values. As of March 31, 2007, there were no derivatives that were designated as hedges for financial reporting purposes.
Interest Rate Instruments – We entered into interest rate swap agreements in the first quarter of 2005 as a means of fixing the interest rate on portions of our floating-rate debt. The total notional amount of outstanding interest rate swap agreements at March 31, 2007 was $250 million, maturing in March of 2008. Included in interest expense for the three months ended March 31, 2007 are realized gains of $0.7 million and unrealized losses of $0.7 million. Included in interest expense for the three months ended March 31, 2006 are realized gains of $0.7 million and unrealized gains of $1.3 million.
Foreign Exchange Instruments – From time to time we use foreign currency forward contracts and option contracts to limit foreign exchange risk on anticipated but not yet committed transactions expected to be denominated in Canadian dollars. At March 31, 2007, we had open foreign exchange forward contracts of $28.8 million. Included in other income (expense) for the three months ended March 31, 2006 are realized gains of $0.3 million and unrealized gains of $0.6 million.
Earnings Per Common Share – Basic and diluted earnings per common share were computed as follows:
| | Three Months Ended March 31, | |
(in thousands except per share data) | | 2007 | | 2006 | |
Numerator: | | | | | |
Net income (loss) | | $ | (1,884 | ) | $ | 20,035 | |
Denominator: | | | | | |
Weighted average shares outstanding - Basic | | 34,894 | | 33,982 | |
Effect of dilutive share-based awards | | — | | 544 | |
Weighted average shares outstanding - Diluted | | 34,894 | | 34,526 | |
Basic earnings per common share | | $ | (0.05 | ) | $ | 0.59 | |
Diluted earnings per common share | | $ | (0.05 | ) | $ | 0.58 | |
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There is no effect of dilutive share-based awards for purposes of calculating earnings per share for the three months ended March 31, 2007, due to being in a net loss position.
Stock-Based Compensation— We account for share-based compensation programs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. In the three months ended March 31, 2007, $0.6 million of pre-tax compensation expense was recognized. The total income tax benefit recognized for stock-based compensation exercises in the statements of income and in additional-paid-in-capital for the three months ended March 31, 2007, was $0.4 million. As of March 31, 2007, there was approximately $5.3 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 1.6 years.
Recent Accounting Adoptions
FIN 48—In July 2006, the FASB issued Interpretation No. 48, FIN 48, Accounting for Uncertainty in Income Taxes, to address the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in SFAS No. 109, Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 applies to fiscal years beginning after December 15, 2006. The impact of the adoption of FIN 48 on January 1, 2007, was to decrease retained earnings by $2.1 million, increase goodwill by $0.7 million, decrease income taxes payable by $6.1 million, decrease net deferred tax liabilities by $2.7 million, and increase non-current income taxes payable by $11.6 million.
In conjunction with the adoption of FIN 48, we have classified uncertain tax positions as non-current income tax liabilities unless they are expected to be paid within 12 months of the balance sheet date. Penalties and income tax-related interest expense are reported as a component of income tax expense and the related liabilities are included in Non-current income taxes payable. As of January 1, 2007, we recorded a liability of approximately $2.7 million and $2.1 million for the payments of interest and penalties, respectively. The liability for the payment of interest and penalties did not materially change as of March 31, 2007.
As of January 1, 2007, we were open to examination in the U.S. federal tax jurisdiction for the 2003-2006 tax years, in Canada for the years of 1997-2006, and in Mexico for the years of 1999-2006. We were also open to examination in various state and local jurisdictions for the 2001-2006 tax years, none of which were individually material.
As of January 1, 2007, the total amount of unrecognized tax benefits was $13.4 million, of which $10.4 million would affect the effective tax rate, if recognized. The amount of unrecognized tax benefits did not materially change as of March 31, 2007.
Recent Accounting Pronouncements
SFAS No. 157— In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. SFAS No. 157 will apply to fiscal years beginning after November 15, 2007. Management is currently evaluating the impact of SFAS No. 157 on the consolidated financial statements.
SFAS No. 159— In February 2007, the FASB issued SFAS No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities, to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS No. 159 on the consolidated financial statements.
Note 2 - Initial Public Offering
On April 26, 2005, we completed an initial public offering of our common stock and Accuride Corporation’s common stock commenced trading on the New York Stock Exchange. Net proceeds from the initial public offering were $89.6 million. The proceeds were used to repay a portion of the Term B Loan facility.
