Presentation on theme: "1 Case Study: Options for a Middle-Market Bankruptcy & Restructuring Presented by The Turnaround Management Association Southern California Chapter October."— Presentation transcript:
1 Case Study: Options for a Middle-Market Bankruptcy & Restructuring Presented by The Turnaround Management Association Southern California Chapter October 26th, 2010 Anderson School of Management
2 The Cast Event AnnouncerPatrick Gengoux, UCLA Anderson School of Management - class of 2011 Accuride CEORob Holland, Creo Capital Partners Investment Banker/Financial Restructuring Advisor Jeff Raithel, Houlihan Lokey (actually worked on this case). Attorney for the Secured LenderChris Manderson, Manderson Schafer & McKinlay Attorney for the CompanyJohn Schafer, Manderson Schafer & McKinlay Turnaround ConsultantPaul Deis, Essex of Oak Park, Inc.
4 Case Objectives: To illustrate the turnaround process What a turnaround involves Who influences the outcome of a turnaround Highlight the different roles necessary to effect a turnaround including –Credit Risk Management –Operational Evaluation/Change Implementation a.k.a. turnaround consulting –Financial Advisory/Restructuring –Legal –Financing Give you a basic sense of the what to expect should your company find itself in distress Value of avoiding a bankruptcy by effective management
5 A Turnaround - in 3 Acts ACT I : Making Trouble (2004-2007) ACT II:Dealing with Trouble (2007-2009) ACT III:The Turnaround (TBD)
6 Making Trouble: 2004-2007 The Entrepreneur/CEO – His company, Accuride was in business since 1986, Went public in 2005. Accuride summary: –Automotive industry supplier –Wheels, –Chassis & suspension components –Trucks, commercial vehicles –Sales tightly coupled to auto industry sales And then they over-expanded and the market turned on them.
8 2008 Revenue by Product Line Heavy-Duty Truck (Class 8) Medium-Duty Truck (Class 5-7) Truck Trailer Light Truck (Class 3-4) Heavy Conventional Tandem-Axle VanTransit Bus Recreational VehicleSingle-Axle Van Stake Van Flat BedTanker Medium ConventionalSchool Bus Walk-In Van 2008 Revenue by End Market 8
10 Expansion & Decline Income Statement Debt increased from $488MM to $698MM
11 Income Statement – Key Details 2006 – a “good year” Net Sales $1,408,155,000 COGS $1,211,258,00086% Gross Margin $ 196,897,00014% Everything else $ 131,764,0009% Net income $ 65,133,0004.6% Cost improvement opportunities are buried here
12 Buried Opportunities 23 separate manufacturing plants, each with its large fixed/indirect cost structure. 4,661,000 sq ft. Common process types – foundry, forging, machining, stamping, tube bending, polishing, assembly. Complex, somewhat top heavy people structure: –3,500 total employees –927 salaried –1,650 unionized – 7 unions); had a lock-out in 2007. Multiple (6 major brands); complex entity structure; multiple subsidiaries. No plant has more than 1 brand. Environmental regulations & costs significant (foundries); these costs are buried in plant indirect costs. Not prepared for any downturn in a cyclic industry. High fixed costs + high debt = vulnerability
13 Act II: 2007 – 2009 Accuride hires: –Financial Advisory Firm –Turnaround Consultant –Lawyers Restructuring plan Actions Taken: Re-negotiate with Labor (including lockouts) 11/07 Management Shakeups 12/07, 2/08, 9/08 Restructuring Plan Announced 9/08 Drawing on its credit facilities 10/08 De-listed from NYSE 11/08 Phase 2 of Restructuring Plan announced 12/08 Restructure of Debt owed to Sun Capital 2/09 Temporary Waiver Signed with Lenders Creditor Steering Committee Formed 7/09 Second Waiver signed 8/09 Debtors give Accuride until 9/30 to effect financial restructuring (9/25)
15 Industry Cycle 2000-2006 Cycle Avg. EBITDA: $148.0 million Company Projected Industry Cycle 2007-2013E Trough to Peak Avg. EBITDA: $125.7 million Historical and projected EBITDA. Results prior to 2005 are pro forma for the TTI acquisition. Industry Cycle 1996-1999 Cycle Avg. EBITDA: $146.4 million 15
16 U.S. Heavy Truck Capacity Utilization Capacity utilization for large commercial vehicles currently remains very low, weighing on aftermarket component sales. In addition, significant cannibalization of parts is occurring from idle vehicles. 16
17 Consolidated Revenue and EBITDA 17 Financial summary of the Company’s projections.
18 Who is Doing What? Credit Risk Management: Bond Holders are seeing increased risk in the transaction and taking action Unsecured Creditors – committee, negotiations. Accuride Secures Debtor-in-Possession Financing Convert debt into equity rights Dilution of existing stockholders 10/8 Debt restructuring completed, 10/9 Accuride files voluntary BK – “Pre-Pack”
20 Act III: Pre-packaged BK Accuride voluntarily files for Bankruptcy Protection and presents a plan –Raised $50MM in “DIP” Financing –Maturities extended to June 2013 –Covenants modified –Sr. Sub-Debt converted to 98% equity holders –Sr. Unsecured Notes get refi’ed to be convertible into 60% of common stock –Unsecured Trade Creditors to be paid in full –Current Shareholders will now own 2% of common stock, and receive warrants for 15% of Equity subject to the above dilution works out to 9%
21 John – Accuride Attorney for the Chapter 11 Filing
22 Summary of Drivers Cash drives everything in business. Low margins results in chronic lack of cash. Fatal combination – Low margins + High leverage/debt + Un-proactive management = Chronic survival challenges, Lack of cash leads to BK and/or a turnaround and restructuring, “Chapter 22, 33”, etc. Once in BK, many others MUST become involved, diluting owners control and destroying investment principal. Outside expertise = become crucial to survival and renewal. Value of assets may be determined by others—often with antagonistic agendas. They are not friends of shareholders.
24 Alternative Ending – The Turnaround Focus on fixing main problems/opportunities – –VERY LOW gross margins – 14-15% in 2006 – “good year” – –Reporting buries almost all cost improvement opportunities –High fixed costs – multiple small plants; 200-300 people each. –Similar processes at separate plants; transportation costs are hidden. –Each of the 23 plants has high breakeven – below this it consumes cash –No product rationalization – drop, sell losers. –Significant unionization; potential uncooperative attitudes to improving productivity & thus margins. –Mexican plants do not appear to be helping profitability
25 Initial Turnaround Plan Replace top & key managers with fresh, success-driven, proactive leaders – not necessarily from auto supplier industry. These will drive real success; “The guys who got you into trouble will not get you out of it.” Develop, implement cash-focused reporting – replace P&L oriented, financial reporting to drive improvements. Inventory – complex production, transportation, multiple warehouses = cost Plant consolidation and/or greenfields to non-union states. Leverage existing plants temporarily – they are well below capacity to bridge greenfields. Get blunt with unions – help or close the plant. Product rationalization - Drop money-losing products; raise prices where market strength good. Cut per-plant fixed cost structure – buried in COGS, Implement transportation management Integrate brands, selling forces, to leverage production capabilities at larger, more efficient plants.
27 Conclusions & Observations Management focused on sales, not profitability. Inattention to cost details – in COGS resulted in losing the company’s equity. Excessive leverage/debt = inability to withstand downturns in a cyclic business. Annual report reads like a list of problems, for which no solutions are proposed.