Item 1. Business
The Company
We believe we are one of the largest manufacturers and suppliers of commercial vehicle components in North America. Our products include commercial vehicle wheels, wheel-end components and assemblies, and ductile and gray iron castings. We market our products under some of the most recognized brand names in the industry, including Accuride, Gunite, and Brillion. We serve the leading OEMs and their related aftermarket channels in most major segments of the commercial vehicle market, including heavy- and medium-duty trucks, commercial trailers, light trucks, buses, as well as specialty and military vehicles.
Our primary product lines are standard equipment used by many North American heavy- and medium-duty truck OEMs.
Our diversified customer base includes substantially all of the leading commercial vehicle OEMs, such as Daimler Truck North America, LLC ("DTNA"), with its Freightliner and Western Star brand trucks, PACCAR, Inc., with its Peterbilt and Kenworth brand trucks, Navistar, Inc., with its International brand trucks, and Volvo Group North America, with its Volvo and Mack brand trucks. Our primary commercial trailer customers include leading commercial trailer OEMs, such as Great Dane Limited Partnership, Utility Trailer Manufacturing Company, and Wabash National, Inc. Our major light truck customer is General Motors Corporation. Our product portfolio is supported by strong sales, marketing and design engineering capabilities and is manufactured in eight strategically located, technologically-advanced facilities across the United States, Mexico and Canada.
Our business consists of three operating segments that design, manufacture, and distribute components for the commercial vehicle market, including heavy- and medium-duty trucks, commercial trailers, light trucks, buses, as well as specialty and military vehicles and their related aftermarket channels and for the global industrial, mining and construction markets. We have identified each of our operating segments as reportable segments. The Wheels segment's products primarily consist of steel and aluminum wheels. The Gunite segment's products consist primarily of wheel-end components and assemblies. The Brillion Iron Works segment's products primarily consist of ductile, austempered ductile and gray iron castings, including engine and transmission components and industrial components. We believe this segmentation is appropriate based upon operating decisions and performance assessments by our President and Chief Executive Officer, who is our chief operating decision maker.
Our financial results for the previous three fiscal years are discussed in "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Item 8: Financial Statements and Supplementary Data" of this Annual Report and the following descriptions of our business should be read in conjunction with the information contained therein. For geographic and financial information related to each of our operating segments, see Note 12 to the "Notes to Consolidated Financial Statements" included herein.
Corporate History
Accuride Corporation, a Delaware corporation ("Accuride" or the "Company"), and Accuride Canada Inc., a corporation formed under the laws of the province of Ontario, Canada, and a wholly owned subsidiary of Accuride, were incorporated in November 1986 for the purpose of acquiring substantially all of the assets and assuming certain liabilities of Firestone Steel Products, a division of The Firestone Tire & Rubber Company. The respective acquisitions by the companies were consummated in December 1986.
On January 31, 2005, pursuant to the terms of an agreement and plan of merger, a wholly owned subsidiary of Accuride merged with and into Transportation Technologies Industries, Inc., or TTI, resulting in TTI becoming a wholly owned subsidiary of Accuride, which we refer to as the "TTI merger". TTI was founded as Johnstown America Industries, Inc. in 1991 in connection with the purchase of Bethlehem Steel Corporation's freight car manufacturing operations.
Discontinued Operations
On August 1, 2013, the Company announced that it completed the sale of substantially all of the assets of its Imperial Group business to Imperial Group Manufacturing, Inc., a new company formed and capitalized by Wynnchurch Capital for total cash consideration of $30.0 million at closing, plus a contingent earn-out of up to $2.25 million. The sale resulted in recognition of a $12.0 million loss for the year ended December 31, 2013 which has been reclassified to discontinued operations. See Note 2 "Discontinued Operations" to the "Notes to Consolidated Financial Statements" included herein for further discussion.
Pursuant to the provisions of the purchase agreement, subject to certain limited exceptions, the purchaser purchased from Imperial all equipment, inventories, accounts receivable, deposits, prepaid expenses, intellectual property, contracts, real property interests, transferable permits and other intangibles related to the business and assumed Imperial's trade and vendor accounts payable and performance obligations under those contracts included in the purchased assets. The real property interests acquired by the
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purchaser include ownership of three plants located in Decatur, Texas, Dublin, Virginia and Chehalis, Washington and a leasehold interest in a plant located in Denton, Texas. Imperial retained ownership of its real property located in Portland, Tennessee and recognized a $2.5 million impairment charge for this property as a component of the loss previously mentioned, which has been reclassified to discontinued operations on our consolidated statements of operations and comprehensive loss for the year ended December 31, 2013. The Company leased the Portland, Tennessee facility to the purchaser from the closing date of the transaction through October 31, 2014. The future function of this facility is currently being evaluated. (See Note 2 to the "Notes to Consolidated Financial Statements" included herein for further explanation)
On September 26, 2011, the Company announced the sale of its wholly-owned subsidiary, Fabco Automotive Corporation ("Fabco") to Fabco Holdings, Inc., a new company formed and capitalized by Wynnchurch Capital, Ltd. in partnership with Stone River Capital Partners, LLC. The sale concluded for a purchase price of $35.0 million, subject to a working capital adjustment, plus a contingent receipt of $2.0 million, which was received in full in 2013. The Company recognized a loss of $6.3 million, including $2.1 million in transactional fees, related to the sale transaction for the year ended December 31, 2011, which is included as a component of discontinued operations. See Note 2 "Discontinued Operations" to the "Notes to Consolidated Financial Statements" included herein for further discussion.
Impairment
During 2012, the Company experienced a decline in its stock price to an amount below the then current book value as well as the impact of business developments in its Gunite reporting unit including a loss of customer market share and evidence of declining aftermarket sales. The Gunite reporting unit recorded impairments to goodwill of $62.8 million, other intangible assets of $36.8 million, and property, plant and equipment of $34.1 million for the year ended December 31, 2012.
Product Overview
We design, produce, and market broad portfolios of commercial vehicle components for the commercial vehicle, global industrial, mining and construction industries. We classify our products under several categories, including wheels, wheel-end components and assemblies, and ductile and gray iron castings. The following describes our major product lines and brands.
Wheels (Approximately 57% of our 2014 net sales, 57% of our 2013 net sales, and 52% of our 2012 net sales)
We are the largest North American manufacturer and supplier of wheels for heavy- and medium-duty trucks, commercial trailers and related aftermarket channels. We offer the broadest product line in the North American heavy- and medium-duty wheel industry and are the only North American manufacturer and supplier of both steel and forged aluminum heavy- and medium-duty wheels. We also produce wheels for buses, commercial light trucks, heavy-duty pick-up trucks, and military vehicles. We market our wheels under the Accuride brand. We are the standard steel and aluminum wheel supplier to a number of North American heavy- and medium-duty truck and trailer OEMs. A description of each of our major products is summarized below:
● Heavy- and medium-duty steel wheels. We offer the broadest product line of steel wheels for the heavy- and medium-duty truck, commercial trailer markets and related aftermarket channels. The wheels range in diameter from 17.5" to 24.5" and are designed for load ratings ranging from 3,640 to 13,000 lbs. We also offer a number of coatings and finishes which we believe provide the customer with increased durability and exceptional appearance.
● Heavy- and medium-duty aluminum wheels. We offer a full product line of aluminum wheels for the heavy- and medium-duty truck, commercial trailer markets and related aftermarket channels. The wheels range in diameter from 19.5" to 24.5" and are designed for load ratings ranging from 4,000 to 13,000 lbs. Aluminum wheels are generally lighter in weight, more readily stylized, and are approximately 2.0 to 3.0 times as expensive as steel wheels.
● Light truck steel wheels. We manufacture light truck single and dual steel wheels that range in diameter from 16" to 19.5" for customers such as General Motors. We are focused on larger diameter wheels designed for select truck platforms used for carrying heavier loads.
● Military Wheels. We produce steel wheels for military applications under the Accuride brand name.
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Wheel-End Components and Assemblies (Approximately 24% of our 2014 net sales, 26% of our 2013 net sales, and 28% of our 2012 net sales)
We are a supplier of wheel-end components and assemblies to the North American heavy- and medium-duty truck markets and related aftermarket channels. We market our wheel-end components and assemblies under the Gunite brand. We produce four basic wheel-end assemblies: (1) disc wheel hub/brake drums, (2) spoke wheel/brake drums, (3) spoke wheel/brake rotors and (4) disc wheel hub/brake rotors. We also manufacture an extensive line of wheel-end components for the heavy- and medium-duty truck markets, such as brake drums, disc wheel hubs, spoke wheels, rotors and automatic slack adjusters. The majority of these components are critical to the safe operation of vehicles. A description of each of our major wheel-end components is summarized below:
• Brake Drums. We offer a variety of heavy- and medium-duty brake drums for truck, commercial trailer, bus, and off-highway applications. A brake drum is a braking device utilized in a "drum brake" which is typically made of iron and has a machined surface on the inside. When the brake is applied, air or brake fluid is forced, under pressure, into a wheel cylinder which, in turn, pushes a brake shoe into contact with the machined surface on the inside of the drum and stops the vehicle. Our brake drums are custom-engineered to exact requirements for a broad range of applications, including logging, mining, and more traditional over-the-road vehicles. To ensure product quality, we continually work with brake and lining manufacturers to optimize brake drum and brake system performance. Brake drums are our primary aftermarket product. The aftermarket opportunities in this product line are substantial as brake drums continually wear with use and eventually need to be replaced, although the timing of such replacement depends on the severity of use.
• Disc Wheel Hubs. We manufacture a complete line of traditional ferrous disc wheel hubs for heavy- and medium-duty trucks and commercial trailers. A disc wheel hub is the component that connects the brake system to the axle upon which the wheel and tire are mounted. In addition, we offer a line of lightweight cast iron hubs that provide users with improved operating efficiency. Our lightweight hubs utilize advanced metallurgy and unique structural designs to offer both significant weight savings and lower costs due to reduced maintenance requirements. Our product line also includes finely machined hubs for anti-lock braking systems, or ABS, which enhance vehicle safety.
• Spoke Wheels. We manufacture a broad line of spoke wheels for heavy-and medium-duty trucks and commercial trailers. While disc wheel hubs have largely displaced spoke wheels for on-highway applications, they are still popular for severe-duty applications such as off-highway vehicles, refuse vehicles, and school buses, due to their greater strength. Our product line also includes finely machined wheels for ABS systems, similar to our disc wheel hubs.
• Disc Brake Rotors. We develop and manufacture durable, lightweight disc brake rotors for a variety of heavy-duty vehicle applications. A disc rotor is a braking device that is typically made of iron with highly machined surfaces. When the brake is applied in a disc brake system, brake fluid from the master cylinder (Hydraulic Disc Brakes) or air from the air compressor (Air Disc Brakes) is forced into a caliper where it presses against a piston, which squeezes two brake pads against the disc rotor and stops the vehicle. Disc brakes are generally viewed as more efficient, although more expensive, than drum brakes and are often found in the front of a vehicle with drum brakes often located in the rear. We manufacture ventilated disc brake rotors that significantly improve heat dissipation as required for applications on Class 7 and 8 vehicles. We offer one of the most complete lines of heavy-duty and medium-duty disc brake rotors in the industry.
• Automatic Slack Adjusters. Automatic slack adjusters react to, and adjust for, variations in brake shoe-to-drum clearance and maintain the proper amount of space between the brake shoe and brake drum. Our automatic slack adjusters automatically adjust the brake shoe-to-brake drum clearance, ensuring consistent clearance at the time of braking. The use of automatic slack adjusters reduces maintenance costs, improves braking performance and minimizes side-pull and stopping distance.
Ductile, Austempered Ductile and Gray Iron Castings (Approximately 19% of our 2014 net sales, 17% of our 2013 net sales, and 20% of our 2012 net sales)
We produce ductile, austempered ductile and gray iron castings under the Brillion brand name. Our Brillion Foundry facility is one of North America's largest iron foundries focused on the supply of complex, highly-cored cast products to market leading customers in the commercial vehicle, diesel engine, construction, agricultural, hydraulic, mining, oil and gas and industrial markets. Brillion utilitizes both vertical and horizontal green sand molding processes to produce cast products that include:
• Transmission and Engine-Related Components. We believe that our Brillion foundry is a leading source for the casting of transmission and engine-related components to the heavy- and medium-duty truck markets, including flywheels, transmission and engine-related housings and brackets.
• Industrial Components. Our Brillion foundry produces components for a wide variety of applications to the industrial machinery, construction, agricultural equipment and oil and gas markets, including flywheels, pump housings, valve body housings, small engine components, and other industrial components. Our industrial components are made to specific customer requirements and, as a result, our product designs are typically proprietary to our customers.
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Cyclical and Seasonal Industry
The commercial vehicle components industry is highly cyclical and, in large part, depends on the overall strength of the demand for heavy- and medium-duty trucks. The industry has historically experienced significant fluctuations in demand based on factors such as general economic conditions, including industrial production and consumer spending, as well as, gas prices, credit availability, and government regulations among others. Cyclical peaks of commercial vehicle production in 1999 and 2006 were followed by sharp production declines of 48% and 69% to trough production levels in 2001 and 2009, respectively. Since 2009, commercial vehicle production levels have recovered, and demand for vehicles that use our products, as predicted by analysts, including America's Commercial Transportation ("ACT") and FTR Associates ("FTR") Publications, is expected to improve in 2015 as economic conditions continue to improve. OEM production of major markets that we serve in North America, from 2008 to 2014, are shown below:
Our operations are typically seasonal as a result of regular OEM customer maintenance and model changeover shutdowns, which usually occur in the third and fourth quarter of each calendar year. This seasonality may result in decreased net sales and profitability during the third and fourth fiscal quarters of each calendar year. In addition, our Gunite product line typically experiences higher aftermarket purchases of wheel-end components in the first and second quarters of each calendar year.
Customers
We market our components to more than 1,000 customers, including most of the major North American heavy- and medium-duty truck and commercial trailer OEMs, as well as to the major aftermarket participants, including OEM dealer networks, wholesale distributors, and aftermarket buying groups. Our largest customers are Navistar, DTNA, Volvo/Mack, PACCAR, and Advanced Wheels which combined accounted for approximately 50.2 percent of our net sales in 2014, and individually constituted approximately 14.1 percent, 13.2 percent, 10.5 percent, 6.5 percent, and 5.8 percent, respectively, of our 2014 net sales. We have long-term relationships with our larger customers, many of whom have purchased components from us or our predecessors for more than 45 years. We garner repeat business through our reputation for quality and our position as a standard supplier for a variety of truck lines. We believe that we will continue to be able to effectively compete for our customers' business due to the high quality of our products, the breadth of our product portfolio, and our continued product innovation.
Sales and Marketing
We have an integrated, corporate-wide sales and marketing group. We have dedicated salespeople and sales engineers who reside near the headquarters of each of the four major truck OEMs and who spend substantially all of their professional time managing existing business relationships, coordinating new sales opportunities and strengthening our relationships with the OEMs. These sales professionals function as a single point of contact with the OEMs, providing "one-stop shopping" for all of our products. Each brand has marketing personnel who, together with applications engineers, have in-depth product knowledge and provide support to the designated OEM sales professionals.
