SUPERIOR INDUSTRIES INTERNATIONAL INC
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
For
the fiscal year ended December 27, 2009
OR
For
the transition period from _________ to _________
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Commission
file number
1-6615
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SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
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(Exact
Name of Registrant as Specified in Its Charter)
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California
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95-2594729
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(State
or Other Jurisdiction of
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(IRS
Employer
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Incorporation
or Organization)
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Identification
No.)
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7800 Woodley Avenue, Van Nuys,
California
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91406
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code:
(818)
781-4973
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, no par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
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Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes [ ] No
[X]
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes
[ ] No
[X]
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.Yes
[X] No [ ]
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (
§
232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).Yes
[ ] No [ ]
Indicate by check mark if the
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated
filer [ ] Accelerated
filer [X] Non-accelerated
filer [ ] Smaller
reporting company [ ]
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
[ ] No [X]
The aggregate market value of the
registrant’s no par value common equity held by non-affiliates as of the last
business day of the registrant’s most recently completed second quarter was
$376,292,000, based on a closing price of $14.11. On March 5, 2010,
there were 26,668,440 shares of common stock issued and
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s 2010
Annual Proxy Statement, to be filed with the Securities and Exchange Commission
within 120 days after the close of the registrant’s fiscal year, are
incorporated by reference into Part III of this Form 10-K.
SUPERIOR INDUSTRIES
INTERNATIONAL, INC.
ANNUAL
REPORT ON FORM 10-K
TABLE
OF CONTENTS
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S-1
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Forward-Looking
Statements
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. We may from time to time
make written or oral statements that are “forward-looking”, within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended (Exchange Act), including
statements contained in this report and other filings with the Securities and
Exchange Commission and reports and other public statements to our shareholders.
These statements may, for example, express expectations or projections about
future actions or results that we may anticipate but, due to developments beyond
our control, do not materialize. Actual results could differ materially because
of issues and uncertainties such as those listed herein, which, among others,
should be considered in evaluating our financial outlook. The principal factors
that could cause our actual performance and future events and actions to differ
materially from such forward-looking statements include, but are not limited to,
the worsening financial crisis, changes in the automotive industry, financial
distress of our customers, declines in industry sales volumes resulting from
economic conditions, increased global competitive pressures, our dependence on
major customers and third party suppliers and manufacturers, our exposure to
foreign currency fluctuations, and other factors or conditions described in Item
1A – Risk Factors section of this Annual Report on Form 10-K. We
assume no obligation to update publicly any forward-looking
statements.
General
Development and Description of Business
Headquartered
in Van Nuys, California, the principal business of Superior Industries
International, Inc. (referred to herein as the “company” or in the first person
notation “we,” “us” and “our”) is the design and manufacture of aluminum road
wheels for sale to original equipment manufacturers (OEM). We are one of the
largest suppliers of cast and forged aluminum wheels to the world’s leading
automobile and light truck manufacturers, with wheel manufacturing operations in
the United States, Mexico and Hungary. Customers in North America represent the
principal market for our products, with approximately 18 percent of our net
sales to international customers by our North American facilities, primarily
delivered to their assembly operations in the United States.
The
company was initially incorporated in Delaware in 1969 and reincorporated in
California in 1994, as the successor to three businesses founded by Louis L.
Borick, founding Chairman and a Director of the company. These
businesses had been engaged in the design, manufacture and sale of automotive
accessories and related aftermarket products since 1957. All of the aftermarket
businesses were sold or discontinued by the end of 2002. Our entry into the OEM
aluminum road wheel business in 1973 resulted from our successful development of
manufacturing technology, quality control and quality assurance techniques that
enabled us to satisfy the quality and volume requirements of the OEM market for
aluminum road wheels. The first aluminum road wheel for a domestic
OEM customer was a Mustang wheel for Ford Motor Company (Ford).
Our OEM
aluminum road wheels, including wheels produced by our 50 percent-owned joint
venture in Hungary, are sold for factory installation, or as optional or
standard equipment on many vehicle models, to Ford, General Motors (GM),
Chrysler, Audi, BMW, Jaguar, Land Rover, Mercedes Benz, Mitsubishi, Nissan,
Seat, Skoda, Subaru, Suzuki, Toyota, Volkswagen and Volvo. We
currently supply cast and forged aluminum wheels for many North American model
passenger cars and light trucks.
The
Chairman and Chief Executive Officer is our chief operating decision maker
(CODM). The CODM evaluates both consolidated and disaggregated
financial information at each manufacturing facility in deciding how to allocate
resources and assess performance. Each manufacturing facility
functions as a separate cost center, manufactures the same products, ships
product to the same group of customers, utilizes the same cast manufacturing
process and as a result, production can be transferred among our
facilities. Accordingly, we operate as a single integrated business
and, as such, have only one operating segment - automotive wheels. Financial
information about this segment and geographic areas is contained in Note 2 –
Business Segments in Notes to Consolidated Financial Statements in Item 8 –
Financial Statements and Supplementary Data of this Annual Report on Form
10-K.
Beginning
with the third quarter of 2008, the automotive industry was negatively impacted
by the continued dramatic shift away from full-size trucks and SUVs caused by
continuing high fuel prices, rapidly rising commodity prices and the tightening
of consumer credit due to the then deteriorating financial
markets. Accordingly, our OEM customers announced unprecedented
restructuring actions, including assembly plant closures, significant reductions
in production of light trucks and SUVs, delayed launches of key 2009 model-year
light truck programs and movement toward more fuel-efficient passenger cars and
cross-over type vehicles. These restructuring actions culminated in
the bankruptcy reorganization of Chrysler and GM in 2009. In addition
to the financial uncertainty of several of our key customers, we also continue
to face continued global competitive pricing pressures. While we have
had long-term relationships with our customers and our supply arrangements are
generally for multi-year periods, the recent bankruptcy filings and resulting
assembly plant closures and other restructuring activities by our customers will
continue to negatively impact our business. These factors may make it
more difficult to maintain long-term supply arrangements with our customers and
there are no guarantees that supply arrangements will be negotiated on terms
acceptable to us in the future.
The
availability and demand for aluminum wheels are subject to unpredictable
factors, such as changes in the general economy, the automobile industry,
gasoline prices and consumer credit availability and interest rates. The raw
materials used in producing our products are readily available and are obtained
through numerous suppliers with whom we have established trade
relations.
Our
customers continue to request price reductions as they work through their own
financial challenges. We are engaged in ongoing programs to reduce
our own costs through process automation and identification of industry best
practices in an attempt to mitigate these pricing pressures. However,
it has become increasingly more difficult to react quickly enough given the
continuing pressure for price reductions, reductions in customer orders, and the
lengthy transitional periods necessary to reduce labor and other
costs. As such, our profit margins will continue to be lower than our
historical levels for some period of time. We will continue to strive
to increase our operating margins from current operating levels by aligning our
plant capacity with industry demand and aggressively implementing cost-saving
strategies to enable us to meet customer-pricing
expectations. However, as we incur costs to implement these
strategies, the initial impact on our future financial position, results of
operations and cash flow may be negative. Additionally, even if
successfully implemented, these strategies may not be sufficient to offset the
impact of on-going pricing pressures and additional reductions in customer
demand in future periods.
We have
taken steps during the last two years to manage our costs in order to
rationalize our production capacity after the announcements over the last six
fiscal quarters by our major customers of assembly plant closures and sweeping
production cuts, particularly in the light truck and SUV
platforms. In August 2008, we announced the planned closure of our
wheel manufacturing facility located in Pittsburg, Kansas, and workforce
reductions in our other North American plants, resulting in the layoff of
approximately 665 employees and the elimination of 90 open
positions. On January 13, 2009, we also announced the planned closure
of our Van Nuys, California wheel manufacturing facility, thereby eliminating an
additional 290 jobs. The Kansas and California facilities ceased
operations in December 2008 and June 2009, respectively.
Due to
the deteriorating financial condition of our major customers and others in the
automotive industry, we have been performing quarterly impairment analyses on
all of our long-lived assets, in accordance with Generally Accepted Accounting
Principles in the United States of America (U.S. GAAP). Based on these analyses,
we concluded during the first quarter of 2009 that the estimated future
undiscounted cash flows of our Fayetteville, Arkansas manufacturing facility
would not be sufficient to recover the carrying value of our long-lived assets
attributable to that facility. As a result, we recorded a pretax
asset impairment charge against earnings totaling $8.9 million during the first
quarter of 2009, reducing the $18.2 million carrying value of certain assets at
this facility to their respective estimated fair values. The
estimated fair values of the long-lived assets at our Fayetteville, Arkansas
manufacturing facility were based, in part, on the estimated fair values of
comparable properties.
Additionally,
our 50 percent-owned joint venture in Hungary is also affected by these same
economic conditions. As a result, management of the joint venture has
been performing quarterly impairment analyses on all of its long-lived assets in
accordance with U.S. GAAP. During the fourth quarter of 2009, this
analysis indicated that the estimated undiscounted future cash flows were not
sufficient to cover the carrying value of the asset group, which resulted in an
impairment of the long-lived assets of the group. We recorded our share of the
charge, or $14.4 million, in our equity in earnings (losses) from joint ventures
during the fourth quarter of 2009.
Raw
Materials
We
purchase aluminum for the manufacture of our aluminum road wheels, which
accounted for substantially all of our total raw material requirements during
2009. The majority of our aluminum requirements are met through
purchase orders with several major domestic and foreign
producers. Generally, the orders are fixed as to minimum and maximum
quantities of aluminum, which the producers must supply during the term of the
orders. During 2009, we were able to successfully secure aluminum
commitments from our primary suppliers to meet production requirements and we
are not anticipating any problems with aluminum requirements for our expected
level of production in 2010. We procure other raw materials through
numerous suppliers with whom we have established trade
relationships.
When
market conditions warrant, we may also enter into contracts to purchase certain
commodities used in the manufacture of our products, such as aluminum, natural
gas and other raw materials. Typically, any such commodity commitments are
expected to be purchased and used over a reasonable period of time in the normal
course of business.
We
currently have several purchase agreements for the delivery of natural gas
through 2012. With the closure of our manufacturing facility in Van
Nuys, California in June 2009, and closure in December 2008 of our manufacturing
facility in Pittsburg, Kansas, we no longer qualified for the Normal Purchase,
Normal Sale (NPNS), exemption provided for in accordance with U.S. GAAP for the
remaining natural gas purchase commitments related to those
facilities. In addition, in the first and second quarters of 2009, we
concluded that the natural gas purchase commitments for our manufacturing
facility in Arkansas and certain natural gas commitments for our facilities in
Chihuahua, Mexico, respectively, no longer qualified for the NPNS exemption
provided for under U.S. GAAP since we could no longer assert that it was
probable we would take full delivery of these contracted quantities in light of
the continued decline of our industry. In accordance with U.S. GAAP
these natural gas purchase commitments are classified as being with “no hedging
designation” and, accordingly, we are required to record any gains and/or losses
associated with the changes in the estimated fair values of these commitments in
our current earnings. The contract and fair values of the purchase
commitments that no longer qualified for the NPNS exemption at December 31, 2009
were $8.6 million and $5.6 million, respectively, which represents a gross
liability of $3.0 million, which was included in accrued expenses in our
December 31, 2009 consolidated balance sheet. See Note 11 –
Commitments and Contingent Liabilities in Notes to Consolidated Financials
Statements in Item 8 – Financials Statements and Supplementary Data for further
discussion.
Seasonal
Variations
The
automotive industry is cyclical and varies based on the timing of consumer
purchases of vehicles, which in turn vary based on a variety of factors such as
general economic conditions, availability of consumer credit, interest rates and
fuel costs. While there have been no significant seasonal variations
in the past few years, production schedules in our industry can vary
significantly from quarter to quarter to meet the scheduling demands of our
customers.
Customer
Dependence
We have
proven our ability to be a consistent producer of quality aluminum wheels with
the capability to meet our customers’ price, quality, delivery and service
requirements. We strive to continually enhance our relationships with our
customers through continuous improvement programs, not only through our
manufacturing operations but in the engineering, wheel development and quality
areas as well. These key business relationships have resulted in
multiple vehicle supply contract awards with our key customers over the past
year.
