SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 1999.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From_____________to_____________.
Commission file number 333-50239
ACCURIDE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 61-1109077
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2315 Adams Lane
Henderson, KY 42420
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (502) 826-5000
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 X No
----- -----
There were 24,728 common shares outstanding as of March 31, 1999.
ACCURIDE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Income for Three Months Ended
March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statement of Stockholders' Equity (Deficiency)
for the Three Months Ended March 31, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (Unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
2
ITEM I. FINANCIAL STATEMENTS
ACCURIDE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31 DECEMBER 31,
ASSETS 1999 1998
(UNAUDITED)
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CURRENT ASSETS:
Cash and cash equivalents $ 38,454 $ 3,471
Customer receivables, net of allowance for doubtful
accounts of $757 and $1,008 59,858 52,287
Other receivables 15,193 8,372
Inventories, net 36,258 36,980
Supplies 7,283 7,187
Prepaid expenses 759 139
Income taxes receivable - 458
Deferred income taxes 881 611
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Total current assets 158,686 109,505
PROPERTY, PLANT AND EQUIPMENT, NET 162,998 159,826
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$31,655 and $30,942 82,604 83,317
Investment in affiliates 27,912 25,855
Deferred financing costs, net of accumulated
amortization of $2,077 and $1,634 12,166 12,609
Deferred income taxes 1,760 3,287
Other 10,724 10,526
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TOTAL $ 456,850 $ 404,925
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 38,183 $ 27,008
Current portion of long-term debt 1,350 1,350
Short term notes payable 5,211 3,911
Accrued payroll and compensation 7,088 8,149
Accrued interest payable 5,370 9,807
Income taxes payable 1,663
Accrued and other liabilities 5,272 6,606
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Total current liabilities 64,137 56,831
LONG-TERM DEBT, less current portion 424,328 387,939
OTHER LIABILITIES 12,345 12,021
MINORITY INTEREST 6,254 6,230
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.01 par value; 5,000 shares
authorized and unissued Common stock and
additional paid in capital, $.01 par value;
45,000 shares authorized, 24,768 shares issued
and outstanding in 1999 and 1998 24,158 24,158
Stock subscriptions receivable (1,086) (1,644)
Retained earnings (deficit) (73,286) (80,610)
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Total stockholders' equity (deficiency) (50,214) (58,096)
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TOTAL $ 456,850 $ 404,925
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See notes to unaudited consolidated financial statements.
3
ACCURIDE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
NET SALES $ 111,533 $ 93,908
COST OF GOODS SOLD 85,441 73,752
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GROSS PROFIT 26,092 20,156
OPERATING:
Selling, general and administrative 6,479 5,354
Start-up costs - 1,146
Management retention bonuses - 810
Recapitalization professional fees - 2,240
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INCOME FROM OPERATIONS 19,613 10,606
OTHER INCOME (EXPENSE):
Interest income 65 140
Interest (expense) (8,956) (6,703)
Equity in earnings (losses) of affiliates 2,315 (2,700)
Other (expense), net (368) (601)
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INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 12,669 742
INCOME TAX PROVISION 5,321 347
MINORITY INTEREST 24 (86)
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NET INCOME $ 7,324 $ 481
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----------- -----------
See notes to unaudited consolidated financial statements.
4
ACCURIDE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
COMMON
STOCK AND
ADDITIONAL STOCK RETAINED
PAID IN SUBSCRIPTIONS EARNINGS
CAPITAL RECEIVABLE (DEFICIT) TOTAL
---------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 24,158 $ (1,644) $ (80,610) $ (58,096)
Net income (Unaudited) 7,324 7,324
Proceeds from stock subscriptions receivable - 558 - 558
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BALANCE AT MARCH 31, 1999 (Unaudited) $ 24,158 $ (1,086) $ (73,286) $ (50,214)
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-------- --------- ---------- ----------
See notes to unaudited consolidated financial statements.
