This week’s review revisits Accuride Corporation (ACW), a diversified manufacturer of commercial vehicle components. Accuride is the largest North American manufacturer and supplier of wheels for heavy and medium duty trucks. Since our last review in September 2015, Accuride has expanded internationally through a joint venture in Italy, continued to introduce industry changing technology, and made internal adjustments to account for variations in product demand.
In November 2015, Accuride acquired a 70% stake in Gianetti Wheels of Italy. Management predicts Gianetti will add $14 million to $15 million in incremental EBITDA by 2018.
In January 2016, the company introduced the industry’s first steel wheel warranted against corrosion.
The company’s Q2 results showed net income of $2.4 million, despite a slowdown in activity in Accuride’s core markets. This was due in part to managements astute monitoring of market trends and their ability to cut costs where needed to ensure continued company profitability.
The over 11.5% yield to maturity on these short 23-month bonds, while not as high as some of the other bond issues reviewed here, still dwarfs the current 2-year U.S. Treasury yield of 0.74%. With competitive yields and excellent diversification into the commercial vehicle industry, these Accuride bonds offer both high cash flow and a solid double digit yield. Therefore, they exceed our criteria for addition to both our FX1 and FX2 managed income portfolios.
We last reviewed Accuride Corporation in September 2015. Since that time, the company has made a key acquisition and brought an industry-changing new product to market. In November 2015, Accuride acquired a majority stake (70%) in steel wheel manufacturer Gianetti Ruote from the MW Italia wheels division of CLN. MW Italia retains a minority interest in the business and its headquarters and principal manufacturing and engineering facility continues to be located in Ceriano Laghetto near Milan. This partnership, which gives Accuride immediate long-term supply contracts with key global OEM (Original Equipment Manufacturers) customers in Europe advances Accuride’s strategy to become a leading wheel supplier to the global commercial vehicle industry. The partnership also enables Accuride to strengthen relationships with its global OEM customers by serving their needs in Europe, build closer ties to key regional OEMs and grow Gianetti’s business.
The Gianetti acquisition is already yielding results for Accuride. In Q2 2016, Gianetti contributed $11 million in net income, helping to offset some of the lower demand in Q2 at Accuride’s Wheels, Gunite and Brillion divisions. Moving forward, Accuride estimates that the addition of Gianetti will add $14 million to $15 million in incremental EBITDA by 2018. Accuride is also establishing an aftermarket distribution network for its wheels across Europe.
The second major development since our last look at Accuride is the company’s introduction of EverSteel, the industry’s first steel wheel warranted against corrosion. These new steel wheels come with a five-year warranty against corrosion, providing lasting value to Accuride’s customers that is unmatched in the industry. The introduction of this new product enables Accuride’s fleet customers to achieve significant savings in wheel refinishing costs and the associated downtime that accompanies that process. Interest in Accuride’s EverSteel wheels is beginning to emerge, with the company recently earning its first major order for EverSteel wheels from a Midwest fleet operator to outfit over 200 trucks and 200 trailers with EverSteel wheels.
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 (Class 8, heavy duty trucks and Class 5 through 7, 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 2015, Accuride Wheels provided 62% of net sales, Gunite provided 24% and Brillion provided 14%.
With Accuride’s primary customer focus in the medium and heavy duty truck markets, trends and movements that affect these markets have a direct effect on Accuride’s revenues. Currently, excess Class 8 inventories (heavy duty trucks) and weaker freight conditions continue to impact orders and OEM customer build schedules. Daimler and Volvo have already begun layoffs in their North American Class 8 assembly lines to address the slowdown.
Factors affecting the medium duty trucks look more favorable than the heavy duty markets. Housing starts are expected to grow more than 20% over 2015 levels and healthy new home sales and continued job growth have translated to optimism on the part of builders and buyers. All of these factors are key drivers of Class 5 through Class 7 truck demand, which is key for Accuride’s steel wheel business. Accuride is experiencing steady demand in its products for the Class 5 through Class 7 truck and trailer build markets, tracking with the strength of the housing and infrastructure projects across the country.
