|Shares Out. (in M):||275||P/E||NA||NA|
|Market Cap (in M):||250||P/FCF||NA||NA|
|Net Debt (in M):||610||EBIT||0||35|
Accuride is a North American supplier of commericial vehicle components (primarily wheels) to heavy and medium duty truck and commercial trailer OEMs. This is a recommendation to purchase the 8.5% senior subordinated bonds, which will convert to equity upon the company's expected late 1Q / early 2Q 2010 emergence from bankruptcy. At a price of 91, a buyer is creating the enterprise (pre NOLs) for 4.9x / 7.2x / 9.1x mid-cycle ('05-'09) EBITDA / unlevered FCF / levered FCF. Applying 2011 plan projections, these ratios are 4.0x, 5.5x and 6.4x. At a valuation of 5.5x (8x unlevered FCF) my estimated 2011 EBITDA, I believe the equity (and converts) will appreciate >20% upon emergence. At 6.0x EBITDA, the potential appreciation is >35%.
Accuride is a deep cyclical operating in the trough part of the cycle. Starting in late 2007, trucking companies began delaying purchases due to a weak freight environment. This continued through 2008 and 2009 with North American Class 8 truck production falling an additional 43% in 2009. Compared to the 2006 peak, production is off 69%.
This weakness coupled with high debt levels from the KKR LBO and TTI acquisition led to Accuride's bankruptcy (Delaware/09-13449) on October 8, 2009. In a prearranged agreement with bondholders and senior lenders (i.e. "pre-pack"), holders of the 8.5% senior subordinated notes will receive 98% of the equity and an option to participate in a rights offering. Note - holders should participate in the rights offering.
Accuride is a North American manufacturer of commercial vehicle components via 19 facilities in the US, Mexico and Canada. The company's products include wheels (41% of sales), wheel-end components and assembles (27%), truck body and chassis parts (13%), seating assembles (4%) and other commercial vehicle components (15%). Known mainly for wheels, Accuride offers the broadest product line in the North American heavy and medium duty wheel industry, and is the only manufacturer of both steel and forged aluminum heavy and medium duty wheels.
The majority of sales are to heavy and medium duty truck and commercial trailer OEMs. Other customers include manufacturers of buses, commercial light trucks and military vehicles. Major customers include Daimler Truck North America (Freightliner, Western Star and Thomas Built), PACCAR (Peterbilt and Kenworth), Navistar and Volvo Truck (Volvo and Mack), which account for 55% of sales. Other customers large include Great Dane and Wabash National on the commercial trailer side and GM for light trucks. The company is a standard supplier of many components, which leads to recurring revenue as these components are installed on most trucks ordered from that platform, unless the end user specifically requests a different product, generally at an additional charge.
Production tends to be lower volume (limits foreign competition) and more customized in the truck industry. This is a key difference between Accuride and automotive suppliers. The relationship between suppliers and truck manufacturers is closer as truck OEMs place a premium on dependable component suppliers, flexibility and "just-in-time" inventory management. Accuride is able to provide a one-stop shopping solution for many types of mission critical components.
Competitors in wheels include Alcoa, ArvinMeritor and Hayes Lemmerz. In the other markets, ArvinMeritor, Consolidated Metco, Web Wheel Products, National Seating and several smaller private companies compete with the company. In terms of market share, Accuride holds #1 or #2 positions in all of its markets.
Raw materials consist of steel and steel scrap, pig iron and aluminum. Other raw materials include silicon sand, binders, sand additives and coasted sand. Natural gas and coke are the primary energy sources for the company's melting operations. On the labor front, approximately 49% of employees are unionized.
As mentioned above, Accuride filed for bankruptcy in October. The company announced that it had agreed to a restructuring with a majority of the ad hoc committee of holders of its 8.5% senior subordinated notes and the steering committee of lenders under its credit facility. The terms of this arrangement are listed below:
A plan confirmation hearing is scheduled for February 10, 2010. Pursuant to a Key Employee Incentive Plan (KEIP), management will get a $4.41 MM bonus if Accuride emerges before March 1st. This potential bonus declines each month. Emergence after May 31, 2010 results in no bonus.