Ford, GM
and Chrysler were our only customers accounting for more than 10 percent of our
consolidated net sales in 2009. Sales to GM, as a percentage of consolidated net
sales and in dollars, were 34 percent or $143.4 million in 2009; 40 percent or
$298.1 million in 2008; and 36 percent or $345.6 million in
2007. Sales to Ford, as a percentage of consolidated net sales and in
dollars, were 35 percent or $146.1 million in 2009; 28 percent or $213.5 million
in 2008; and 33 percent or $311.3 million in 2007. Sales to Chrysler,
as a percentage of consolidated net sales and in dollars, were 12 percent or
$52.0 million in 2009; 14 percent or $107.0 million in 2008; and 13 percent or
$123.8 million in 2007.
The loss
of all or a substantial portion of our sales to Ford, GM or Chrysler
would have a significant
adverse effect on our financial results, unless the lost sales volume could be
replaced. However, given the continued financial uncertainty and the
current economic climate in the automobile industry, we can not provide any
assurance that any lost sales volume could be replaced. We have had
excellent long-term relationships with our customers. However, intense global
competitive pricing pressure continues to make it difficult to maintain these
relationships, and we expect this trend to continue into the
future.
Net
Sales Backlog
We
receive OEM purchase orders to produce aluminum road wheels typically for
multiple model years. These purchase orders are for vehicle wheel
programs that usually last three to five years. However, customers can impose
competitive pricing provisions in those purchase orders each year, thereby
reducing our profit margins or increasing the risk of our losing future sales
under those purchase orders. We manufacture and ship based on customer release
schedules, normally provided on a weekly basis, which can vary due to cyclical
automobile production or high dealer inventory levels. Accordingly,
even though we have purchase orders covering multiple model years, weekly
release schedules can vary with customer demand, thus firm backlog is not
meaningful.
Competition
The
market for aluminum road wheels is highly competitive based primarily on price,
technology, quality, delivery and overall customer service. We are one of the
leading suppliers of aluminum road wheels for OEM installations in the world. We
supply approximately 30 to 35 percent of the aluminum wheels installed on
passenger cars and light trucks in North America. Competition is global in
nature with growing exports from Asia. There are several competitors
with facilities in North America, none of which aggregate greater than 10
percent of the total North American production capacity. See
additional comments concerning competition in Item 1A – Risk Factors
below. Other types of road wheels, such as those made of steel also
compete with our products. For the model year 2008, according to
Wards Auto Info Bank
, an
industry publication, aluminum wheel installation rates on passenger cars and
light trucks produced in North America remained unchanged from 2007 at 65
percent compared to 63 percent for the model year 2006. While
aluminum wheel installation rates have grown from only 10 percent in the
mid-1980s, in recent years, this growth rate has slowed. We expect
the trend of slow growth or no growth in installation rates to
continue. Accordingly, we expect that our ability to grow in the
future will be dependent upon increasing our share of the existing declining
market. Although aluminum wheel installation rates have remained
steady in percentage terms, total new automotive sales declines in 2008 and
again in 2009. In addition, intense global pricing pressures and
further contraction of the automotive industry may further decrease our
profitability and could potentially result in the loss of business in the
future.
Research
and Development
Our
policy is to continuously review, improve and develop engineering capabilities
so that customer requirements are met in the most efficient and cost effective
manner available. We strive to achieve this objective by attracting
and retaining top engineering talent and by maintaining the latest
state-of-the-art computer technology to support engineering
development. A fully staffed engineering center, located in
Fayetteville, Arkansas, supports our research and development manufacturing
needs. We also have a technical center in Detroit, Michigan, that maintains a
complement of engineering staff centrally located near our largest customers’
headquarters, engineering and purchasing offices.
Research
and development costs (primarily engineering and related costs), which are
expensed as incurred, are included in cost of sales in the consolidated
statements of operations. Amounts expended on research and
development costs during each of the last three years were $3.1 million in 2009,
$4.7 million in 2008 and $6.3 million in 2007. The decrease
experienced in 2009 was due to closure of our engineering center in Van Nuys,
California, and the reduction of wheel program development activities in the
current year.
Government
Regulation
Safety
standards in the manufacture of vehicles and automotive equipment have been
established under the National Traffic and Motor Vehicle Safety Act of
1966. We believe that we are in compliance with all federal standards
currently applicable to OEM suppliers and to automotive
manufacturers.
Environmental
Compliance
Our
manufacturing facilities, like most other manufacturing companies, are subject
to solid waste, water and air pollution control standards mandated by federal,
state and local laws. Violators of these laws are subject to fines
and, in extreme cases, plant closure. We believe our facilities are
substantially in compliance with all standards presently
applicable. However, costs related to environmental protection may
continue to grow due to increasingly stringent laws and regulations and our
ongoing commitment to rigorous internal standards. The cost of environmental
compliance was approximately $0.7 million in 2009, $1.0 million in 2008 and $1.3
million in 2007. We expect that future environmental compliance expenditures
will approximate these levels and will not have a material effect on our
consolidated financial position. See further discussion of
environmental compliance issues in Item 3 – Legal Proceedings.
Employees
As of
December 31, 2009, we had approximately 3,500 full-time employees including our
joint venture, Suoftec Light Metal Products Production & Distribution Ltd.
(Suoftec), compared to approximately 3,700 employees at December 31, 2008 and
5,300 at December 31, 2007. Our joint venture manufacturing facility in Hungary
employed approximately 500 full-time employees at December 31,
2009. None of our employees are part of a collective bargaining
agreement.
Fiscal
Year End
Our
fiscal year is the 52- or 53-week period ending on the last Sunday of the
calendar year. The fiscal years 2009, 2008 and 2007 comprised the
52-week periods ended December 27, 2009 and December 28, 2008, and December 30,
2007, respectively. For convenience of presentation, all fiscal years
are referred to as beginning as of January 1 and ending as of December 31, but
actually reflect our financial position and results of operations for the
periods described above.
Available
Information
Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy and other information statements, and any amendments thereto are
available, without charge, on or through our website www.supind.com under
“Investor”, as soon as reasonably practicable after they are filed
electronically with the Securities and Exchange Commission (SEC). The public may
read and copy any materials filed with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of
the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a website, www.sec.gov, which contains these reports,
proxy and information statements and other information regarding the company.
Also included on our website, www.supind.com under Investors is our Code of
Business Conduct and Ethics, which, among others, applies to our Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer. Copies of all SEC
filings and our Code of Business Conduct and Ethics are also available, without
charge, from Superior Industries International, Inc., Shareholder Relations,
7800 Woodley Avenue, Van Nuys, CA 91406.
The
following discussion of risk factors contains “forward-looking” statements,
which may be important to understanding any statement in this Annual Report on
Form 10-K or elsewhere. The following information should be read in conjunction
with Item 7 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) and Item 8 – Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
Our
business routinely encounters and addresses risks and
uncertainties. Our business, results of operations and financial
condition could be materially adversely affected by the factors described
below. Discussion about the important operational risks that our
businesses encounter can also be found in the MD&A section and in the
business description in Item 1 – Business of this Annual Report on Form
10-K. Below, we have described our present view of certain risks and
uncertainties we face. Additional risks and uncertainties not
presently known to us, or that we currently do not consider significant, could
also potentially impair our business, results of operations and financial
condition. Our reactions to these risks and uncertainties as well as
our competitors’ reactions will affect our future operating
results.
Risks
Relating To Our Company
Current Economic and Financial
Market Conditions -
Current global economic and financial market
conditions, including severe disruptions in the credit markets and potential
weakness in the recovery from global economic recession, may materially and
adversely affect our results of operations and financial condition. These
conditions have and are likely to continue to materially impact the automotive
industry generally and the financial stability of our customers, suppliers and
other parties with whom we do business. Specifically, the impact of
these volatile and negative conditions may include: decreased demand for our
products due to the financial position of our OEM customers and general declines
in the level of automobile demand; our decreased ability to accurately forecast
future product trends and demand; and a negative impact on our ability to timely
collect receivables from our customers and, conversely, reductions in the level
and tightening of terms of trade credit available to us.
Automotive Industry Trends -
A significant portion of our sales are to domestic automotive OEMs and,
therefore, our financial performance depends, in large part, on conditions in
the automotive industry, which, in turn, are dependent upon the U.S. and global
economies generally. As previously discussed, the results for fiscal
year 2009 were negatively impacted by severe reductions in customer demand
caused by the economic recession, fluctuating fuel prices and a lack of consumer
credit. A significant number of our customers announced restructuring actions,
including planned assembly plant closures, delays in launching key 2009
model-year light truck programs, and other actions to accelerate movement toward
more fuel-efficient passenger cars and crossover-type vehicles. Weakness in
recoveries of the U.S. and global economies has adversely and may continue to
adversely affect consumer spending, and result in decreased demand for
automobiles and light trucks. If OEMs were to decrease production due
to such reduced demand or union work stoppages, our financial performance could
be further adversely affected.
In
addition, relatively modest declines in our customers’ production levels could
have a significant adverse impact on our short-term profitability as any further
declines in production by our customers may require further actions on our part
to address our capacity requirements.
In the automotive
industry, there has been a trend toward consolidation as seen with the merger of
Chrysler and Fiat in 2009. Continued consolidation of the automotive industry
could adversely affect our business. Such consolidation could result
in a loss of some of our present customers to our competitors and could thereby
lead to reduced demand and greater pressure on our pricing, which may have a
significant negative impact on our business. Additionally, due to the
present uncertainty in the economy, our major customers have been seeking ways
to lower their own costs of manufacturing through increased use of internal
manufacturing or through relocation of production to countries with lower
production costs. This internal manufacturing or reliance on local or
other foreign suppliers may have a significant negative impact on our
business. If actual OEM production volume were to continue to be
reduced accordingly, our business would be adversely affected. Our sales are
also impacted by our customers’ inventory levels and production
schedules. If our OEM customers significantly reduce their inventory
levels and reduce their orders from us, our performance would be adversely
impacted. In this environment, we cannot predict future production
rates or inventory levels or the underlying economic factors. Continued
uncertainty and unexpected fluctuations may have a significant negative impact
on our business.
The
foregoing economic and financial conditions, including decreased access to
credit, may lead to increased levels of restructurings, bankruptcies,
liquidations and other unfavorable events for our customers, suppliers and other
service providers and financial institutions with whom we do
business. Such events could, in turn, negatively affect our business
either through loss of sales or inability to meet our commitments (or inability
to meet them without excess expense) due to a loss of suppliers or other
providers.
GM, Ford
and Chrysler, together represented approximately 82 percent of our total wheel
sales for the fiscal years 2009 and 2008. Since late 2008, Chrysler and GM
received emergency funding from the U.S. federal government as part of efforts
to restructure both automakers. On April 30, 2009, Chrysler filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code. This was followed on June 1, 2009 by GM’s announcement
that it was also filing a voluntary petition under Chapter 11 of the Bankruptcy
Code. Reorganized entities for both Chrysler and GM emerged from
bankruptcy on June 10, 2009 and July 10, 2009, respectively. Shortly
after the Chapter 11 filings, both Chrysler and GM designated us as a key
supplier, indicating that all pre-and post-petition accounts receivable would be
paid in accordance with payment terms existing prior to the bankruptcy
filings. There continues to be uncertainty surrounding the various
restructurings within the automotive industry, which may lead to additional
bankruptcy filings and additional financing from the U.S. government that may
impose conditions on our customers that would adversely impact demand for our
products.
Although
both Chrysler and GM have emerged from bankruptcy, there can be no assurance
that their respective bankruptcy restructurings will restore consumer
confidence, increase vehicle production or improve the current economic and
financial conditions. In addition, there continues to be uncertainty
surrounding other restructurings within the automotive industry, which may lead
to additional bankruptcy filings and additional financing from the U.S.
government that may impose conditions on our customers that would adversely
impact demand for our products.
Expiration of Government
Programs
– In 2009, the automotive industry was positively impacted by
the federal government’s Car Allowance Rebate System, also known as “cash for
clunkers” and other programs designed to increase consumer
spending. The increase in automotive production resulted in increased
demand for our products. There are no assurances that automotive
production and correspondingly, demand for our products, would have reached the
levels it did in 2009 without the “cash for clunkers’ program and other
government programs. Furthermore, there is no guarantee that the
federal government will enact any further programs to increase consumer spending
or to improve the state of the economy and the automotive industry in
particular. Although the U.S. Department of the Treasury has outlined an
Automotive Industry Financing Program designed to prevent significant disruption
of the U.S. auto industry, there is no guarantee that such a program will be
successful or enacted at all. In the event the federal government
does not enact such programs or if such programs are unsuccessful, demand for
our products may be negatively impacted.