5
ACCURIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,324 $ 481
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 5,155 4,504
Amortization 1,243 1,012
Bonuses payable by a principal stockholder - 810
Deferred income taxes 1,257 (722)
Equity in (earnings) losses of affiliates (2,315) 2,700
Minority interest 24 86
Changes in certain assets and liabilities:
Receivables (14,392) (8,429)
Inventories and supplies 626 525
Prepaid expenses and other assets 1,243 (2,354)
Accounts payable 11,175 (246)
Accrued and other liabilities (6,508) 8,181
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Net cash provided by operating activities 4,832 6,548
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (8,327) (7,323)
Capitalized interest - (30)
Net cash distribution from AKW L.P. 265 (349)
Other (7) -
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Net cash used in investing activities (8,069) (7,702)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short term notes payable 1,300 3,000
Principal payments on short-term notes payable - (1,340)
Net increase in revolving line of credit 36,362 29,750
Proceeds from issuance of long-term debt - 333,918
Deferred financing costs - (13,735)
Proceeds from stock subscriptions receivable 558 905
Issuance of shares 108,000
Redemption of shares - (454,257)
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Net cash provided by financing activities 38,220 6,241
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Increase in cash and cash equivalents 34,983 5,087
Cash and cash equivalents, beginning of period 3,471 7,418
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Cash and cash equivalents, end of period $ 38,454 $ 12,505
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See notes to unaudited consolidated financial statements.
6
ACCURIDE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998
Note 1 - BASIS OF PRESENTATION - The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles, except that the unaudited consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, in the opinion of Accuride Corporation (the "Company"), all
adjustments (consisting of normal recurring accruals) considered necessary to
present fairly the consolidated financial statements have been included.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999. The unaudited consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements
and notes thereto disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
Note 2 - INVENTORIES - Inventories were as follows:
MARCH 31, DECEMBER 31,
1999 1998
-------- -----------
Raw materials $ 3,946 $ 8,920
Work in process 8,033 7,757
Finished manufactured goods 24,209 20,060
LIFO adjustment 1,143 1,122
Other (1,073) (879)
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Inventories, net $ 36,258 $ 36,980
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Note 3 - LABOR RELATIONS -The Company's prior contract with the UAW covering
employees at the Henderson Facility expired in February 1998 and the Company
was not able to negotiate a mutually acceptable agreement with the UAW.
Therefore, a strike occurred at the Henderson Facility on February 20, 1998.
The Company is continuing to operate with its salaried employees and
contractors. On March 31, 1998, the Company began an indefinite lock-out. The
members of the UAW have rejected all of the Company's offers for a new
contract. Currently, there is, and the Company believes that there will be,
no supply disruption to the Company's customer base; however, there can be no
assurance to that effect.
Note 4 - SUPPLEMENTAL CASH FLOW DISCLOSURE - During the three months ended
March 31, 1999, the Company paid $9,087 and $2,033 for interest and income
taxes, respectively. Non-cash transactions that resulted from the redemption
in 1998 included the issuance of common stock and the related stock
subscriptions receivable of $1,539 and the increase in stockholders' equity
and the net deferred tax asset in the amount of $18,480 from the increase in
the tax basis of assets.
Note 5 - NEW ACCOUNTING PRONOUNCEMENT - Statement of Financial Standards No.
133 ("SFAS 133"), "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," was issued in June 1998 and is effective for
7
all fiscal quarters of all fiscal years beginning after June 15, 1999. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as a fair value hedge, a
cash flow hedge, or a hedge of foreign currency exposure. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends
on the intended use of the derivative and the resulting designation.
Management has not yet fully evaluated the effect of the new standard on the
financial statements.
Note 6 - FOREIGN CURRENCY - As of January 1, 1999, the Mexican economy was
determined not to be highly inflationary. Accordingly, management has
reviewed the primary economic environment in which Accuride de Mexico, S.A.
de C.V. ("ADM") operates and determined ADM's functional currency to be the
U.S. dollar.
Note 7 - SEGMENT REPORTING - The Company operates in one business segment:
the design, manufacture and distribution of wheels and rims for trucks,
trailers, and other vehicles.
GEOGRAPHIC SEGMENTS - The Company has foreign operations in the United
States, Canada, and Mexico, which are summarized below. Sales between
geographic areas are made at negotiated selling prices.