Pre-Petition Capital Structure (9/30/09)
US & CAD Revolver $56 MM
Term Loan B $225
Last-Out Term Loan* $77
Industrial Revenue Bond $3
8.5% Senior Subordinated Notes* $275
Total Debt** $635 MM
Net Debt $610 MM
*Held by Sun Capital Partners.
**The latest monthly (October) I could find shows total debt of $658 MM and cash of $53 MM.
Estimated Post-Petition Capital Structure
Restructured Credit Facility* $281 MM
Industrial Revenue Bond $3
7.5% Senior Convertible Notes** $140
Total Debt*** $424 MM
Net Debt $329 MM
*LIBOR +6.75% (with a LIBOR floor of 3%).
**Terms: PIK for first 3 years, 2020 maturity, convertible (187.5 MM shares) @ any time by holder, call protection, upstream guarantees.
***Does not include OPEB and pension liabilities of $81 MM as of 12/31/08.
The $140 MM rights offering of converts is coercive and should trade well above par, so I expect most subordinated holders to participate. The offering is backstopped (for a king's ransom) by Blackrock, Brigade, Sankaty and Tinicum. Assuming conversion of the new converts, subordinated holders will receive a 91.4% stake, equity holders 0.6% and the backstop providers receive an incremental 8%. If the warrants* are exercised, the interests shift to 26.7% (bonds), 6.5% (equity), 6.8% (backstop) and 60% (convert), respectively.
*Warrants (15% of company) to be exercisable at a "strike price that is 110% of a par recovery" on the subordinated notes on the effective date.
Financials 2005 2006 2007 2008 2009E
Revenue $1,229 MM $1,408 $1,014 $931 $575
EBITDA $198 $216 $106 $67 $22
Capital Expenditures $48 $42 $36 $30 $23
North American Class 5-7* 253 275 205 158 94
North American Class 8* 336 376 212 205 116
Trailers* 256 277 214 142 76
Plan Projections 2010E 2011E 2012E 2013E
Revenue $769 MM $1,023 $1,247 $1,456
EBITDA $80 $152 $201 $240
North American Class 5-7* 123 157 180 195
North American Class 8* 142 253 298 309
Trailers* 102 180 237 263
*ACT Research. An estimated 20% and 35% of sales is from Class 5-7 and Class 8 trucks.
As you can see from the historical performance, this business is very cyclical. Pre-recession, the sector grew with GDP. Management's 2011E numbers appear aggressive, although the announced $70 MM cost cuts* from the "strategic restructuring" should provide a tailwind. On the last conference call (2Q09) management claimed the company gained market share (without using price) including winning its first aluminum wheel sales contract in Europe (Utility Trailer) and additional military business. Typically, incremental product sales result in contribution margins in the 20%-30% range, which should provide some expense leveraging when sales rebound.
*Headcount reductions of 31%, consolidated facilities (aluminum plants/warehouses) and reduced sq. footage by 20% without reducing capacity.
In any event, there should be sustained growth off of the lows seen in 2008 and 2009. The average age of Class 8 North American trucks in 2010 will approximate 6.6 years, the highest level ever (at least going back 20 years). Historically, fleet ages averaged 5.8 years. Between the cost cuts, recent contract wins and volume increases, I expect 2011 to at least hit the mid-cycle average of $125-130 MM.
At current prices, I calculate you are creating Accuride for 4.0x, 5.5x and 6.4x EBITDA, unlevered FCF and FCF using management's 2011 estimates. On a mid-cycle basis, which I believe is most appropriate, these ratios are 4.9x, 7.2x and 9.1x. The comparable set in the POR is Commercial Vehicle Group, Cummins, Navistar, PACCAR, Superior Industries, Titan International, Wabash National and WABCO. I also included ArvinMeritor. The average multiple for these businesses is 6.6x 2011 EBITDA, or 5.8x if I remove the highest and the lowest multiples.
On a standalone basis and compared to peers, Accuride looks cheap to me. I believe there is >20-35% potential appreciation (before considering the value of NOLs). Supplying commercial wheels to large truck OEMs is not a great business, but it is more specialized than the automotive business and less capital intensive. In the end you're buying the market dominant player at a production trough (1st time since 1982 production declined three years in a row) with bankruptcy dynamics on your side.
Emergence from bankruptcy
Evidence of increasing Class 5-8 truck production