Global Pricing Pressure -
We
continue to experience increased competition in our domestic and international
markets. Since some products are being shipped to the U.S. from Asia and
elsewhere, many of our North American competitors have excess capacity and, in
order to promote volume, are placing intense pricing pressure in our market
place. These competitive pressures are expected to continue and may result in
decreased sales volumes and unit price reductions, resulting in lower revenues,
gross profit and operating income and cash flows.
Additionally,
cost-cutting initiatives adopted by our customers generally result in increased
downward pressure on pricing. OEMs historically have had significant leverage
over their outside suppliers because the automotive component supply industry is
fragmented and serves a limited number of automotive OEMs, and, as such, Tier 1
suppliers like us are subject to substantial continued pressure from OEMs to
reduce the price of their products. If we are unable to generate sufficient
production cost savings in the future to offset price reductions, our gross
margin and profitability and cash flows would be adversely affected. In
addition, changes in OEMs’ purchasing policies or payment practices could have
an adverse effect on our business.
Competition
-
The automotive component
supply industry is highly competitive, both domestically and internationally.
Competition is based primarily on price, technology, quality, delivery and
overall customer service. Some of our competitors are companies, or
divisions or subsidiaries of companies that are larger and have greater
financial and other resources than we do. We cannot ensure that our
products will be able to compete successfully with the products of these or
other companies. Furthermore, the rapidly evolving nature of the
markets in which we compete has attracted new entrants, particularly in low cost
countries. As a result, our sales levels and margins are being adversely
affected by pricing pressures caused by such new entrants, especially in
low-cost foreign markets, such as China. Such new entrants with lower cost
structures pose a significant threat to our ability to compete internationally
and domestically. These factors led to selective sourcing of future
business by our customers to foreign competitors in the past and they may
continue to do so in the future. In addition, any of our competitors may foresee
the course of market development more accurately than we are able to, develop
products that are superior to our products, have the ability to produce similar
products at a lower cost than we do, or adapt more quickly than we do to new
technologies or evolving customer requirements. As a result, our
products may not be able to compete successfully with their products. As a
result of highly competitive market conditions in our industry, a number of our
competitors have been forced to seek bankruptcy protection. These
competitors may emerge and in some cases have emerged from bankruptcy protection
with stronger balance sheets and a desire to gain market share by offering their
products at a lower price than our products, which would have an adverse impact
on our financial condition and results of operations and cash
flows.
Dependence on Major Customers
- We derived approximately 82 percent of our fiscal 2009 and 2008 net sales from
Ford, GM and Chrysler and their subsidiaries. We do not have guaranteed
long-term agreements with these customers and cannot predict whether that we
will maintain our current relationships with these customers or whether we will
continue to supply them at current levels. The loss of a significant portion of
sales to Ford, GM or Chrysler would have a material adverse effect on our
business, unless the lost revenues were replaced. Ford, GM and Chrysler have
been experiencing decreasing market share in North America. In addition, if any
of our significant customers were to encounter further financial difficulties,
work stoppages or seek bankruptcy protection, our business could be adversely
affected.
Furthermore,
our OEM customers are not required to purchase any minimum amount of products
from us. The contracts we have entered into with most of our customers provide
that we will provide wheels for a particular
vehicle
model, rather than for manufacturing a specific quantity of products. Such
contracts range from one year to the life of the model (usually three to five
years), typically are non-exclusive, and do not require the purchase by the
customer of any minimum number of wheels from us. Therefore, a significant
decrease in demand for certain key models or group of related models sold by any
of our major customers, or a decision by a manufacturer not to purchase from us,
or to discontinue purchasing from us, for a particular model or group of models,
could have a material adverse effect on us.
Dependence on Third-Party Suppliers
and Manufacturers
- Generally, we obtain our raw materials, supplies and
energy requirements from various sources. Although we currently
maintain alternative sources, our business is subject to the risk of price
increases and periodic delays in delivery. Fluctuations in the prices
of raw materials may be driven by the supply/demand relationship for that
commodity or governmental regulation. In addition, if any of our
suppliers seek bankruptcy relief or otherwise cannot continue their business as
anticipated, the availability or price of raw materials could be adversely
affected.
Although
we are able to periodically pass aluminum cost increases onto our customers, we
may not be able to pass along all changes in aluminum costs and our customers
are not obligated to accept energy or other supply cost increases that we may
attempt to pass along to them. In addition, fixed price natural gas
contracts that expire in the future may expose us to higher costs that cannot be
immediately recouped in selling prices. This inability to pass on
these cost increases to our customers could adversely affect our operating
margins and cash flow, possibly resulting in lower operating income and
profitability.
Existing Cost Structure
– In
recent years, we have implemented several cost cutting initiatives in order to
reduce our overall costs and improve our margins in response to pricing
pressures from our customers. However, our strategy of optimizing our
cost structures may not be sufficient to offset future price pressures from our
customers which may have an adverse impact on our financial
performance. If North American production of passenger cars and light
trucks using our wheel programs continues to decrease, it is possible that we
will be unable to recover the full value of certain other production assets in
our other plants in North America, possibly resulting in additional impairment
charges. We will continue to monitor the recoverability of these
assets to determine whether further impairment charges are
appropriate.
Unexpected Production
Interruptions
- An interruption in production capabilities at any of our
facilities as a result of equipment failure, interruption of raw material or
other supplies, labor disputes or other reasons could result in our inability to
produce our products, which would reduce our sales and operating results for the
affected period. We have, from time to time, undertaken significant
re-tooling and modernization initiatives at our facilities, which in the past
have caused and in the future may cause, unexpected delays and plant
underutilization, and such adverse consequences may continue to occur as we
continue to modernize our production facilities. In addition, we
generally deliver our products only after receiving the order from the customer
and thus do not hold large inventories. In the event of a stoppage in production
at any of our manufacturing facilities, even if only temporary, or if we
experience delays as a result of events that are beyond our control, delivery
times could be severely affected. Any significant delay in deliveries to our
customers could lead to returns or cancellations and cause us to lose future
sales, as well as expose us to claims for damages. Our manufacturing facilities
are also subject to the risk of catastrophic loss due to unanticipated events
such as fires, earthquakes, explosions or violent weather conditions. We have in
the past and may in the future experience plant shutdowns or periods of reduced
production as a result of facility modernization initiatives, equipment failure,
delays in deliveries or catastrophic loss, which could have a material adverse
effect on our results of operations or financial condition.
Valuation of Deferred Tax
Assets
– During 2009, we established a valuation allowance against all of
our domestic deferred tax assets and against our foreign net operating loss
carryforwards. In considering whether a valuation allowance was
required for our U.S. federal deferred tax assets, we considered all available
positive and negative evidence. Based on the weight of all available
evidence, we have concluded that the negative evidence outweighs the positive
and that it is more likely than not that 1) the federal U.S. and state deferred
tax assets, net of valuation allowance, will not be realized within the
carryforward period, and 2) the foreign net operating loss carryforwards will
not be realized within the carryforward period. This is because we
can not look to future taxable income as a source of income given our cumulative
losses. We therefore established a full valuation allowance against
this deferred tax asset. However, we will continue to assess the need
for further valuation allowances in the future.
Dependence on Key Personnel
-
Our success depends in part on our ability to attract, hire, train, and retain
qualified managerial, engineering, sales and marketing personnel. We face
significant competition for these types of employees in our industry. We may be
unsuccessful in attracting and retaining the personnel we require to conduct our
operations successfully.
In
addition, key personnel may leave us and compete against us. Our success also
depends to a significant extent on the continued service of our senior
management team. We may be unsuccessful in replacing key managers who either
resign or retire. The loss of any member of our senior management team or other
experienced, senior employees could impair our ability to execute our business
plans and strategic initiatives, cause us to lose customers and experience
reduces net sales, or lead to employee morale problems and/or the loss of other
key employees. In any such event, our financial condition, results of
operations, internal control over financial reporting, or cash flows could be
adversely affected.
Effective Internal Control Over
Financial Reporting
– Management is responsible for establishing and
maintaining adequate internal control over financial reporting. Many
of our key controls rely on maintaining a sufficient complement of personnel
with an appropriate level of accounting knowledge, experience and training in
the application of accounting principles generally accepted in the United States
of America in order to operate effectively. If we are unable to
attract, hire, train and retain a sufficient complement of qualified personnel
required to operate these controls effectively, our financial statements may
contain material misstatements, unintentional errors, or omissions and late
filings with regulatory agencies may occur.
Impact of Aluminum Pricing
-
The cost of aluminum is a significant component in the overall production cost
of a wheel. Additionally, a portion of our selling prices to OEM customers is
tied to the cost of aluminum. Our selling prices are adjusted periodically to
current aluminum market conditions based upon market price changes during
specific pricing periods. Theoretically, assuming selling price adjustments and
raw material purchase prices move at the same rate, as the price of aluminum
increases, the effect is an overall decrease in the gross margin percentage,
since the gross profit in absolute dollars would be the same. The opposite would
then be true in periods during which the price of aluminum
decreases.
However,
since the pricing periods and pricing methodologies during which selling prices
are adjusted for changes in the market prices of aluminum differ for each of our
customers, and the selling price changes are fixed for various periods, our
selling price adjustments may not entirely offset the increases or decreases
experienced in our aluminum raw material purchase prices. This is especially
true during periods of frequent increases or decreases in the market price of
aluminum and when a portion of our aluminum purchases is via long-term fixed
purchase agreements. Accordingly, our gross profit is subject to fluctuations,
since the change in the product selling prices related to the cost of aluminum
does not necessarily match the change in the aluminum raw material purchase
prices during the period being reported, which may have a material adverse
effect on our operating results for the period being reported.
Legal Proceedings
- The
nature of our business subjects us to litigation in the ordinary course of our
business. We are exposed to potential product liability and warranty risks that
are inherent in the design, manufacture and sale of automotive products, the
failure of which could result in property damage, personal injury or death.
Accordingly, individual or class action suits alleging product liability or
warranty claims could result. Although we currently maintain what we believe to
be suitable and adequate product liability insurance in excess of our
self-insured amounts, we cannot assure you that we will be able to maintain such
insurance on acceptable terms or that such insurance will provide adequate
protection against potential liabilities. In addition, if any of our products
prove to be defective, we may be required to participate in a recall involving
such products. A successful claim brought against us in excess of available
insurance coverage, if any, or a requirement to participate in any product
recall, could have a material adverse effect on our results of operations or
financial condition. See Item 3 - Legal Proceedings section of this
Annual Report on Form 10-K for a description of the significant legal
proceedings in which we are presently involved. We cannot assure you
that any current or future claims will not adversely affect our cash flows,
financial condition or results of operations.
Implementation of New Systems
- We are currently testing and validating the design of a new enterprise
resource planning system, as well as training the system users and we have not
modified any of our existing controls and procedures as of December
2009. We anticipate implementing the new system as of the beginning
of the second quarter of 2010. We may encounter technical and
operating difficulties during the implementation of these upgrades, as our
employees learn and operate the systems, which are critical to our operations.
Any difficulties we encounter in upgrading the system may affect our internal
control over financial reporting, disrupt our ability to deal effectively with
our employees, customers and other companies with which we have commercial
relationships, and also may prevent us from effectively reporting our financial
results in a timely manner. Any such disruption could have a material adverse
impact on our financial condition, cash flows or results of operations. In
addition, the costs incurred in correcting any errors or problems with the
upgraded system could be substantial.
Implementation of Operational
Improvements
- As part of our ongoing focus on being a
low-cost provider of high quality products, we continually analyze our business
to further improve our operations and identify cost-cutting measures. Our
continued analysis may include identifying and implementing opportunities for:
(i) further rationalization of manufacturing capacity; (ii) streamlining of
marketing and general and administrative overhead; (iii) implementation of
lean manufacturing and Six Sigma initiatives; or (iv) efficient investment
in new equipment and technologies and the upgrading of existing equipment. We
may be unable to successfully identify or implement plans targeting these
initiatives, or fail to realize the benefits of the plans we have already
implemented, as a result of operational difficulties, a weakening of the economy
or other factors.