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Note 3 - Inventories
Inventories are stated at the lower of cost or market. We review inventory on hand and write down excess and obsolete inventory based on our assessment of future demand and historical experience. The components of inventory on a FIFO basis, except at our subsidiary in Mexico, which values inventories using an average cost basis, are as follows:
| | March 31,
2007 | | December 31,
2006 | |
Raw materials | | $ | 33,442 | | $ | 29,437 | |
Work in process | | 38,761 | | 39,796 | |
Finished manufactured goods | | 39,498 | | 34,420 | |
Total inventories, net | | $ | 111,701 | | $ | 103,653 | |
Note 4 - Intangible Assets and Excess of Purchase Price Over Net Assets Acquired, Net
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, have been applied to the acquisition of TTI, which occurred on January 31, 2005. Accordingly, the tangible and identifiable intangible assets and liabilities were adjusted to fair values with the remainder of the purchase price recorded as goodwill. Additionally, goodwill and indefinite lived intangibles assets (trade names) are not amortized but are reviewed for impairment at least annually or more frequently if impairment indicators arise. We estimate that aggregate amortization expense for 2007 will be $5,750 with the following year at $5,300, and the following three years at approximately $4,735 each year. The summary of goodwill and other intangible assets is as follows:
| | | | As of March 31, 2007 | | As of December 31, 2006 | |
| | Weighted
Average
Useful
Lives | | Gross
Amount | | Accumulated Amortization | | Carrying
Amount | | Gross
Amount | | Accumulated
Amortization | | Carrying
Amount | |
Goodwill | | — | | $ | 386,953 | | — | | $ | 386,953 | | $ | 389,513 | | — | | $ | 389,513 | |
Other Intangible Assets: | | | | | | | | | | | | | | | |
Non-compete Agreements | | 3.0 | | $ | 2,600 | | $ | 1,233 | | $ | 1,367 | | $ | 2,600 | | $ | 999 | | $ | 1,601 | |
Trade Names | | — | | 38,080 | | — | | 38,080 | | 38,080 | | — | | 38,080 | |
Technology | | 14.7 | | 33,540 | | 4,968 | | 28,572 | | 33,540 | | 4,395 | | 29,145 | |
Customer Relationships | | 29.6 | | 71,500 | | 5,293 | | 66,207 | | 71,500 | | 4,682 | | 66,818 | |
| | | | $ | 145,720 | | $ | 11,494 | | $ | 134,226 | | $ | 145,720 | | $ | 10,076 | | $ | 135,644 | |
The following presents the changes in the carrying amount of goodwill for the period ended March 31, 2007:
Balance at December 31, 2006 | | $ | 389,513 | |
Increase from adoption of FIN 48 | | 731 | |
Decrease from other tax resolutions | | (3,291 | ) |
Balance at March 31, 2007 | | $ | 386,953 | |
Goodwill was reduced by $3,291 in accordance with EITF 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination, in the three months ended March 31, 2007, due to settlements of tax audits and amendments of previously filed returns.
Note 5 - Property, Plant and Equipment
During the three months ended March 31, 2007, we recorded $9.8 million of additional depreciation of certain assets in our wheel business as a result of a reduction of the useful lives of these assets, as discussed in the Form 10-K for the year ended December 31, 2006.
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Note 6 - Comprehensive income
Comprehensive income for the three months ended March 31 is summarized as follows:
| | For The Three Months Ended March 31, | |
| | 2007 | | 2006 | |
Net income | | $ | (1,884 | ) | $ | 20,035 | |
Other comprehensive income (net of tax): | | | | | |
Unrealized (loss) on derivatives | | — | | (402 | ) |
Minimum pension liability adjustment | | (141 | ) | — | |
Total comprehensive income | | $ | (2,025 | ) | $ | 19,633 | |
Included in accumulated other comprehensive income during 2006 are unrealized losses on derivatives that were designated as cash flow hedges in accordance with SFAS No. 133. Also included in accumulated other comprehensive income is the impact of minimum pension liability fluctuations in the Canadian dollar to U.S. dollar exchange rate related to our Canadian pension plans.
Note 7 - Debt
Debt at March 31, 2007, and December 31, 2006, consisted of the following:
| | March 31,
2007 | | December 31,
2006 | |
Term B Facility | | $ | 304,625 | | $ | 364,625 | |
Senior Subordinated Notes | | 275,000 | | 275,000 | |
Industrial Revenue Bond | | 3,100 | | 3,100 | |
Total | | $ | 582,725 | | $ | 642,725 | |
As of March 31, 2007, the $125.0 million revolving facility was fully available.