We also market our products directly to end users, particularly large truck fleet operators, with a focus on wheels and wheel-end products to create "pull-through" demand for our products. This effort is intended to help convince the truck and trailer OEMs to designate our products as standard equipment and to create sales by encouraging fleets to specify our products on the equipment that they purchase, even if our product is not offered as standard equipment on the products being purchased. The fleet sales group also provides aftermarket sales coverage for our various products, particularly wheels and wheel-end components. These sales professionals promote and sell our products to the aftermarket, including OEM dealers, warehouse distributors and aftermarket buying groups.
We have a consolidated aftermarket distribution strategy for our wheels and wheel-end components. In support of this strategy, we have a centralized distribution center in Batavia, Illinois. As a result, customers can order steel and aluminum wheels, brake drums, rotors, hubs and automatic slack adjusters on one purchase order, improving freight efficiencies and inventory turns for our customers. The aftermarket infrastructure enables us to increase direct shipments from our manufacturing plant to larger aftermarket customers utilizing a virtual distribution strategy that allows us to maintain and enhance our competitiveness by eliminating unnecessary freight and handling through the distribution center.
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International Sales
We consider sales to customers outside of the United States as international sales. International sales for the years ended December 31, 2014, 2013, and 2012 are as follows:
For additional information, see Note 12 to the "Notes to Consolidated Financial Statements" included herein.
Manufacturing
We operate eight facilities, which are characterized by advanced manufacturing capabilities, in North America. Our U.S. manufacturing operations are located in Illinois, Kentucky, Ohio, Pennsylvania, South Carolina, and Wisconsin. In addition, we have manufacturing facilities in Canada and Mexico. These facilities are strategically located to meet our manufacturing needs and the demands of our customers.
All of our significant production operations are ISO-9000/TS 16949 certified, which means that they comply with certain quality assurance standards for truck component suppliers. We believe our manufacturing operations are highly regarded by our customers, and we have received numerous quality and lean awards from our customers including PACCAR's Preferred Supplier award and Daimler Truck North America's Masters of Quality award, and the Association of Manufacturing Excellence ("AME") Plant of the Year award (Henderson, KY-2014). The Brillion foundry was featured for its advanced lean and quality systems by The American Casting Society in 2014.
All of our facilities incorporate extensive lean visual operating systems in the management of their day to day operations. This helps improve our product and process flow and on-time-delivery to our customers while minimizing required inventory levels across the business.
Competition
We operate in highly competitive markets. However, no single manufacturer competes with all of the products manufactured and sold by us in the heavy- and medium-duty truck markets, and the degree of competition varies among the different products that we sell. In each of our markets, we compete on the basis of price, manufacturing and distribution capabilities, product quality, product design, product line breadth, delivery, and service.
The competitive landscape for each of our brands is unique. Our primary competitors in the wheel markets include Alcoa Inc. and Maxion Wheels. Our primary competitors in the wheel-ends and assemblies markets for heavy- and medium-duty trucks and commercial trailers are KIC Holdings, Inc., Meritor, Inc., Consolidated Metco Inc., and Webb Wheel Products Inc. Our major competitors in the industrial components market include ten to twelve foundries operating in the Midwest and Southern regions of the United States and in Mexico.
Raw Materials and Suppliers
We typically purchase steel for our wheel products from a number of different suppliers by negotiating high-volume one year contracts directly with steel mills or steel service centers. While we believe that our supply contracts can be renewed on acceptable terms, we may not be able to renew these contracts on such terms, or at all. However, we do not believe that we are overly dependent on long-term supply contracts for our steel requirements as we have alternative sources available if need requires. Depending on market dynamics and raw material availability, the market is occasionally in tight supply, which may result in occasional industry allocations and surcharges.
We obtain aluminum for our wheel products from aluminum billet casting manufacturers. We believe that aluminum is readily available from a variety of sources. Aluminum prices have been volatile from time-to-time. We attempt to minimize the impact of such volatility through selected customer supported hedge agreements, supplier agreements and contractual price adjustments with customers.
Major raw materials for our wheel-end and industrial component products are steel scrap and pig iron. We do not have any long-term pricing agreements with any steel scrap or pig iron suppliers, but we do not anticipate having any difficulty in obtaining steel scrap or pig iron due to the large number of potential suppliers and our position as a major purchaser in the industry. A portion of the increases in steel scrap prices for our wheel-ends and industrial components are passed-through to most of our customers by way
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of a fluctuating surcharge, which is calculated and adjusted on a periodic basis. Other major raw materials include silicon sand, binders, sand additives and coated sand, which are generally available from multiple sources. Coke and natural gas, the primary energy sources for our melting operations, have historically been generally available from multiple sources, and electricity, another of these energy sources, has historically been generally available.
Employees and Labor Unions
As of December 31, 2014, we had approximately 2,247 employees, of which 497 were salaried employees with the remainder paid hourly. Unions represent approximately 1,512 of our employees, which is approximately 67% percent of our total employees. We have collective bargaining agreements with several unions, including (1) the United Auto Workers, (2) the United Steelworkers, (3) the International Association of Machinists and Aerospace Workers, (4) the National Automobile, Aerospace, Transportation, and General Workers Union of Canada and (5) El Sindicato Industrial de Trabajadores de Nuevo Leon.
Each of our unionized facilities has a separate contract with the union that represents the workers employed at such facility. The union contracts expire at various times over the next few years with the exception of our union contract that covers the hourly employees at our Monterrey, Mexico, facility, which expires on an annual basis in January unless otherwise renewed. The 2015 negotiations in Monterrey were successfully completed prior to the expiration of our union contract. In 2014, we successfully negotiated new bargaining agreements for our Erie, Pennsylvania and Rockford, Illinois facilities, which will expire on September 3, 2018 and March 25, 2019, respectively. We have a contract expiring at our London, Ontario facility on March 12, 2015, but have already negotiated a successor agreement that will be effective from March 13, 2015 through March 12, 2018. No other collective bargaining agreements expire in 2015.
Intellectual Property
We believe the protection of our intellectual property is important to our business. Our principal intellectual property consists of product and process technology, a number of patents, trade secrets, trademarks and copyrights. Although our patents, trade secrets, and copyrights are important to our business operations and in the aggregate constitute a valuable asset, we do not believe that any single patent, trade secret, or copyright is critical to the success of our business as a whole. We also own common law rights and U.S. federal and foreign trademark registrations for several of our brands, which we believe are valuable, including Accuride®, BrillionTM, and Gunite®. Our policy is to seek statutory protection for all significant intellectual property embodied in patents and trademarks. From time to time, we may grant licenses under our intellectual property and receive licenses under intellectual property of others.
Backlog
Our production is based on firm customer orders and estimated future demand. Since firm orders generally do not extend beyond 15-45 days, backlog volume is generally not significant.
Environmental Matters
Our operations, facilities, and properties are subject to extensive and evolving laws and regulations pertaining to air emissions, wastewater and stormwater discharges, the handling and disposal of solid and hazardous materials and wastes, the investigation and remediation of contamination, and otherwise relating to health, safety, and the protection of the environment and natural resources. The violation of such laws can result in significant fines, penalties, liabilities or restrictions on operations. From time to time, we are involved in administrative or legal proceedings relating to environmental, health and safety matters, and have in the past incurred and will continue to incur capital costs and other expenditures relating to such matters. For example, we are currently involved in a proceeding regarding alleged violations of stormwater regulations at our Brillion facility, which could subject us to fines, penalties or other liabilities. In connection with that matter, we have completed certain capital improvements related to the underlying allegations. Based on current information, we do not expect that this matter will have a material adverse effect on our business, results of operations or financial conditions; however, we cannot assure you that this or any other future environmental compliance matters will not have such an effect.
In addition to environmental laws that regulate our ongoing operations, we are also subject to environmental remediation liability. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and analogous state laws, we may be liable as a result of the release or threatened release of hazardous materials into the environment regardless of when the release occurred. We are currently involved in several matters relating to the investigation and/or remediation of locations where we have arranged for the disposal of foundry wastes. Such matters include situations in which we have been named or are believed to be potentially responsible parties in connection with the contamination of these sites. Additionally, environmental remediation may be required to address soil and groundwater contamination identified at certain of our facilities.
As of December 31, 2014, we had an environmental reserve of approximately $1.5 million, related primarily to our foundry operations. This reserve is based on management's review of potential liabilities as well as cost estimates related thereto. Any expenditures required for us to comply with applicable environmental laws and/or pay for any remediation efforts will not be reduced
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or otherwise affected by the existence of the environmental reserve. Our environmental reserve may not be adequate to cover our future costs related to the sites associated with the environmental reserve, and any additional costs may have a material adverse effect on our business, results of operations or financial condition. The discovery of additional environmental issues, the modification of existing laws or regulations or the promulgation of new ones, 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 a material adverse effect.
The Iron and Steel Foundry National Emission Standard for Hazardous Air Pollutants ("NESHAP") was developed pursuant to Section 112(d) of the Clean Air Act and requires major sources of hazardous air pollutants to install controls representative of maximum achievable control technology. Based on currently available information, we do not anticipate material costs regarding ongoing compliance with the NESHAP; however if we are found to be out of compliance with the NESHAP, we could incur liability that could have a material adverse effect on our business, results of operations or financial condition.
At our 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.
Research and Development Expense
Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amount expensed in the years ended December 31, 2014, 2013 and 2012 totaled $5.6 million, $5.7 million and $6.6 million, respectively.
Website Access to Reports
We make our periodic and current reports available, free of charge, on our website as soon as practicable after such material is electronically filed with the Securities and Exchange Commission (the "SEC"). Our website address is www.accuridecorp.com and the reports are filed under "SEC Filings" in the Investor Information section of our website. Our website and information included in or linked to our website are not part of this 2014 Annual Report filed on Form 10-K. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC's website is www.sec.gov.
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Item 1A.
Item 1A. Risk Factors
Factors That May Affect Future Results
In this report, we have made various statements regarding current expectations or forecasts of future events. These statements are "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are also made from time-to-time in press releases and in oral statements made by our officers. Forward-looking statements are identified by the words "estimate," "project," "anticipate," "will continue," "will likely result," "expect," "intend," "believe," "plan," "predict" and similar expressions.
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 statements and estimates. These statements or estimates may not be realized and actual results may differ from those contemplated in these "forward-looking statements." Some of the factors that may cause these statements and estimates to differ materially include, among others, market demand in the commercial vehicle industry, general economic, business and financing conditions, labor relations, government action, competitor pricing activity, expense volatility, and each of the risks highlighted below.
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. Our expectations, beliefs, or projections may not be achieved or accomplished. In addition to other factors discussed in the report, some of the important factors that could cause actual results to differ from those discussed in the forward-looking statements include the following risk factors.
Risks Related to Our Business and Industry
We rely on, and make significant operational decisions based, in part, upon industry forecasts for commercial vehicles and for the end markets that Brillion serves, and these forecasts may prove to be inaccurate.
We continue to operate in a challenging economic environment and our ability to maintain liquidity may be affected by economic or other conditions that are beyond our control and which are difficult to predict. The 2015 OEM production forecasts by ACT Publications for the significant commercial vehicle markets that we serve, as of February 10, 2015, are as follows:
North American Class 8
340,226
North American Classes 5-7
228,534
U.S. Trailers
303,300
Brillion's end markets include commercial truck, mobile off-highway construction, agricultural, and mining equipment, and oil and gas infrastructure. These markets are very sensitive to commodity pricing of agricultural products, metals, and oil and gas.
We are dependent on sales to a small number of our major customers in our Wheels and Gunite segments and on our status as standard supplier on certain truck platforms of each of our major customers.
Sales, including aftermarket sales, to Navistar, DTNA, Volvo/Mack, PACCAR, and Advanced Wheel constituted approximately 14.1 percent, 13.2 percent, 10.5 percent, 6.5 percent, and 5.8 percent, respectively, of our 2014 net sales. No other customer accounted for more than 5 percent of our net sales for this period. The loss of any significant portion of sales to any of our major customers would likely have a material adverse effect on our business, results of operations or financial condition.
We are a standard supplier of various components at many of our major OEM customers, which results in recurring revenue as our standard components are installed on most trucks ordered from that platform, unless the end user specifically requests a different product, generally at an additional charge. The selection of one of our products as a standard component may also create a steady demand for that product in the aftermarket. We may not maintain our current standard supplier positions in the future, and may not become the standard supplier for additional truck platforms. The loss of a significant standard supplier position or a significant number of standard supplier positions with a major customer could have a material adverse effect on our business, results of operations or financial condition. For example, during 2012 Gunite lost standard position at two OEMs for certain products, which led to impairment charges as described in Note 4 and Note 6 to the "Notes to Consolidated Financial Statements" included herein.
We are continuing to engage in efforts intended to improve and expand our relations with each of the customers named above. We have supported our position with these customers through direct and active contact with end users, trucking fleets, and dealers, and have located certain of our marketing personnel in offices near these customers and most of our other major customers. We may not be able to successfully maintain or improve our customer relationships so that these customers will continue to do business with us as they have in the past or be able to supply these customers or any of our other customers at current levels. The loss
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of a significant portion of our sales to any of these named customers could have a material adverse effect on our business, results of operations or financial condition. In addition, the delay or cancellation of material orders from, or problems at, any of our other major customers could have a material adverse effect on our business, results of operations, or financial condition.
Increased cost or reduced supply of raw materials and purchased components may adversely affect our business, results of operations or financial condition.
Our business is subject to the risk of price increases and fluctuations and periodic delays in the delivery of raw materials and purchased components that are beyond our control. Our operations require substantial amounts of raw steel, aluminum, steel scrap, pig iron, electricity, coke, natural gas, bearings, purchased components, silicon sand, binders, sand additives, and coated sand. Fluctuations in the delivery of these materials may be driven by the supply/demand relationship for material, factors particular to that material or governmental regulation for raw materials such as electricity and natural gas. In addition, if any of our suppliers seek bankruptcy relief or otherwise cannot continue their business as anticipated or we cannot renew our supply contracts on favorable terms, the availability or price of raw materials could be adversely affected. Fluctuations in prices and/or availability of the raw materials or purchased components used by us, which at times may be more pronounced during periods of increased industry demand, may affect our profitability and, as a result, have a material adverse effect on our business, results of operations, or financial condition. In addition, as described above, a shortening or elimination of our trade credit by our suppliers may affect our liquidity and cash flow and, as a result, have a material adverse effect on our business, results of operations, or financial condition.
We use substantial amounts of raw steel and aluminum in our production processes to produce our steel and aluminum wheels. Although raw steel is generally available from a number of sources, we have obtained favorable sourcing by negotiating and entering into high-volume contracts with terms of usually no longer than 1 year. We obtain raw steel and aluminum from various suppliers. We may not be successful in renewing our supply contracts on favorable terms or at all. A substantial interruption in the supply of raw steel or aluminum or inability to obtain a supply of raw steel or aluminum on commercially desirable terms could have a material adverse effect on our business, results of operations or financial condition. We are not always able, and may not be able in the future, to pass on increases in the price of raw steel or aluminum to our customers on a timely basis or at all. In particular, when raw material prices increase rapidly or to significantly higher than normal levels, we may not be able to pass price increases through to our customers on a timely basis, if at all, which could adversely affect our operating margins and cash flow. Any fluctuations in the price or availability of raw steel or aluminum may have a material adverse effect on our business, results of operations or financial condition.
