case study: options for a middle-market bankruptcy & restructuring
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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. The Cast. Patrick – Kick off. Case Objectives: To illustrate the turnaround process. - PowerPoint PPT PresentationTRANSCRIPT
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Case Study:
Options for a Middle-Market Bankruptcy & Restructuring
Presented byThe Turnaround Management Association
Southern California Chapter
October 26th, 2010
Anderson School of Management
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The CastEvent Announcer Patrick Gengoux, UCLA Anderson
School of Management - class of 2011
Accuride CEO Rob Holland, Creo Capital Partners
Investment Banker/Financial Restructuring Advisor
Jeff Raithel, Houlihan Lokey (actually worked on this case).
Attorney for the Secured Lender Chris Manderson, Manderson Schafer & McKinlay
Attorney for the Company John Schafer, Manderson Schafer & McKinlay
Turnaround Consultant Paul Deis, Essex of Oak Park, Inc.
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Patrick – Kick off
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Case Objectives: To illustrate the turnaround process
• What a turnaround involves • Who influences the outcome of a turnaround• Highlight the different roles necessary to effect a
turnaround including– Credit Risk Management– Operational Evaluation/Change Implementation a.k.a. turnaround
consulting– Financial Advisory/Restructuring– Legal– Financing
• Give you a basic sense of the what to expect should your company find itself in distress
• Value of avoiding a bankruptcy by effective management
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A Turnaround - in 3 Acts
ACT I : Making Trouble (2004-2007)
ACT II: Dealing with Trouble (2007-
2009)
ACT III: The Turnaround (TBD)
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Making Trouble: 2004-2007The Entrepreneur/CEO –
• His company, Accuride was in business since 1986,
• Went public in 2005.
• Accuride summary:
– Automotive industry supplier
– Wheels,
– Chassis & suspension components
– Trucks, commercial vehicles
– Sales tightly coupled to auto industry sales
• And then they over-expanded and the market turned on them.
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Rob – The CEO - Making Trouble
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2008 Revenue by Product Line
Heavy-Duty Truck (Class 8)
Medium-Duty Truck (Class 5-7)
Truck Trailer
Light Truck (Class 3-4)
Heavy Conventional Tandem-Axle Van Transit Bus
Recreational Vehicle Single-Axle Van Stake
Van Flat Bed Tanker
Medium Conventional School Bus Walk-In Van
2008 Revenue by End Market
Others, 16.0%
Trailers, 5.0%
Heavy / Medium Duty, 49.0%
Aftermarket, 27.0%
Military, 3.0%
Wheels, 42.0%
Other Components, 19.0%
Wheel End Components, 23.0%
Seating Assemblies, 4.0%
Truck Body and Chasis, 12.0%
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Rob – Industry Overview
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Expansion & Decline
Income StatementDebt increased from $488MM to $698MM
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Income Statement – Key Details2006 – a “good year”
Net Sales $1,408,155,000
COGS $1,211,258,000 86%
Gross Margin
$ 196,897,000 14%
Everything else
$ 131,764,000 9%
Net income $ 65,133,000 4.6%
Cost improvementopportunities are buried here
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Buried Opportunities• 23 separate manufacturing plants, each with its large fixed/indirect
cost structure. 4,661,000 sq ft.• Common process types – foundry, forging, machining, stamping,
tube bending, polishing, assembly.• Complex, somewhat top heavy people structure:
– 3,500 total employees– 927 salaried– 1,650 unionized – 7 unions); had a lock-out in 2007.
• Multiple (6 major brands); complex entity structure; multiple subsidiaries. No plant has more than 1 brand.
• Environmental regulations & costs significant (foundries); these costs are buried in plant indirect costs.
• Not prepared for any downturn in a cyclic industry. High fixed costs + high debt = vulnerability
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Act II: 2007 – 2009• Accuride hires:
– Financial Advisory Firm – Turnaround Consultant– Lawyers
• Restructuring plan• Actions Taken: Re-negotiate with Labor (including lockouts) 11/07• Management Shakeups 12/07, 2/08, 9/08• Restructuring Plan Announced 9/08• Drawing on its credit facilities 10/08• De-listed from NYSE 11/08• Phase 2 of Restructuring Plan announced 12/08• Restructure of Debt owed to Sun Capital 2/09• Temporary Waiver Signed with Lenders Creditor Steering Committee
Formed 7/09• Second Waiver signed 8/09• Debtors give Accuride until 9/30 to effect financial restructuring (9/25)
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Jeff – Financial Restructuring
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Industry Cycle2000-2006
Cycle Avg. EBITDA: $148.0 million
Company Projected Industry Cycle 2007-2013E
Trough to Peak Avg. EBITDA: $125.7 million
Historical and projected EBITDA. Results prior to 2005 are pro forma for the TTI acquisition.