United
Three months ended March 31, 1999 States Canada Mexico Eliminations Combined
Net Sales:
Sales to unaffiliated customers-Domestic $ 101,123 $ 3,900 $ 4,519 $ - $ 109,542
Sales to unaffiliated customers-Export 390 30 1,571 - 1,991
Sales among geographic segments 8,162 35,599 2,506 (46,267) -
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Total $ 109,675 $ 39,529 $ 8,596 $ (46,267) $ 111,533
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----------------------------------------------------------------------
Income from operations: $ 16,276 $ 2,241 $ 1,096 $ - $ 19,613
Assets:
Identifiable assets $ 280,827 $ 113,795 $ 48,353 $ (14,037) $ 428,938
Investments in affiliates 27,912 - - - 27,912
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Total $ 308,739 $ 113,795 $ 48,353 $ (14,037) $ 456,850
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United
Three months ended March 31, 1998 States Canada Mexico Eliminations Combined
Net Sales:
Sales to unaffiliated customers-Domestic $ 72,977 $ 11,907 $ 6,619 $ 91,503
Sales to unaffiliated customers-Export 416 175 1,814 2,405
Sales among geographic segments 2,291 30,058 501 (32,850) -
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Total $ 75,684 $ 42,140 $ 8,934 $ (32,850) $ 93,908
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Income from operations: $ 5,593 $ 4,478 $ 535 $ 10,606
Assets:
Identifiable assets $ 225,061 $ 113,501 $ 32,006 $ (14,024) $ 356,544
Investments in affiliates 22,415 22,415
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Total $ 247,476 $ 113,501 $ 32,006 $ (14,024) $ 378,959
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8
Sales to three customers exceeded 10% of total net sales for the three months
ended March 31, as follows:
1999 % OF 1998 % OF
AMOUNT SALES AMOUNT SALES
Customer one $ 27,794 24.9% $ 12,316 13.1%
Customer two 12,926 11.6% 8,336 8.9%
Customer three 11,710 10.5% 12,170 13.0%
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$ 52,430 47.0% $ 32,822 35.0%
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Each geographic segment made sales to all three major customers in the first
quarter of 1999 and 1998.
Note 8 - SUBSEQUENT EVENTS - On April 1, 1999, the Company acquired Kaiser
Aluminum & Chemical Corporation's ("Kaiser") 50% interest in AKW L.P., a
Delaware limited partnership ("AKW"), pursuant to the terms of a Purchase
Agreement by and among the Company, Kaiser and Accuride Ventures, Inc., a
wholly owned subsidiary of the Company (the "Acquisition"). In connection
with the Acquisition, AKW and Kaiser amended and restated an existing lease
agreement pursuant to which AKW leases certain property from Kaiser. AKW was
formed in 1997 as a 50-50 joint venture between Kaiser and the Company to
design, manufacture, and sell heavy-duty aluminum wheels. The Acquisition
gives the Company, through its wholly owned subsidiary, 100% control of AKW.
Total consideration paid to Kaiser for the 50% interest was approximately $70
million, which was determined through arms-length negotiations between the
parties. The Company temporarily financed the acquisition through the
Company's $140.0 million revolving line of credit (the "Revolver").
On April 16, 1999, the Company amended and restated its credit facility to
reflect an additional $100 million term loan provided by a syndication of
banks and other financial institutions with Citicorp USA, Inc. as
administrative agent, Salomon Smith Barney, Inc. as arranger, Bankers Trust
Company as syndication agent, and Wells Fargo Bank N.A. as documentation
agent. The purpose of the new term loan is to refinance approximately $70
million of debt borrowed under the Revolver to fund the Acquisition of
Kaiser's 50% interest in AKW and to otherwise reduce amounts outstanding
under the Revolver.
9
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 form.
Except for the historical information contained herein, this report on Form
10-Q contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
indicated by such forward-looking statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998.
NET SALES. Net sales increased by $17.6 million, or 18.8%, for the three
months ended March 31, 1999 to $111.5 million, compared to $93.9 million for
the three months ended March 31, 1998. The increase in net sales is primarily
due to increased industry volume and sales of new products from the new
Columbia, Tennessee facility which started operations in the third quarter of
1998.
GROSS PROFIT. Gross profit increased by $5.9 million, or 29.4% to $26.1
million for the three months ended March 31, 1999 from $20.1 million for the
three months ended March 31, 1998. Gross profit as a percentage of net sales
increased to 23.4% for the three months ended March 31, 1999 from 21.5% for
the three months ended March 31, 1998. The increase in gross profit as a
percentage of sales is due to an overall increase in volume and improved
margins at the Henderson, Kentucky facility. The improvements at Henderson,
Kentucky were achieved by effectively controlling the costs associated with
the labor strike. Gross profit was also favorably impacted by increased
industry volumes and sales of new products from the Columbia, Tennessee
facility.
OPERATING EXPENSES. Operating expenses decreased by $3.1 million, or 32.2%,
to $6.5 million for the three months ended March 31, 1999 from $9.6 million
for the three months ended March 31, 1998. This decrease was primarily due to
one time operating expenses incurred in the first three months of 1998 for
professional fees of $2.2 million related to the Company's recapitalization,
for start-up costs of $1.1 million relating to the new Tennessee light truck
wheels facility, and the management retention bonuses of $0.8 million paid by
Phelps Dodge Corporation, a previous principal stockholder ("Phelps Dodge")
in conjunction with the Company's recapitalization. Excluding the expenses
recorded for the three months ended March 31, 1998 for professional fees,
start-up costs, and management retention bonuses, operating expenses
increased by $1.1 million to $6.5 million for the three months ended March
31, 1999 from $5.4 million for the three months ended March 31, 1998. As a
percentage of net sales, operating expenses for the three months ended March
31, 1999 were 5.8% as compared to 5.7% for the three months ended March 31,
1998, excluding the expenses for professional fees, start-up costs, and
management retention bonuses.