Steel scrap and pig iron are also major raw materials used in our business to produce our wheel-end and industrial components. Steel scrap is derived from, among other sources, junked automobiles, industrial scrap, railroad cars, agricultural and heavy machinery, and demolition steel scrap from obsolete structures, containers and machines. Pig iron is a low-grade cast iron that is a product of smelting iron ore with coke and limestone in a blast furnace. The availability and price of steel scrap and pig iron are subject to market forces largely beyond our control, including North American and international demand for steel scrap and pig iron, freight costs, speculation and foreign exchange rates. Steel scrap and pig iron availability and price may also be subject to governmental regulation. We are not always able, and may not be able in the future, to pass on increases in the price of steel scrap and pig iron to our customers. In particular, when raw material prices increase rapidly or to significantly higher than normal levels, we may not be able to pass price increases through to our customers on a timely basis, if at all, which could have a material adverse effect on our operating margins and cash flow. Any fluctuations in the price or availability of steel scrap or pig iron may have a material adverse effect on our business, results of operations or financial condition. See "Item 1 - Business-Raw Materials and Suppliers".
Our business is affected by the seasonality and regulatory nature of the industries and markets that we serve.
Our operations are typically seasonal as a result of regular customer maintenance and model changeover shutdowns, which typically occur in the third and fourth quarter of each calendar year. This seasonality may result in decreased net sales and profitability during the third and fourth fiscal quarters and have a material adverse effect on our business, results of operations, or financial condition. In addition, our Gunite product line typically experiences higher aftermarket purchases of wheel-end components during the first and second quarters of the calendar year. In addition, federal and state regulations (including engine emissions regulations, tariffs, import regulations and other taxes) may have a material adverse effect on our business and are beyond our control.
Cost reduction and quality improvement initiatives by OEMs could have a material adverse effect on our business, results of operations or financial condition.
We are primarily a components supplier to the heavy- and medium-duty truck industries, which are characterized by a small number of OEMs that are able to exert considerable pressure on components suppliers to reduce costs, improve quality and provide additional design and engineering capabilities. Given the fragmented nature of the industry, OEMs continue to demand and receive price reductions and measurable increases in quality through their use of competitive selection processes, rating programs, and various other arrangements. We may be unable to generate sufficient production cost savings in the future to offset such price reductions. OEMs may also seek to save costs by relocating production to countries with lower cost structures, which could in turn lead them to purchase components from local suppliers with lower production costs. Additionally, OEMs have generally required component
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suppliers to provide more design engineering input at earlier stages of the product development process, the costs of which have, in some cases, been absorbed by the suppliers. Future price reductions, increased quality standards and additional engineering capabilities required by OEMs may reduce our profitability and have a material adverse effect on our business, results of operations, or financial condition.
We operate in highly competitive markets and we may not be able to compete successfully.
The markets in which we operate are highly competitive. We compete with a number of other manufacturers and distributors that produce and sell similar products. Our products primarily compete on the basis of price, manufacturing and distribution capability, product design, product quality, product delivery and product service. Some of our competitors are companies, or divisions, units or subsidiaries of companies that are larger and have greater financial and other resources than we do. For these reasons, our products may not be able to compete successfully with the products of our competitors. In addition, our competitors may foresee the course of market development more accurately than we do, develop products that are superior to our products, or have the ability to produce similar products at a lower cost than we can, or adapt more quickly than we do to new technologies or evolving regulatory, industry, or customer requirements. As a result, our products may not be able to compete successfully with their products. In addition, OEMs may expand their internal production of components, shift sourcing to other suppliers, or take other actions that could reduce the market for our products and have a negative impact on our business. We may encounter increased competition in the future from existing competitors or new competitors. We expect these competitive pressures in our markets to remain strong. See "Item 1 - Business-Competition".
In addition, competition from foreign truck components suppliers, especially in the aftermarket, may lead to an increase in truck components imported into North America, adversely affecting our market share and negatively affecting our ability to compete. Foreign truck components suppliers, including those in China, may in the future increase their current share of the markets for truck components in which we compete. Some of these foreign suppliers may be owned, controlled or subsidized by their governments, and their decisions with respect to production, sales and exports may be influenced more by political and economic policy considerations than by prevailing market conditions. In addition, foreign truck components suppliers may be subject to less restrictive regulatory and environmental regimes that could provide them with a cost advantage relative to North American suppliers. Therefore, there is a risk that some foreign suppliers, including those in China, may increase their sales of truck components in North American markets despite decreasing profit margins or losses. Brillion is also influenced unfavorably by the import of iron castings from China and India, which is a growing threat.
On March 30, 2011, we, along with one other United States domestic commercial vehicle steel wheel supplier, filed antidumping and countervailing duty petitions with the United States International Trade Commission and the United States Department of Commerce alleging that manufacturers of certain steel wheels in China are dumping their products in the United States and that these manufacturers have been subsidized by their government in violation of United States trade laws. In May 2011, the International Trade Commission issued a preliminary determination that there was a reasonable indication that the U.S. steel wheel industry is materially injured or threatened with material injury by reason of imports from China of certain steel wheels, and began the final phase of its investigation. In August 2011, the U.S. Department of Commerce issued a preliminary determination of countervailing duties on steel wheels imported from China ranging from 26.2 percent to 46.6 percent ad valorem, and in October 2011, the U.S. Department of Commerce issued a preliminary determination of antidumping duty margins ranging from 110.6 percent to 243.9 percent ad valorem. On March 19, 2012, the Department of Commerce made final determinations of dumping and subsidy margins which cumulatively were approximately 70 percent to 228 percent ad valorem. However, on April 17, 2012, the International Trade Commission determined that the domestic industry has not been injured and was not presently threatened with injury from subject imports, and consequently withdrew all import duties on the subject imports. If future trade cases do not provide relief from unfair trade practices, U.S. protective trade laws are weakened or international demand for trucks and/or truck components decreases, an increase of truck component imports into the United States may occur, which could have a material adverse effect on our business, results of operation or financial condition.
Economic and other conditions may adversely impact the valuation of our assets resulting in impairment charges that could have a material adverse effect on our business, results of operations, or financial condition.
We review goodwill and our indefinite lived intangible assets (trade names) for impairment annually or more frequently if impairment indicators exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows, a sustained, significant decline in our stock price and market capitalization, a significant adverse change in industry or economic trends, unanticipated competition, slower growth rates, and significant changes in the manner of the use of our assets or the strategy for our overall business. Such adverse trends could include a swift and significant cyclical downturn in the North American commercial vehicle industry or shirt in purchasing strategies toward products imported from low cost countries. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. For example, due to business developments during 2012, including the loss of standard position for some of its products at two OEM customers, our
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Gunite reporting unit recorded goodwill, intangibles, and property, plant and equipment impairments of $62.8 million, $36.8 million and $34.1 million, respectively, for the year ended December 31, 2012. In the most recent rest for impairment, our analysis concluded that the Wheels reporting unit had 7 percent of value in excess of its carrying value. Considering the cyclical nature of the North American commercial vehicle industry and other end-markets along with the other economic trends mentioned previously, we will continue to closely monitor the performance of the Wheels and Brillion reporting segments for any indication of potential impairment triggering events. If we determine in the future that there are other potential impairments in any of our reporting units, we may be required to record additional charges to earnings that could have a material adverse effect on our business, results of operations, or financial condition.
We are subject to risks associated with our international operations.
We sell products in international locations and operate plants in Canada and Mexico. In addition, it is part of our strategy to continue to expand internationally. Our current and future international sales and operations are subject to risks and uncertainties, including:
● possible government legislation;
● difficulties and costs associated with complying with a wide variety of complex and changing laws, treaties and regulations;
● unexpected changes in regulatory environments;
● limitations on our ability to enforce legal rights and remedies;
● economic and political conditions, war and civil disturbance;
● tax rate changes;
● tax inefficiencies and currency exchange controls that may adversely impact our ability to repatriate cash from non-United States subsidiaries;
● the imposition of tariffs or other import or export restrictions;
● costs and availability of shipping and transportation;
● increased competition from global competitors; and
● nationalization of properties by foreign governments.
We may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely impact our business outside the United States and our business, financial condition and results of operations. In addition, international expansion will also require significant attention from our management and could require us to add additional management and other resources in these markets.
In addition, we operate in parts of the world that have experienced governmental corruption, and we could be adversely affected by violations of the Foreign Corrupt Practices Act ("FCPA") and similar worldwide anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. If we were found to be liable for FCPA violations, we could be liable for criminal or civil penalties or other sanctions, which could have a material adverse impact on our business, financial condition and results of operations.
We face exposure to foreign business and operational risks including foreign exchange rate fluctuations and if we were to experience a substantial fluctuation, our profitability may change.
In the normal course of doing business, we are exposed to risks associated with changes in foreign exchange rates, particularly with respect to the Canadian Dollar and Mexican Peso. From time to time, we use forward foreign exchange contracts, and/or other derivative instruments, to help offset the impact of the variability in exchange rates on our operations, cash flows, assets and liabilities. At December 31, 2014, however, we had $$7.0 million in open foreign exchange forward contracts. Factors that could further impact the risks associated with changes in foreign exchange rates include the accuracy of our sales estimates, volatility of currency markets and the cost and availability of derivative instruments. See "Item 7A - Quantitative and Qualitative Disclosure about Market Risk -Foreign Currency Risk". In addition, changes in the laws or governmental policies in the countries in which we operate could have a material adverse effect on our business, results of operations, or financial condition.
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We may not be able to continue to meet our customers' demands for our products and services.
In order to remain competitive, we must continue to meet our customers' demand for our products and services. However, we may not be successful in doing so. If our customers' demand for our products and/or services exceeds our ability to meet that demand, we may be unable to continue to provide our customers with the products and/or services they require to meet their business needs. Factors that could result in our inability to meet customer demands include an unforeseen spike in demand for our products and/or services, a failure by one or more of our suppliers to supply us with the raw materials and other resources that we need to operate our business effectively or poor management of our Company or one or more divisions or units of our Company, among other factors. Our ability to provide our customers with products and services in a reliable and timely manner, in the quantity and quality desired and
with a high level of customer service, may be severely diminished as a result. If this happens, we may lose some or all of our customers to one or more of our competitors, which could have a material adverse effect on our business, results of operations, or financial condition.
In addition, it is important that we continue to meet our customers' demands in the truck components industry for product innovation, improvement and enhancement, including the continued development of new-generation products, design improvements and innovations that improve the quality and efficiency of our products. Developing product innovations for the truck components industry has been and will continue to be a significant part of our strategy. However, such development will require us to continue to invest in research and development and sales and marketing. In the future, we may not have sufficient resources to make such necessary investments, or we may be unable to make the technological advances necessary to carry out product innovations sufficient to meet our customers' demands. We are also subject to the risks generally associated with product development, including lack of market acceptance, delays in product development and failure of products to operate properly. We may, as a result of these factors, be unable to meaningfully focus on product innovation as a strategy and may therefore be unable to meet our customers' demand for product innovation.
Equipment failures, delays in deliveries or catastrophic loss at any of our facilities could lead to production or service curtailments or shutdowns.
We manufacture our products and provide services at eight facilities and provide logistical services at our just-in-time sequencing facilities in the United States. An interruption in production or service capabilities at any of these facilities as a result of equipment failure or other reasons could result in our inability to produce our products, which would reduce our net sales and earnings for the affected period. In the event of a stoppage in production at any of our facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times to our customers could be severely affected. Any significant delay in deliveries to our customers could lead to increased returns or cancellations and cause us to lose future sales. Our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. We may experience plant shutdowns or periods of reduced production as a result of equipment failure, delays in deliveries or catastrophic loss, which expenses in excess of insurance, if any, could have a material adverse effect on our business, results of operations or financial condition.
We are subject to risks relating to our information technology systems, and any failure to adequately protect our critical information technology systems could materially affect our operations.
We rely on information technology systems across our operations, including for management, supply chain and financial information and various other processes and transactions. In addition, we are in the process of a corporate-wide migration to a new enterprise resource planning ("ERP") software system. Our ability to effectively manage our business depends on the security, reliability and capacity of these systems. Information technology system failures, network disruptions or breaches of security could disrupt our operations, causing delays or cancellation of customer orders or impeding the manufacture or shipment of products, processing of transactions or reporting of financial results. An attack or other problem with our systems could also result in the disclosure of proprietary information about our business or confidential information concerning our customers or employees, which could result in significant damage to our business and our reputation.
In addition, we could be required to expend significant additional amounts to respond to information technology issues or to protect against threatened or actual security breaches. We may not be able to implement measures that will protect against all of the significant risks to our information technology systems.
We may be subject to product liability claims, recalls or warranty claims, which could be expensive, damage our reputation and result in a diversion of management resources.
As a supplier of products to commercial vehicle OEMs, we face an inherent business risk of exposure to product liability claims in the event that our products, or the equipment into which our products are incorporated, malfunction and result in property damage, personal injury or death. Product liability claims could result in significant losses as a result of expenses incurred in defending claims
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or the award of damages. While we do maintain product liability insurance, we cannot assure you that it will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on our results of operations.
In addition, we may be required to participate in evaluations, investigations, or recalls involving products sold by us if any are alleged to be or prove to be defective or noncompliant with applicable federal motor vehicle safety standards. Further, we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. For example, in January 2015, the National Highway Traffic Safety Administration ("NHTSA") initiated a preliminary evaluation of certain steel wheels alleged to have cracks resulting in a loss of tire air pressure. Although we believe that NHTSA should close the preliminary evaluation without a finding of defect and do not expect that this matter will have a material adverse effect on our business, results of operations or financial conditions, we cannot assure you that this or any other future investigation will not have such an effect. Any evaluation, investigation or recall could involve significant expense and diversion of management attention and other resources, and could adversely affect our brand image as well as our business, results of operations or financial conditions.
Work stoppages or other labor issues at our facilities or at our customers' facilities could have a material adverse effect on our operations.
As of December 31, 2014, unions represented approximately 67 percent of our workforce. As a result, we are subject to the risk of work stoppages and other labor relations matters. Any prolonged strike or other work stoppage at any one of our principal unionized facilities could have a material adverse effect on our business, results of operations or financial condition. We have collective bargaining agreements with different unions at various facilities. These collective bargaining agreements expire at various times over the next few years, with the exception of our union contract at our Monterrey, Mexico facility, which expires on an annual basis. The 2015 negotiations in Monterrey were successfully completed prior to the expiration of our union contract. In 2012, we extended the labor contracts at our London, Ontario facility through March 2018. Also, in 2013 we successfully negotiated our collective bargaining agreement at our Brillion, Wisconsin facility, extending that agreement through June, 2018. In 2014, we successfully negotiated our collective bargaining agreements at Erie, Pennsylvania and Rockford, Illinois facilities, extending those agreements through September 3, 2018 and March 25, 2019, respectively. We do not anticipate any work stoppages or labor issues during 2015; however, we cannot assure you that a significant labor issue will not arise.