Note 8 - Pension and Other Postretirement Benefit Plans
Components of Net Periodic Benefit Cost for the three months ended March 31:
| | Pension Benefits | | Other Benefits | |
| | 2007 | | 2006 | | 2007 | | 2006 | |
Service cost-benefits earned during the year | | $ | 1,082 | | $ | 1,118 | | $ | 331 | | $ | 388 | |
Interest cost on projected benefit obligation | | 2,446 | | 2,278 | | 1,203 | | 1,207 | |
Expected return on plan assets | | (3,450 | ) | (2,954 | ) | — | | — | |
Prior service cost and other amortization (net) | | 625 | | 718 | | (104 | ) | (33 | ) |
Net amount charged to income | | $ | 703 | | $ | 1,160 | | $ | 1,430 | ) | $ | 1,562 | |
Curtailment charge | | 3,178 | | — | | (283 | | | |
Contractual termination benefits charge | | 6,334 | | — | | — | | — | |
Total amount charged to income | | $ | 10,215 | | $ | 1,160 | | $ | 1,147 | | $ | 1,562 | |
During the three months ended March 31, 2007, we recorded a pre-tax curtailment and other contractual termination benefits charges of $9.2 million related to a reduction-in-force in our London, Ontario, facility. The contractual benefits charge represents a potential partial pension wind-up, which was determined to be probable for purposes of recognizing one-time benefits in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities and SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. As of March 31, 2007, $3,656 has been contributed to our sponsored pension plans. We presently anticipate contributing an additional $11,860 to fund our pension plans in 2007 for a total of $15,516.
Also during the three months ended March 31, 2007, we recorded $9.0 million of severance costs related to the reduction-in-force as a component of cost of good sold. There were no cash payments made in the period.
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Note 10 – Contingencies
We are from time to time involved in various legal proceedings of a character normally incident to our business. We do not believe that the outcome of these proceedings will have a material adverse effect on our condensed consolidated financial condition or results of our operations.
As of March 31, 2007, we had an environmental reserve of approximately $2.6 million, related primarily to TTI’s foundry operations. This reserve is based on current cost estimates and does not reduce estimated expenditures to net present value, but does take into account the benefit of a contractual indemnity given to us by a prior owner of our wheel-end subsidiary. The failure for the indemnitor to fulfill its obligations could result in future costs that may be material. Any cash expenditures required by us or our subsidiaries to comply with applicable environmental laws and/or to pay for any remediation efforts will not be reduced or otherwise affected by the existence of the environmental reserve. We currently anticipate spending approximately $0.2 million per year in 2007 through 2010 for monitoring the various environmental sites associated with the environmental reserve, including attorney and consultant costs for strategic planning and negotiations with regulators and other potentially responsible parties, and payment of remedial investigation costs. Based on all of the information presently available to us, we believe that our environmental reserves will be adequate to cover the future costs related to the sites associated with the environmental reserves, and that any additional costs will not have a material adverse effect on our financial condition, results of operations or cash flows. However, the discovery of additional sites, the modification of existing or the promulgation of new laws or regulations, 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 such a material adverse effect.
The final Iron and Steel Foundry National Emission Standard for Hazardous Air Pollutants, or NESHAP, was developed pursuant to Section 112(d) of the Clean Air Act and requires all major sources of hazardous air pollutants to install controls representative of maximum achievable control technology. We are evaluating the applicability of the Iron and Steel Foundry NESHAP to our foundry operations. If applicable, compliance with the Iron and Steel Foundry NESHAP may result in future significant capital costs, which we currently expect to be approximately $6 million in total during the period 2007 through 2008.
Our operations are subject to federal, state, and local environmental laws, rules, and regulations. Pursuant to the Recapitalization of the Company on January 21, 1998, we were indemnified by Phelps Dodge Corporation with respect to certain environmental liabilities at our Henderson and London facilities, subject to certain limitations. 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.
During the fourth quarter of 2006, we were able to resolve a commercial dispute with Ford Motor Company. As a result of the resolution, we recognized $10.4 million of revenue in 2006, $8.0 million in the three months ended March 31, 2007, and anticipate recognizing an additional $2.6 million of revenue in the remainder of 2007. In addition, cash flow increased by $10.0 million in 2006 and we anticipate an increase of $11.0 million in mid-2007. We anticipate that Ford will re-source its Accuride business to another supplier during 2007. In 2006, sales to Ford represented less than 6% of consolidated revenues.
As of March 31, 2007, we had 4,331 employees, of which 996 were salaried employees with the remainder paid hourly. Unions represented approximately 2,245 employees, or 52% of the total. Union contracts expiring in 2007 subsequent to March 31, 2007, represent approximately 1,350 employees, or 31% of the total. The negotiations for Gunite’s Elkhart Plant One Facility, representing approximately 405 employees, or 9.4% of the total, were successfully completed prior to the July 2007 expiration of our union contract. We do not anticipate that the outcome of the remaining negotiations will have a material adverse effect on our operating performance or costs.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements and notes included in Item 1 of Part I of this report on Form 10-Q and our report on Form 10-K for the year ended December 31, 2006. Except for the historical information contained herein, this 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.
Overview
The commercial vehicle market continued at a reasonably robust pace during the first three months of 2007, yet was declining as the quarter ended. Current industry forecasts by analysts, including America’s Commercial Transportation (“ACT”) Publications, predict that the North American commercial vehicle industry will decline significantly in 2007 due to a change in emissions standards that became effective in 2007. We experienced reduced demand from the commercial vehicle industry in the first three months of 2007 compared to the first three months of 2006. Net sales for the three months ended March 31, 2007, were $325.4 million compared to net sales of $359.9 million for the three months ended March 31, 2006. We anticipate that these variances compared to 2006 will increase more significantly the remainder of this year.
