Accuride Corporation Reports Third Quarter Results for 2008
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EVANSVILLE, Ind. November 6, 2008: Accuride Corporation, on a U.S. GAAP basis, a net loss of $201.2 million, or ($5.67) per diluted share, negatively impacted by non-cash goodwill and other intangible impairment and restructuring charges totaling $202.0 million, or ($5.69) per diluted share
Accuride Corporation , a leading manufacturer and supplier of commercial vehicle components, today announced its third quarter fiscal year 2008 results. Sales were $239.5 million, compared with $220.6 million in the prior year period. The increase in sales is related to strong demand for wheel-end components and military wheels as well as raw material recovery surcharges, partially offset by reduced demand from customers in the commercial vehicle industry. On a U.S. GAAP basis, the Company reported a net loss of $201.2 million, or ($5.67) per diluted share, compared with a net loss of $1.2 million, or ($0.03) per diluted share, in the prior year. The results for the quarter were impacted by $195.5 million in non-cash goodwill and other intangible impairment and $6.5 million of restructuring charges totaling $202.0 million, or ($5.69) per diluted share.
“Throughout the third quarter, we continued to build on the momentum from the previous quarter including organic growth initiatives and operating improvements,” said Bill Lasky, Accuride’s President and CEO. “Even though customer demand in our end markets remained at low levels, the restructuring initiatives announced during the quarter allowed us to streamline our operations and lower operating expenses without hindering our ability to meet projected customers’ needs during the next industry peak build levels.”
Sales of $239.5 million in the third quarter of 2008 were up 8.6 percent compared to the prior year quarter. Components sales increased 23.6 percent during the third quarter, largely driven by increases in wheel-end and other industrial component sales and raw material surcharge recovery. Wheels sales declined 7.3 percent due to reduced demand for Class 5-7 vehicles and trailers, as well as reduced sales to light vehicle steel wheel customers.
Gross profit declined to $11.9 million, or 5.0 percent of sales, including $6.8 million in costs related to the recently announced restructuring initiatives compared to $13.3 million, or 6.0 percent of sales, in third quarter, 2007. Gross profit in the Wheels segment declined compared to the prior year quarter primarily due to lower demand for commercial vehicle wheels and $4.3 million in costs related to the recently announced restructuring initiatives. Gross profit in 2007 for the Wheels segment benefited from $0.4 million related to a commercial dispute with a customer which was offset by a $1.2 million charge related to a change in post-employment benefits. Gross profit in the Components segment improved dramatically versus the prior year as operations continue to improve despite $2.1 million in costs related to the recently announced restructuring initiatives.
The Company had an operating loss of $215.1 million in the third quarter of 2008, due to $212.2 million in goodwill and other intangible impairment and $11.5 million in restructuring charges. Excluding these charges, the Company experienced a decrease in operating expenses totaling $3.6 million related to on-going expense and salary reduction initiatives.
Restructuring Initiatives
On September 23, 2008, the Company announced a series of strategic restructuring initiatives to reduce expenses, increase competitiveness, strengthen customer relationships and improve shareholder value.
As a result of the initial initiatives, Accuride eliminated 392 positions, or 11 percent of its total workforce. At the same time, the Company reiterated that it would continue to pursue a second phase of initiatives that would further reduce overhead costs and improve asset utilization through the redeployment of equipment and rationalization of facilities, while maintaining capacity to service projected customer needs during peak build levels.
The Company incurred a restructuring charge of approximately $11.5 million in the third quarter of 2008, of which a total of $7.2 million will impact cash during 2008 and 2009. It is expected that the restructuring will save the Company an estimated $6.0 million in 2008 and generate annual cost savings of $27.5 million thereafter. The impacts and benefits of the second phase of restructuring are expected to be announced in late fourth quarter.
Goodwill and Other Intangible Impairment
Under SFAS No. 142, we are required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The analysis of potential impairment of goodwill requires a two-step approach. The first step is the estimation of fair value of each operating segment. If step one indicates that impairment potentially exists, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value.
