This week, our focus turns to an issuer within the U.S. auto and commercial vehicle industries. Accuride Corporation is the largest North American manufacturer and supplier of wheels for heavy and medium duty trucks. The company also manufactures wheel end components through its Gunite division. This company has made significant progress since taking on new management in 2011. It’s “Fix and Grow” initiative has yielded impressive results, registering an impressive 66% increase in adjusted EBITDA in 2014. It has also made excellent progress in cost reductions and has begun to realize growth in both its Wheels and Gunite business segments. In fact, June 2015 was the best order month ever for aftermarket drums at Gunite. With oil prices remaining at historically low levels, truck fleet owners now have extra capital from fuel savings to update and upgrade their aging fleets.
Rated B3/B- by Moody’s and S&P, Accuride’s 2018 bonds carry a 9.5% coupon and trades close to it current callable price of about 102.375. The yield to worst call, which is at par in August of 2016, works out to about 7%, while its yield to maturity in 2018 is about 8.6%. With such a short callable at par feature (under 1 year), 7% is extremely attractive. However, the high coupon provides an even more attractive yield, up to 8.6%, if not redeemed until its maturity in 36 months. Therefore, we see these higher couponed bonds as offer excellent cash flow, above average yields, and sound diversification into the auto and commercial vehicle industry, which has seen healthy growth so far in 2015. In light of of these factors, we are targeting Accuride’s 2018 bonds for addition to our global high yield income portfolios, FX1 and FX2.
About the Issuer
Based in Evansville Indiana, Accuride is one the largest and most diversified manufacturers and suppliers of commercial vehicle components in North America. Its products include vehicle wheels, wheel-end components and assemblies and ductile and gray iron castings. Its brands include industry names such as Accuride, Gunite and Brillion. It is the largest North American manufacturer and supplier of wheels for heavy- and medium-duty trucks and commercial trailers, and the only manufacturer and supplier of both steel and forged aluminum heavy- and medium-wheels. The company serves leading OEMs (original equipment manufacturers) in most major segments of the commercial vehicle market, including heavy and medium-duty trucks, commercial trailers, light trucks, and buses as well as specialty and military vehicles. Accuride’s customer list contains many well-known industry names such as Daimler (maker of Freightliner trucks), PACCAR (maker of Peterbilt and Kenworth trucks), Navistar, Volvo/Mack trucks, Wabash National and General Motors. The company currently employs 2,250 people and maintains nine facilities with locations in the United States, Mexico and Canada.
Accuride has three major business units: Gunite Corporation, which makes brake drums, wheel hubs, disc wheel hubs, spoke wheels, rotors and slack adjusters: Accuride Wheels, which makes wheels for trucks, buses, commercial light trucks and military vehicles: and finally, Brillion Iron Works, which makes castings for heavy and medium duty trucks. As a percentage of total net sales in 2014, Accuride Wheels provided 57% of net sales, Gunite provided 24% and Brillion provided 19%.
Accuride’s products support both the auto sector in the U.S. as well as the commercial vehicle industry, specifically, medium duty and heavy duty trucks (class 5 through class 8). After the first half of 2015, the auto industry is on track for its best year in over 15 years, with both truck and light vehicle sales and production remaining strong. And 2015 commercial vehicle production is expected to top 2014, and approach levels not seen in the last decade. As housing and construction markets continue to recover and strengthen, this also adds to the growth and continued strength in the Class 5-8 heavy truck and trailer markets. In fact, 2015 build slots at both Class 8 and trailer manufacturers continue to fill, with many trailer manufacturers sold out through the balance of this year and pushing orders into 2016.
“Fix and Grow”
In 2011, Accuride announced the Fix and Grow initiative to upgrade its manufacturing facilities and processes, reduce costs, and improve profitability. This two-year,$150 million investment program aimed to restructure and expand its core wheel and wheel-end component operations, and upgrade the capabilities of each of its business units. These investments included, among others:
$55 million for additional aluminum wheel capacity,
more than $35 million to restructure and upgrade its Gunite business, and
$21 million in environmental and safety-related facility upgrades.
Fast forward a few years and the company is now seeing the benefits of “Fix and Grow”. As part of this initiative, the company has been reducing labor and operating expenses with the goal of increasing profitability. Between 2012 and 2014, the company was able to reduce labor costs by 14%, primarily through the negotiation of bargaining agreements with the unions represented in its manufacturing facilities. Selling, general and administrative costs (SG&A) have also decreased, registering an 11.8% reduction in 2014 over 2013 levels.