We are
continuing to implement action plans to improve operational performance and
mitigate the impact of the severe pricing environment in which we operate. We
must emphasize, however, that while we continue to reduce costs through process
automation and identification of industry best practices, these cost reductions
may not fully offset decreases in the prices of our products due to the slow and
methodical nature of developing and implementing cost reduction initiatives. In
addition, fixed price natural gas contracts that expire in the future years may
expose us to higher costs that cannot be immediately recouped in selling prices.
The impact of these factors on our future financial position and results of
operations may be negative, to an extent that cannot be predicted, and we may
not be able to implement sufficient cost saving strategies to mitigate any
future impact.
Resources for Future
Expansion
- In 2006, we opened our newest facility in Chihuahua, Mexico,
to supply aluminum wheels to the North American aluminum wheel
market. This is our third manufacturing facility in Chihuahua,
Mexico. A significant change in our business, the economy or an unexpected
decrease in our cash flow for any reason could result in our inability to have
the capital required to complete similar projects in the future without outside
financing.
New Product Introduction
- In
order to effectively compete in the automotive supply industry, we must be able
to launch new products to meet our customers’ demand in a timely manner. We
cannot ensure, however, that we will be able to install and certify the
equipment needed to produce products for new product programs in time for the
start of production, or that the transitioning of our manufacturing facilities
and resources to full production under new product programs will not impact
production rates or other operational efficiency measures at our facilities. In
addition, we cannot ensure that our customers will execute on schedule the
launch of their new product programs, for which we might supply products. Our
failure to successfully launch new products, or a failure by our customers to
successfully launch new programs, could adversely affect our
results.
Technological and Regulatory
Changes
- Changes in legislative, regulatory or industry requirements or
in competitive technologies may render certain of our products obsolete or less
attractive. Our ability to anticipate changes in technology and regulatory
standards and to successfully develop and introduce new and enhanced products on
a timely basis will be a significant factor in our ability to remain
competitive. We cannot ensure that we will be able to achieve the technological
advances that may be necessary for us to remain competitive or that certain of
our products will not become obsolete. We are also subject to the risks
generally associated with new product introductions and applications, including
lack of market acceptance, delays in product development and failure of products
to operate properly.
International Operations
- We
manufacture our products in Mexico and Hungary and sell our products throughout
the world. Unfavorable changes in foreign cost structures, trade protection
laws, policies and other regulatory requirements affecting trade and
investments, social, political, labor, or economic conditions in a specific
country or region, including foreign exchange rates, difficulties in staffing
and managing foreign operations and foreign tax consequences, among other
factors, could have a negative effect on our business and results of
operations.
Labor Relations
- In the
event of an adverse relationship with our workforce, our labor costs could
increase which would increase our overall production costs. In
addition, we could be adversely affected by any labor difficulties or work
stoppage involving our customers.
Foreign Currency Fluctuations
– Due to the growth of our operations outside of the United States, we have
experienced increased foreign currency gains and losses in the ordinary course
of our business. As a result, fluctuations in the exchange rate
between the U.S. dollar, the euro, the Mexican peso and any currencies of other
countries in which we conduct our business may have a material impact on our
financial condition as cash flows generated in other currencies will be used, in
part, to service our U.S. dollar-denominated creditors.
In
addition, fluctuations in foreign currency exchange rates may affect the value
of our foreign assets as reported in U.S. dollars, and may adversely affect
reported earnings and, accordingly, the comparability of period-to-period
results of operations. Changes in currency exchange rates may affect the
relative prices at which we and our foreign competitors sell products in the
same market. In addition, changes in the value of the relevant currencies may
affect the cost of certain items required in our operations. We cannot ensure
that fluctuations in exchange rates will not otherwise have a material adverse
effect on our financial condition or results of operations, or cause significant
fluctuations in quarterly and annual results of operations.
Environmental Matters
- We
are subject to various foreign, federal, state and local environmental laws,
ordinances, and regulations, including those governing discharges into the air
and water, the storage, handling and disposal of solid and hazardous wastes, the
remediation of soil and groundwater contaminated by hazardous substances or
wastes, and the health and safety of our employees. Under certain of these laws,
ordinances or regulations, a current or previous owner or operator of property
may be liable for the costs of removal or remediation of certain hazardous
substances on, under, or in its property, without regard to whether the owner or
operator knew of, or caused, the presence of the contaminants, and regardless of
whether the practices that resulted in the contamination were legal at the time
they occurred. The presence of, or failure to remediate properly, such
substances may adversely affect the ability to sell or rent such property or to
borrow using such property as collateral. Persons who generate, arrange for the
disposal or treatment of, or dispose of hazardous substances may be liable for
the costs of investigation, remediation or removal of these hazardous substances
at or from the disposal or treatment facility, regardless of whether the
facility is owned or operated by that person. Additionally, the owner of a site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site. We believe
that we are in material compliance with environmental laws, ordinances and
regulations and do not anticipate any material adverse effect on our earnings or
competitive position relating to environmental matters. It is possible, however,
that future developments could lead to material costs of environmental
compliance for us. The nature of our current and former operations and the
history of industrial uses at some of our facilities expose us to the risk of
liabilities or claims with respect to environmental and worker health and safety
matters which could have a material adverse effect on our financial health. We
are also required to obtain permits from governmental authorities for certain
operations. We cannot ensure that we have been or will be at all times in
complete compliance with such permits. If we violate or fail to comply with
these permits, we could be fined or otherwise sanctioned by regulators. In some
instances, such a fine or sanction could be material. In addition, some of our
properties are subject to indemnification and/or cleanup obligations of third
parties with respect to environmental matters. However, in the event of the
insolvency or bankruptcy of such third parties, we could be required to bear the
liabilities that would otherwise be the responsibility of such third
parties.
Climate
change legislation or regulations restricting emission of “greenhouse gases”
could result in increased operating costs and reduced demand for the vehicles
that use our product. On December 15, 2009, the U.S. Environmental
Protection Agency (EPA) published its findings that emissions of carbon dioxide,
methane and other “greenhouse gases” present an endangerment to public health
and the environment because emissions of such gases are, according to the EPA,
contributing to warming of the earth’s atmosphere and other climatic changes.
These findings allow the EPA to adopt and implement regulations that would
restrict emissions of greenhouse gases under existing provisions of the federal
Clean Air Act. Accordingly, the EPA has proposed regulations that would require
a reduction in emissions of greenhouse gases from motor vehicles and could
trigger permit review for greenhouse gas emissions from certain stationary
sources. In addition, on October 30, 2009, the EPA published a final rule
requiring the reporting of greenhouse gas emissions from specified large
greenhouse gas emission sources in the United States, including facilities that
emit more than 25,000 tons of greenhouse gases on an annual basis, beginning in
2011 for emissions occurring in 2010. At the state level, more than one-third of
the states, either
individually
or through multi-state regional initiatives, already have begun implementing
legal measures to reduce emissions of greenhouse gases. The adoption and
implementation of any regulations imposing reporting obligations on, or limiting
emissions of greenhouse gases from, our equipment and operations or from the
vehicles that use our product could adversely affect demand for those vehicles
or require us to incur costs to reduce emissions of greenhouse gases associated
with our operations.
We incur
significant costs to comply with applicable environmental, health and safety
laws and regulations in the ordinary course of our business. Given the nature of
our operations and the extensive environmental, public health and safety
regulatory framework, the clear course of action is to place more
restrictions and limitations on activities that may be perceived to affect the
environment.
None.
Our
worldwide headquarters is located in leased office space in Van Nuys,
California. We currently maintain and operate a total of six facilities that
produce aluminum wheels for the automotive industry, located in Arkansas;
Chihuahua, Mexico; and Tatabanya, Hungary. These six facilities encompass
3,160,000 square feet of manufacturing space and 30,000 square feet of office
space. We own all of our facilities with the exception of one
warehouse in Rogers, Arkansas, and our worldwide headquarters located in Van
Nuys, California that are leased and we have a 50 percent ownership stake in our
Tatabanya, Hungary facility through our 50 percent ownership stake in
Suoftec. We ceased wheel manufacturing operations in our Johnson
City, Tennessee facility, totaling 301,500 square feet, at the end of the first
quarter of 2007. Additionally, we ceased wheel manufacturing
operations in our Pittsburg, Kansas facility, totaling 492,000 square feet
during the fourth quarter of 2008. Both of these properties are
currently available for sale. In June 2009, we closed our Van Nuys,
California manufacturing and warehousing facilities, totaling 318,000 square
feet.
In
general, these facilities, which have been constructed at various times over the
past several years, are in good operating condition and are adequate to meet our
productive capacity requirements. There are active maintenance
programs to keep these facilities in good condition, and we have an active
capital spending program to replace equipment as needed to keep technologically
competitive on a worldwide basis.
Additionally,
reference is made to Note 1 - Summary of Significant Accounting Policies, Note 5
- Property, Plant and Equipment and Note 8 - Leases and Related Parties, in
Notes to the Consolidated Financial Statements in Item 8 – Financial Statements
and Supplementary Data of this Annual Report on Form 10-K.
Derivative
Litigation
In late
2006, two shareholder derivative complaints were filed, one each by plaintiffs
Gary B. Eldred and Darrell D. Mack, based on allegations concerning some of the
company’s past stock option grants and practices. These cases were subsequently
consolidated as
In re Superior
Industries International, Inc. Derivative Litigation
, which is pending in
the United States District Court for the Central District of California. In the
plaintiffs’ consolidated complaint, filed on March 23, 2007, the company was
named only as a nominal defendant from whom the plaintiffs sought no monetary
recovery. In addition to naming the company as a nominal defendant, the
plaintiffs named various present and former employees, officers and directors of
the company as individual defendants from whom they sought monetary and/or
equitable relief, purportedly for the benefit of the company.
We reached an agreement in principle to settle the litigation. The settlement received the preliminary approval of the Court on November 9, 2009 and, after notice was given as directed by the Court, the Court gave its final approval of the settlement on February 3, 2010, and entered its Order and Final Judgment dismissing the litigation, with prejudice. The terms of the settlement provide that, among other things: the Company will adopt and/or maintain for a specified period certain procedures related to the granting and administration of stock options, as well as certain corporate governance measures; counsel for the plaintiffs in the litigation will receive a specified dollar amount for their fees and expenses, which amount shall be paid by the Company’s insurance carrier; the Company and its past and present officers, directors and employees are released from any claims related to the matters alleged in the litigation; and the plaintiffs and their counsel are released from any claims related to the filing, prosecution, and settlement of the litigation.
Air
Quality Matters
The South
Coast Air Quality Management District (the SCAQMD) issued to us notices of
violation, dated December 14, 2007 and December 5, 2008, alleging violations of
certain permitting and air quality rules at our Van Nuys, California
manufacturing facility. The December 2007 notice involved operating
three facility furnaces with different burners than those described on the
permit to operate the furnaces. The December 2008 notice was
issued after the company self-disclosed and corrected certain discrepancies
associated with the manner that the facility reported nitrogen oxide (NOx)
emissions in 2004 and 2005. To resolve the violation notices,
throughout 2008 and 2009, the company worked closely with the SCAQMD to achieve
compliance and took all steps necessary to remedy the issues associated with
these violations, including the submission of permit applications to modify the
description of the burners for three of the plant’s furnaces. The
company also took steps to ensure that all required reporting and other
regulatory obligations to SCAQMD were made. On September 22, 2009,
Superior entered into a settlement agreement with the SCAQMD. The
salient terms of the agreement required the company to pay a civil penalty of
fifty thousand dollars in exchange for a release from all liability with regard
to any condition at the facility prior to June 30, 2009. The
September 22, 2009 settlement agreement serves as a global resolution of the
notices of violations as well as any other past compliance issues associated
with the facility.
Other
We are
party to various other legal and environmental proceedings incidental to our
business. Certain claims, suits and complaints arising in the
ordinary course of business have been filed or are pending against
us. Based on facts now known, we believe all such matters are
adequately provided for, covered by insurance, are without merit, and/or involve
such amounts that would not materially adversely affect our consolidated results
of operations, cash flows or financial position.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Information
regarding executive officers who are also Directors is contained in our 2010
Annual Proxy Statement under the caption “Election of
Directors.” Such information is incorporated into Part III, Item 10 –
Directors, Executive Officers and Corporate Governance. With the
exception of the Chief Executive Officer (CEO), all executive officers are
appointed annually by the Board of Directors and serve at the will of the Board
of Directors. For a description of the CEO’s employment agreement,
see “Employment Agreements” in our 2010 Annual Proxy Statement, which is
incorporated herein in reference.