In addition, if any of our customers experience a material work stoppage, that customer may halt or limit the purchase of our products. This could cause us to shut down production facilities relating to these products, which could have a material adverse effect on our business, results of operations or financial condition.
We are subject to a number of environmental laws and regulations that may require us to make substantial expenditures or cause us to incur substantial liabilities.
Our operations, facilities, and properties are subject to extensive and evolving laws and regulations pertaining to air emissions, wastewater and stormwater discharges, the handling and disposal of solid and hazardous materials and wastes, the investigation and remediation of contamination, and otherwise relating to health, safety, and the protection of the environment and natural resources. The violation of such laws can result in significant fines, penalties, liabilities or restrictions on operations. From time to time, we are involved in administrative or legal proceedings relating to environmental, health and safety matters, and have in the past incurred and will continue to incur capital costs and other expenditures relating to such matters. For example, we are involved in a proceeding regarding alleged violations of stormwater regulations at our Brillion facility, which could subject us to fines, penalties or other liabilities. In connection with that matter, we have made certain capital improvements related to the underlying allegations. Based on current information, we do not expect that this matter will have a material adverse effect on our business, results of operations or financial conditions; however, we cannot assure you that these or any other future environmental compliance matters will not have such an effect.
In addition to environmental laws that regulate our ongoing operations, we are also subject to environmental remediation liability. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and analogous state laws, we may be liable as a result of the release or threatened release of hazardous materials into the environment regardless of when the release occurred. We are currently involved in several matters relating to the investigation and/or remediation of locations where we have arranged for the disposal of foundry wastes. Such matters include situations in which we have been named or are believed to be potentially responsible parties in connection with the contamination of these sites. Additionally, environmental remediation may be required to address soil and groundwater contamination identified at certain of our facilities.
As of December 31, 2014, we had an environmental reserve of approximately $1.5 million, related primarily to our foundry operations. This reserve is based on management's review of potential liabilities as well as cost estimates related thereto. Any expenditures required for us to comply with applicable environmental laws and/or pay for any remediation efforts will not be reduced or otherwise affected by the existence of the environmental reserve. Our environmental reserve may not be adequate to cover our
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future costs related to the sites associated with the environmental reserve, and any additional costs may have a material adverse effect on our business, results of operations or financial condition. The discovery of additional environmental issues, the modification of existing laws or regulations or the promulgation of new ones, 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 a material adverse effect.
The Iron and Steel Foundry National Emission Standard for Hazardous Air Pollutants ("NESHAP") was developed pursuant to Section 112(d) of the Clean Air Act and requires major sources of hazardous air pollutants to install controls representative of maximum achievable control technology. Based on currently available information, we do not anticipate material costs regarding ongoing compliance with the NESHAP; however if we are found to be out of compliance with the NESHAP, we could incur liability that could have a material adverse effect on our business, results of operations or financial condition.
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. See "Item 1 - Business-Environmental Matters."
Future climate change regulation may require us to make substantial expenditures or cause us to incur substantial liabilities.
Many scientists, legislators and others attribute climate change to increased emissions of greenhouse gases ("GHGs"), which has led to significant legislative and regulatory efforts to limit GHGs. In the recent past, Congress has considered legislation that would have reduced GHG emissions through a cap-and-trade system of allowances and credits, under which emitters would be required to buy allowances to offset emissions. In addition, in late 2009, the EPA promulgated a rule requiring certain emitters of GHGs to monitor and report data with respect to their GHG emissions and, in May 2010, finalized its "tailoring" rule for determining which stationary sources are required to obtain permits, or implement best available control technology, on account of their GHG emission levels. The EPA is also expected to adopt additional rules in the future that will require permitting for ever-broader classes of GHG emission sources. Moreover, several states, including states in which we have facilities, are considering or have begun to implement various GHG registration and reduction programs. Certain of our facilities use significant amounts of energy and may emit amounts of GHGs above certain existing and/or proposed regulatory thresholds. GHG laws and regulations could increase the price of the energy we purchase, require us to purchase allowances to offset our own emissions, require us to monitor and report our GHG emissions or require us to install new emission controls at our facilities, any one of which could significantly increase our costs or otherwise negatively affect our business, results of operations or financial condition. In addition, future efforts to curb transportation-related GHGs could result in a lower demand for our products, which could negatively affect our business, results of operation or financial condition. While future GHG regulation appears likely, it is difficult to predict how these regulations will affect our business, results of operations or financial condition.
We might fail to adequately protect our intellectual property, or third parties might assert that our technologies infringe on their intellectual property.
The protection of our intellectual property is important to our business. We rely on a combination of trademarks, copyrights, patents, and trade secrets to provide protection in this regard, but this protection might be inadequate. For example, our pending or future trademark, copyright, and patent applications might not be approved or, if allowed, they might not be of sufficient strength or scope. Conversely, third parties might assert that our technologies or other intellectual property infringe on their proprietary rights. Any intellectual property-related litigation could result in substantial costs and diversion of our efforts and, whether or not we are ultimately successful, the litigation could have a material adverse effect on our business, results of operations or financial condition. See "Item 1 - Business-Intellectual Property."
Litigation against us could be costly and time consuming to defend.
We are regularly subject to legal proceedings and claims that arise in the ordinary course of business, such as workers' compensation claims, OSHA investigations, employment disputes, unfair labor practice charges, customer and supplier disputes, intellectual property disputes, and product liability claims arising out of the conduct of our business. Litigation may result in substantial costs and may divert management's attention and resources from the operation of our business, which could have a material adverse effect on our business, results of operations or financial condition.
Anti-takeover provisions could discourage or prevent potential acquisition proposals and a change of control, and thereby adversely impact the performance of our common stock.
Certain anti-takeover provisions that are contained in our governing documents, including our advance notice bylaw and the fact that our stockholders may not call special meetings or take action by written consent, could deter a change of control and negatively affect the price of our common stock.
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Additionally, if a person or entity is able to acquire a substantial amount of our common stock, a change of control could be triggered under Delaware General Corporation Law, our Asset Based Loan ("ABL") credit facility or the indenture governing our senior notes. If a change of control under our ABL credit facility were to occur, we would need to obtain a waiver from our lenders or amend the facility. If a change of control under the indenture were to occur, we could be required to repurchase our senior notes at the option of the holders. If we are unable to obtain a waiver/amendment or repurchase the notes, as applicable, or otherwise refinance these debts, the lenders or noteholders, as applicable, could potentially accelerate these debts, and our liquidity and capital resources could be significantly limited and our business operations could be materially and adversely affected.
If we fail to retain our executive officers, our business could be harmed.
Our success largely depends on the efforts and abilities of our executive officers. Their skills, experience and industry contacts significantly contribute to the success of our business and our results of operations. The loss of any one of them could be detrimental to our business, results of operations or financial condition. All of our executive officers are at will, but, as noted below, many of them have a severance agreement. In addition, our future success and profitability will also depend, in part, upon our continuing ability to attract and retain highly qualified personnel throughout our Company.
We have entered into typical severance arrangements with certain of our senior management employees, which may result in certain costs associated with strategic alternatives.
Severance and retention agreements with certain senior management employees provide that the participating executive is entitled to a regular severance payment if we terminate the participating executive's employment without "cause" or if the participating executive terminates his or her employment with us for "good reason" (as these terms are defined in the agreement) at
any time other than during a "Protection Period." The regular severance benefit is equal to the participating executive's base salary for one year. See "Item 10 - Directors, Executive Officers, and Corporate Governance." A Protection Period begins on the date on which a "change in control" (as defined in the agreement) occurs and ends 18 months after a "change in control".
The change in control severance benefit is payable to an executive if his or her employment is terminated during the Protection Period either by the participating executive for "good reason" or by us without "cause." The change in control severance benefits for Tier II executives (Messrs. Dauch, Adams, Hazlett, Martin, Risch, and Ms. Blair) consist of a payment equal to 200% of the executive's salary plus 200% of the greater of (i) the annualized incentive compensation to which the executive would be entitled as of the date on which the change of control occurs or (ii) the average incentive compensation award over the three years prior to termination. The change in control severance benefits for Tier III executives (other key executives) consist of a payment equal to 100% of the executive's salary and 100% of the greater of (i) the annualized incentive compensation to which the executive would be entitled as of the date on which the change of control occurs or (ii) the average incentive compensation award over the three years prior to termination. If the participating executive's termination occurs during the Protection Period, the severance and retention agreement also provides for the continuance of certain other benefits, including reimbursement for forfeitures under qualified plans and continued health, disability, accident and dental insurance coverage for the lesser of 18 months (or 12 months in the case of Tier III executives) from the date of termination or the date on which the executive receives such benefits from a subsequent employer. We no longer use the form of Tier I severance and retention agreements.
Neither the regular severance benefit nor the change in control severance benefit is payable if we terminate the participating executive's employment for "cause," if the executive voluntarily terminates his or her employment without "good reason" or if the executive's employment is terminated as a result of disability or death. Any payments to which the participating executive may be entitled under the agreement will be reduced by the full amount of any payments to which the executive may be entitled due to termination under any other severance policy offered by us. These agreements would make it costly for us to terminate certain of our senior management employees and such costs may also discourage potential acquisition proposals, which may negatively affect our stock price.
Our products may be rendered obsolete or less attractive by changes in regulatory, legislative or industry requirements.
Changes in regulatory, legislative or industry requirements may render certain of our products obsolete or less attractive. Our ability to anticipate changes in these requirements, especially changes in regulatory standards, will be a significant factor in our ability to remain competitive. We may not be able to comply in the future with new regulatory, legislative and/or industrial standards that may be necessary for us to remain competitive and certain of our products may, as a result, become obsolete or less attractive to our customers.
Our strategic initiatives may be unsuccessful, may take longer than anticipated, or may result in unanticipated costs.
Future strategic initiatives could include divestitures, acquisitions, and restructurings, the success and timing of which will depend on various factors. Many of these factors are not in our control. In addition, the ultimate benefit of any acquisition would
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depend on the successful integration of the acquired entity or assets into our existing business. Failure to successfully identify, complete, and/or integrate future strategic initiatives could have a material adverse effect on our business, our results of operations, or financial condition.
Additionally, our strategy contemplates significant growth in international markets in which we have significantly less market share and experience than we have in our domestic operations and markets. In addition, some of our competitors have established a global footprint. An inability to penetrate these international markets could adversely affect our results of operations.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its pre-change net operating losses ("NOLs"), to offset future taxable income. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we return to profitability.
Risks Related to Our Indebtedness
Our leverage and debt service obligations could have a material adverse effect on our financial condition or our ability to fulfill our obligations and make it more difficult for us to fund our operations.
As of December 31, 2014, our total gross indebtedness was $327.0 million. Our indebtedness and debt service obligations could have important negative consequences to us, including:
• Difficulty satisfying our obligations with respect to our indebtedness;
• Difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes;
• Increased vulnerability to general economic downturns and adverse industry conditions;
• Limited flexibility in planning for, or reacting to, changes in our business and in our industry in general; and
• Placing us at a competitive disadvantage compared to our competitors that have less debt.
Despite our leverage, we and our subsidiaries will be able to incur more indebtedness. This could further exacerbate the risk described immediately above, including our ability to service our indebtedness.
We and our subsidiaries may be able to incur additional indebtedness in the future. Although our ABL credit facility and indenture governing our senior notes contain restrictions on the incurrence of additional indebtedness, such restrictions are subject to a number of qualifications and exceptions, and under certain circumstances indebtedness incurred in compliance with such restrictions (or with the consent of our lenders) could be substantial. For example, we may incur additional debt to, among other things, finance future acquisitions, expand through internal growth, fund our working capital needs, comply with regulatory requirements, respond to competition or for general financial reasons alone. To the extent new debt is added to our and our subsidiaries' current debt levels, the risks described above would increase.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.
Our business may not, however, generate sufficient cash flow from operations. Future borrowings may not be available to us under our ABL credit facility in an amount sufficient to enable us to pay our indebtedness or to fund other liquidity needs. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional equity capital or refinance all or a portion of our indebtedness. We are unable to predict the timing of such sales or the proceeds which we could realize from such sales, or whether we would be able to refinance any of our indebtedness on commercially reasonable terms or at all.
We are subject to a number of restrictive covenants, which, if breached, may restrict our business and financing activities.
Our ABL facility and the indenture governing our senior secured notes contain various covenants that impose operating and financial restrictions on us and/or our subsidiaries. Our failure to comply with any of these covenants, or our failure to make payments
- 18 -
of principal or interest on our indebtedness, could result in an event of default, or trigger cross-default or cross-acceleration provisions under other agreements, which could result in these obligations becoming immediately due and payable, and cause our creditors to terminate their lending commitments. Any of the foregoing occurrences could have a material adverse effect on our business, results of operations or financial condition.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The table below sets forth certain information regarding the material owned and leased properties of Accuride as of December 31, 2014. We believe these properties are suitable and adequate for our business.
Facility Overview
Location
Business function
Brands
Manufactured
Owned/
Leased
Size
(sq. feet)
Evansville, IN
Corporate Headquarters
Corporate
Leased
37,229
London, Ontario, Canada
Heavy- and Medium-duty Steel Wheels, Light Truck Steel Wheels
Accuride
Owned
536,259
Henderson, KY
Heavy- and Medium-duty Steel Wheels, R&D
Accuride
Owned
364,365
Monterrey, Mexico
Heavy- and Medium-duty Steel and Aluminum Wheels, Light Truck Wheels
Accuride
Owned
262,000
Camden, SC
Forging and Machining-Aluminum Wheels
Accuride
Owned
80,000
Erie, PA
Forging and Machining-Aluminum Wheels
Accuride
Leased
421,229
Springfield, OH
Assembly Line and Sequencing
Accuride
Owned
136,036
Whitestown, IN
Subleased to unrelated third party
None
Leased
364,000
Batavia, IL
Warehouse
None
Leased
170,462
Rockford, IL
Wheel-end Foundry and Machining, Administrative Office
Gunite
Owned
619,000
Brillion, WI
Molding, Finishing, Administrative Office
Brillion
Owned
593,200
Portland, TN
Idle
None
Owned
86,000
Our Erie, Pennsylvania property may be purchased for a nominal sum, subject to refinancing of $1.7 million from the local government economic development organization. There are no plans to purchase this property.
Our former Whitestown, Indiana distribution operations were moved to Batavia, Illinois in the second half 2013 and this facility is currently subleased to an unrelated third party. Our Portland, Tennessee facility operations were ceased by Imperial Group on August 1, 2013 upon the sale of our Imperial business to a third party, and the facility was leased by the purchaser through October 2014. The future function of this facility is currently being evaluated. (See Note 2 to the "Notes to Consolidated Financial Statements" included herein for further explanation)
Item 3.
Item 3. 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, intellectual property, 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, our liability with respect to any such action or proceeding may exceed our established accruals. Further, litigation that may arise in the future may have a material effect on our financial condition.
Item 4.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
As of February 27, 2015, there were approximately 11 holders of record of our Common Stock, although there are substantially more beneficial owners.
The following table sets forth the high and low sale prices of our Common Stock, which is listed on the New York Stock Exchange, during 2013 and 2014.