OTHER INCOME (EXPENSE). Interest expense increased to $9.0 million for the
three months ended March 31, 1999 compared to $6.7 million for the three
months ended March 31, 1998, due primarily to the debt incurred in the
recapitalization of the Company on January 21, 1998, which was outstanding
for a full quarter in 1999 compared to 1998. Equity in earnings (losses) of
affiliates increased by approximately $5.0 million to $2.3 million for the
three months ended March 31, 1999 from a loss of $2.7 million for the three
months ended March 31, 1998. The increase was due to the increased equity
earnings from the AKW joint venture which contributed $2.2 million of
earnings in the first quarter of 1999 as compared to a loss of $2.8 million
in the first quarter of 1998 which was due to the $3.4 million effect of a
product recall campaign implemented at AKW. Excluding the $3.4 million effect
of the product recall campaign, equity in earnings
10
of affiliates increased $1.6 million to $2.3 million for the first quarter
1999 compared to $0.7 million for the first quarter of 1998 primarily due to
improved earnings at AKW.
ADJUSTED EBITDA. Adjusted EBITDA increased by $5.5 million, or 24.5%, to
$27.9 million for the three months ended March 31, 1999 from $22.4 million
for the three months ended March 31, 1998 due primarily to higher steel
product sales volume and higher equity in earnings of affiliates. In
determining Adjusted EBITDA for the three months ended March 31, 1999, income
from operations has been increased by (i) depreciation and amortization
(except for amortization of deferred financing costs) and (ii) equity in
earnings of affiliates. In determining Adjusted EBITDA for the three months
ended March 31, 1998, income from operations has been increased by (i)
depreciation and amortization, (ii) equity in earnings (losses) of
affiliates, (iii) $2.2 million of professional fees related to the Company's
recapitalization, (iv) $3.4 million relating to the AKW product recall, (v)
$0.8 million of management retention bonuses paid by Phelps Dodge, and (vi)
an estimated cost of $2.5 million incurred in connection with the labor
strike at the Company's facility in Henderson, Kentucky.
NET INCOME. Net income increased by $6.8 million to $7.3 million for the
three months ended March 31, 1999 from $0.5 million for the three months
ended March 31, 1998 due to higher pretax earnings, as described above, and a
lower effective tax rate. The Company's effective tax rate was 42.0% for the
three months ended March 31, 1999 compared to 46.8% for the three months
ended March 31, 1998. The lower effective tax rate is the result of increased
pre-tax income compared to the level of permanent differences.
CHANGES IN FINANCIAL CONDITION
At March 31, 1999, the Company's total assets amounted to $456.9 million, as
compared to $404.9 million at December 31, 1998. The $52.0 million or 12.8%
increase in total assets during the three months ended March 31, 1999 was
primarily the result of a $35.0 million increase in cash, an increase in net
property plant and equipment of $3.2 million, a $7.6 million increase in
customer receivables and a $6.8 million increase in other receivables. The
increase in cash is a result of a cash draw on the Revolver to fund the
purchase of Kaiser's 50% interest in AKW (see Note 8 of the unaudited
consolidated financial statements). The increase in net property, plant and
equipment was primarily due to investments in AdM's new facility. The
increase in customer receivables reflected increased sales volume from U.S.
customers. Other receivables increase was primarily due to (i) a $2.0 million
increase in accounts receivable from aluminum wheels sales by AKW, pursuant
to the AKW formation agreement whereby the Company performs all billing and
collection functions for AKW as a means of providing customer convenience,
(ii) a $1.4 million increase in a receivable from AKW for rebates paid to
aluminum wheel customers by the Company, (iii) a $2.1 million increase in a
receivable due from Industria Automotriz, S.A. de C.V. (49% owner of AdM) ,
and (iv) a $0.8 million increase in an unrealized gain associated with the
foreign currency forward contracts entered into by the Company.
At March 31, 1999, the Company's total liabilities amounted to $500.8
million, as compared to $456.8 million at December 31, 1998. The $44.0
million or 9.6% increase in total liabilities was primarily due to the $35.0
million increase in long-term debt to fund the purchase of Kaiser's 50%
interest in AKW (see Note 8 of the unaudited consolidated financial
statements) and a $11.2 million increase in accounts payable due to increased
production volumes and an improvement in managing payment terms.