Listed
below are the name, age, position and business experience of each of our
officers who are not directors:
|
Assumed
|
||||||||||
|
Name
|
Age
|
Position
|
Position
|
|||||||
|
Robert
D. Bracy
|
62
|
Senior
Vice President, Facilities
|
2005
|
|||||||
|
Vice
President, Facilities
|
1997
|
|||||||||
|
Robert
A. Earnest
|
48
|
Vice
President, General Counsel and
Corporate
Secretary
|
2007
|
|||||||
|
Director,
Tax and Legal and Corporate Secretary
|
2006
|
|||||||||
|
Director,
Tax and Customs – Nissan North America
|
2001
|
|||||||||
|
Emil
J. Fanelli
|
67
|
Vice
President and Corporate Controller
|
2008
|
|||||||
|
Acting
Chief Financial Officer
|
2007
|
|||||||||
|
Vice
President and Corporate Controller
|
2001
|
|||||||||
|
Stephen
H. Gamble
|
55
|
Vice
President, Treasurer
|
2006
|
|||||||
|
Director,
Financial Planning and Analysis
|
2001
|
|||||||||
|
Parveen
Kakar
|
43
|
Senior
Vice President, Corporate Engineering and Product
Development
|
2008
|
|||||||
|
Vice
President, Program Development
|
2003
|
|||||||||
|
Michael
J. O’Rourke
|
48
|
Executive
Vice President, Sales, Marketing and Operations
|
2009
|
|||||||
|
Senior
Vice President, Sales and Administration
|
2003
|
|||||||||
|
Razmik
Perian
|
52
|
Chief
Information Officer
|
2006
|
|||||||
|
Director,
Corporate Information Technology
|
2000
|
|||||||||
|
Eddie
Rodriguez
|
55
|
Vice
President, Human Resources
|
2007
|
|||||||
|
Director,
Human Resources – The Coca-Cola Company
|
2004
|
|||||||||
|
Gabriel
Soto
|
61
|
Vice
President, Mexico Operations
|
2004
|
|||||||
|
Kenneth
A. Stakas
|
58
|
Senior
Vice President, Manufacturing
|
2006
|
|||||||
|
Vice
President of Operations -
|
||||||||||
|
Amcast
Automotive, Components Group
|
2000
|
|||||||||
|
Cameron
Toyne
|
50
|
Vice
President, Supply Chain Management
|
2008
|
|||||||
|
Vice
President, Purchasing
|
2007
|
|||||||||
|
Director
of Purchasing
|
2004
|
|||||||||
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the New York Stock Exchange (symbol:
SUP). We had approximately 540 shareholders of record as of February
8, 2010 and 26.7 million shares issued and outstanding as of March 5,
2010.
*Assumes
the value of the investment in Superior Industries International common stock
and each index was $100 on December 31, 2004 and that all dividends were
reinvested.
|
Superior
Industries
|
Dow
Jones
US Total
|
Dow
Jones
US Auto
|
||||||||||
|
International,
Inc.
|
Market
Index
|
Parts
Index
|
||||||||||
|
2004
|
$ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||
|
2005
|
$ | 78.72 | $ | 106.32 | $ | 84.27 | ||||||
|
2006
|
$ | 70.55 | $ | 122.88 | $ | 90.25 | ||||||
|
2007
|
$ | 68.62 | $ | 130.26 | $ | 103.67 | ||||||
|
2008
|
$ | 41.38 | $ | 81.85 | $ | 51.64 | ||||||
|
2009
|
$ | 63.03 | $ | 105.42 | $ | 77.04 | ||||||
Dividends
Cash
dividends declared during 2009 and 2008 totaled $0.64 per share in each year and
were paid on a quarterly basis. Continuation of quarterly dividends
is contingent upon various factors, including economic and market conditions,
none of which can be accurately predicted, and the approval of our Board of
Directors.
Quarterly
Common Stock Price Information
The
following table sets forth the high and low closing sales price per share of our
common stock during the periods indicated.
|
2009
|
2008
|
|||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||
|
First
Quarter
|
$
|
12.88
|
$
|
8.31
|
$
|
21.55
|
$
|
16.43
|
||||||
|
Second
Quarter
|
$
|
15.18
|
$
|
11.85
|
$
|
22.21
|
$
|
17.42
|
||||||
|
Third
Quarter
|
$
|
16.35
|
$
|
13.60
|
$
|
19.97
|
$
|
16.07
|
||||||
|
Fourth
Quarter
|
$
|
16.35
|
$
|
13.26
|
$
|
19.35
|
$
|
8.92
|
||||||
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
On March
17, 2000, the Board of Directors authorized the repurchase of 4.0 million shares
of our common stock as part of the 2000 Stock Repurchase Plan (Repurchase
Plan). During the fiscal year 2009, there were no repurchases of
common stock. As of December 31, 2009, approximately 3.2 million
shares remained available for repurchase under the Repurchase Plan.
Recent
Sales of Unregistered Securities
During
the fiscal year 2009, there were no sales of unregistered
securities.
The
following selected consolidated financial data should be read in conjunction
with Item 7 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations and Item 8 – Financial Statements and Supplementary Data
of this Annual Report on Form 10-K.
Our
fiscal year is the 52- or 53-week period ending on the last Sunday of the
calendar year. The fiscal years 2009, 2008 and 2007 comprised the
52-week periods ended December 27, 2009, December 28, 2008 and December 30,
2007, respectively. The fiscal year 2006 comprised the 53-week period
ended December 31, 2006. The fiscal year 2005 comprised the 52-week
periods ended December 25, 2005. For convenience of presentation, all
fiscal years are referred to as beginning as of January 1 and ending as of
December 31, but actually reflect our financial position and results of
operations for the periods described above.
|
Fiscal
Year Ended December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Net
sales
|
418,846 | 754,894 | 956,892 | 789,862 | 804,161 | |||||||||||||||
|
Gross
profit (loss)
|
(10,169 | ) | 6,577 | 32,492 | 8,740 | 48,824 | ||||||||||||||
|
Impairments
of long-lived assets
|
11,804 | 18,501 | - | 4,470 | 7,855 | |||||||||||||||
|
Income
(loss) from operations
|
(44,618 | ) | (37,668 | ) | 3,321 | (21,409 | ) | 19,167 | ||||||||||||
|
Income
(loss) from continuing operations
|
||||||||||||||||||||
|
before
income taxes and equity earnings
|
(43,255 | ) | (28,573 | ) | 10,200 | (16,088 | ) | 23,908 | ||||||||||||
|
Income
tax (provision) benefit
(1)
|
(26,047 | ) | 1,778 | (6,263 | ) | 285 | (9,572 | ) | ||||||||||||
|
Equity
earnings (loss)
(2)
|
(24,840 | ) | 742 | 5,355 | 5,004 | 5,039 | ||||||||||||||
|
Net
income (loss)
|
(94,142 | ) | (26,053 | ) | 9,292 | (10,799 | ) | 19,375 | ||||||||||||
|
|
||||||||||||||||||||
|
Current
assets
|
308,132 | 319,289 | 356,079 | 346,593 | 359,740 | |||||||||||||||
|
Current
liabilities
|
66,776 | 62,201 | 95,596 | 112,083 | 110,634 | |||||||||||||||
|
Working
capital
|
241,356 | 257,088 | 260,483 | 234,510 | 249,106 | |||||||||||||||
|
Total
assets
|
541,853 | 628,539 | 729,922 | 712,505 | 719,895 | |||||||||||||||
|
Long-term
debt
|
- | - | - | - | - | |||||||||||||||
|
Shareholders'
equity
|
373,272 | 471,593 | 550,573 | 563,114 | 583,988 | |||||||||||||||
|
Financial
Ratios
|
||||||||||||||||||||
|
Current
ratio
(3)
|
4.6:1
|
5.1:1
|
3.7:1
|
3.1:1
|
3.3:1
|
|||||||||||||||
|
Long-term
debt/total capitalization
(4)
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||
|
Return
on average shareholders' equity
(5)
|
-22.3 | % | -5.1 | % | 1.7 | % | -1.8 | % | -1.2 | % | ||||||||||
|
Share
Data
|
||||||||||||||||||||
|
Net
income (loss)
|
||||||||||||||||||||
|
-
Basic
|
$ | (3.53 | ) | $ | (0.98 | ) | $ | 0.35 | $ | (0.41 | ) | $ | 0.73 | |||||||
|
-
Diluted
|
$ | (3.53 | ) | $ | (0.98 | ) | $ | 0.35 | $ | (0.41 | ) | $ | 0.73 | |||||||
|
Shareholders'
equity at year-end
|
$ | 14.00 | $ | 17.68 | $ | 20.67 | $ | 21.16 | $ | 21.95 | ||||||||||
|
Dividends
declared
|
$ | 0.640 | $ | 0.640 | $ | 0.640 | $ | 0.640 | $ | 0.635 | ||||||||||
|
(1) See
Note 7 - Income Taxes in Notes to Consolidated Financial Statements in
Item 7 - Financial Statements and Supplementary Data in
|
||||||||||||||||||||
|
this
Annual Report on Form 10-K for a discussion of material items impacting
the 2009 income tax provision.
|
||||||||||||||||||||
|
(2) See
Note 6 - Investments in Notes to Consolidated Financial Statements in Item
7 - Financial Statements and Supplementary Data in
|
||||||||||||||||||||
|
this
Annual Report on Form 10-K for a discussion of material items impacting
our 2009 joint venture losses.
|
||||||||||||||||||||
|
(3) The
current ratio is current assets divided by current
liabilities.
|
||||||||||||||||||||
|
(4) Long-term
debt/total capitalization represents long-term debt divided by total
shareholders' equity plus long-term debt.
|
||||||||||||||||||||
|
(5) Return
on average shareholders' equity is net income (loss) divided by average
shareholders' equity. Average shareholders' equity is
|
||||||||||||||||||||
|
the
beginning of the year shareholders' equity plus the end of year
shareholders' equity divided by two.
|
||||||||||||||||||||
AND
RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our Consolidated Financial Statements and the Notes
to the Consolidated Financial Statements included in Item 8 - Financial
Statements and Supplementary Data in this Annual Report on Form 10-K. This
discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of certain factors, including but
not limited to those discussed in Item 1A - Risk Factors and elsewhere in this
Annual Report on Form 10-K.
Beginning
with the third quarter of 2008, the automotive industry was negatively impacted
by the continued dramatic shift away from full-size trucks and SUVs caused by
continuing high fuel prices, rapidly rising commodity
prices and the
tightening of consumer credit due to the then deteriorating financial
markets. Accordingly, our OEM customers announced unprecedented
restructuring actions, including assembly plant closures, significant reductions
in production of light trucks and SUVs, delayed launches of key 2009 model-year
light truck programs and movement toward more fuel-efficient passenger cars and
cross-over type vehicles. In the second quarter of 2009, both
Chrysler and GM announced on April 30, 2009 and June 1, 2009, respectively, that
they were filing a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code after receiving emergency funding from the U.S. federal
government. Chrysler emerged from bankruptcy on June 10, followed by
GM on July 11. The majority, if not all, of Chrysler’s and GM’s
assembly plants were closed during their bankruptcy proceedings.
We have
taken steps to manage our costs in order to rationalize our production capacity
after the announcements beginning in the third quarter of 2008 by our major
customers of assembly plant closures and sweeping production cuts, particularly
in the light truck and SUV platforms. In August 2008, we announced
the planned closure of our wheel manufacturing facility located in Pittsburg,
Kansas, and workforce reductions in our other North American plants, resulting
in the layoff of approximately 665 employees and the elimination of 90 open
positions. On January 13, 2009, we also announced the planned closure
of our Van Nuys, California wheel manufacturing facility, thereby eliminating an
additional 290 jobs. The Kansas and California facilities ceased
operations in December 2008 and June 2009, respectively.