Our operating challenges are to meet these varying levels of production while improving our internal productivity and mitigate the margin pressure from rising material costs.
On January 31, 2005, pursuant to the terms of an agreement and plan of merger, one of our wholly-owned subsidiaries was merged with and into TTI, resulting in TTI becoming a wholly-owned subsidiary of Accuride.
In connection with the TTI merger, we entered into a Fourth Amended and Restated Credit Agreement consisting of (1) a new term credit facility in an aggregate principal amount of $550.0 million that will mature on January 31, 2012, and (2) a revolving credit facility in an aggregate principal amount of $125.0 million that will terminate on January 31, 2010. In addition, we issued $275.0 million aggregate principal amount of 8½% senior subordinated notes due in 2015.
On April 26, 2005, our common stock commenced trading on the New York Stock Exchange. For the three months ended March 31, 2007, we reduced our senior debt by $60.0 million from existing cash reserves.
During the fourth quarter of 2006, we were able to resolve a commercial dispute with Ford Motor Company. As a result of the resolution, we recognized $10.4 million of revenue in 2006, $8.0 million in the three months ended March 31, 2007, and anticipate recognizing an additional $2.6 million of revenue in the remainder of 2007. In addition, cash flow increased by $10.0 million in 2006 and we anticipate an increase of $11.0 million in mid-2007. We anticipate that Ford will re-source its Accuride business to another supplier during 2007. In 2006, sales to Ford represented less than 6% of consolidated revenues.
The Company consists of seven operating segments that design, manufacture and distribute components for trucks, trailers, and other vehicles. These operating segments are aggregated into a single reportable segment as they have similar economic characteristics, products and production processes, class of customer and distribution methods. We believe this segmentation is appropriate based upon management’s operating decisions and performance assessment.
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Results of Operations
Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006
The following table sets forth certain income statement information of Accuride for the three months ended March 31, 2007 and March 31, 2006:
(Amounts in thousands, except per share data) | | March 31, 2007 | | March 31, 2006 | |
Net sales | | $ | 325,430 | | 100.0 | % | $ | 359,925 | | 100.0 | % |
Gross profit | | 24,116 | | 7.4 | % | 56,014 | | 15.6 | % |
Operating expenses | | 15,051 | | 4.6 | % | 13,689 | | 3.8 | % |
Income from operations | | 9,065 | | 2.8 | % | 42,325 | | 11.8 | % |
Interest (expense), net | | (12,019 | ) | (3.7 | )% | (11,630 | ) | (3.2 | )% |
Equity in earnings of affiliate | | — | | — | | 215 | | 0.1 | % |
Other income, net | | 74 | | 0.0 | % | 602 | | 0.2 | % |
Net income (loss) | | $ | (1,884 | ) | (0.6 | )% | $ | 20,035 | | 5.6 | % |
Other Data: | | | | | | | | | |
Weighted average common shares outstanding—basic | | 34,894 | | | | 33,982 | | | |
Basic income (loss) per share | | $ | (0.05 | ) | | | $ | 0.59 | | | |
Weighted average common shares outstanding—diluted | | 34,894 | | | | 34,526 | | | |
Diluted income (loss) per share | | $ | (0.05 | ) | | | $ | 0.58 | | | |
Net Sales. Net sales for the three months ended March 31, 2007 were $325.4 million, which was a decrease of 9.6%, compared to net sales of $359.9 million for the three months ended March 31, 2006. The decrease in net sales is primarily a result of the reduced demand as a result of emission standards that became effective in 2007, partially offset by $8.0 million of revenue resulting from a resolution of a commercial dispute with a customer. The reduced demand from the commercial vehicle industry in the first three months of 2007 was more mild than anticipated and we anticipate the revenue variances compared to prior years to be significantly greater the remainder of the year.
Gross Profit. Gross profit decreased $31.9 million to $24.1 million for the three months ended March 31, 2007 from $56.0 million for the three months ended March 31, 2006. Included in the current year’s results is additional depreciation expense in our wheels business of $9.8 million and severance expense and other benefit charges of $18.2 million related to a reduction-in-force in our London, Ontario, facility. Also included in the current year’s results is the increase in revenue of $8.0 million mentioned above.
Operating Expenses. Operating expenses increased $1.4 million to $15.1 million for the three months ended March 31, 2007 from $13.7 million for the three months ended March 31, 2006. This was primarily due to year over year increases in non-cash share-based compensation expense of $0.5 million and audit and other consulting fees of $0.8 million.