Due to the significant decline in our stock price resulting from overall economic and industry conditions, we determined that an indicator of impairment existed as of June 30, 2008, and subsequently began the step one analysis. The results indicate that impairments do exist in our Components and Other reporting segments. As we were not able to complete the step two analysis, we recorded the estimated goodwill and other intangible asset impairment charges of $193.1 million and $19.1 million, respectively, in the three months ended September 30, 2008. We plan to conclude the analysis during the three months ended December 31, 2008, and will make any adjustments to the impairment charges, if necessary. Such charges are non-cash and do not affect our liquidity, tangible equity or debt covenant ratios.
For the nine-month period ended September 30, 2008, sales were $722.6 million compared with $791.1 million in the prior year period. The prior year period included $32.7 million in additional light steel wheel sales to Ford and GM and $10.4 million of revenue related to a resolution of a commercial dispute with a customer. The additional decline in sales was related to a reduction in demand from the commercial vehicle industry.
Gross profit for the nine months declined to $45.5 million, or 6.3 percent of sales, from $65.9 million, or 8.3 percent of sales, in the prior year. Gross profit in 2008 was impacted by $6.8 million in costs related to the recently announced restructuring initiatives. Gross profit in the Wheels segment declined compared to the prior year due primarily to lower demand for commercial vehicle wheels and the $4.3 million in restructuring initiative costs discussed above. During the first nine months of 2007, the Wheels segment recognized $17.5 million of severance and other benefit charges related to a reduction in the workforce in Canada, other benefit charges of $1.2 million related to a change in post-employment benefits in our facility in Erie, Pennsylvania, and $11.8 million of additional depreciation expense as a result of the reduction of useful lives of certain assets, which was partially offset by $10.4 million related to the aforementioned resolution of a commercial dispute with a customer. Gross profit in the Components segment declined compared to the prior year despite improvements in operations due to lower demand for commercial vehicles and $2.1 million in costs related to the recently announced restructuring initiatives. Gross profit in the Components segment for the first nine months of 2008 was impacted by $7.7 million of one-time charges related to a labor disruption at the Rockford, Illinois, facility and $2.0 million of severance related charges.
The Company had an operating loss of $207.9 million in the nine-month period ended September 30, 2008, due primarily to $212.2 million in goodwill and other intangible impairment and $11.5 million in restructuring charges. Excluding these charges, the Company experienced a decrease in operating expenses totaling $6.5 million related to ongoing expense and salary reduction initiatives. The Company had operating income of $22.9 million in the corresponding period last year.
The Company reported a net loss of $209.5 million, or ($5.91) per diluted share, during the first nine months of 2008 including goodwill and other intangible impairment and restructuring charges totaling $202.0 million, or ($5.69) per diluted share. This compares to net income of $1.8 million, or $0.05 per diluted share, in the first nine months of the prior year.
Liquidity and Debt
Adjusted EBITDA was $20.1 million, or 8.4 percent of sales, for the third quarter of 2008, compared to Adjusted EBITDA of $13.7 million, or 6.2 percent of sales, for the same quarter of 2007. Adjusted EBITDA was $58.3 million, or 8.1 percent of sales, for the first nine months of 2008, compared to Adjusted EBITDA of $91.2 million, 11.5 percent of sales, for the same period in 2007. The purpose and reconciliation of Adjusted EBITDA for the Company to the most directly comparable GAAP measure is set forth in the accompanying schedules.
As of September 30, 2008, the Company had cash of $32.4 million and total debt of $572.7 million resulting in net debt of $540.3 million. For the third quarter of 2008, cash from operating activities was $5.5 million and capital expenditures totaled $5.0 million, resulting in free cash flow of $0.5 million, compared to free cash flow of $2.6 million in the third quarter of 2007. The Company expects to generate approximately $45-50 million in free cash flow in the fourth quarter of this year.
As of September 30, 2008, the leverage ratio as defined by the Company’s credit agreement was 6.62 times trailing Adjusted EBITDA. The Company is currently in full compliance with the financial covenants under its credit facility and anticipates compliance through the end of the year. Depending on the strength of the commercial vehicle market and the Company’s results from operations, it is possible that the Company may not maintain compliance with certain financial covenants at the end of the first quarter of 2009. The Company is monitoring this situation closely and will continue to explore alternatives to address compliance concerns. All debt amortization payments have been prepaid through 2011.