Our
customers continue to request price reductions as they work through their own
financial challenges. We are engaged in ongoing programs to reduce
our own costs through process automation and identification of industry best
practices in an attempt to mitigate these pricing pressures. However,
it has become increasingly more difficult to react quickly enough given the
continuing pressure for price reductions, reductions in customer orders, and the
lengthy transitional periods necessary to reduce labor and other
costs. As such, our profit margins will likely continue to be lower
than our historical levels for some period of time. We will continue
to strive to increase our operating margins from current operating levels by
aligning our plant capacity with industry demand and aggressively implementing
cost-saving strategies to enable us to meet customer-pricing
expectations. However, as we incur costs to implement these
strategies, the initial impact on our future financial position, results of
operations and cash flow may be negative. Additionally, even if
successfully implemented, these strategies may not be sufficient to offset the
impact of on-going pricing pressures and additional reductions in customer
demand in future periods.
Overall
North American production of passenger cars and light trucks during the year was
reported by industry publications as being down approximately 32 percent versus
a year ago, as production of passenger cars decreased 36 percent and production
of light trucks and SUVs decreased 28 percent. The U.S. automotive
industry in 2009 was impacted negatively by extended assembly plant closures and
the lack of available consumer credit as a result of the deterioration of the
financial markets and overall recessionary economic conditions in the
U.S.
Unit
shipments in our first and second quarters of 2009 approximated 1.4 million
wheels per quarter, the lowest level for any quarter since the first quarter of
1992. Unit shipments increased to approximately 2.0 million wheels in the third
quarter of 2009 and were approximately 2.4 million wheels in the fourth quarter
of 2009. Sales in the second half of 2009 were positively impacted by
increased production, as both GM and Chrysler began to return to more normalized
production levels following their emergence from Chapter 11 bankruptcy
protection. We also believe that automotive production generally was
positively impacted by increased consumer demand for new automobiles, largely
driven by the federal government’s Car Allowance Rebate System, also known as
“cash for clunkers”. Gross loss for the year was ($10.2) million, or
(2) percent of net sales, compared to profit of $6.6 million, or 1 percent of
net sales, in the same period a year ago. The net loss after income
taxes and equity earnings for the period was ($94.1) million, or ($3.53) per
diluted share, compared to a net loss in 2008 of ($26.1) million, or ($0.98) per
diluted share.
Listed in the table below are several key indicators we use to monitor our financial condition and operating performance.
Results
of Operations
|
Fiscal
Year Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars, except per share amounts)
|
||||||||||||
|
Net
sales
|
$ | 418,846 | $ | 754,894 | $ | 956,892 | ||||||
|
Gross
profit
|
$ | (10,169 | ) | $ | 6,577 | $ | 32,492 | |||||
|
Percentage
of net sales
|
-2.4 | % | 0.9 | % | 3.4 | % | ||||||
|
Income
(loss) from operations
|
$ | (44,618 | ) | $ | (37,668 | ) | $ | 3,321 | ||||
|
Percentage
of net sales
|
-10.7 | % | -5.0 | % | 0.3 | % | ||||||
|
Net
income (loss) from continuing operations
|
$ | (94,142 | ) | $ | (26,053 | ) | $ | 9,292 | ||||
|
Percentage
of net sales
|
-22.5 | % | -3.5 | % | 1.0 | % | ||||||
|
Diluted
earnings (loss) per share
|
$ | (3.53 | ) | $ | (0.98 | ) | $ | 0.35 | ||||
Net Sales
Consolidated
net sales decreased $336.1 million, or 45 percent, to $418.8 million in 2009
from $754.9 million in 2008. Aluminum wheel sales decreased $329.5 million in
2009 to $408.9 million from $738.4 million a year ago, a 45 percent decrease.
Unit shipments in 2009 decreased 3.2 million, or 31 percent, to 7.2 million from
10.4 million in 2008. The average selling price of our wheels in 2009 decreased
by 20 percent compared to 2008, as the average pass-through price of aluminum
decreased by 16 percent in 2009 compared to 2008. The change in the
average selling price related to aluminum price changes accounted for $81.4
million of the wheel sales decrease and the unit shipment decline accounted for
$228.2 million of the decrease. The balance of the total wheel sales
decline was due to the change in sales mix. Tooling reimbursement
revenues that were recognized were $10.0 million this year compared to $16.5
million a year ago.
U.S.
Operations
Consolidated
net sales by our U.S. wheel plants decreased $272.0 million, or 67 percent, to
$134.3 million in 2009 from $406.3 million in 2008. The
decrease in revenues in 2009 is directly attributable to a 58 percent decrease
in unit shipments and a lower average selling price due principally to a
reduction in the pass-through price of aluminum. We closed our
Kansas and California plants in the U.S. in December 2008 and June 2009,
respectively, and shifted a portion of these facilities production to our Mexico
plants which partially contributed to the decrease in unit
shipments. The significant decrease in 2009 unit shipments and
revenues compared 2008 is attributable to the reduced consumer demand for
automobiles and light trucks and the shift of production from the U.S. to
Mexico.
Mexico
Operations
Net sales
by our Mexican wheel plants decreased $57.9 million, or 18 percent, to $272.9
million in 2009 from $330.8 million in 2008. The decrease in net
sales in 2009 compared to 2008 is primarily attributable to the decrease in
average selling price due to the reduction in the aluminum pass through price,
partially offset by the 4 percent increase in units shipped. In
addition, changes in foreign exchange rates negatively impacted net sales in
2009 by approximately 19 percent when comparing 2008 revenues to
2009.
Unit
shipments to Ford increased to 35 percent of our total OEM unit shipments in
2009 from 26 percent a year ago, while unit shipments to GM decreased to 34
percent from 39 percent in 2008. Unit shipments to Chrysler decreased to 13
percent from 15 percent in 2008, while shipments to our international customers
totaled 18 percent compared to 20 percent in 2008. According to
Wards Auto Info Bank
, overall
North American production of passenger cars and light trucks in 2009 decreased
approximately 32 percent compared to our 31 percent decrease in aluminum wheel
shipments. However, production of the specific passenger cars and light trucks
using our wheel programs decreased 34 percent compared to our 31 percent
decrease in our total shipments, indicating a slight increase in market share.
Production of light trucks and SUVs with our wheel programs decreased 30 percent
compared to our 22 percent decrease in shipments. Production of passenger cars
with our wheel programs was down 38 percent compared to our 41 percent decrease
in shipments.
Consolidated
net sales decreased $202.0 million, or 21 percent, to $754.9 million in 2008
from $956.9 million in 2007. Aluminum wheel sales decreased $206.1 million in
2008 to $738.4 million from $944.5 million in 2007, a 22 percent decrease. Unit
shipments in 2008 decreased 2.8 million, or 22 percent, to 10.4 million from
13.2 million in 2007. The average selling price of our wheels in 2008 was
approximately the same as the average selling price in 2007, as the average
pass-through price of aluminum was the same in both years and there was no
significant change in sales mix. The decrease in unit shipments accounted for
$203.3 million of the wheel sales decrease, with the balance of the decrease due
to the change in sales mix. Tooling reimbursement revenues were $16.5
million in 2008 compared to $12.4 million in 2007.
According
to
Wards Automotive Yearbook
2009,
aluminum wheel installation rates on passenger cars and light
trucks in the U.S. was 65 percent for the 2008 and 2007 model years compared to
63 percent for the 2006 model year. Aluminum wheel installation rates
have increased to this level since the mid-1980s, when this rate was only 10
percent. However, in recent years, this growth rate has slowed with the aluminum
wheel installation rate increasing only 13 percentage points from 52 percent for
the 1997 model year, while experiencing a slight decrease between 2004 and
2005. We expect this trend of slow growth or no growth to continue.
In addition, our ability to grow in the future may be negatively impacted by
continued customer pricing pressures and overall economic conditions that impact
the sales of passenger cars and light trucks, such as continued fluctuating fuel
prices and a continued lack of available consumer credit.
U.S.
Operations
Consolidated
net sales by our U.S. wheel plants decreased $146.0 million, or 26 percent, to
$406.3 million in 2008 from $552.3 million in 2007. The
decrease in revenues in 2008 is directly attributable to a 28 percent decrease
in unit shipments. During the first quarter of 2007, we closed
our Tennessee plant in the U.S. and shifted a portion of that facility’s
production to our Mexico plants which partially contributed to the decrease in
unit shipments. The significant decrease in 2008 unit shipments and
revenues compared 2007 is attributable to the reduced consumer demand for
automobiles and light trucks.
Mexico
Operations
Net sales
by our Mexican wheel plants decreased $57.6 million, or 15 percent, to $330.8
million in 2008 from $388.4 million in 2007. The decrease in net
sales in 2008 compared to 2007 is primarily attributable to a decrease in unit
shipments due to a reduction in consumer demand for automobiles and light
trucks. During 2007, we opened a new plant in Mexico and absorbed a
portion of the production of our Tennessee plant that closed during the first
quarter of 2007. In addition, changes in foreign exchange rates
negatively impacted net sales in 2008 by approximately 2 percent.
Gross
Profit (Loss)
During
2009, consolidated gross profit decreased $16.7 million to a gross loss of
($10.2) million, or (2) percent of net sales, from a gross profit of $6.5
million, or 1 percent of net sales, in 2008. The major factors contributing to
the decreased gross profit in 2009 were the 31 percent and 32 percent decreases
in unit shipments and wheels produced in our plants, respectively. As indicated
above, unit shipments and, therefore, plant productivity were impacted severely
by various customer restructuring actions and market conditions that affected
the entire automotive industry and reduced consumer demand for cars and light
trucks. Due to our own restructuring actions during 2009, gross
profit included charges totaling approximately $21.3 million related to the
following actions. One-time termination benefit costs and other plant closure
costs for the Van Nuys and Pittsburg facilities amounted to $14.5 million and
$1.8 million, respectively, and the one-time termination benefit costs
associated with the workforce reductions at our other North American plants
amounted to approximately $2.5 million. Because of the closures of the Van Nuys
and Pittsburg facilities and reduced production volumes at our other facilities,
certain forward natural gas contracts for those operations no longer qualified
for the normal purchase exemption under the accounting rules. Accordingly, gross
profit included a charge of $2.5 million, representing the difference between
the contract and fair values of those contracts.
During
2008, consolidated gross profit decreased $25.9 million to $6.6.million, or 1
percent of net sales, from $32.5 million, or 3 percent of net sales, in 2007.
The major factors contributing to the decreased gross profit in 2008 were the 22
percent decreases in both unit shipments and wheels produced in our plants. As
indicated above, unit shipments and, therefore, plant productivity were impacted
severely by various customer restructuring actions and market conditions that
affected the entire automotive industry. Due to our own restructuring
actions during 2008 referred to above, gross profit included charges totaling
approximately $6.4 million. Severance and other plant closure costs for the
Kansas facility amounted to $3.8 million, and the severance costs associated
with the workforce reductions at our other North American plants amounted to
approximately $1.0 million. Because of the closures of the Kansas and California
facilities, the forward natural gas contracts for those operations no longer
qualified for the normal purchase exemption under the accounting rules.
Accordingly, gross profit included a charge of $1.6 million, representing the
difference between the contract and fair values of those contracts as of the end
of 2008. Gross profit in 2008 was also negatively impacted by the loss on the
sale of forged wheels purchased from our joint venture and sold by us to our
customers in the United States, totaling $3.8 million. This amount included
reductions to inventory valuation due to decreases in the aluminum portion of
our selling prices, freight and duty charges and third party warehousing
costs.
The cost
of aluminum is a significant component in the overall cost of a wheel.
Additionally, a portion of our selling prices to OEM customers is attributable
to the cost of aluminum. Our selling prices are adjusted periodically to current
aluminum market conditions based upon market price changes during specific
pricing periods though we are exposed to timing differences. Theoretically,
assuming selling price adjustments and raw material purchase prices move at the
same rate, as the price of aluminum increases, the effect is an overall decrease
in the gross margin percentage, since the gross profit in absolute dollars would
be the same. The opposite would then be true in periods during which the price
of aluminum decreases.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $22.6 million, or 5 percent of net
sales, in 2009 compared to $25.7 million, or 3 percent of net sales, in 2008,
and $29.2 million, or 3 percent of net sales, in 2007. The $3.1 million decrease
in selling, general and administrative expenses in 2009 was due principally to
reductions in salaries and related fringe expenses of $1.2 million and in
reductions in the provision for bad debts of $1.2 million. Selling, general and
administrative expenses were $3.4 million lower in 2008 than 2007, due
principally to reduction in legal expenses of $2.9 million.