Industry Cycle1996-1999
Cycle Avg. EBITDA: $146.4 million
$122.2$129.2
$143.0
$191.2
$147.9
$118.7 $116.4
$151.3
$196.9
$217.7
$113.4
$79.0
$14.8
$79.6
$152.3
$200.9
$239.8
$87.2
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
E
2010
E
2011
E
2012
E
2013
E
EB
ITD
A ($
in m
illi
ons)
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16
70%
75%
80%
85%
90%
95%
100%
1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 2Q09
Qua
rter
ly A
nnua
lized
Cha
nge
U.S. Heavy Truck Capacity Utilization
Capacity utilization for large commercial vehicles currently remains very low, weighing on aftermarket component sales.
In addition, significant cannibalization of parts is occurring from idle vehicles.
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212,391
290,000
155,000
375,000
215,000
376,448
103,536
205,237
$0.0
$200.0
$400.0
$600.0
$800.0
$1,000.0
$1,200.0
$1,400.0
$1,600.0
2006 2007 2008 2009E 2010E 2011E 2012E 2013E
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Revenue Company Projected Class 8 Builds
Con
solid
ated
Rev
enue
($
in m
illio
ns)
Class 8 B
uilds
15.4%
11.2%
8.5%
2.7%
10.4%
14.9%
16.1% 16.5%
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
2006 2007 2008 2009E 2010E 2011E 2012E 2013E
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
EBITDA EBITDA Margin
Con
solid
ated
EB
ITD
A (
$ in
mill
ions
)
EB
ITD
A M
argin
Consolidated Revenue and EBITDA
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Financial summary of the Company’s projections.
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Who is Doing What?• Credit Risk Management: Bond Holders are
seeing increased risk in the transaction and taking action
• Unsecured Creditors – committee, negotiations.
• Accuride Secures Debtor-in-Possession Financing
• Convert debt into equity rights
• Dilution of existing stockholders
• 10/8 Debt restructuring completed, 10/9 Accuride files voluntary BK – “Pre-Pack”
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Chris – Secured Lender’s Attorney
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Act III: Pre-packaged BK
• Accuride voluntarily files for Bankruptcy Protection and presents a plan– Raised $50MM in “DIP” Financing– Maturities extended to June 2013– Covenants modified– Sr. Sub-Debt converted to 98% equity holders– Sr. Unsecured Notes get refi’ed to be convertible into
60% of common stock– Unsecured Trade Creditors to be paid in full– Current Shareholders will now own 2% of common
stock, and receive warrants for 15% of Equity subject to the above dilution works out to 9%
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John – Accuride Attorney for the Chapter 11 Filing
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Summary of Drivers• Cash drives everything in business.• Low margins results in chronic lack of cash.• Fatal combination –
Low margins+ High leverage/debt+ Un-proactive management= Chronic survival challenges,
• Lack of cash leads to BK and/or a turnaround and restructuring, “Chapter 22, 33”, etc.
• Once in BK, many others MUST become involved, diluting owners control and destroying investment principal.
• Outside expertise = become crucial to survival and renewal.• Value of assets may be determined by others—often with
antagonistic agendas. They are not friends of shareholders.
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Paul – The Turnaround – Alternate “Ending”
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Alternative Ending – The Turnaround• Focus on fixing main problems/opportunities –
– VERY LOW gross margins – 14-15% in 2006 – “good year” – – Reporting buries almost all cost improvement opportunities – High fixed costs – multiple small plants; 200-300 people each.– Similar processes at separate plants; transportation costs are
hidden.– Each of the 23 plants has high breakeven – below this it
consumes cash– No product rationalization – drop, sell losers.– Significant unionization; potential uncooperative attitudes to
improving productivity & thus margins.– Mexican plants do not appear to be helping profitability
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Initial Turnaround Plan• Replace top & key managers with fresh, success-driven, proactive leaders – not
necessarily from auto supplier industry. These will drive real success; “The guys who got you into trouble will not get you out of it.”
• Develop, implement cash-focused reporting – replace P&L oriented, financial reporting to drive improvements.
• Inventory – complex production, transportation, multiple warehouses = cost• Plant consolidation and/or greenfields to non-union states.• Leverage existing plants temporarily – they are well below capacity to bridge
greenfields.• Get blunt with unions – help or close the plant.• Product rationalization - Drop money-losing products; raise prices where market
strength good.• Cut per-plant fixed cost structure – buried in COGS, • Implement transportation management• Integrate brands, selling forces, to leverage production capabilities at larger, more
efficient plants.
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Patrick – It’s a Wrap!
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Conclusions & Observations
• Management focused on sales, not profitability.
• Inattention to cost details – in COGS resulted in losing the company’s equity.
• Excessive leverage/debt = inability to withstand downturns in a cyclic business.
• Annual report reads like a list of problems, for which no solutions are proposed.