Interest (Expense), net. Net interest expense increased $0.4 million to $12.0 million for the three months ended March 31, 2007 from $11.6 million for the three months ended March 31, 2006. The increase is attributable to $0.7 million of unrealized losses from our interest rate swap agreements in the current period compared to $1.3 million of unrealized gains in the prior year’s results, partially offset by a decrease in interest expense related to reduced debt. Debt on March 31, 2007, was $582.7 million compared to debt of $697.7 million on March 31, 2006.
Net Income (Loss). We had a net loss of $1.9 million for the three months ended March 31, 2007 compared to net income of $20.0 million for the three months ended March 31, 2006. This was primarily a result of the lower gross profit due to the reduction in sales volume and the additional depreciation, severance and other benefit charges.
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Changes in Financial Condition
At March 31, 2007, we had total assets of $1,168.2 million, as compared to $1,233.2 million at December 31, 2006. The $65.0 million, or 5.3%, decrease in total assets during the three months ended March 31, 2007 primarily resulted from payments of debt.
Working capital, defined as current assets (excluding cash) less current liabilities, increased $27.6 million from December 31, 2006, to March 31, 2007. Significant changes in working capital from December 31, 2006 included:
· an increase in net customer receivables of $16.7 million due timing of receipts;
· an increase in inventories of $8.0 million due to the draw-down of inventories at year-end;
· a reduction of interest payable of $6.1 million due to timing of interest payments.
Capital Resources and Liquidity
Our primary sources of liquidity during the three months ended March 31, 2007 were cash reserves and our $125 million revolving credit facility, as discussed below, which is not currently drawn.
We believe that cash from operations, existing cash reserves, and availability under the New Revolver will provide adequate funds for our working capital needs, planned capital expenditures and debt service obligations for the next 12 months and the foreseeable future. Our ability to fund working capital needs, planned capital expenditures, scheduled debt payments, and to comply with all of the financial covenants under our credit agreement, depends on our future operating performance and cash flow, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
Operating Activities
Net cash provided by operating activities during the first three months of 2007 amounted to $2.7 million compared to a use of $17.3 million for the comparable period in 2006. The primary differences were deferred taxes and the changes in working capital. The primary working capital improvement was in customer receivables, which used $37.1 million less cash during the three months ended March 31, 2007, compared to the three months ended March 31, 2006. This was mainly due to product demand and timing of receipts.
Investing Activities
Net cash used in investing activities totaled $10.2 million for the three months ended March 31, 2007 compared to a use of $6.4 million for the three months ended March 31, 2006.
Our most significant cash outlays for investing activities are the purchases of property, plant and equipment. Our capital expenditures in 2006 were $42.2 million. Capital expenditures for 2007 are expected to be approximately $40 million to $45 million, which we expect to fund through our cash from operations or existing cash reserves.
Financing Activities
Net cash used in financing activities totaled $59.1 million for the three months ended March 31, 2007 compared to $0.6 million of net cash provided for the comparable period in 2006. We reduced debt by $60.0 million in the three months ended March 31, 2007 with cash reserves.
Bank Borrowing. In connection with the TTI merger, we entered into a Fourth Amended and Restated Credit Agreement consisting of (1) a new term credit facility (the Term B Loan Facility) in an aggregate principal amount of $550.0 million that will mature on January 31, 2012 and (2) a revolving credit facility (the “New Revolver”) in an aggregate principal amount of $125.0 million (comprised of a new $95.0 million U.S. revolving credit facility and the continuation of a $30.0 million Canadian revolving credit facility) that will terminate on January 31, 2010. As of March 31, 2007, $304.6 million was outstanding under the Term B Loan Facility and the New Revolver was not drawn. The Term B Loan Facility requires quarterly amortization payments of $1.4 million that commenced on March 31, 2005, with the balance paid on the maturity date for the Term B Loan Facility. As of March 31, 2007, the regularly scheduled payments due through December 31, 2011 were prepaid without penalty. The interest rates per annum applicable to loans under our new senior credit facilities are, at the option of the Company or Accuride Canada Inc., as applicable, a base rate or Eurodollar rate plus, in each case, an applicable margin which is subject to adjustment based on our leverage ratio. The base rate is a fluctuating interest rate equal to the highest of (a) the base rate
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reported by Citibank, N.A. (or, with respect to the Canadian revolving credit facility, the reference rate of interest established or quoted by Citibank Canada for determining interest rates on U.S. dollar denominated commercial loans made by Citibank Canada in Canada), (b) a reserve adjusted three-week moving average of offering rates for three-month certificates of deposit plus one-half of one percent (0.5%) and (c) the federal funds effective rate plus one-half of one percent (0.5%). The obligations under our new senior credit facilities are guaranteed by all of our domestic subsidiaries. The loans under the new senior credit facilities are secured by, among other things, a lien on substantially all of our U.S. properties and assets and of our domestic subsidiaries and a pledge of 65% of the stock of our foreign subsidiaries. The loans under the Canadian revolving facility are also secured by substantially all of the properties and assets of Accuride Canada Inc.