Impairment
of Long-Lived Assets and Other Charges
Due to
the deteriorating financial condition of our major customers and other changes
in the automotive industry, we performed impairment analyses at the end of each
fiscal quarter at the end of the year 2009 on all long-lived assets in our
operating plants, in accordance with U.S. GAAP. Our estimated
undiscounted cash flow projections as of the end of the year exceeded the asset
carrying values in all of our wheel manufacturing plants in North America;
therefore, no impairment was required to be made to our long-lived assets in our
operating plants in the fourth quarter of 2009.
Based on
the impairment analyses conducted at the end of the first quarter of 2009, we
concluded that the estimated future undiscounted cash flows of our Fayetteville,
Arkansas manufacturing facility would not be sufficient to recover the carrying
value of our long-lived assets attributable to that facility. As a
result, we recorded a pretax asset impairment charge against earnings totaling
$8.9 million during the first quarter of 2009, reducing the $18.2 million
carrying value of certain assets at this facility to their respective estimated
fair values. The estimated fair values of the long-lived assets at
our Fayetteville, Arkansas manufacturing facility were determined with the
assistance of estimated fair values of comparable properties and an independent
third party appraisal of the machinery and equipment. These assets
are classified as held and used in accordance with U.S. GAAP. We have
classified the inputs to the nonrecurring fair value measurement of these assets
as being Level 2 within the fair value hierarchy in accordance with U.S.
GAAP.
In
January 2009, we announced the planned closure of our wheel manufacturing
facility located in Van Nuys, California in an effort to further reduce costs
and more closely align our capacity with sharply lower demand for aluminum
wheels by the automobile and light truck manufacturers. The facility ceased
operations at the end of the second quarter of 2009, resulting in the layoff of
approximately 290 employees. A pretax asset impairment charge against earnings
totaling $10.3 million, reducing the $10.8 million carrying value of certain
assets at the Van Nuys
manufacturing
facility to their respective fair values, was recorded in the fourth quarter of
2008, when we concluded that the estimated future undiscounted cash flows of
that operation would not be sufficient to recover the carrying value of our
long-lived assets attributable to that facility. We used an
independent third party appraiser to assist us in determining the fair values of
these assets.
During
the second quarter of 2009, we received an offer for the sale of our Johnson
City, Tennessee facility which was subsequently cancelled. We believe
this offer was the best indicator of the current fair value of the property and
we recorded a reduction in our carrying value of this facility by $0.6 million
to the $2.2 million offer. Additionally, we received some
indications, based on equipment sales that occurred subsequent to June 28, 2009,
that the carrying values of the held for sale equipment from our Pittsburg,
Kansas, and Van Nuys, California, facilities, totaling $2.6 million, were higher
than their current market values. Consequently, we recorded an
additional impairment charge of $1.9 million to reduce the carrying value of
this equipment to their new estimated fair values in the second quarter
also. We have classified the above nonrecurring fair value
measurements as Level 2 inputs within the fair value hierarchy utilizing the
market approach in accordance with U.S. GAAP. Due to plant shutdowns
and the realignment of our business to match our current production needs, we
have identified, and are in the process of selling, specific long-lived assets
from our former manufacturing operations in Johnson City, Tennessee, and
Pittsburg, Kansas. These assets, which totaled $6.8 million at
December 31, 2009, are classified as assets held for sale in accordance with
U.S. GAAP.
In August
2008, we announced the planned closure of our wheel manufacturing facility
located in Pittsburg, Kansas, in an effort to eliminate excess wheel capacity
and enhance overall efficiency. The closure, which was completed in December
2008, resulted in the layoff of approximately 600 employees. A pretax asset
impairment charge against earnings totaling $5.0 million, reducing the carrying
value of certain assets at the Pittsburg facility to their respective fair
values, was recorded in the third quarter of 2008, when we concluded that the
estimated future undiscounted cash flows of that operation would not be
sufficient to recover the carrying value of our long-lived assets attributable
to that facility. In the fourth quarter of 2008, when it was determined that the
carrying values of additional long-lived assets would not be recovered, the
impairment charge was increased by an additional $2.4 million. We
used an independent third party appraiser to assist us in determining the fair
values of the assets at the Pittsburg, Kansas, facility.
For the
periods between the announced plant closures and the date operations actually
ceased, these assets are classified as held-and-used, in accordance with U.S.
GAAP. Upon termination of plant operations, the remaining assets are classified
as held-for-sale.
One-time
termination benefits and other shutdown costs related to the above plant
closures and workforce reductions in our other North American facilities were
$19.1 million in 2009, of which $18.8 million was included in cost of sales and
$0.3 million was included in selling, general and administrative
expenses. One-time termination benefits and other shutdown costs were
$4.7 million in 2008 and were included in costs of sales. One-time
termination benefits were derived from the individual agreements with each
employee and were accrued ratably over the requisite service
period. Payments for one-time termination benefits and other shutdown
costs totaled $16.7 million in 2009 compared with $4.6 million in 2008 and the
resulting liabilities of $2.5 million and $0.1 million for 2009 and 2008,
respectively, were included in accrued expenses in our consolidated balance
sheets for their respective periods.
Income
(Loss) from Operations
Aluminum,
natural gas and other direct material costs are a significant component of the
direct costs to manufacture wheels. These costs are substantially the
same for all of our plants since the same set of suppliers service both our U.S.
and Mexico operations. In addition, our operations in the U.S. and Mexico sell
to the same customers, utilize the same marketing and engineering resources,
have the same material inputs, have interchangeable manufacturing processes and
provide the same basic end product. However, profitability between
our U.S. and Mexico operations can vary as a result of differing labor and
benefit costs, the mix of wheels manufactured and sold by each plant, as well as
differing plant utilization levels resulting from our internal allocation of
wheel programs to our plants.
Changes in raw material costs and product mix had a nominal impact on income (loss) from operations since changes in aluminum costs are passed through to our customers and product mix remained relatively unchanged during the periods presented. Overall profitability of our U.S. and Mexico operations was impacted severely by various customer restructuring actions, global economic conditions that affected the entire automotive industry, and our own restructuring actions during these three years.
Consolidated
income (loss) from operations includes our U.S. operations and our international
operations, which are principally our wheel manufacturing operations in Mexico,
and certain costs that are not allocated to a specific
operation. These expenses include corporate services that are
primarily incurred in the U.S. but are not charged directly to our world-wide
operations, such as selling, general and administrative expenses, engineering
services for wheel program development and manufacturing support, environmental
and other governmental compliance services, etc.
Consolidated
income (loss) from operations decreased $7.0 million to a loss of ($44.6)
million in 2009 from the loss of ($37.6) million in 2008. Income from
operations of our U.S. operations decreased $12.7 million, while income from our
Mexican operations decreased $0.2 million when comparing 2009 to
2008. The net decrease in income from our North American
manufacturing operations compared to 2008 was offset by a $6.0 million
improvement in corporate costs during 2009. Included below are
the major items that impacted income (loss) from operations for our U.S. and
Mexico operations during 2009.
U.S.
Operations
As noted
above, income (loss) from operations for our U.S. operations decreased by $12.7
million from 2008 to 2009. Our U.S. operations during 2009 consisted
of two wheel plants for the entire year and our Van Nuys, California, facility
for the first half of the year, whereas 2008 also included our Kansas and
California facilities for the entire year. After the operations
ceased at our Kansas and California facilities, the production was apportioned
between our other U.S. and Mexico facilities with the bulk of the production
being redirected to our Mexico facilities. The impairments related to
the long-lived assets of our Kansas and California facilities, along with those
at our Fayetteville, Arkansas facility, and the related plant closure costs and
workforce reductions at our other U.S. facilities reduced our income (loss) from
operations in the U.S. by $12.7 million from 2008 to 2009. The
remaining decrease in income (loss) from operations from 2008 to 2009 for our
U.S. operations was attributable primarily to a 58 percent decrease in unit
shipments due to the reduced consumer demand for passenger cars and light trucks
and to a decrease in plant utilization in 2009 of 25 percent.
Mexico
Operations
Income
from operations for our Mexico operations decreased by $0.2 million in 2009.
Mexico operations during 2009 and 2008 consisted of three fully operational
wheel plants. The increase in income from operations of our Mexico
operations after adjusting for workforce reductions costs and losses on certain
forward natural gas contracts was due primarily to a 4 percent increase in unit
shipments, which was partially offset by a reduction in plant utilization in
2009 of 14 percent and an increase in workforce reduction expenses of $1.4
million.
Included
in our income (loss) from operations in Mexico were $2.3 million in workforce
reduction costs and losses on certain forward natural gas contracts in 2009
compared to workforce reduction costs on $0.6 million in 2008.
U.S. versus Mexico Production
In 2009,
wheels produced by our Mexico and U.S. operations accounted for 69 percent and
31 percent, respectively, of our total production. This compares to 45 percent
in Mexico and 55 percent in the U.S. in 2008. We anticipate that the
percentage of production in Mexico will remain at approximately 69 percent of
our total production in 2010.
Consolidated
income (loss) from operations decreased $41.0 million to a loss of ($37.7)
million in 2008 from income of $3.3 million in 2007. Income from
operations of our U.S. operations and Mexico operations decreased $27.6 million
and $15.6 million, respectively, when comparing 2007 to 2008. These
decreases were offset slightly by a $2.2 million improvement in corporate costs
during 2008. Included below are the major items that impacted
income (loss) from operations for our U.S. and Mexico operations during this
three year period.
As noted
above, income (loss) from operations for our U.S. operations decreased by $27.6
million from 2007 to 2008. Our U.S. operations during 2008 consisted
of four wheel plants for the entire year, whereas 2007 also included our
Tennessee plant until it ceased operations at the end of the first quarter of
that year. After the
operations ceased at our Tennessee
plant, its production was apportioned between our other U.S. and Mexico
facilities. The actions related to the Tennessee plant closure and
the recently announced closures of our Kansas and California wheel facilities
referred to above, reduced our income (loss) from operation in the U.S. by $20.0
million from 2007 due to impairments, plant closure costs and workforce
reduction expenses incurred as a result of those actions. The
remaining decrease in income (loss) from operations from 2007 to 2008 for our
U.S. operations was attributable to reduced plant utilization of 21 percent and
a 28 percent decrease in unit shipments due to the reduced consumer demand for
passenger cars and light trucks. Changes in pricing or product mix
did not have a material impact on the decrease in income (loss) from our U.S.
operations when comparing 2007 to 2008.
Mexico
Operations
Income
(loss) from operations for our Mexico operations decreased $15.6 million when
comparing 2007 to 2008. Mexico operations during 2008 and 2007 consisted of
three fully operational wheel plants in Mexico. Our third wheel plant
in Mexico began full production and sales as of the beginning of
2007. Workforce reduction expenses in our Mexico operations increased
by $0.6 million from 2007 to 2008. The remaining decrease in income
(loss) from operations for our Mexico operations was due to a 10 percent
decrease in unit shipments and the resulting 11 percent decline in plant
utilization. Changes in pricing, product mix, or currencies, did not
have a material impact on the decrease in income (loss) from operations for our
Mexico operations.
U.S. versus Mexico
Production
In 2008,
our U.S. and Mexico operations accounted for 55 percent and 45 percent,
respectively, of our total production, compared to 59 percent
and 41 percent, respectively, in 2007.
Interest
Income, net and Other Income (Expense), net
Net
interest income for the year decreased 26 percent to $2.2 million from $2.9
million in 2008, due principally to a decrease in the average rate of return to
1.1 percent from 2.7 percent in 2008, offsetting an increase of $40.2 million in
the average balance of cash invested. Net interest income in 2008 decreased 21
percent to $2.9 million from $3.7 million in 2007, due principally to a decrease
in the average rate of return to 2.7 percent from 4.9 percent in 2007,
offsetting an increase of $28.1 million in the average balance of cash
invested.
Net other
income (expense) in 2009 was ($0.8) million compared to $6.2 million in 2008.