On February 25, 2015, the closing price of our Common Stock was $5.30.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our Common Stock. For the foreseeable future, we intend to retain any earnings, and we do not anticipate paying any cash dividends on our Common Stock. In addition, our ABL credit facility and indenture governing the senior secured notes restrict our ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Capital Resources and Liquidity." Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon then existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors considers relevant.
2010 RESTRICTED STOCK UNIT AWARDS
In May 2010, we entered into individual restricted stock unit agreements with certain employees of the Company and its subsidiaries that provided for the issuance of up to 178,268 shares of Common Stock. The RSUs entitled the recipients to receive a corresponding number of shares of the Company's Common Stock on the date the RSU vests. The RSUs were not granted under the terms of any plan and are evidenced by the previously filed form Restricted Stock Unit Agreement. The RSUs vested one-third annually over three years subject to the employee's continued employment with the Company. The final tranche of these RSU awards vested in May 2013.
In August 2010, we entered into individual restricted stock unit agreements with members of our Board of Directors that provided for the issuance of up to 55,790 shares of Common Stock. The RSUs entitled the recipients to receive a corresponding number of shares of the Company's Common Stock on the date the RSU vests. The RSUs were not granted under the terms of any plan and are evidenced by the previously filed form Restricted Stock Unit Agreement. The final tranche of these RSU awards vested in March 2014.
STOCK INCENTIVE
In August 2010, we adopted the Accuride Corporation 2010 Incentive Award Plan (the "2010 Incentive Plan") and reserved 1,260,000 shares of Common Stock for issuance under the plan, plus such additional shares of Common Stock that the plan administrator deemed necessary to prevent unnecessary dilution upon issuance of shares pursuant to terms of our then outstanding convertible notes, up to a maximum number shares of Common Stock such that the total number of shares available for issuance under the 2010 Incentive Plan would not exceed ten percent (10%) of the fully diluted shares outstanding from time to time calculated by adding the total shares issued and outstanding at any given time plus the number of shares issued upon conversion of any of the convertible notes at the time of such conversion. During 2010, we effectively converted all outstanding convertible notes to equity, and we subsequently amended the 2010 Incentive Plan to reserve 3,500,000 shares of Common Stock for issuance under the 2010 Incentive Plan.
On March 13, 2014, our Board of Directors adopted, subject to shareholder approval, the Second Amended and Restated 2010 Incentive Award Plan, which increased the number of shares of our common stock available for grants under the plan by
- 20 -
1,700,000 shares, extended the term of the plan until 2024, and made certain other adjustments. Our shareholders approved the Second Amended and Restated 2010 Incentive Award Plan at our Annual Meeting in April 2014, which resulted in a total of 5,200,000 shares of Common Stock being reserved for issuance under the plan.
On April 28, 2011, the Board of Directors of the Company approved restricted stock unit grants to management which will vest annually over a four year period, with 20 percent vesting on each of May 18, 2012, May 18, 2013, and May 18, 2014, and the final 40 percent vesting on May 18, 2015. The RSUs will fully vest upon a change in control of the Company, as defined in the Restricted Stock Unit Agreement.
On February 28, 2012, the Compensation Committee of the Board of Directors approved restricted stock unit and non-qualified stock option grants to certain employees of the Company that were effective as of March 5, 2012. The restricted stock unit awards will vest annually over a four year period, with 20 percent vesting on each of March 5, 2013, March 5, 2014, and March 5, 2015, and the final 40 percent vesting on March 5, 2016. The stock option awards will vest ratably over three years. Both the restricted stock unit and option awards include double trigger change in control vesting provisions, as described in the award agreements.
On March 21, 2013, the Compensation Committee of the Board of Directors approved equity grants to certain employees of the Company. Each grant was split evenly into service-based and performance based-awards. The service-based restricted stock unit awards will vest annually over a four year period, with 20 percent vesting on each of March 5, 2014, March 5, 2015, and March 5, 2016, and the final 40 percent vesting on March 5, 2017. The performance-based awards will vest upon meeting the threshold criteria for the performance period, which is January 1, 2013 through December 31, 2015. The restricted stock unit awards include double trigger change in control vesting provisions, as described in the award agreements.
On February 26, 2014, the Compensation Committee of the Board of Directors approved equity grants to certain employees of the Company. Each grant was split evenly into service-based and performance-based awards. The service-based restricted stock unit awards will vest annually over a four year period, with 20 percent vesting on each of March 5, 2015, March 5, 2016, and March 5, 2017, and the final 40 percent vesting on March 5, 2018. The performance-based awards will vest upon meeting the threshold criteria for the performance period, which is January 1, 2014 through December 31, 2016. The restricted stock unit awards include double trigger change in control vesting provisions, as described in the award agreements.
The following table gives information about equity awards as of December 31, 2014:
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PERFORMANCE GRAPH
The following graph shows the total stockholder return of an investment of $100 in cash on March 3, 2010, the date public trading commenced in our postpetition Common Stock, to December 31, 2014 for (i) our postpetition Common Stock, (ii) the S&P 500 Index, and (iii) a peer group of companies we refer to as "Commercial Vehicle Suppliers." Five year historical data is not presented as a result of the bankruptcy and since the financial results of the Successor Company are not comparable with the results of the Predecessor Company. We believe that a peer group of representative independent commercial vehicle suppliers is appropriate for comparing shareowner return. The Commercial Vehicle Suppliers group consists of Meritor, Inc., Commercial Vehicle Group, Inc., Cummins, Inc., Eaton Corporation, and Stoneridge, Inc. All values assume reinvestment of the full amount of all dividends and are calculated through December 31, 2014.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
- 22 -
Item 6.
Item 6. Selected Consolidated Financial Data
The following financial data is an integral part of, and should be read in conjunction with the "Consolidated Financial Statements" and notes thereto. Information concerning significant trends in the financial condition and results of operations is contained in "Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes matters we consider important to understanding the results of our operations for each of the three years in the period ended December 31, 2014, and our capital resources and liquidity as of December 31, 2014 and 2013.
The following discussion should be read in conjunction with "Selected Consolidated Financial Data" and our "Consolidated Financial Statements" and the notes thereto, all included elsewhere in this report. The information set forth in this MD&A includes forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to differ from those contained in the forward-looking statements including, but not limited to, those discussed in Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
In the normal course of doing business, we are exposed to the 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 currencies of exposure are the Canadian Dollar and Mexican Peso. From time to time, we use foreign currency financial instruments, namely foreign currency derivative contracts, to offset the impact of the variability in exchange rates on our operations, cash flows, assets and liabilities. At December 31, 2014, we had $0.6 million in open forward contracts.
Foreign currency derivative contracts provide only limited protection against currency risks. Factors that could impact the effectiveness of our currency risk management programs include accuracy of sales estimates, volatility of currency markets and the cost and availability of derivative instruments. The counterparty to the foreign exchange contracts is a financial institution with an investment grade credit rating. The use of forward contracts protects our cash flows against unfavorable movements in exchange rates to the extent of the amount under contract.
Raw Material/Commodity Price Risk
We rely upon the supply of certain raw materials and commodities in our production processes, and we have entered into contractual purchase commitments for certain metals and natural gas. A 10% adverse change in pricing (considering 2014 production volume) would cause an increase in expenses of approximately $31.0 million, which would be reduced through the terms of the sales,
- 41 -
supply, and procurement contracts that would allow us to pass along some of these expenses, although in some cases on a delayed basis. Additionally, from time to time, we use commodity price swaps and futures contracts to manage the variability in certain commodity prices on our operations and cash flows. At December 31, 2014, we had no open commodity price swaps or futures contracts.
Interest Rate Risk
We use long-term debt as a primary source of capital. 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 December 31, 2014:
Item 8.
Item 8. Financial Statements and Supplementary Data
Attached, see Item 15.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Exchange Act, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2014. Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of December 31, 2014 to ensure that information required to be disclosed under the Exchange Act is recorded, processed, summarized, and reported, within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with U.S. GAAP.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, our management has concluded that, as of December 31, 2014, our internal controls over financial reporting were effective based on that framework.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of the effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Deloitte & Touche LLP, the Company's independent registered public accounting firm, issued an audit report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2014, which is included herein.
- 42 -
Changes in Internal Controls Over Financial Reporting. During the fourth quarter of fiscal 2014, there were no changes to our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by Item 10 is incorporated by reference to the information set forth in our Proxy Statement in connection to our 2015 Annual Meeting of Shareholders ("2015 Proxy Statement") to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this Form 10-K.
Code of Ethics for CEO and Senior Financial Officers
As part of our system of corporate governance, our Board of Directors has adopted a code of conduct (the "Accuride Code of Conduct") that is applicable to all employees including our Chief Executive Officer and senior financial officers. The Accuride Code of Conduct is available on our website at http://www.accuridecorp.com. We intend to disclose on our website any amendments to, or waivers from, the Accuride Code of Conduct that are required to be publicly disclosed pursuant to the rules of the SEC.
Item 11.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the information set forth in our 2015 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Item 12 is incorporated by reference to the information set forth in our 2015 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is incorporated by reference to the information set forth in our 2015 Proxy Statement.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference to the information set forth in our 2015 Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) The following constitutes a list of Financial Statements and Financial Statement Schedules required to be included in this report:
1. Financial Statements
The following financial statements of the Registrant are filed herewith as part of this report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets-As of December 31, 2014 and 2013.
Consolidated Statements of Operations and Comprehensive Loss- For the years ended December 31, 2014, 2013, and 2012.
Consolidated Statements of Stockholders' Equity - For the years ended December 31, 2014, 2013 and 2012.
Consolidated Statements of Cash Flows-For the years ended December 31, 2014, 2013 and 2012.
Notes to Consolidated Financial Statements-For the years ended December 31, 2014, 2013 and 2012.
2. Financial Statement Schedules
Schedules are omitted because of the absence of conditions under which they are required or because the required information is presented in the Financial Statements or notes thereto.
- 43 -
3. Exhibits
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
-
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.
2.3
-
ThirdAmended Joint Plan of Reorganization for Accuride Corporation, et al. Previously filed as an exhibit to the Form 8-K filed on February 22, 2010, and incorporated herein by reference.
2.4
-
Confirmation Order for Third Amended Plan of Reorganization. Previously filed as an exhibit to the Form 8-K filed on February 22, 2010, and incorporated herein by reference.
2.5
-
Stock Purchase Agreement by and among Accuride Corporation, Truck Components, Inc., Fabco Automotive Corporation and Fabco Holdings Inc., dated September 26, 2011. Previously filed as an exhibit to the Form 8-K filed on September 30, 2011, and incorporated herein by reference.
3.1
-
Amended and Restated Certificate of Incorporation of Accuride Corporation. Previously filed as an exhibit to the Form 8-K (Acc. No. 0001104659-10-012168) filed on March 4, 2010, and incorporated herein by reference.
3.2
-
Certificate of Amendment to the Amended and Restated Certificate of Incorporation. Previously filed as an exhibit to the Form 8-K (ACC No. 0001104659-10-059191) filed on November 18, 2010, and incorporated herein by reference.
3.3
-
Amended and Restated Bylaws of Accuride Corporation. Previously filed as an exhibit to the Form 8-K (Acc. No. 0001104659-10-004054) filed on February 1, 2011, and incorporated herein by reference.
4.1
-
Registration Rights Agreement, dated February 26, 2010, by and between Accuride Corporation and each of the Holders party thereto. Previously filed as an exhibit to the Form 8-K (Acc. No. 0001104659-10-012168) filed on March 4, 2010 and incorporated herein by reference.
4.2
-
Indenture, dated as of July 29, 2010, by and among Accuride Corporation, the guarantors named therein, Wilmington Trust FSB, as trustee and Deutsche Bank Trust Company Americas, with respect to 9.5% First Priority Senior Secured Notes due 2018. Previously filed as an exhibit to the Form 8-K filed on August 2, 2010 (Acc. No. 0001104659-10-012168) and incorporated herein by reference.
4.3
-
Form of 9.5% First Priority Senior Secured Notes due 2018. Previously filed as an exhibit to Form 8-K filed on August 2, 2010 and incorporated herein by reference.
4.4
-
Intercreditor Agreement, dated as of July 29, 2010, among Deutsche Bank Trust Company Americas, as initial ABL Agent, and Deutsche Bank Trust Company Americas, as Senior Secured Notes Collateral Agent. Previously filed as an exhibit to the Form 8-K filed on August 2, 2010 (Acc. No. 0001104659-10-012168) and incorporated herein by reference.
4.5
-
Joinder and Amendment to Intercreditor Agreement, dated July 11, 2013, by and among Wells Fargo, National Association, a national banking association, as the New ABL Agent and Deutsche Bank Trust Company Americas, as Senior Secured Notes Collateral Agent. Previously filed as an exhibit to the Form 8-K filed on July 12, 2013 and incorporated herein by reference
10.1
-
Lease Agreement, dated October 26, 1998, as amended, by and between Accuride Corporation and Viking Properties, LLC, regarding the Evansville, Indiana office space. 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.
10.2
-
Fourth Addendum to Lease Agreement With Option to Purchase, dated December, 22 2009, by and between Accuride Corporation, Viking Properties, LLC, and Logan Indiana Properties, LLC. Previously filed as an exhibit to the Form 8-K filed on March 4, 2010 and incorporated herein by reference.
10.3
-
Fifth Addendum to Lease Agreement With Option to Purchase, dated September 2, 2014, by and among Viking Properties, LLC, Logan Properties, LLC and Accuride Corporation. Previously filed as an exhibit to the Form 8-K filed on September 5, 2014 and incorporated herein by reference.
10.4
-
Amended and Restated Plant Parcel Lease Agreement, dated as of March 31, 2005 and amended and restated as of March 1, 2010, by and between Accuride Erie L.P. and Greater Erie Industrial Development Corporation, as further amended by the attached Subordination, Non-disturbance and Attornment Agreement, dated June 9, 2009, between First National Bank of Pennsylvania, Greater Erie Industrial Development Corporation and Accuride Erie, L.P. Previously filed as an exhibit to the Form 8-K filed on June 15, 2009 and incorporated herein by reference.
10.5*
-
Accuride Executive Retirement Allowance Policy, dated December 2008. Previously filed as an exhibit to the Form 10-K filed on March 13, 2009 and incorporated herein by reference.
10.6*
-
Form of Amended & Restated Severance and Retention Agreement (Tier II executives).Previously filed as an exhibit to the Form 10-K filed on March 15, 2012, and incorporated herein by reference.
- 44 -
- 45 -
31.1†
-
Section 302 Certification of Richard F. Dauch in connection with the Annual Report of Form 10-K of Accuride Corporation for the fiscal year ended December 31, 2014.
31.2†
-
Section 302 Certification of Gregory A. Risch in connection with the Annual Report of Form 10-K of Accuride Corporation for the fiscal year ended December 31, 2014.
32.1††
-
Section 906 Certification of Richard F. Dauch in connection with the Annual Report on Form 10-K of Accuride Corporation for the fiscal year ended December 31, 2014.
32.2††
-
Section 906 Certification of Gregory A. Risch in connection with the Annual Report on Form 10-K of Accuride Corporation for the fiscal year ended December 31, 2014.