Initial Public Offering. On April 26, 2005, we completed our initial public offering (“IPO”). Net proceeds from the IPO were $89.6 million. We used all of the net proceeds from the IPO as well as other available cash as part of our repayment in April 2005 of $93.0 million of the Term B Loan Facility. This prepayment was not subject to a prepayment penalty.
Restrictive Debt Covenants. Our senior credit facilities contain numerous financial and operating covenants that limit the discretion of management with respect to certain business matters. These covenants place significant restrictions on, among other things, our 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. We are also required to meet certain financial ratios and tests, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio. Failure to comply with the obligations contained in the credit documents could result in an event of default, and possibly the acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that may contain cross-acceleration or cross-default provisions. As of March 31, 2007, and currently, we are in compliance with our financial covenants and ratios.
Senior Subordinated Notes. In connection with the TTI merger, we issued $275.0 million aggregate principal amount of 81¤2% senior subordinated notes due 2015 in a private placement transaction. Interest on the senior subordinated notes is payable on February 1 and August 1 of each year, beginning on August 1, 2005. The notes mature on February 1, 2015 and may be redeemed, at our option, in whole or in part, at any time on or before February 1, 2010 at a price equal to 100% of the principal amount, plus an applicable make-whole premium, and accrued and unpaid interest and special interest if any, to the date of redemption, and on or after February 1, 2010 at certain specified redemption prices. In addition, on or before February 1, 2008, we may redeem up to 40% of the aggregate principal amount of the senior subordinated notes issued under the indenture with the proceeds of certain equity financings. The new senior subordinated notes are general unsecured obligations (1) subordinated in right of payment to all of our and the guarantors’ existing and future senior indebtedness, including any borrowings under our new senior credit facilities; (2) equal in right of payment with any of our and the guarantors’ existing and future senior subordinated indebtedness; (3) senior in right of payment to all of our and the guarantors’ existing and future subordinated indebtedness and (4) structurally subordinated to all obligations of our subsidiaries that do not guarantee the outstanding notes. On June 15, 2005, we completed an exchange offer of these senior subordinated notes for substantially identical notes registered under the Securities Act of 1933, as amended. As of March 31, 2007, those Notes remain outstanding.
Off-Balance Sheet Arrangements. We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. From time to time we may enter into operating leases, letters of credit, or take-or-pay obligations related to the purchase of raw materials that would not be reflected in our balance sheet.
Recent Accounting Pronouncements. SFAS No. 157— In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. SFAS No. 157 will apply to fiscal years beginning after November 15, 2007. Management is currently evaluating the impact of SFAS No. 157 on the consolidated financial statements.
SFAS No. 159— In February 2007, the FASB issued SFAS No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities, to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS No. 159 on the consolidated financial statements.
Critical Accounting Policies and Estimates. We have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We included in our Form 10-K for the year ended December 31, 2006
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a discussion of our most critical accounting policies, which are those that have a material impact on our financial condition or operating performance and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Factors Affecting Future Results
In this report, we have made various statements regarding current expectations or forecasts of future events, which speak only as of the date the statements, are made. These statements are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are also made from time-to-time in press releases and in oral statements made by the officers of Accuride. Forward-looking statements are identified by the words “estimate,” “project,” “anticipate,” “will continue,” “will likely result,” “expect,” “intend,” “believe,” “plan,” “predict” and similar expressions. Forward looking statements also include, but are not limited to, statements regarding commercial vehicle market recovery, projections of revenue, income, loss, or working capital, capital expenditure levels, ability to mitigate rising raw material costs through increases in selling prices, plans for future operations, financing needs, the ultimate outcome and impact of any litigation against Accuride, the sufficiency of our capital resources and plans and assumptions relating to the foregoing.
Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect. Therefore, undue reliance should not be placed upon these estimates and statements. We cannot assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.” We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised to consult further disclosures we may make on related subjects in our filings with the SEC. In addition to other factors discussed in this report, some of the important factors that could cause actual results to differ materially from those discussed in the forward-looking statements include the following:
· a more severe than anticipated commercial vehicle industry downturn in 2007 could have a material adverse effect on our business;
· the loss of a major customer could have a material adverse effect on our business;
· the demands of original equipment manufacturers for price reductions may adversely affect profitability;
· our credit documents contain significant financial and operating covenants that limit the discretion of management with respect to certain business matters. We must also meet certain financial ratios and tests as described above. Failure to comply with the obligations contained in the debt agreements could result in an event of default, and possibly the acceleration of the related debt and the acceleration of debt under other instruments evidencing debt that may contain cross-acceleration or cross-default provisions;
· a labor strike may disrupt our supply to our customer base;
· we use a substantial amount of raw steel and aluminum and are vulnerable to industry shortages, significant price increases, and surcharges, some of which we may not be able to pass through to our customers;
· we may encounter increased competition in the future from existing competitors or new competitors;
· our significant indebtedness may have important consequences, including, but not limited to, impairment of our ability to obtain additional financing, reduction of funds available for operations and business opportunities or limitations on our ability to dispose of assets;
· significant volatility in the foreign currency markets could have an adverse effect on us;
· our ability to service our indebtedness is dependent upon operating cash flow;
· an interruption of performance of our machinery and equipment could have an adverse effect on us;
· an interruption in supply of steel or aluminum could reduce our ability to obtain favorable sourcing of such raw materials;
· we may be subject to liability under certain environmental laws and the cost of compliance with these regulations could have a material adverse effect on our financial condition and may adversely affect our ability to sell or rent such property or to borrow using such property as collateral;
· the interests of our principal stockholder may conflict with the interests of the holders of our securities; and
· our success depends largely upon the abilities and experience of certain key management personnel. The loss of the services of one or more of these key personnel could have a negative impact on our business.