On October 30, 2008, the Company sent a notice to draw $95 million in principal amount under its existing $125 million revolving credit facility under the Fourth Amended and Restated Credit Agreement as a precautionary measure in light of the current financial market conditions. The Company received $78.4 million in proceeds in connection with the draw down notice. As anticipated, Lehman Commercial Paper Inc. did not fund its $16.6 million portion of the draw down due to its bankruptcy filing. The remaining undrawn committed amount of the revolving credit facility after giving effect to the borrowing described above is approximately $30 million of which Lehman Commercial Paper Inc.’s remaining commitment is approximately $7.6 million. The Company does not have any immediate needs for the additional liquidity.
Industry Overview
Accuride Corporation continues to be negatively impacted by continued weakness within the commercial vehicle market. The three major segments Accuride supplies (North America Class 5-8 vehicles, U.S. Trailers, and the related aftermarket channels) have all suffered year-over-year losses mainly due to a soft economy and a recessionary freight environment.
During the third quarter, the industry saw improvement within the North America Class 8 segment compared to the previous year’s third quarter, such improvement however, was offset by declines in North American Class 5-7, U.S. trailer and aftermarket segments.
Backlogs within the Class 5-8 markets as well as the trailer market are currently at historical lows and order boards within these markets saw month-over-month declines in the third quarter. With backlogs failing to increase, some OEMs continue to reduce their build plans with very little notice to suppliers for the remainder of 2008. Currently OEM reported build rates translate into North America Class 8 production levels of approximately 200,000 units for 2008.
Looking ahead to 2009, the Company does not anticipate a significant pre-buy in advance of upcoming changes in emission standards similar to what was experienced in 2006. According to industry experts, equipment demand will remain at replacement levels through the first half of 2009 as the general economy and freight environment remain weak. Therefore, 2009 outlook expectations have been lowered with an industry rebound not expected until the second half of the year at the earliest.
Company Outlook
As the Company reported on September 23, 2008, the restructuring initiatives are expected to have an approximate $6 million incremental impact to its fourth quarter 2008 earnings. The Company anticipates that mitigating factors will keep its earnings under pressure. Factors include a prolonged delay in certain revenue programs due to customer start-up difficulties, continued weak build rates and a delay of a portion of the Company’s recovery of raw material cost increases to early 2009.
Based upon projected North American Class 8 production of approximately 200,000 units for 2008 and Class 5-7 production of approximately 180,000, the Company expects its 2008 Adjusted EBITDA to be in the range of $80 to $90 million.
“Despite a very challenging demand and raw material environment, we have made great strides by implementing operating improvements in a number of our businesses,” said Lasky. “The initial restructuring steps taken earlier this quarter will enable us to strengthen the Company as we head into 2009 with an estimated $20 million in year-over-year cost savings. But we aren’t stopping there. There are additional initiatives to be announced later in the fourth quarter that provide additional savings in 2009. While we are not yet prepared to share the details, we are drafting a phase two restructuring plan that has the potential to contribute an additional $12 – 15 million to our bottom line starting in 2010. Along with a lower cost structure for Accuride, the plan will result in added capacity in key areas. While it is anticipated that 2009 will be another tough year for the industry, I am confident that we have the correct individuals in place to effectively lead our operations, renew our focus on our core product lines, strengthen customer relationships, and ultimately enter 2010 ready for the upswing and positioned for leadership.”
The Company will conduct a conference call to review its third quarter results on Thursday, November 6, 2008, at 10:00 a.m. Central Time. The phone number to access the conference call is (866) 800-8652 in the United States, or (617) 614-2705 internationally, access code 34015342. The conference call will be accompanied by a slide presentation, which can be accessed through the investor relations section of the Company’s web site. A replay will be available beginning November 6, 2008, at 12:00 p.m. Central Time, continuing to November 13, 2008, by calling (888) 286-8010 in the United States, or (617) 801-6888 internationally, access code 95851310. The financial results for the three-month and nine-month period ended September 30, 2008, will also be archived at ACCURIDE.