Accuride has also begun to see the “growth” part of the “Fix and Grow” initiative come to fruition. Adjusted EBITDA has registered extremely healthy gains over the past three quarters; Q4 2014 grew by 59.2% year over year, Q1 2015 grew by 18.5% year over year, and in its last quarterly reported results, Q2 2015 adjusted EBITDA grew by 11.5% year over year. Also, the company recently registered an impressive win with a new long-term agreement with Daimler North America (the maker of Freightliner trucks). Under this multiyear agreement, Accuride will supply its cast and machined Gunite brake drums to Daimler’s aftermarket parts group. This agreement should represent an additional $10 to $12 million in operating revenue beginning in the second half of 2015.
Due in large part to Accuride’s Fix and Grow initiative, the company’s recent financials have been steadily improving. For the company’s fiscal year 2014, adjusted EBITDA grew a whopping 66%, growing from $47.0 million in 2013 to $78.0 million in 2014.
The company’s most recently reported quarterly results also showcase a company who is gaining strength. For Q2 2015, Accuride generated over $20 million in free cash flow, and continued its growth in adjusted EBITDA, generating an 11.5% gain year over year. Additionally, the company beat analysts EPS estimates, registering $0.13 / share, $0.03/ share more than the $0.10 / share estimate.
Accuride’s interest coverage ratio has also shown improvement this year. For Q1 2015, the company had operating income of $9.328 million and interest expense of $8.350 million for an interest coverage ratio of 1.12x. At the end Q2, that ratio showed an improvement. For the six month period ending June 30, 2015, Accuride had an interest coverage ratio of 1.41x, with operating income for the period of $23.512 million and interest expense of $16.704 million. As the economic recovery in the auto and commercial trucking industries continues, Accuride stands perfectly positioned to improve its financial ratios and increase its profitability.
Accuride’s total liquidity has also increased in 2015. As of December 31, 2014, the company had a total liquidity of $70.3 million. That figure held almost constant in Q1 2015 ($70.9 million), and increased significantly in Q2 2015 to $90.2 million ($30.8 million in cash plus $59.4 million in credit facility). In addition, the company also recorded $206 million net value in property, plant and equipment as of 6/30/2015.
The default risk is Accuride’s ability to perform. The company has made great strides the past three years improving its products and increasing the company’s profitability. With new long term contracts coming in, like the recent contract with Daimler North America, coupled with the recovering auto and heavy truck industries, we think Accuride stands to reap substantial benefits.
One of Accuride’s units, Brillion Iron Works, has experienced recent declines in its business. This is due to its largest customer being tied to the oil and gas industry, which has continued to experience unprecedented price decreases. Brillion’s second largest set of customers are in the agricultural sector (such as Caterpillar and John Deere) which has also experiences a downturn in activity this year. Although Accuride has been making excellent progress recently in its Wheels and Gunite segments, continued declines from Brillion could affect overall revenues and profitability.
After an extended period of low interest rates, many income investors are presently concerned at the prospect of rising interest rates and the effects on bond prices and yields. With a higher coupon, short term bond, such as this 36-month bond from Accuride, interest rate risk is significanctly lower than its long-term counterpart. In addition, most clients at Durig Capital hold their bonds to maturity, in which case the prevailing interest rate effects at the time of maturity are negated.
These very short, over 7% yield to worst call (in less than one year) Accuride bonds have similar yields and durations to other bond issues reviewed on BondYields.com, such as the 7.83% PHI Inc Bonds, the7.75% Hidroelectrica Piedra del Aguila, or the 8.6% Scribe Bonds.
Summary and Conclusion
Accuride Corporation has spent the past few years reengineering the company to create quality products as well as gain back market share. The company has judiciously reduced its costs and expenses, while at the same time increasing its business in both its Wheels and Gunite divisions. Its adjusted EBITDA has shown excellent growth over the last 18 months and the company’s ratios and liquidity have both shown recent improvements. These competitively yielding 7% short-term bonds offer the income investor unique diversification into the auto and heavy commercial vehicle industries, and we are therefore adding these to our Fixed-Income1.com and Fixed-Income2.com global high yield income portfolios.
Issuer: Accuride Corporation, Inc.
Yield to Worst Call: ~7.09% (@par on 8/01/2016)
Yield to Maturity: ~8.69%
Disclosure: Some Durig Capital clients may currently own Accuride’s 2018 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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