101.INS†
-
XBRL Instance Document
101.SCH†
-
XBRL Taxonomy Extension Schema Document
101.CAL†
-
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB†
-
XBRL Taxonomy Extension Label Linkbase Document
101.PRE†
-
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF†
-
XBRL Taxonomy Extension Definition Linkbase Document
† Filed herewith
†† Furnished herewith
* Management contract or compensatory agreement
- 46 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 3, 2015
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ RICHARD F. DAUCH
President and Chief Executive Officer
March 3, 2015
Richard F. Dauch
(Principal Executive Officer)
/s/ GREGORY A. RISCH
Senior Vice President and Chief Financial Officer
March 3, 2015
Gregory A. Risch
(Principal Financial and Accounting Officer)
/s/ JOHN W. RISNER
Chairman of the Board of Directors
March 3, 2015
John W. Risner
/s/ ROBIN J. ADAMS
Director
March 3, 2015
Robin J. Adams
/s/ KEITH E. BUSSE
Director
March 3, 2015
Keith E. Busse
/s/ ROBERT E. DAVIS
Director
March 3, 2015
Robert E. Davis
/s/ LEWIS M. KLING
Director
March 3, 2015
Lewis M. Kling
/s/ JAMES R. RULSEH
Director
March 3, 2015
James R. Rulseh
- 47 -
ACCURIDE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
- 48 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Accuride Corporation and subsidiaries
Evansville, Indiana
We have audited the accompanying consolidated balance sheets of Accuride Corporation and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. We also have audited the Company's internal control over financial reporting as of December 31, 2014, based on Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Accuride Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 3, 2015
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ACCURIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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ACCURIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
See accompanying notes to consolidated financial statements.
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ACCURIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
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ACCURIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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ACCURIDE CORPORATION
For the years ended December 31, 2014, 2013, and 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands unless otherwise noted, except share and per share data)
Note 1 - Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations - We are engaged primarily in the design, manufacture and distribution of components for trucks, trailers and certain military and construction vehicles. We sell our products primarily within North America and Latin America to original equipment manufacturers and to the aftermarket.
Basis of Presentation and Consolidation - The accompanying consolidated financial statements include the accounts of Accuride Corporation (the "Company") and its wholly-owned subsidiaries, including Accuride Canada, Inc. ("Accuride Canada"), Accuride Erie L.P. ("Accuride Erie"), Accuride EMI, LLC ("Accuride Camden"), Accuride de Mexico, S.A. de C.V. ("AdM"), AOT, Inc. ("AOT"), and Transportation Technologies Industries, Inc. ("TTI"). TTI's subsidiaries include Brillion Iron Works, Inc. ("Brillion") and Gunite Corporation ("Gunite"). All significant intercompany transactions have been eliminated. Certain operating results from prior periods have been reclassified to discontinued operations to reflect the sale of certain businesses. See Note 2 "Discontinued Operations" for further discussion.
On August 1, 2013, the Company announced the sale of substantially all of the assets, liabilities and business of its Imperial Group business to Wynnchurch Capital, Ltd. in partnership with Imperial Manufacturing, Inc. for $30.0 million, plus a contingent earn-out opportunity of up to $2.25 million. The sale resulted in the recognition of a $12.0 million loss, including a $2.5 million impairment charge on the assets retained, on our consolidated statement of operations, which is reclassified within Discontinued Operations. The sale included a working capital adjustment, plus a contingent payment of up to $2.25 million depending on Imperial's financial performance during calendar years 2013-2015. See Note 2 "Discontinued Operations" for further discussion.
Management's Estimates and Assumptions - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") 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.
Revenue Recognition - Revenue from product sales is recognized upon shipment whereupon title passes and we have no further obligations to the customer. Provisions for discounts and rebates to customers, and returns and other adjustments are provided for as a reduction of sales in the same period the related sales are recorded.
Cash and Cash Equivalents - Cash and cash equivalents include all highly liquid investments with original maturities of three months or less. The carrying value of these investments approximates fair value due to their short maturity.
Inventories - Inventories are stated at the lower of cost or market. Cost for substantially all inventories is determined by the first-in, first-out method ("FIFO"). We review inventory on hand and write down excess and obsolete inventory based on our assessment of future demand and historical experience. We also recognize abnormal items as current-period charges. Fixed production overhead costs are based on the normal capacity of the production facilities.
Property, Plant and Equipment - Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over their expected useful lives. Generally, buildings and improvements have useful lives of 15-40 years, and factory machinery and equipment have useful lives of 10 years. Internal-use software is stated at cost less accumulated amortization and is amortized using the straight-line method over its estimated useful life of three years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project.
Deferred Financing Costs - Costs incurred in connection with the ABL Credit Agreement and issuance of our senior secured notes (see Note 7) were originally deferred and are being amortized over the life of the related debt using the effective interest method.
Goodwill - Goodwill represents the excess of the reorganization value of the Company over the fair value of net tangible assets and identifiable assets and liabilities resulting from the fresh-start reporting. See Note 4 for further discussion.
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Intangible Assets - Identifiable intangible assets consist of trade names, technology and customer relationships. Indefinite lived intangibles assets (trade names) are not amortized. The lives for the definite-lived intangibles assets are reviewed to ensure recoverability whenever events or changes in economic circumstances indicate the carrying amount of such assets may not be recoverable. See Note 4 for further discussion.
Impairment - We evaluate our long-lived assets to be held and used and our amortizing intangible assets for impairment when events or changes in economic circumstances indicate the carrying amount of such assets may not be recoverable. Impairment is determined by comparison of the carrying amount of the asset to the undiscounted net cash flows expected to be generated by the related asset group. Long-lived assets to be disposed of are carried at the lower of cost or fair value less the costs of disposal.
Goodwill and our indefinite lived intangible assets (trade names) are reviewed for impairment annually or more frequently if impairment indicators exist. Impairment is determined for trade names by comparison of the carrying amount to the fair value, which is determined using an income approach (relief from royalty method). Impairment is determined for goodwill using the two-step approach. The first step is the estimation of fair value of each reporting unit, which is compared to the carrying value. 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 implied fair value of goodwill is less than its carrying value.
Pension Plans - We have trusteed, non-contributory pension plans covering certain U.S. and Canadian employees. For certain plans, the benefits are based on career average salary and years of service and, for other plans, a fixed amount for each year of service. Our net periodic pension benefit costs are actuarially determined. Our funding policy provides that payments to the pension trusts shall be at least equal to the minimum legal funding requirements.
Postretirement Benefits Other Than Pensions - We have postretirement health care and life insurance benefit plans covering certain U.S. non-bargained and Canadian employees. We account for these benefits on an accrual basis and provide for the expected cost of such postretirement benefits accrued during the years employees render the necessary service. Our funding policy provides that payments to participants shall be at least equal to our cash basis obligation.
Postemployment Benefits Other Than Pensions - We have certain post-employment benefit plans, which provide severance benefits, covering certain U.S. and Canadian employees. We account for these benefits on an accrual basis.
Product Warranties - The Company provides product warranties in conjunction with certain product sales. Generally, sales are accompanied by a 1- to 5-year standard warranty. These warranties cover factors such as non-conformance to specifications and defects in material and workmanship. See Note 17 for a discussion of warranties.
Income Taxes - Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results, adjusted for the results of discontinued operations and changes in accounting policies, and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
We have concluded that it is more likely than not that we will not realize the benefits of certain deferred tax assets, totaling $110 million, for which we have provided a valuation allowance. See Note 9 for a discussion of valuation allowances.
We record uncertain tax positions on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. We also recognize accrued interest expense and penalties related to the unrecognized tax benefits as additional tax expense.
Research and Development Costs - Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred and are reported as a component of operating expenses in the consolidated statements of operations and comprehensive loss. The amount expensed in the years ended December 31, 2014, 2013 and 2012 totaled $5.6 million, $5.7 million and $6.6 million, respectively.
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Foreign Currency - The assets and liabilities of Accuride Canada and AdM that are receivable or payable in cash are converted at current exchange rates, and inventories and other non-monetary assets and liabilities are converted at historical rates. Revenues and expenses are converted at average rates in effect for the period. The functional currencies of Accuride Canada and AdM have been determined to be the U.S. dollar. Accordingly, gains and losses resulting from conversion of such amounts, as well as gains and losses on foreign currency transactions, are included in operating results as "Other loss, net." For the years ended December 31, 2014, 2013, and 2012 we had aggregate net foreign currency losses of $4.1 million, $0.6 million and $1.1 million, respectively.
Concentrations of Credit Risk - Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, customer receivables, and derivative financial instruments. We place our cash and cash equivalents and execute derivatives with high quality financial institutions. Generally, we do not require collateral or other security to support customer receivables.
Derivative Financial Instruments - We periodically use derivative instruments to manage exposure to foreign currency, commodity prices, and interest rate risks. We do not enter into derivative financial instruments for trading or speculative purposes. The derivative instruments used by us include interest rate, foreign exchange, and commodity price instruments. All derivative instruments are recognized on the consolidated balance sheet at their estimated fair value. As of December 31, 2014 and 2013, there were no derivatives outstanding.
Foreign Exchange Instruments - At December 31, 2014, the notional amount of open foreign exchange forward contracts was $7.0 million. There were no open foreign exchange forward contracts as of December 31, 2013.
Earnings Per Share - Earnings per share are calculated as net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated by dividing net income (loss) by the weighted-average number of common shares outstanding plus common stock equivalents outstanding during the year. Employee stock options outstanding to acquire 144,095 and 165,197 shares in 2014 and 2013 respectively, were not included in the computation of diluted earnings per common share because the effect would be anti-dilutive.
Stock Based Compensation - As described in Note 10, we maintain stock-based compensation plans which allow for the issuance of incentive stock options, or ISOs, as defined in section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights ("SARs"), deferred stock, dividend equivalent rights, performance awards and stock payments (referred to collectively as Awards), to officers, our key employees, and to members of the Board of Directors. We recognize compensation expense under the modified prospective method as a component of operating expenses.
On November 9, 2011, our Board of Directors adopted a Rights Agreement pursuant to which one purchase right was distributed as a dividend on each share of our common stock held of record as of the close of business on November 23, 2011. On November 7, 2012, our Board of Directors adopted an Amended and Restated Rights Agreement (the "Amended and Restated Rights
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Agreement"), which modified the Original Rights Agreement by extending the term of the Original Rights Agreement to November 9, 2015, subject to stockholder approval at our 2013 annual meeting of stockholders, and making certain other adjustments. On December 19, 2012, our Board of Directors amended the Amended and Restated Rights Agreement by shortening the term to April 30, 2014, subject to stockholder approval at our 2013 Annual Meeting of stockholders. Our stockholders ratified the Amended and Restated Rights Agreement at our 2013 Annual Meeting. Pursuant to its terms, the Rights plan terminated on April 30, 2014, without the rights becoming exercisable.
New Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue From Contracts With Customers. The amendments in this update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605. The objective of the amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards ("IFRS"). The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods therein. Early adoption is not permitted. The Company is evaluating the effect, if any, on its financial statements.
On June 19, 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period. This Update is intended to resolve the diverse accounting treatment of those awards in practice. The amendment is effective for annual and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is evaluating the effect, if any, on its financial statements.
On August 27, 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern. The amendments in this Update provide guidance in U.S. GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is evaluating the effect, if any, on its financial statements.
Recent Accounting Adoptions
In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The objective of the amendments in this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for those obligations addressed within existing guidance in U.S. GAAP. The amendment requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and an additional amount the reporting entity expects to pay on behalf of its co-obligors. The entity is required to disclose the nature and amount of the obligation as well as other information about those obligations. The Company adopted this ASU as of January 1, 2014. This adoption did not have an effect on our financial statements.
On July 18, 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Topic 740 does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The objective of the amendments in this update is to eliminate that diversity in practice. The Company adopted this ASU as of January 1, 2014. This adoption did not have an effect on our financial statements.
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Note 2 - Discontinued Operations
On August 1, 2013, the Company announced that it completed the sale of substantially all of the assets of its Imperial Group business to Imperial Group Manufacturing, Inc., a new company formed and capitalized by Wynnchurch Capital for total cash consideration of $30.0 million at closing, plus a contingent earn-out opportunity of up to $2.25 million. The sale was effective as of July 31, 2013. The sale resulted in recognition of a $12.0 million loss for the year ended December 31, 2013, which has been reclassified to discontinued operations.
Pursuant to the provisions of the purchase agreement, subject to certain limited exceptions, the purchaser purchased from Imperial all equipment, inventories, accounts receivable, deposits, prepaid expenses, intellectual property, contracts, real property interests, transferable permits and other intangibles related to the business and assumed Imperial's trade and vendor accounts payable and performance obligations under those contracts included in the purchased assets. The real property interests acquired by the purchaser include ownership of three plants located in Decatur, Texas, Dublin, Virginia and Chehalis, Washington and a leasehold interest in a plant located in Denton, Texas. Imperial retained ownership of its real property located in Portland, Tennessee and included a $2.5 million impairment charge for this property in the loss on sale. The Company leased the Portland, Tennessee facility to the purchaser from the closing date of the transaction through October 31, 2014. The future function of this facility is currently being evaluated.
In connection with these transactions, we have reclassified current and prior period operating results, including the gain/loss on the sale transactions, to discontinued operations.
The following table presents sales and income from operations attributable to Imperial, Fabco, Bostrom Seating and Brillion Farm.
The loss related to the sale of Imperial as of July 31, 2013 was as follows:
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Note 3 - Inventories
Inventories at December 31, 2014 and 2013, on a FIFO basis, were as follows:
Note 4 - Goodwill and Other Intangible Assets
The Company performs its annual assessment for impairment of goodwill at November 30 for all reporting units that have goodwill and tests these balances more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The estimates and assumptions underlying the fair value calculations used in the Company's annual impairment tests are uncertain by their nature and can vary significantly from actual results. Factors that management must estimate include, but are not limited to, industry and market conditions, sales volume and pricing, raw material costs, capital expenditures, working capital changes, cost of capital, and tax rates. These factors are especially difficult to predict when U.S. and global financial markets are volatile. The estimates and assumptions used in its impairment tests are consistent with those the Company uses in its internal planning. These estimates and assumptions may change from period to period. If the Company uses different estimates and assumptions in the future, impairment charges may occur and could be material.
In performing the annual impairment test for goodwill, the Company utilizes the two-step approach. The first step under this guidance requires a comparison of the carrying value of the reporting units to the fair value of these reporting units. Only the Wheels and Brillion reporting units have Goodwill, therefore, the test only applies to those reporting units. The Company uses a blend of the income and market valuation approaches to determine the fair value of each reporting unit. The income approach calculates fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate and a market approach that uses guideline companies. The market approach uses financial measures from guideline companies to apply to the Company's reporting units' revenue and earnings. If the blended fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of a reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit's goodwill to its carrying value.
For 2014 and 2013, we evaluated the value of the goodwill and indefinite lived intangibles for each reporting units and determined there was no impairment indicator. In the most recent test for impairment, the Wheels reporting unit had 7 percent of value in excess of its carrying value. Considering the cyclical nature of the North American commercial vehicle industry and our other end-markets, along with other economic trends, the Company will continue to closely monitor the performance of the Wheels and Brillion reporting units for any indication of potential impairment triggering events.