11
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of liquidity are cash flow from operations and
borrowings under the Revolver. The Company's primary uses of cash are funding
working capital, capital expenditures under the Company's expansion plans and
debt service.
As of March 31, 1999, the Company had cash and short-term investments of
$38.5 million compared to $3.5 million at the beginning of the year. The
Company's operating activities provided $4.8 million and the financing
activities provided $38.2 million which was used to fund the Company's
investing activities of $8.1 million and increase its cash and short-term
investments $35.0 million to fund the purchase of AKW (see Note 8 of the
unaudited consolidated financial statements).
Investing activities during the three months ended March 31, 1999 were $8.1
million compared to $7.7 million for the three months ended March 31, 1998.
Cash flow from financing activities during the three months ended March 31,
1999 were $38.2 million compared to $6.2 million for the three months ended
March 31, 1998.
The Company incurred capital expenditures in 1998 (excluding capital
expenditures by AdM) of $29.9 million. The Company expects its capital
expenditures (excluding capital expenditures by AdM) to decrease to
approximately $26.2 in 1999. It is anticipated that these expenditures will
fund (i) approximately $6.0 million of technology advancement projects; (ii)
investments in productivity improvements in 1999 to the Company's steel wheel
business of approximately $7.7 million and (iii) maintenance of business
expenditures of approximately $10.5 million. Future investments in
productivity improvements are expected to be focused on additional
automation, shop floor and engineering systems and improved coating
capabilities.
The Company anticipates that AdM will require additional capital expenditures
of approximately $5.3 million for the remainder of 1999 to finalize
construction and equip the Monterrey, Mexico facility. The Monterrey, Mexico
facility is expected to be operational in mid-1999 at an approximate cost for
land and building of $9.2 million. Total project cost through 1999 is
expected to be approximately $29.4 million, of which approximately $24.1
million was spent as of March 31, 1999. The Company finalized a $32.5 million
credit facility for AdM on July 9, 1998. This is comprised of a term loan of
$25.0 million and a working capital facility of $7.5 million.
DESCRIPTION OF THE CREDIT FACILITY. In January 1998 the Company entered into
a credit facility (the "Credit Facility") with a syndicate of banks and other
financial institutions (the "Lenders") led by Citicorp USA, Inc., as
administrative agent (the "administrative agent"), Salomon Smith Barney,
Inc., as arranger, Bankers Trust Company, as syndication agent, and Wells
Fargo Bank N.A. as documentation agent. The Credit Facility provides for term
loans of $135.0 million (the "Term Loans") and a $140.0 million revolver (the
"Revolver"). The Term Loans are comprised of a $60.0 million loan that will
mature on January 21, 2005 ("Tranche A") and a $75.0 million loan that will
mature on January 21, 2006 ("Tranche B"). The Company's Canadian subsidiary
is the borrower under Tranche A, and the Company has guaranteed the repayment
of such borrowing under Tranche A and all other obligations of such Canadian
subsidiary under the Credit Facility. The Term Loans provide for nominal
annual amortization (approximately 1% per year). The commitment under the
Revolver will decline to $100.0 million on January 21, 2003 and final
maturity of loans under the Revolver will be January 21, 2004. The Credit
Facility was amended and restated in April 1999 to account for an additional
$100 million term loan. (See "Subsequent Events").
12
DESCRIPTION OF THE NOTES. In January 1998 the Company issued $200 million of
notes (the "Notes") pursuant to an indenture (the "Indenture") between the
Company and U.S. Trust Company, N. A., as trustee (the "Trustee"). The
Indenture is limited in aggregate principal amount to $300.0 million, of
which $200.0 million were issued as Private Notes and subsequently exchanged
for Exchange Notes, which exchange has been registered under the Securities
Act of 1933, as amended. Additional notes may be issued in one or more series
from time to time, subject to the limitations set forth under the Indenture.
The Indenture provides certain restrictions on the payment of dividends by
the Company. The Indenture is subject to and governed by the Trust Indenture
Act of 1939, as amended. The Notes are general unsecured obligations of the
Company and are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined in the Indenture) of the Company. As of March
31, 1999, the aggregate amount of the Company's outstanding Senior
Indebtedness was approximately $194.2 million. The Notes mature on February
1, 2008. Interest on the Notes accrues at the rate of 9 1?4% per annum and is
due and payable semi-annually in arrears on February 1 and August 1,
commencing on August 1, 1998, to holders of record of the Notes on the
immediately preceding January 15 and July 15.