Making Expense Adjustments to Align with Product Demand
Accuride delivered profitable results in the second quarter of this year despite the lower Class 8 truck builds in North America, and lower production from its OEM customers, which affected the company’s results in its Wheels and Gunite divisions. Accuride management was quick to spot the lower year-over-year demand for its products and took proactive measures to reduce its ongoing costs. In Q1, the company aggressively adjusted schedules and staffing at selected wheel plants, delayed non-critical project work and reduced inventory levels. Also, the corporate component of EBITDA was $1.2 million less in Q2 2016 when compared to a year ago, due to headcount reductions and reduced Sales, General and Adminstrative (SG&A) costs.
Brillion Iron Works
Accuride’s division Brillion Iron Works has been experiencing decreased revenues due to its largest customer being tied to the oil and gas industry. Accuride has been seeking to diversify Brillion’s revenue streams and has made progress towards this goal this year. In May, Brillion secured new contracts across a broad range of industries (industrial, municipal, automotive, commercial vehicles), including a major long-term contract to supply transmission flywheels to a subsidiary of Daimler Trucks North America. Together, these contracts help diversify Brillion’s revenue sources with approximately $14 million in annualized new business. The effects of these contracts on revenue should begin to materialize later this year. With that in mind, 2017 should prove to be measurably better for Brillion and Accuride.
Although Brillion is the smallest contributor to Accuride’s net sales (14% in 2015), it currently represents a significant challenge to Accuride’s overall profitability. The company’s Wheels and Gunite divisions have had solid performance this year, but the company’s overall profits have been adversely affected by Brillion’s results. The good news is that Brillion is diversifying and also that the oil and gas industry is slowly recovering, which should restore some of Brillion’s revenues. Given these factors, once Brillion is back on track, Accuride’s financials should improve significantly.
As mentioned previously, Accuride delivered a profitable quarter in Q2, despite lower product demand due to reduced manufacturing activity in its core markets. The company posted gross profit of $23.3 million in Q2, with a net income of $2.5 million. Both its Wheels and Gunite divisions posted increases in their adjusted EBITDA as a percentage of net sales. For the Wheels division, that percentage increased from 22.8% in Q2 2015, to 23.7% in Q2 2016. For the Gunite division, the percentage increased from 18.5% to 19.0%. Accuride’s total adjusted EBITDA margin also improved in Q2, increasing to 14.6% from 14.0% in Q2 2015.
For its latest reported quarter ending June 30, 2016, Accuride had operating income of $11.5 million and interest expense of $8.4 million for an interest coverage ratio of 1.4x. This is consistent with the company’s interest coverage at our last review.
Accuride also has a strong liquidity position, with a total liquidity as of June 30, 2016 of $77.7 million. This balance is made up of $27.8 million in cash and $49.9 million from its ABL credit facility.
The default risk is Accuride’s ability to perform. The company continues to be profitable, even with the slowdown in its core markets. It has solid liquidity and sufficient interest coverage. The company has made a smart investment in Gianetti wheels, which is already beginning to add revenues, and has introduced an industry changing product in its EverSteel wheels. Management has been quick to respond to market changes, scaling back expenses and production schedules where needed. Given these factors, the 11+% current yield on these short 23-month bonds appear to outweigh the risks identified here.
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 with its Gianetti joint venture and EverSteel Wheels introduction, continuing challenges with Brillion could affect overall revenues and profitability.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Accuride continues to carry out its growth plans with its recent acquisition of a majority stake in Gianetti wheels. This move not only gives Accuride access to key global OEM customers in Euorpe, it also provides an additional aftermarket distribution for its wheels across Europe. The company also continues to introduce new technologies to give it the competitive edge in the commercial vehicle component industry. Accuride management has been very astute in its assessment of market trends as they are unfolding and have made the necessary adjustments to keep the company profitable even when product demand temporarily decreases. These 9.50% couponed bonds, currently yielding over 11.5%, provide a great opportunity for investors to increase their cash flow and their overall portfolio return, and are therefore marked for addition to our Fixed-Income1.com and Fixed-Income2.com global high yield income portfolios.
Issuer: Accuride Corporation, Inc.
Yield to Maturity: ~11.58%
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Disclosure: Durig Capital and certain clients may have positions in Accuride 2018 bonds.
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