For 2012, as a result of business developments in the Gunite reporting unit, including a loss of customer market share, evidence of declining aftermarket sales, overall reduced production levels of the commercial vehicle market, operating losses for the past several years, and recent declines in the Company's stock price to an amount below book value, the Gunite reporting unit failed the step one goodwill impairment test. As of December 31, 2012 the Company estimated the fair value of the Gunite reporting unit utilizing a discounted cash flow model as the Company believes it is the most reliable indicator of fair value. Therefore, the second step of the analysis was performed resulting in the Company recognizing goodwill impairment charges of $62.8 million in 2012. The Wheels and Brillion reporting units both passed the step one test.
The Company determines the fair value of other indefinite lived intangible assets, primarily trade names, using the relief-from-royalty method, an income based approach. The approach calculates fair value by applying royalty rates to the after tax cash flows attributable to the asset, and then discounting these after tax cash flows to a present value using a risk-adjusted discount rate. The calculated fair value is compared to the carrying value to determine if any impairment exists. Significant Level 3 inputs included in the valuation of trade names include the selected royalty rate and discount rate.
If events or circumstances change, a determination is made by management to ascertain whether certain indefinite lived intangibles such as customer relationships and technology have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, an impairment loss is recognized in an amount necessary to write down the assets to fair value as determined from expected future discounted cash flows.
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For 2014 and 2013, we evaluated definite lived intangible assets for potential impairment indicators and determined there were none.
For 2012, we performed a recoverability test of the Gunite's definite lived intangible assets by using an undiscounted cash flow method. We first determined the asset group to be the Gunite reporting unit, which represents the lowest level of identifiable cash flows. Our test concluded that the Gunite asset group was not recoverable as the resulting undiscounted cash flows were less
than the carrying amount of the asset group. Accordingly, we estimated the fair value of the definite lived intangible assets to determine the impairment amount. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs.
To determine the estimated fair value of customer relationships, the multi-period excess earnings method was used. This method is based on the concept that cash flows attributable to the assets analyzed are available after deducting costs associated with the business as well as a return on the assets employed in the generation of the cash flows. Significant Level 3 inputs for this valuation model include determining the attrition rate associated with customer revenues, contributory asset charges and required rates of return on tangible and intangible assets, as well as a discount rate for the cash flows. To determine the fair value of technology, the relief-from-royalty method described above was used. In applying this method to technology, significant Level 3 inputs include determining the technology obsolescence rate, a royalty rate, and an appropriate discount rate.
As a result of the fair value measurements for Gunite's trade names, customer relationships and technology, the Company recorded an impairment charge of these intangible assets totaling $36.8 million for the year ended December 31, 2012.
The following represents the carrying amount of goodwill, on a reportable segment basis:
The changes in the carrying amount of other intangible assets for the period December 31, 2012 to December 31, 2014 by reportable segment for the Company, are as follows:
The summary of goodwill and other intangible assets is as follows:
We estimate that the annual aggregate intangible asset amortization expense for the Company will be approximately $8.1 million in 2015 through 2019.
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Note 5 - Assets Held for Sale
At December 31, 2013, assets totaling $1.3 million were classified as held for sale. The assets consisted of a building and land related to the Elkhart, IN facility that our Gunite business exited in 2012. The sale of these assets was completed on February 24, 2014, net proceeds totaled $1.1 million.
Note 6 - Property, Plant and Equipment
Property, plant and equipment at December 31, 2014 and 2013 consist of the following:
Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was $33.7 million, $35.6 million and $48.1 million, respectively.
In 2012, the Company considered the impact of business developments in its Gunite reporting unit, including a loss of customer market share and evidence of declining aftermarket sales. In addition to the concerns with our Gunite business, the Company had also experienced a decline in its stock price to an amount below then current book value. These events triggered a long-lived asset impairment analysis for Gunite.
We performed a recoverability test of the Gunite's long-lived assets by using an undiscounted cash flow method. We first determined the asset group to be the Gunite reporting unit, which represents the lowest level of identifiable cash flows. Our test concluded that the Gunite asset group was not recoverable as the resulting undiscounted cash flows were less than the carrying amount of the asset group. Accordingly, we estimated the fair value of the long lived assets to determine the impairment amount. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs.
To determine the estimated fair value of real and personal property, the market approach and cost approach were considered. The income approach was not considered as we concluded it was not feasible to allocate or attribute income to individual assets given our asset group determination to be the Gunite reporting unit. Under the cost approach, the determination of fair value considered the estimates of the cost to replace or reproduce assets of equal utility at current prices with adjustments in value for physical deterioration and functional obsolescence based on the condition of the assets. Under the market approach, the determination of fair value considered the market prices in transactions for similar assets and certain direct market values based on quoted prices from brokers and market professionals. For real estate, we concluded that the market approach was the most appropriate valuation method. For buildings, we concluded that the cost approach was the most appropriate valuation method. For personal property, we concluded that the cost approach, adjusted for an in-exchange or salvage premise, was the most appropriate method for determining fair value.
Significant Level 3 inputs for real estate and building measurements included location of the property, zoning, physical deterioration, functional obsolescence and external obsolescence. Significant Level 3 inputs for personal property included physical deterioration, functional obsolescence and economic obsolescence.
As a result of our fair value estimates, we adjusted the carrying amount of the Gunite's personal property to fair value and recorded asset impairment charges of $34.1 million in 2012. The fair value estimates for the Gunite personal property were based on a valuation premise that assumes the assets' highest and best use are different than their current use as a result of lower volume demands for Gunite's products due to the loss of customers in 2012, reduced production levels in the commercial vehicle market, and its declining aftermarket segments in North America.
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Note 7 - Debt
As of December 31, 2014, total debt was $323.2 million consisting of $306.2 million of our outstanding 9.5% senior secured notes, net of discount, and a $17.0 million draw on our ABL facility. As of December 31, 2013, total debt was $330.2 million consisting of $305.2 million of our outstanding 9.5% senior secured notes, net of discount and a $25.0 million draw on our ABL facility.
The following table represents the average interest rate and average amount outstanding under our ABL facility as of the year ended December 31, 2014 and 2013:
On July 11, 2013, we entered into an Asset Based Loan ("New ABL Facility") Facility and used $45.3 million of borrowings under the New ABL Facility and cash on hand to repay all amounts outstanding under the Prior ABL Facility and to pay related fees and expenses.
Our debt consists of the following:
● ABL Credit Agreement -On July 11, 2013, we entered into the New ABL Facility and used $45.3 million of borrowings under the New ABL Facility and cash on hand to repay all amounts outstanding under the Prior ABL Facility and to pay related fees and expenses.
The New ABL Facility is a senior secured asset based credit facility in an aggregate principal amount of up to $100.0 million, consisting of a $90.0 million revolving credit facility and a $10.0 million first-in last-out term facility, with the right, subject to certain conditions, to increase the availability under the facility by up to $50.0 million in the aggregate. The New ABL Facility currently matures on July 11, 2018, which may be extended pursuant under certain circumstances pursuant to the terms of the New ABL Facility.
The New ABL Facility provides for loans and letters of credit in an amount up to the aggregate availability under the facility, subject to meeting certain borrowing base conditions, with sub-limits of up to $10.0 million for swingline loans and $20.0 million for letters of credit. Borrowings under the New ABL Facility bear interest through maturity at a variable rate based upon, at our option, either LIBOR or the base rate (which is the greatest of one-half of 1.00% in excess of the federal funds rate, 1.00% in excess of the one-month LIBOR rate and the Agent's prime rate), plus, in each case, an applicable margin. The applicable margin for loans under the first-in last-out term facility that are (i) LIBOR loans ranges, based on the our average excess availability, from 2.75% to 3.25% per annum and (ii) base rate loans ranges, based on our average excess availability, from 1.00% to 1.50%. The applicable margin for other advances under the New ABL Facility that are (i) LIBOR loans ranges, based on our average excess availability, from 1.75% to 2.25% and (ii) base rate loans ranges, based on our average excess availability, from 0.00% to 0.50%.
We must also pay an unused line fee equal to 0.25% per annum to the lenders under the New ABL Facility if utilization under the facility is greater than or equal to 50.0% of the total available commitments under the facility and a commitment fee equal to 0.375% per annum if utilization under the facility is less than 50.0% of the total available commitments under the facility. Customary letter of credit fees are also payable, as necessary.
The obligations under the New ABL Facility are secured by (i) first-priority liens on substantially all of the Company's accounts receivable and inventories, subject to certain exceptions and permitted liens (the "ABL Priority Collateral") and (ii) second-priority liens on substantially all of the Company's owned real property and tangible and intangible assets other than the ABL Priority Collateral, including all of the outstanding capital stock of our domestic subsidiaries, subject to certain exceptions and permitted liens (the "Notes Priority Collateral").
● 9.5% Senior Secured Notes - On July 29, 2010, we issued $310.0 million aggregate principal amount of senior secured notes. Under the terms of the indenture governing the senior secured notes, the senior secured notes bear interest at a rate of 9.5% per year, paid semi-annually in February and August, and mature on August 1, 2018. Prior to maturity we may redeem the senior secured notes on the terms set forth in the indenture governing the senior secured notes. The senior secured notes are guaranteed by the Guarantors (see Note 17), and the senior secured notes and the related guarantees are secured by first
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priority liens on the Notes Priority Collateral and second priority liens on the ABL Priority Collateral. Associated with the issuance of the senior secured notes, we recorded a discount of $3.8 million, which is being amortized over the life of the notes as a component of interest expense.
Restrictive Debt Covenants. Our credit documents (the New ABL Facility and the indentures governing the senior secured notes) contain operating covenants that limit the discretion of management with respect to certain business matters. These covenants place significant restrictions on, among other things, the 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. In addition, the New ABL Facility contains a financial covenant which requires us to maintain a fixed charge coverage ratio, which is when the excess availability is less than 10 percent of the total commitment under the New ABL Facility. Due to the amount of our excess availability (as calculated under the New ABL Facility), the Company is not currently in a compliance period and, we do not have to maintain a fixed charge coverage ratio, although this is subject to change.
Note 8 - Pension and Other Postretirement Benefit Plans
We have funded noncontributory employee defined benefit pension plans that cover U.S. and Canadian employees (the "plans") who meet eligibility requirements. Employees covered under the U.S. salaried plan, who were hired prior to 2006, are eligible to participate upon the completion of one year of service and benefits are determined by their cash balance accounts, which are based on interest allocations they earned each year and pay allocations earned for years prior to 2009. Employees covered under the Canadian salaried plan are eligible to participate upon the completion of two years of service and benefits are based upon career average salary and years of service. Employees who are covered under the hourly plans are generally eligible to participate at the time of employment and benefits are generally based on a fixed amount for each year of service. U.S. employees are vested in the plans after five years of service; Canadian hourly employees are vested after two years of service. We use a December 31 measurement date for all of our plans. For the pension obligation as of December 31, 2014, the Company used the recently issued mortality tables. This change along with an increased discount rate increased our obligation.
In addition to providing pension benefits, we also have certain unfunded health care and life insurance programs for U.S. non-bargained and Canadian employees who meet certain eligibility requirements. These benefits are provided through contracts with insurance companies and health service providers. The coverage is provided on a non-contributory basis for certain groups of employees and on a contributory basis for other groups.
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Obligations and Funded Status:
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Components of Net Periodic Benefit Cost:
Actuarial Assumptions:
Assumptions used to determine benefit obligations as of December 31 were as follows:
Assumptions used to determine net periodic benefit cost for the years ended December 31 were as follows:
The expected long-term rate of return on assets is determined primarily by looking at past performance. In addition, management considers the long-term performance characteristics of the asset mix.
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Assumed health care cost trend rates at December 31 were as follows:
Health care cost trend rate assumed for next year
7.17%
7.63%
Rate to which the cost trend rate is assumed to decline
4.81%
4.82%
Year that the rate reaches the ultimate trend rate
The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trend rates would have the following effects on 2014:
Plan Assets:
Our pension plan weighted-average asset allocations by level within the fair value hierarchy at December 31, 2014, are presented in the table below. Our pension plan assets were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our Level 1 plan assets are valued using active trading prices as listed in the New York stock exchange and the Toronto stock exchange. Our Level 2 plan assets are securities for which the market is not considered to be active and are valued using observable inputs, which may include, among others, the use of adjusted market prices, last available bids or last available sales prices. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and their placement within the fair value hierarchy levels. For more information on a description of the fair value hierarchy, see Note 13.
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Our pension plan weighted-average asset allocations by level within the fair value hierarchy at December 31, 2013, are presented in the following table:
Our investment objectives are (1) to maintain the purchasing power of the current assets and all future contributions; (2) to maximize return within reasonable and prudent levels of risk; (3) to maintain an appropriate asset allocation policy that is compatible with the actuarial assumptions while still having the potential to produce positive real returns; and (4) to control costs of administering the plan and managing the investments.
Our desired investment result is a long-term rate of return on assets that is at least a 5% real rate of return, or 5% over inflation as measured by the Consumer Price Index for the U.S. plans. The target rate of return for the plans have been based upon the assumption that future real returns will approximate the long-term rates of return experienced for each asset class in our investment policy statement. Our investment guidelines are based upon an investment horizon of greater than five years, so that interim fluctuations should be viewed with appropriate perspective. Similarly, the Plans' strategic asset allocation is based on this long-term perspective.
We believe that the Plans' risk and liquidity posture are, in large part, a function of asset class mix. Our investment committee has reviewed the long-term performance characteristics of various asset classes, focusing on balancing the risks and rewards of market behavior. Based on this and the Plans' time horizon, risk tolerances, performance expectations and asset class preferences, the following two strategic asset allocations were derived for our U.S. plans.
Asset allocation for our Accuride Retirement Plan and Erie Hourly Pension Plan:
Lower
Limit
Strategic
Allocation
Upper
Limit
Domestic Large Capitalization Equities:
Value
10%
10%
20%
Growth
10%
13%
20%
Index-Passive
15%
20%
25%
Domestic Small Cap Equities
2%
10%
10%
International Equities
5%
11%
15%
Fixed Income:
Intermediate
15%
35%
35%
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Asset allocation for remainder of our U.S. plans:
Lower
Limit
Strategic
Allocation
Upper
Limit
Domestic Large Capitalization Equities:
Value
10%
10%
20%
Growth
10%
10%
20%
Index-Passive
15%
17%
25%
Domestic Mid Cap Equities
5%
10%
15%
International Equities
5%
13%
15%
Fixed Income:
Intermediate
15%
35%
35%
Money Market
1%
5%
10%
The allocation of the fund is reviewed periodically. Should any of the strategic allocations extend beyond the suggested lower or upper limits, a portfolio rebalance may be appropriate.