Management believes that cash flow from operations and availability under the
Revolver will provide adequate funds for the Company's foreseeable working
capital needs for 1999, planned capital expenditures and debt service
obligations. Any future acquisitions, joint ventures or other similar
transactions will likely require additional capital, and there can be no
assurance that any such capital will be available to the Company on
acceptable terms or at all. The Company's ability to fund its working capital
needs, planned capital expenditures and scheduled debt payments, to implement
its expansion plans, to refinance indebtedness and to comply with all of the
financial covenants under its debt agreements, depends on its 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 the Company's control.
YEAR 2000 COMPLIANCE
In 1997, a comprehensive project plan to address the Year 2000 issue as it
relates to the Company's operation was developed and implemented. The scope
of the plan includes seven phases including Awareness, Identification, Impact
Analysis, Risk Evaluation, Remediation, Testing and Contingency Planning. A
project team that consists of key members of the technology staff,
representatives of functional business units and senior management was
developed.
An assessment of the impact of the Year 2000 issue on the Company's computer
systems was completed in the fourth quarter of 1997. From the assessment, the
Company identified and prioritized those systems deemed to be mission
critical or those that have a significant impact on normal operations.
The Company relies on third party vendors and service providers for certain
data processing capabilities. Formal communications with these providers were
initiated in 1997 to assess the Year 2000 readiness of their products and
services. Responses indicate that the significant providers currently have
compliant versions available or are well into the renovation and testing
phases. However, the Company can give no guarantee that the systems of these
service providers and vendors on which the Company's systems rely will be
timely Year 2000 compliant.
Additionally, the Company has implemented a plan to manage the potential risk
posed by the impact of the Year 2000 issue on its major customers and
suppliers. Formal communications have been initiated, and the assessment is
moving forward on schedule.
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CURRENT STATUS. The project team estimates that the Company's Year 2000
readiness project is approximately 75% complete. The following table provides
a summary of the current status of the seven phases involved and a projected
timetable for completion.
Project Phase % Completed Completion Comments
- -------------- ----------- ---------- ---------
Awareness 100% Completed
Identification 100% Completed
Impact Analysis 100% Completed
Risk Evaluation 100% Completed
---------------
Remediation 95% Oct. 31, 1999 All critical systems are completed.
Testing 85% June 30, 1999 Involves ongoing testing of critical systems.
Contingency Planning 10% Aug. 31, 1999
Overall Completion Estimate 77%
COSTS. The Company has thus far primarily used and expects to continue to use
internal resources to implement its readiness plan and to upgrade or replace
and test systems affected by the Year 2000 issue. During the three months
ended March 31, 1999, the Company incurred approximately $44,000 of direct
and indirect costs for Company-owned systems and applications related to Year
2000 remediation. A majority of these costs are currently believed to be
incremental expenses that will not recur in the Year 2000 or thereafter. Year
2000 remediation costs were approximately $1.3 million and $1.4 million in
1998 and 1997, respectively. The Company estimates that its additional costs
for Year 2000 remediation and testing of its computer systems through the end
of 1999 will not exceed $1.1 million.
The costs and the timetable in which the Company plans to complete the Year
2000 readiness activities are based on management's estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third party readiness plans and other
factors. The Company can make no guarantee that these estimates will be
achieved, and actual results could differ from such plans.
RISK ASSESSMENT. Given the information known at this time about the Company's
systems that are non-compliant, coupled with the Company's ongoing, normal
course of business efforts to upgrade or replace critical systems, as
necessary, management does not expect Year 2000 compliance costs to have a
material adverse impact on the Company. Although the Company believes that
internal Year 2000 compliance will be achieved by December 31, 1999, there
can be no assurance that the Year 2000 problem affecting the Company, its
customers and suppliers will not have a material adverse effect on the
Company's business, financial condition and results of operations. In light
of the many adverse conditions that could happen to the Company associated
with Year 2000 compliance, along with the speculation that some or many of
them may not happen, it is difficult to hypothesize a most reasonably likely
worst case Year 2000 scenario with any degree of certainty. With that in
mind, the Company currently believes the most reasonably likely worst case
scenario would be the failure of certain key production capabilities or
similar failures occurring within the Company's supply chain. These types of
catastrophic failures, although unlikely, would result in the inability of
the Company to supply products to customers for a period of time.
14
CONTINGENCY PLAN. Realizing that some disruption may occur despite its
efforts, the Company is in the process of developing contingency plans for
each critical system in the event that one or more of those systems fail.