For further information, refer to the business description and additional risk factors sections included in our Form 10-K for the year ended December 31, 2006, as filed with the SEC.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of doing business, we are exposed to risks associated with changes in foreign exchange rates, raw material/commodity prices, and interest rates. We use derivative instruments to manage these exposures. The objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures.
Foreign Currency Risk
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures to maximize the overall effectiveness of our foreign currency derivatives. The principal currency of exposure is the Canadian dollar. Foreign exchange forward contracts and option contracts are used to offset the impact of the variability in exchange rates on our operations, cash flows, assets and liabilities. At March 31, 2007, we had open foreign exchange forward contracts of $28.8 million.
Raw Material/Commodity Price Risk
We rely upon the supply of certain raw materials and commodities in our production processes and have entered into long-term supply contracts for our steel and aluminum requirements. The exposures associated with these commitments are primarily managed through the terms of the sales, supply, and procurement contracts. From time to time, we use commodity price swaps and futures contracts to manage the variability in certain commodity prices. At March 31, 2007, we had no material commodity price swaps and futures contracts.
Interest Rate Risk
We use long-term debt as a primary source of capital in our business. The following table presents the principal cash repayments and related weighted average interest rates by maturity date for our long-term fixed-rate debt and other types of long-term debt at March 31, 2007:
(Dollars in thousands) | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | | Total | | Fair Value | |
Long-term Debt: | | | | | | | | | | | | | | | | | |
Fixed | | — | | — | | — | | — | | — | | $ | 275,000 | | $ | 275,000 | | $ | 277,750 | |
Average Rate | | — | | — | | — | | — | | — | | 8.50 | % | 8.50 | % | | |
Variable | | — | | — | | — | | — | | — | | $ | 307,725 | | $ | 307,725 | | $ | 310,010 | |
Average Rate | | — | | — | | — | | — | | — | | 7.34 | % | 7.34 | % | | |
We have used interest rate swaps to alter interest rate exposure between fixed and variable rates on a portion of our long-term debt. As of March 31, 2007, we had one interest rate swap agreement of $250.0 million outstanding that will mature in March 2008. Under the terms of the interest rate swap agreements entered into in March 2005, we agreed with the counterparty to exchange, at specified intervals, the difference between 3.55% from March 2005 through March 2006, 4.24% from March 2006 through March 2007, and 4.43% from March 2007 through March 2008, and the variable rate interest amounts calculated by reference to the notional principal amount.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither Accuride nor any of our subsidiaries is a party to any legal proceeding which, in the opinion of management, would have a material adverse effect on our business or financial condition. However, we from time-to-time are involved in ordinary routine litigation incidental to our business, including actions related to product liability, contractual liability, workplace safety and environmental claims. We establish reserves for matters in which losses are probable and can be reasonably estimated. While we believe that we have established adequate accruals for our expected future liability with respect to our pending legal actions and proceedings, we cannot assure you that our liability with respect to any such action or proceeding would not exceed our established accruals. Further, we cannot assure that litigation having a material adverse affect on our financial condition will not arise in the future.
