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Case Study:

Options for a Middle-Market Bankruptcy & Restructuring

Presented byThe Turnaround Management Association

Southern California Chapter

October 26th, 2010

Anderson School of Management

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The CastEvent Announcer Patrick Gengoux, UCLA Anderson

School of Management - class of 2011

Accuride CEO Rob Holland, Creo Capital Partners

Investment Banker/Financial Restructuring Advisor

Jeff Raithel, Houlihan Lokey (actually worked on this case).

Attorney for the Secured Lender Chris Manderson, Manderson Schafer & McKinlay

Attorney for the Company John Schafer, Manderson Schafer & McKinlay

Turnaround Consultant Paul Deis, Essex of Oak Park, Inc.

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Patrick – Kick off

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Case Objectives: To illustrate the turnaround process

• What a turnaround involves • Who influences the outcome of a turnaround• Highlight the different roles necessary to effect a

turnaround including– Credit Risk Management– Operational Evaluation/Change Implementation a.k.a. turnaround

consulting– Financial Advisory/Restructuring– Legal– Financing

• Give you a basic sense of the what to expect should your company find itself in distress

• Value of avoiding a bankruptcy by effective management

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A Turnaround - in 3 Acts

ACT I : Making Trouble (2004-2007)

ACT II: Dealing with Trouble (2007-

2009)

ACT III: The Turnaround (TBD)

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Making Trouble: 2004-2007The Entrepreneur/CEO –

• His company, Accuride was in business since 1986,

• Went public in 2005.

• Accuride summary:

– Automotive industry supplier

– Wheels,

– Chassis & suspension components

– Trucks, commercial vehicles

– Sales tightly coupled to auto industry sales

• And then they over-expanded and the market turned on them.

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Rob – The CEO - Making Trouble

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2008 Revenue by Product Line

Heavy-Duty Truck (Class 8)

Medium-Duty Truck (Class 5-7)

Truck Trailer

Light Truck (Class 3-4)

Heavy Conventional Tandem-Axle Van Transit Bus

Recreational Vehicle Single-Axle Van Stake

Van Flat Bed Tanker

Medium Conventional School Bus Walk-In Van

2008 Revenue by End Market

Others, 16.0%

Trailers, 5.0%

Heavy / Medium Duty, 49.0%

Aftermarket, 27.0%

Military, 3.0%

Wheels, 42.0%

Other Components, 19.0%

Wheel End Components, 23.0%

Seating Assemblies, 4.0%

Truck Body and Chasis, 12.0%

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Rob – Industry Overview

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Expansion & Decline

Income StatementDebt increased from $488MM to $698MM

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Income Statement – Key Details2006 – a “good year”

Net Sales $1,408,155,000

COGS $1,211,258,000 86%

Gross Margin

$ 196,897,000 14%

Everything else

$ 131,764,000 9%

Net income $ 65,133,000 4.6%

Cost improvementopportunities are buried here

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Buried Opportunities• 23 separate manufacturing plants, each with its large fixed/indirect

cost structure. 4,661,000 sq ft.• Common process types – foundry, forging, machining, stamping,

tube bending, polishing, assembly.• Complex, somewhat top heavy people structure:

– 3,500 total employees– 927 salaried– 1,650 unionized – 7 unions); had a lock-out in 2007.

• Multiple (6 major brands); complex entity structure; multiple subsidiaries. No plant has more than 1 brand.

• Environmental regulations & costs significant (foundries); these costs are buried in plant indirect costs.

• Not prepared for any downturn in a cyclic industry. High fixed costs + high debt = vulnerability

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Act II: 2007 – 2009• Accuride hires:

– Financial Advisory Firm – Turnaround Consultant– Lawyers

• Restructuring plan• Actions Taken: Re-negotiate with Labor (including lockouts) 11/07• Management Shakeups 12/07, 2/08, 9/08• Restructuring Plan Announced 9/08• Drawing on its credit facilities 10/08• De-listed from NYSE 11/08• Phase 2 of Restructuring Plan announced 12/08• Restructure of Debt owed to Sun Capital 2/09• Temporary Waiver Signed with Lenders Creditor Steering Committee

Formed 7/09• Second Waiver signed 8/09• Debtors give Accuride until 9/30 to effect financial restructuring (9/25)

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Jeff – Financial Restructuring

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Industry Cycle2000-2006

Cycle Avg. EBITDA: $148.0 million

Company Projected Industry Cycle 2007-2013E

Trough to Peak Avg. EBITDA: $125.7 million

Historical and projected EBITDA. Results prior to 2005 are pro forma for the TTI acquisition.