While we use the same methodologies to manage the Canadian plans, the primary objective is to achieve a minimum rate of return of Consumer Price Index plus 3 over 4-year moving periods, and to obtain total fund rates of return that are in the top third over 4-year moving periods when compared to a representative sample of Canadian pension funds with similar asset mix characteristics. The asset mix for the Canadian pension fund is targeted as follows:
Minimum
Maximum
Total Equities
14%
20%
Foreign Equities
7%
10%
Bonds and Mortgages
70%
80%
Short-Term
0%
0%
Cash Flows-We expect to contribute approximately $8.3 million to our pension plans and $4.2 million to our other postretirement benefit plans in 2015. Pension and postretirement benefits (which include expected future service) are expected to be paid out of the respective plans as follows:
Other Plans-We also provide a 401(k) savings plan and a retirement contribution plan for substantially all U.S. salaried employees. Expenses recognized for the years ended December 31, 2014, 2013, and 2012 totaled $1.1 million, $1.3 million, and $1.4 million, respectively.
Note 9 - Income Taxes
The components of income (loss) from continuing operations before income taxes, categorized based on the location of the taxing authorities were as follows:
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The income tax provision (benefit) are as follows:
A reconciliation of the U.S. statutory tax rate to our effective tax rate is as follows:
Deferred income tax assets and liabilities comprised the following at December 31:
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The Company has recorded a deferred tax asset reflecting a benefit of $88.0 million of federal loss carryforwards and $13.4 million of state loss carryforwards as of December 31, 2014. As a result of bankruptcy, the Company underwent an ownership change that subjects these losses to limitations pursuant to IRS Code Section 382. As a result of this limitation, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities. These deferred tax assets will expire beginning 2016 through 2034. We have deferred tax assets for additional state tax credits which will expire beginning 2017 through 2026. We also have recorded deferred tax assets for federal tax credits which will expire beginning 2029. Realization of deferred tax assets is dependent upon taxable income within the carryforward periods available under the applicable tax laws. Although realization of deferred tax assets in excess of deferred tax liabilities is not certain, management has concluded that it is more likely than not the Company will realize the full benefit of deferred tax assets in foreign jurisdictions. However, during 2013 and 2014, management has concluded that it is more likely than not that we will not realize the full benefit of our U.S. federal and state deferred tax assets due to three cumulative years of net losses and changes of management's estimate of future earnings, and recorded a valuation allowance against the amounts that are not likely to be recognized as of 2013 and 2014. For the period ended December 31, 2014, the valuation allowance increased by $10.5 million, of which $1.5 million was attributable to continuing operations, and $9.0 million was attributable to attributes that have no effect on the Company's effective rate. For the period ended December 31, 2013, the valuation allowance decreased by $1.7 million, which is attributable to $3.2 million increase from continuing operations, a $4.4 million increase from discontinued operations, and a $9.3 million decrease related to attributes that have no effect on the Company's effective tax rate.
Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as discontinued operations and OCI. An exception is provided in ASC 740 when there is aggregate income from categories other than continuing operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expenses recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including unrealized gains from pension and post-retirement benefits recorded as a component of OCI, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets. As a result, for the year ended December 31, 2013, the Company recorded a tax expense of $12.6 million in OCI related to the unrealized gains on pension and post-retirement benefits, and recorded a corresponding tax benefit of $12.6 million in continuing operations. This treatment was not applicable for the year ended December 31, 2014 due to unrealized losses in the pension and post-retirement.
No provision has been made for U.S. income taxes related to undistributed earnings of our Canadian foreign subsidiary that we intend to permanently reinvest in order to finance capital improvements and/or expand operations either through the expansion of the current operations or the purchase of new operations. At December 31, 2014, Accuride Canada had $20.7 million of cumulative retained earnings. The Company distributes earnings for the Mexican foreign subsidiary and expects to distribute earnings annually. Therefore, deferred tax liabilities are recorded for undistributed earnings and profits. For 2013 and 2014, there are no undistributed earnings of our Mexican foreign subsidiary.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits are as follows:
The total amount of unrecognized tax benefits that would, if recognized, impact the effective income tax rate was approximately $2.6 million as of December 31, 2014.
We also recognize accrued interest expense and penalties related to the unrecognized tax benefits as additional tax expense, which is consistent with prior periods. The total amount of accrued interest and penalties was $3.1 million and $0.8 million respectively, as of December 31, 2014. A net decrease in interest of $0.5 million and a net decrease in penalties of $0.7 million was recognized in 2014. The total amount of accrued interest and penalties was approximately $3.6 million and $1.5 million, respectively, as of December 31, 2013.
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As of December 31, 2014, we were open to examination in the U.S. federal tax jurisdiction for the 2011-2013 tax years, in Canada for the years of 2006-2013, and in Mexico for the years of 2008-2013. We were also open to examination in various state and local jurisdictions for the 2010-2013 tax years, none of which were individually material. Tax years 2007 - 2010 in the U.S. federal tax jurisdiction, and 1998-2010 in various state and local jurisdictions, remain open subject to the future utilization of net operating losses generated in those years. We believe that our accrual for tax liabilities is adequate for all open audit years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events.
The Company is not currently under any U.S. federal, state or local or non-U.S. income tax examinations and therefore does not anticipate significant increases or decreases in its remaining unrecognized tax benefits within the next twelve months.
Note 10 - Stock-Based Compensation Plans
On May 18, 2010, the Company authorized and granted 182,936 shares of Common Stock for issuance pursuant to individual restricted stock unit agreements with employees of the Company. The awards granted on May 18, 2010 vested in installments of 33%, 33%, and 34% over a three year period on the anniversary date of the grant, subject to continued service to the Company. On August 3, 2010, the Company authorized and granted 55,790 shares of Common Stock for issuance pursuant to individual restricted stock unit agreements with directors of the Company. The awards granted on August 3, 2010 vested on March 1, 2011 and March 1, 2014, subject to continued service to the Company as of those dates.
In August 2010, we adopted the Accuride Corporation 2010 Incentive Award Plan (the "2010 Incentive Plan") and reserved 1,260,000 shares of Common Stock for issuance under the plan, plus such additional shares of Common Stock that the plan administrator deemed necessary to prevent unnecessary dilution upon issuance of shares pursuant to terms of our convertible notes due 2020, up to a maximum number shares of Common Stock such that the total number of shares available for issuance under the 2010 Incentive Plan would not exceed ten percent (10%) of the fully diluted shares outstanding from time to time calculated by adding the total shares issued and outstanding at any given time plus the number of shares issued upon conversion of any of the convertible notes at the time of such conversion. During 2010, we effectively converted all outstanding convertible notes to equity, and we subsequently amended the 2010 Incentive Plan to reserve 3,500,000 shares of Common Stock, for issuance under the 2010 Incentive Plan.
On March 13, 2014, our Board of Directors adopted, subject to shareholder approval, the Second Amended and Restated 2010 Incentive Award Plan, which increased the number of shares of our common stock available for grants under the plan by 1,700,000 shares, extended the term of the plan until 2024, and made certain other adjustments. Our shareholders approved the Second Amended and Restated 2010 Incentive Award Plan at our Annual Meeting in April 2014, which resulted in a total of 5,200,000 shares of Common Stock being reserved for issuance under the plan.
Service Options - In August, 2012, we granted stock options to certain officers and other key employees as consideration for service. Options granted generally vest ratably over a three year period and have 10-year contractual terms. The table below summarizes service option activity during the year ended December 31, 2014:
There is no intrinsic value on service options outstanding due to the closing price on December 31, 2014 being lower than the strike price of the options.
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Restricted Stock Units ("RSUs") - We grant RSUs to certain officers and other key employees as consideration for service. The table below summarizes RSU activity during the year ended December 31, 2014:
As of December 31, 2014, there was approximately $2.3 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 1.7 years. The fair market value of our vested shares and shares expected to vest as of December 31, 2014 was $2.0 million and $5.9 million, respectively.
Compensation expense for share-based compensation programs was recognized as a component of operating expenses as follows:
In determining the estimated fair value of our stock option awards as of the grant date, we used the Black-Scholes option-pricing model with the assumptions illustrated in the table below:
The expected volatility is based upon volatility of our common stock that has been traded for a period. The expected term of options granted is derived from historical exercise and termination patterns, and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is based on the published U.S. Treasury yield curve in effect at the time of grant for instruments with a similar life. The dividend yield is based upon the most recently declared quarterly dividend as of the grant date.
Note 11 - Commitments
We lease certain plant, office space, and equipment for varying periods. Management expects that in the normal course of business, expiring leases will be renewed or replaced by other leases. Purchase commitments related to fixed assets at December 31, 2014 and 2013 totaled $12.5 million and $4.4 million, respectively. Capital lease commitments totaled $12.2 million and $13.6 million in 2014 and 2013 respectively. Rent expense for the years ended December 31, 2014, 2013, and 2012, was $5.8 million, $3.5 million, and $4.5 million respectively. Future minimum lease payments for all non-cancelable operating leases having a remaining term in excess of one year at December 31, 2014, are as follows:
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Note 12 - Segment Reporting
Based on our continual monitoring of the long-term economic characteristics, products and production processes, class of customer, and distribution methods of our operating segments, we have identified each of our operating segments below as reportable segments. We believe this segmentation is appropriate based upon operating decisions and performance assessments by our President and Chief Executive Officer, who is our chief operating decision maker. The accounting policies of the reportable segments are the same as described in Note 1, "Significant Accounting Policies".
Current and prior period operating results from Imperial Group were reclassified to discontinued operations during the year ended December 31, 2013. The reconciling item between operating income and income (loss) before income taxes from continuing operations includes net interest expense, other income (loss), and restructuring items. The reconciling item for years ended December 31, 2014, 2013, and 2012 was ($37.2) million, ($35.3) million and ($35.8) million, respectively. Excluded from net sales above, are inter-segment sales from Brillion Iron Works to Gunite, as shown in the table below:
Geographic Information-Net sales are attributed to geographic areas based on the country in which the product is sold. Our operations in the United States, Canada, and Mexico are summarized below:
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The information for each of our geographic regions included sales to each of the three major customers in 2014 that each exceed 10% of total net sales. Sales to those customers are as follows:
Sales by product grouping are as follows:
Note 13 - Financial Instruments
We have determined the estimated fair value amounts of financial instruments using available market information and other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. A fair value hierarchy accounting standard exists for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). Determining which category an asset or liability falls within the hierarchy requires significant judgment.
The hierarchy consists of three levels:
Level 1 Quoted market prices in active markets for identical assets or liabilities;
Level 2 Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 Unobservable inputs developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
The carrying amounts of cash and cash equivalents, trade receivables, and accounts payable approximate fair value because of the relatively short maturity of these instruments. The fair value of our 9.5% senior secured notes are based on market quotes, which we determined to be Level 1 inputs, at December 31, 2014 was approximately $319.2 million compared to the carrying amount of $306.2 million and at December 31, 2013 was approximately $306.9 million compared to the carrying amount of $305.2 million.
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The Company believes the fair value of the outstanding borrowings of our ABL facility at December 31, 2014 and 2013 equals the carrying value of $17.0 million and $25.0 million, respectively. As of December 31, 2014 and 2013 we had no other remaining significant financial instruments.
See Note 4, "Goodwill and Other Intangible Assets", and Note 6, "Property, Plant and Equipment", for a description of significant Level 3 inputs used in development of fair value of nonfinancial assets.
Note 14 - Quarterly Data (unaudited)
The following tables set forth certain quarterly income statement information for the years ended December 31, 2014 and 2013:
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Note 15 - Valuation and Qualifying Accounts
The following table summarizes the changes in our valuation and qualifying accounts:
Note 16 - Contingencies
We are from time to time involved in various legal proceedings of a character normally incidental to our business. We do not believe that the outcome of these proceedings will have a material effect on our consolidated financial statements.
In addition to environmental laws that regulate our ongoing operations, we are also subject to environmental remediation liability. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and analogous state laws, we may be liable as a result of the release or threatened release of hazardous materials into the environment regardless of when the release occurred. We are currently involved in several matters relating to the investigation and/or remediation of locations where we have arranged for the disposal of foundry wastes. Such matters include situations in which we have been named or are believed to be potentially responsible parties in connection with the contamination of these sites. Additionally, environmental remediation may be required to address soil and groundwater contamination identified at certain of our facilities.
As of December 31, 2014, we had an environmental reserve of approximately $1.5 million, related primarily to our foundry operations. This reserve is based on management's review of potential liabilities as well as cost estimates related thereto. Any expenditures required for us to comply with applicable environmental laws and/or pay for any remediation efforts will not be reduced or otherwise affected by the existence of the environmental reserve. Our environmental reserve may not be adequate to cover our future costs related to the sites associated with the environmental reserve, and any additional costs may have a material adverse effect on our business, results of operations or financial condition. The discovery of additional environmental issues, the modification of existing laws or regulations or the promulgation of new ones, 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 a material adverse effect.
The Iron and Steel Foundry National Emission Standard for Hazardous Air Pollutants ("NESHAP") was developed pursuant to Section 112(d) of the Clean Air Act and requires major sources of hazardous air pollutants to install controls representative of maximum achievable control technology. Based on currently available information, we do not anticipate material costs regarding ongoing compliance with the NESHAP; however if we are found to be out of compliance with the NESHAP, we could incur liability that could have a material adverse effect on our business, results of operations or financial condition.
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.
As of December 31, 2014, we had approximately 2,247 employees, of which 497 were salaried employees with the remainder paid hourly. Unions represent approximately 1,512 of our employees, which is approximately 67 percent of our total employees. Each of our unionized facilities has a separate contract with the union that represents the workers employed at such facility. The union contracts expire at various times over the next few years with the exception of our union contract that covers the hourly employees at our Monterrey, Mexico, facility, which expires on an annual basis in January unless otherwise renewed. The 2015 negotiations in Monterrey were successfully completed prior to the expiration of our union contract. In 2012, we extended the labor contract at our London, Ontario facility through March 2018. In 2013, we successfully negotiated our collective bargaining agreement at our Brillion, Wisconsin facility, extending that agreement through June, 2018.
In 2014, we successfully negotiated new bargaining agreements for our Erie, Pennsylvania and Rockford, Illinois facilities, which will expire on September 3, 2018 and March 29, 2019, respectively.
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Note 17 - Product Warranties
The Company provides product warranties in conjunction with certain product sales. Generally, sales are accompanied by a 1- to 5-year standard warranty. These warranties cover factors such as non-conformance to specifications and defects in material and workmanship.
Estimated standard warranty costs are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date in other current liabilities reflects the estimated number of months of warranty coverage outstanding for products delivered times the average of historical monthly warranty payments, as well as additional amounts for certain major warranty issues that exceed a normal claims level.
The following table summarizes product warranty activity recorded for years ended December 31, 2014, 2013 and 2012:
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Note 18-Guarantor and Non-guarantor Financial Statements
Our senior secured notes are, jointly and severally, fully and unconditionally guaranteed, on a senior basis, by all of our existing and future 100% owned domestic subsidiaries ("Guarantor Subsidiaries"). The non-guarantor subsidiaries are our foreign subsidiaries and discontinued operations. The following condensed financial information illustrates the composition of the combined Guarantor Subsidiaries:
CONDENSED CONSOLIDATED BALANCE SHEETS
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Note 19 - Changes in Accumulated Other Comprehensive Income (Loss) by Component
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Reclassifications out of Accumulated Other Comprehensive Income:
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and post retirement plan costs. See Pension footnote, Note 8, for additional details.
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