Although not yet complete, the Company is considering the following items,
among others, as key pieces of the contingency plans: the creation of special
"rapid response" technology teams; scheduling availability of key personnel,
additional testing and simulation activities, establishment of rapid decision
processes, development of support critical customer functions in the event
information systems or mechanized processes experience Year 2000 disruptions,
determination of alternative suppliers and implementation of data retention
and recovery procedures for customers and critical business data with on-site
(primary) as well as off-site (secondary) data copies. While this is an
ongoing process, the Company expects to have the contingency plan
substantially completed by August 31, 1999.
SUBSEQUENT EVENTS
On April 1, 1999, the Company acquired Kaiser's 50% interest in AKW, pursuant
to the terms of a Purchase Agreement by and among the Company, Kaiser and
Accuride Ventures, Inc., a wholly owned subsidiary of Accuride. In connection
with the Acquisition, AKW and Kaiser amended and restated an existing lease
agreement pursuant to which AKW leases certain property from Kaiser. AKW was
formed in 1997 as a 50-50 joint venture between Kaiser and Accuride to
design, manufacture, and sell heavy-duty aluminum wheels. The Acquisition
gives the Company, through its wholly owned subsidiary, 100% control of AKW.
Total consideration paid to Kaiser for the 50% interest was approximately $70
million, which was determined through arms-length negotiations between the
parties. The Company temporarily financed the Acquisition through the
Company's Revolver.
On April 16, 1999, the Company amended and restated the Credit Facility to
account for an additional $100 million term loan provided by a syndication of
banks and other financial institutions. The purpose of the additional term
loan was to refinance approximately $70 million of debt under the Revolver
used to fund the recent acquisition of 50% of AKW L.P. and to pay down an
additional portion of the Revolver.
FACTORS AFFECTING FUTURE RESULTS
The factors discussed below, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this report, including, without limitation, in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
related press release and in oral statements made by authorized officers of
the Company. When used in this report, any press release or oral statements,
the words "estimate," "project," "anticipate," "expect," "intend," "believe"
and similar expressions are intended to identify forward-looking statements.
All of these forward-looking statements are based on estimates and
assumptions made by management of the Company, which, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance should not be
placed upon such estimates and statements. No assurance can be given that any
of such statements or estimates will be realized and actual results will
differ from those contemplated by such forward-looking statements.
Accordingly, the Company hereby identifies the following important factors
which could cause the Company's financial results to differ materially from
any such results which might be projected, forecast, estimated or budgeted by
the Company in forward-looking statements:
- - significant indebtedness of the Company may have important consequences,
including, but not limited to, impairment of the Company's ability to
obtain additional financing, reduction of funds available for operations
and business opportunities or limitation on the Company's ability to
dispose of assets;
- - the Company's ability to service its indebtedness is dependent upon
operating cash flow of its subsidiaries and joint ventures;
- - loss of a major customer could have material adverse effect on the
Company's business;
15
- - original equipment manufacturers' demands for price reduction may adversely
affect profitability;
- - cyclical nature of industry could cause fluctuations in demand for
Company's products;
- - labor strike may disrupt the Company's supply to its customer base;
- - interruption in supply of steel or aluminum could reduce Company's ability
to obtain favorable sourcing of such raw materials;
- - Company's competitors could reduce market for the Company's product;
- - potential liability of the Company for environmental matters and the costs
of compliance with certain governmental regulations could have a material
adverse effect on the Company's financial condition and may adversely
affect the Company's ability to sell or rent such property or to borrow
using such property as collateral;
- - Company may have difficulty in achieving growth strategies and there is no
assurance that such strategies will be successful or will improve operating
results;
- - continued service of key management personnel is not guaranteed;
- - interests of the principal stockholder of the Company may conflict with the
interests of the holders of securities of the Company; and
- - no assurance that the Company's computer software and operating systems, or
those of its customers or suppliers, will be Year 2000 compliant.
The foregoing review of the factors should not be construed as exhaustive or
as any admission regarding the adequacy of disclosures made by the Company
prior to this filing. For further information, refer to the "Risk Factors"
section included in the Company's Annual Report on Form 10-K for the Fiscal
Year ended December 31, 1998 filed with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of doing business, is exposed to the risks
associated with foreign currency exchange rates and changes in interest
rates. The Company uses foreign exchange contracts to hedge both balance
sheet and off-balance sheet foreign currency commitments. Specifically, these
foreign exchange contracts offset foreign currency denominated purchase
commitments from suppliers, accounts receivable from and future committed
sales to customers, and operating expenses in Canada. Management believes the
use of foreign currency financial instruments reduces the risks that arise
from doing business in international markets. Contracts are generally one
year or less. At March 31,1999, the Company had open foreign exchange forward
contracts with a notional amount of $54.5 million.