Industry Cycle1996-1999

Cycle Avg. EBITDA: $146.4 million

$122.2$129.2

$143.0

$191.2

$147.9

$118.7 $116.4

$151.3

$196.9

$217.7

$113.4

$79.0

$14.8

$79.6

$152.3

$200.9

$239.8

$87.2

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

EB

ITD

A ($

in m

illi

ons)

15

16

70%

75%

80%

85%

90%

95%

100%

1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 2Q09

Qua

rter

ly A

nnua

lized

Cha

nge

U.S. Heavy Truck Capacity Utilization

Capacity utilization for large commercial vehicles currently remains very low, weighing on aftermarket component sales.

In addition, significant cannibalization of parts is occurring from idle vehicles.

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212,391

290,000

155,000

375,000

215,000

376,448

103,536

205,237

$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

$1,600.0

2006 2007 2008 2009E 2010E 2011E 2012E 2013E

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Revenue Company Projected Class 8 Builds

Con

solid

ated

Rev

enue

($

in m

illio

ns)

Class 8 B

uilds

15.4%

11.2%

8.5%

2.7%

10.4%

14.9%

16.1% 16.5%

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

2006 2007 2008 2009E 2010E 2011E 2012E 2013E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

EBITDA EBITDA Margin

Con

solid

ated

EB

ITD

A (

$ in

mill

ions

)

EB

ITD

A M

argin

Consolidated Revenue and EBITDA

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Financial summary of the Company’s projections.

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Who is Doing What?• Credit Risk Management: Bond Holders are

seeing increased risk in the transaction and taking action

• Unsecured Creditors – committee, negotiations.

• Accuride Secures Debtor-in-Possession Financing

• Convert debt into equity rights

• Dilution of existing stockholders

• 10/8 Debt restructuring completed, 10/9 Accuride files voluntary BK – “Pre-Pack”

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Chris – Secured Lender’s Attorney

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Act III: Pre-packaged BK

• Accuride voluntarily files for Bankruptcy Protection and presents a plan– Raised $50MM in “DIP” Financing– Maturities extended to June 2013– Covenants modified– Sr. Sub-Debt converted to 98% equity holders– Sr. Unsecured Notes get refi’ed to be convertible into

60% of common stock– Unsecured Trade Creditors to be paid in full– Current Shareholders will now own 2% of common

stock, and receive warrants for 15% of Equity subject to the above dilution works out to 9%

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John – Accuride Attorney for the Chapter 11 Filing

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Summary of Drivers• Cash drives everything in business.• Low margins results in chronic lack of cash.• Fatal combination –

Low margins+ High leverage/debt+ Un-proactive management= Chronic survival challenges,

• Lack of cash leads to BK and/or a turnaround and restructuring, “Chapter 22, 33”, etc.

• Once in BK, many others MUST become involved, diluting owners control and destroying investment principal.

• Outside expertise = become crucial to survival and renewal.• Value of assets may be determined by others—often with

antagonistic agendas. They are not friends of shareholders.

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Paul – The Turnaround – Alternate “Ending”

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Alternative Ending – The Turnaround• Focus on fixing main problems/opportunities –

– VERY LOW gross margins – 14-15% in 2006 – “good year” – – Reporting buries almost all cost improvement opportunities – High fixed costs – multiple small plants; 200-300 people each.– Similar processes at separate plants; transportation costs are

hidden.– Each of the 23 plants has high breakeven – below this it

consumes cash– No product rationalization – drop, sell losers.– Significant unionization; potential uncooperative attitudes to

improving productivity & thus margins.– Mexican plants do not appear to be helping profitability

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Initial Turnaround Plan• Replace top & key managers with fresh, success-driven, proactive leaders – not

necessarily from auto supplier industry. These will drive real success; “The guys who got you into trouble will not get you out of it.”

• Develop, implement cash-focused reporting – replace P&L oriented, financial reporting to drive improvements.

• Inventory – complex production, transportation, multiple warehouses = cost• Plant consolidation and/or greenfields to non-union states.• Leverage existing plants temporarily – they are well below capacity to bridge

greenfields.• Get blunt with unions – help or close the plant.• Product rationalization - Drop money-losing products; raise prices where market

strength good.• Cut per-plant fixed cost structure – buried in COGS, • Implement transportation management• Integrate brands, selling forces, to leverage production capabilities at larger, more

efficient plants.

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Patrick – It’s a Wrap!

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Conclusions & Observations

• Management focused on sales, not profitability.

• Inattention to cost details – in COGS resulted in losing the company’s equity.

• Excessive leverage/debt = inability to withstand downturns in a cyclic business.

• Annual report reads like a list of problems, for which no solutions are proposed.