Item 6. Exhibits
Exhibit No. | | | | Description |
| | | | |
2.1 | | — | | Agreement and Plan of Merger, dated as of December 24, 2004, by and among Accuride Corporation, Amber Acquisition Corp., Transportation Technologies Industries, Inc., certain signing stockholders and the Company Stockholders Representatives. Previously filed as an exhibit to the Form 8-K filed on December 30, 2004 and incorporated herein by reference. |
2.2 | | — | | Stock Subscription and Redemption Agreement, dated as of November 17, 1997, among Accuride Corporation, Hubcap Acquisition L.L.C. and Phelps Dodge Corporation. Previously filed as an exhibit to the Form S-4 effective July 23, 1998 (Reg. No. 333-50239) and incorporated herein by reference. |
2.3 | | — | | Amendment to Agreement and Plan of Merger, dated as of January 28, 2005, by and among Accuride Corporation, Amber Acquisition Corp., Transportation Technologies Industries, Inc. certain signing stockholders and the Company Stockholders Representatives. Previously filed as an exhibit to the Form 8-K filed on February 4, 2005 and incorporated herein by reference. |
3.1 | | — | | Amended and Restated Certificate of Incorporation of Accuride Corporation. Previously filed as an exhibit to Amendment 4, filed on April 21, 2005, to the Form S-1 effective April 25, 2005 (Reg. No. 333-121944) and incorporated herein by reference. |
3.2 | | — | | Amended and Restated Bylaws of Accuride Corporation. Previously filed as an exhibit to Form 8-K filed on December 22, 2005 and incorporated herein by reference. |
4.1 | | — | | Specimen common stock certificate of registrant. Previously filed as an exhibit to Amendment 2, filed March 25, 2005, to Form S-1 effective April 25, 2005 (Reg. No. 333-121944) and incorporated herein by reference. |
4.2 | | — | | Indenture, dated as of January 31, 2005, by and among the Registrant, all of the Registrant’s direct and indirect Domestic Subsidiaries existing on the Issuance Date and The Bank of New York Trust Company, N.A., with respect to $275.0 million aggregate principal amount of 8 1¤2% Senior Subordinated Notes due 2015. Previously filed as an exhibit to the Form 8-K filed on February 4, 2005 and incorporated herein by reference. |
4.3 | | — | | Amended and Restated Registration Rights Agreement dated January 31, 2005 by and between the Registrant and each of the Stockholders (as defined therein). Previously filed as an exhibit to the Form 8-K filed on February 4, 2005 and incorporated herein by reference. |
4.4 | | — | | Shareholder Rights Agreement dated January 31, 2005 by and between the Registrant and the Stockholders (as defined therein). Previously filed as an exhibit to the Form 8-K filed on February 4, 2005 and incorporated herein by reference. |
4.5 | | — | | Registration Rights Agreement, dated January 31, 2005, by and among Accuride Corporation, as issuer, the Guarantors named in Schedule A thereto and Lehman Brothers Inc., Citigroup Global Markets Inc. and UBS Securities LLC, as initial purchasers. Previously filed as an exhibit to Amendment 2, filed March 25, 2005, to Form S-1 effective April 25, 2005 (Reg. No. 333-121944) and incorporated herein by reference. |
4.6 | | — | | Stockholders’ Agreement, dated January 21, 1998, as amended and assigned, by and among Accuride Corporation, RSTW Partners III, L.P. (as successor to Phelps Dodge Corporation) and Hubcap Acquisition L.L.C. Previously filed as an exhibit to Amendment 2, filed March 25, 2005, to Form S-1 effective April 25, 2005 (Reg. No. 333-121944) and incorporated herein by reference. |
4.7* | | — | | Form of Stockholders’ Agreement by and among Accuride Corporation, certain employees and Hubcap Acquisition L.L.C. Previously filed as an exhibit to the Form S-4 effective July 23, 1998 (Reg. No. 333-50239) and incorporated herein by reference. |
4.8* | | — | | Form of Amendment to Stockholders’ Agreement by and among Accuride Corporation, certain employees |
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| | | | and the Hubcap Acquisition L.L.C. Previously filed as an exhibit to Amendment No. 1, filed September 22, 2005 (Reg. No. 333-128327) and incorporated herein by reference. |
4.9 | | — | | Bond Guaranty Agreement dated as of March 1, 1999 by Bostrom Seating, Inc. in favor of NBD Bank as Trustee. Previously filed as an exhibit to Amendment No. 1 filed on February 23, 2005 to the Form S-1 effective April 25, 2005 (Reg. No. 333-121944) and incorporated herein by reference. |
10.10 | | — | | Lease Agreement, dated as of February 9, 2007, by and between Imperial Group, L.P. and Northgate Investors, LLC. Previously filed as an exhibit to the Form 8-K filed on February 13, 2007, and incorporated herein by reference. |
10.11 | | — | | Lease Agreement, dated as of March 13, 2007, by and between Imperial Group, L.P. and B.R. Williams Trucking, Inc. Previously filed as an exhibit to the Form 8-K filed on March 13, 2007, and incorporated herein by reference. |
31.1† | | — | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14 of the Exchange Act of 1934 - Terrence J. Keating. |
31.2† | | — | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14 of the Exchange Act of 1934 – David K. Armstrong. |
32.1† | | — | | Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
† | Filed herewith |
* | Management contract or compensatory agreement |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ACCURIDE CORPORATION
/s/ Terrence J. Keating | | | Dated: | May 2, 2007 | |
Terrence J. Keating | | |
Chairman and Chief Executive Officer | | |
| | |
| | |
/s/ David K. Armstrong | | | Dated: | May 2, 2007 | |
David K. Armstrong | | |
Chief Financial Officer and General Counsel | | |
Principal Accounting Officer | | |
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