The Company's hedging activities provide only limited protection against
currency exchange risks. Factors that could impact the effectiveness of the
Company's hedging programs include accuracy of sales estimates, volatility of
currency markets and the cost and availability of hedging instruments. The
counterparties to the forward contracts are financial institutions with
investment grade credit ratings. The Company monitors its foreign currency
cash flow transactions and executes forward contracts to reduce its foreign
exchange exposures. The use of forward contracts protects the Company's cash
flows against unfavorable movements in exchange rates, to the extent of the
amount under contract. A 10% adverse change in currency exchange rates for
the Company's foreign currency derivatives held at March 31,1999, would have
an impact of approximately $5.4 million on the fair value of such
instruments. This quantification of exposure to the market risk associated
with foreign exchange financial instruments does not take into account the
offsetting impact of changes in the fair value of the Company's foreign
denominated assets, liabilities and firm commitments.
Accuride uses long-term debt as a primary source of capital in its business.
The following table presents the principal cash repayments and related
weighted average interest rates by maturity date for Accuride long-term
fixed-rate debt and its other types of long-term debt at March 31, 1999:
16
Long-Term Debt:
(Dollars in
thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed $200,000 $200,000 $200,000
Avg. Rate 9.25% 9.25%
Variable $0 $1,350 $10,725 $13,850 $4,475 $196,250 $226,650 $226,650
Avg. Rate 6.91% 8.08% 8.12% 7.85% 7.19% 7.30%
The Company has used an interest rate swap to alter interest rate exposures
between fixed and floating rates on a portion of the Company's long-term
debt. As of March 31, 1999, $100.0 million notional amount of interest rate
swap was outstanding. On average during the three month period ended March
31, 1999, the Company paid 5.75% as a fixed rate and received 4.9933% on the
interest rate swap. Under the terms of the interest rate swap, the Company
agrees with the counterparty to exchange, at specified intervals, the
difference between the fixed rate and floating rate interest amounts
calculated by reference to the agreed notional principal amount. The interest
rate swap matures in January, 2001. The Company also used an interest rate
cap to set a ceiling on the maximum floating interest rate the Company would
incur on a portion of the Company's long term debt. As of March 31, 1999,
$35.0 million notional amount of interest rate cap was outstanding. Under the
terms of the interest rate cap, the Company is entitled to receive from the
counterparty on a quarterly basis the amount, if any, by which the
three-month Eurodollar interest rate exceeds 7.5%. The interest rate cap
matures in January, 2001. The Company is exposed to credit related losses in
the event of nonperformance by the counterparties to the interest rate swap
and interest rate cap, although no such losses are expected as the
counterparties are financial institutions having an investment grade credit
rating.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company does not believe that there are any pending or threatened
legal proceedings other than non-material legal proceedings incidental
to the Company's business, that if adversely determined, could have a
material adverse effect on the Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
Not applicable.
17
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit No Description
---------- -----------
a) *10.1 Purchase Agreement dated April 1, 1999, between the Company, Accuride Ventures, Inc.
(the Company's wholly owned subsidiary) and Kaiser Aluminum and Chemical Corporation
("Kaiser").
*10.2 Amended and Restated Lease Agreement, dated April 1, 1999, between Kaiser and AKW, L.P.
10.3 Amended and Restated Credit Agreement, dated April 16, 1999, between the Company,
Citicorp USA, Inc., as administrative agent, Salomon Smith Barney, Inc. as arranger,
Bankers Trust Company as syndication agent and Wells Fargo Bank N.A. as the
documentation agent.
10.4 Amended and Restated Pledge Agreement dated April 16, 1999 between the Company, Accuride
Canada, Inc., and Accuride Ventures, Inc. as pledgors and Citicorp USA, Inc. as
administrative agent.
27.1 Financial Data Schedule
* Previously filed as an exhibit to the Company's
Form 8-K filed on April 14, 1999 and incorporated
herein by reference.
(b) Form 8-K No Form 8-K reports were filed during the quarter ended March 31, 1999
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/ WILLIAM P. GREUBEL Dated: May 14, 1999
- -----------------------------
William P. Greubel
President and Chief Executive Officer
/s/ JOHN R. MURPHY Dated: May 14, 1999
- -----------------------------
John R. Murphy
Vice President - Finance and Chief Financial Officer
Principal Accounting Officer
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