For the first nine months of 2008, the Mexican peso exchange rate averaged 10.54
pesos to the U.S. dollar. During the fourth quarter, this rate increased to
13.85 Mexican pesos to the U.S. dollar, averaging 13.20 Mexican pesos to the
U.S. dollar for the quarter. As a result, net other income (expense) in 2008
included foreign exchange transaction gains totaling $5.9 million in the fourth
quarter and $5.4 million for the year 2008.
Effective Income Tax Rate
Our
income (loss) from continuing operations before income taxes and equity earnings
was ($43.3) million in 2009, ($28.6) million in 2008, and $10.2 million in 2007.
The effective tax rate on the 2009 pretax income from continuing operations was
a provision of 60.2 percent compared to a tax benefit of 6.2 percent in 2008,
and a provision of 61.4 percent in 2007. The following is a reconciliation of
the United States federal tax rate to our effective income tax rate along with a
discussion of the key drivers that impacted our effective income tax rate for
the periods presented:
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||||
|
Statutory
rate - (provision) benefit
|
35.0
|
%
|
35.0
|
%
|
(35.0)
|
%
|
|||||||||
|
State
tax (provisions), net of federal income tax benefit
(1)
|
10.6
|
5.0
|
(0.6)
|
||||||||||||
|
Permanent
differences
(2)
|
(5.0)
|
(12.0)
|
(20.9)
|
||||||||||||
|
Tax
credits
|
0.1
|
0.7
|
0.7
|
||||||||||||
|
Foreign
income taxed at rates other than the statutory rate
(3)
|
1.4
|
(0.3)
|
19.6
|
||||||||||||
|
Valuation
allowance
(4)
|
(106.4)
|
(25.2)
|
(6.5)
|
||||||||||||
|
Changes
in tax liabilities, net
(5)
|
7.3
|
(0.6)
|
(18.3)
|
||||||||||||
|
Other
|
(3.2)
|
3.6
|
(0.4)
|
||||||||||||
|
Effective
income tax rate
|
(60.2)
|
%
|
6.2
|
%
|
(61.4)
|
%
|
|||||||||
|
1)
|
Actual
state tax provisions and benefits, net of federal income tax benefit
during 2007, 2008, and 2009, were a provision of $0.1 million, a benefit
of $1.4 million, and a benefit of $4.6 million,
respectively. The primary driver in the increase in state
provision for 2009 is the result of generating net state income tax losses
during those periods.
|
|
2)
|
Actual
permanent differences impacting the income tax provisions during 2007,
2008 and 2009 were $2.1 million, $3.4 million, and $2.2 million,
respectively. There were no material changes in the permanent
differences for each of the periods presented. The primary
drivers of the percentage changes in the effective income tax rate related
to permanent differences were the fluctuating levels of income (loss) from
continuing operations before income taxes and equity
earnings.
|
|
3)
|
During
2007, a greater proportion of our income was generated in foreign
jurisdictions when compared to 2008 and 2009. The impact of foreign income
taxed at rates other than the statutory rate on our reported tax
provisions was $2.0 million in 2007, $0.1 million in 2008, and $0.6
million in 2009. During these same periods, our income (loss) from
continuing operations before income taxes and equity earnings was $10.2
million in 2007, ($28.6) million in 2008, and ($43.3) million in 2009.
The higher proportion of foreign earnings in 2007 as a percentage of
the lower consolidated income from continuing operations before taxes and
equity earnings in that year resulted in the significant impact on the
effective income tax rate in 2007.
|
|
4)
|
During
2007, 2008, and 2009, increases in our valuation allowances resulted in
additional tax expense of $0.7 million, $7.2 million, and $46.0 million,
respectively. The significant increase in the tax expense
related to valuation allowances during 2009 was due to an increase in the
valuation allowance recorded for our beginning federal deferred tax assets
in the amount of $35.6 million, an increase related to current year
deferred tax items for which a valuation allowance was established in the
amount of $7.5 million, and an increase in the valuation allowance
recorded for our foreign net operating loss carryforwards of $0.6 million
for which we have determined that it was more likely than not that the
benefit would not be realized. The significant increase
in the tax expense related to valuation
allowances during
2008 was due to an increase in the valuation allowance recorded for our
foreign net operating loss carryforwards and foreign tax credit
carryforwards for which we determined that it was more likely than not
that the benefit would not be
realized.
|
|
5)
|
The
impact of changes in our tax liabilities resulted in additional tax
expense of $1.9 million, expense of $0.2 million, and a benefit of $3.2
million during 2007, 2008, and 2009, respectively. Effective
January 1, 2007, we adopted the U.S. GAAP method of accounting for
uncertain tax positions. The increase in tax liabilities during
2007 relates to accruals for interest and penalties on the liability
established upon adoption of the U.S. GAAP method of accounting for
uncertain tax positions at the beginning of that year. In 2008,
we continued to accrue interest and penalties on the tax liabilities
established for uncertain tax positions. However, also during
2008, we decreased the tax liabilities as a result of the expiration of
statutes of limitations on years for which a liability had originally been
established upon adoption of the U.S. GAAP method of accounting for
uncertain tax positions. The increase in tax liabilities
due to accruals for interest and penalties, minus the decrease due to the
expiration of statutes of limitations, resulted in a net increase of $0.2
million to our 2008 income tax provision. During 2009, we
continued to accrue interest and penalties on beginning tax liabilities
which resulted in increases to our tax provision in the amount of $4.3
million. During 2009, we completed certain audits that resulted
in a net reduction to the tax liability which decreased our tax provision
in the amount of $7.5 million.
|
We
are a multinational company subject to taxation in many
jurisdictions. We record liabilities dealing with uncertainty in the
application of complex tax laws and regulations in the various taxing
jurisdictions in which we operate. If we determine that payment of
these liabilities will be unnecessary, we reverse the liability and recognize
the tax benefit during the period in which we determine the liability no longer
applies. Conversely, we record additional tax liabilities or
valuation allowances in a period in which we determine that a recorded liability
is less than we expect the ultimate assessment to be or that a tax asset is
impaired. The effects of recording liability increases and decreases
are included in the effective income tax rate.
Equity
in Earnings of Joint Ventures
Effective
in June 2008, we terminated our 50 percent-owned marketing joint venture,
Topy-Superior Limited (TSL), which earned commissions for marketing our products
to potential OEM customers based in Asia. The net operating results through the
date of dissolution and the final settlement of the TSL joint venture did not
have a material impact on our results of operations or financial
condition.
We have a
50 percent-owned joint venture, Suoftec Light Metal Products Production &
Distribution Ltd (Suoftec), a manufacturer of both light-weight forged and cast
aluminum wheels in Hungary. The investment in this joint venture is accounted
for utilizing the equity method of accounting. Accordingly, our share of joint
venture’s net income is included in the consolidated statements of operations in
“Equity in Earnings (Losses) of Joint Ventures”.
Suoftec Joint
Venture
Net sales
of Suoftec were also negatively impacted by customer restructuring and the
economic conditions affecting the automotive industry in Europe. The
joint venture’s net sales decreased $54.1 million, or 39 percent, in 2009 to
$83.1 million from $137.2 million in 2008, as unit shipments declined 31 percent
and average selling price in U.S. dollars fell by 13 percent. However, the
average selling price in euros, the functional currency of the joint venture,
declined approximately 7 percent, which was compounded by a decrease in the U.S.
dollar/euro exchange rate of approximately 6 percent.
Net sales
in 2008 decreased $8.5 million, or 6 percent, to $137.2 million from $145.7
million in 2007. Unit shipments decreased 9 percent from those of the prior year
at 2.3 million units, while the average selling price in U.S. dollars increased
3 percent. However, the average selling price in euros, the functional currency
of the joint venture, declined by 5 percent, while the U.S. dollar/euro exchange
rate of increased approximately 8 percent.
Gross
profit in 2009 decreased to a loss of ($17.4) million, or (21) percent of net
sales, from profit of $2.9 million, or 2 percent of net sales, in 2008. Gross
profit margin in 2009 was impacted negatively by the continuing shift in sales
mix to smaller, lower-profit margin wheels. Gross profit in 2009 was also
impacted negatively by cost increases related to operating inefficiencies and
quality issues. Gross profit in 2008 decreased to $2.9 million, or 2 percent of
net sales, from $14.9 million, or 10 percent of net sales, in 2007. Gross profit
margin in 2008 was impacted negatively by a significant shift in sales mix from
larger, higher profit margin aluminum wheels to smaller, lower-profit margin
wheels. Gross profit in 2008 was also impacted negatively by a 25 percent
increase in utility costs, which was partially offset by lower operating
supplies and depreciation expense.
Selling,
general and administrative costs in 2009 were $1.9 million, or 2 percent of net
sales, compared to $2.6 million, or 2 percent of net sales in 2008 and $2.0
million, or 1 percent of net sales in 2007. The principal reason for the $0.7
million decrease in 2009 compared to 2008 was lower commission based sales in
the current period.
Because
our 50 percent-owned joint venture in Hungary was also affected by similar
economic conditions impacting the European automotive industry, management has
tested the long-lived assets of the Hungarian joint venture, Suoftec, for
impairment at the end of each fiscal quarter in 2009 in accordance with U.S.
GAAP. Due to the general decline in the European automotive industry,
during the fourth quarter of 2009, the projected future shipments declined
sharply compared to the projections earlier in the year. The
impairment analysis performed at the end of the year indicated that the
estimated undiscounted future cash flows from the reduced projected shipments of
our joint venture facility would not be sufficient to recover the carrying value
of long-lived assets attributable to that facility. As a result, our
joint venture recorded a $28.8 million pretax impairment charge against their
long-lived assets reducing the carrying value of the asset grouping of $76.0
million to the asset grouping’s fair value. We recorded our share of
the charge, or $14.4 million, in our equity in earnings (losses) from joint
ventures during the fourth quarter of 2009. The estimated fair value
of the Suoftec asset group was determined using a discounted cash flow model
with the resulting value compared with comparable valuation multiples and was
determined using Level 3 inputs within the fair value hierarchy in accordance
with U.S. GAAP. The discounted cash flow analysis included several
key assumptions including the timing of cost savings initiatives that will be
implemented, resolution of certain operational inefficiencies and quality
issues, and margin improvement on new business all of which may never
materialize or may not be sufficient to offset the impact of on-going pricing
pressures and reductions in customer demand in future periods. There
is no guarantee that we will achieve our estimated results or that future
impairment charges will not be recorded. See Note 6 – Investments in
Notes to Consolidated Financial Statements in Item 8 – Financial Statements and
Supplementary Data in this Annual Report on Form 10-K for further discussion of
our Suoftec joint venture.
The
reduction in other income (expense), net in 2009 of $1.2 million was due
principally to lower interest income and higher foreign exchange transactional
losses in the current period. The reduction in other income (expense), net in
2008 of $0.6 million compared to 2007 was due principally to increased interest
income being offset by foreign exchange transactional losses.
Due to
the net operating losses for the last three years and a reduced outlook,
Suoftec’s management established valuation allowances totaling $4.2 million
during 2009 for net operating losses and other deferred tax
assets. The statutory income tax rate in Hungary was 16 percent in
2008 and 2007 plus an additional 4 percent solidarity tax. Effective
in January 2010, the statutory income tax rate in Hungary will increase to 19
percent and the 4 percent solidarity tax will cease. The annual
effective income tax rates were (2.2) percent in 2009, 22.2 percent in 2008,
compared to 18.7 percent in 2007.
The
resulting net loss was ($50.1) million in 2009, compared to income of $0.4
million in 2008 and $11.2 million in 2007. Our 50-percent share of these
earnings (losses) was ($25.1) million, $0.2 million and $5.6 million,
respectively. After adjusting for the elimination of intercompany profits on
wheels purchased from Suoftec, our equity earnings (losses) in each year were
($24.8) million in 2009, $0.7 million in 2008 and $5.2 million in
2007.
Suoftec’s
cash at the end of 2009 was $14.9 million compared to $25.4 million a year ago.
Working capital decreased $14.3 million to $32.5 million from $46.8 million at
the end of 2008, due principally to a reduction of $10.5 million in cash, $3.6
million decrease in net inventories and an increase in current liabilities of
$3.1 million, partially offset by a $2.8 million increase in accounts
receivable. The current ratio decreased to 3.3 from 5.1 a year ago. Capital
expenditures in 2009 were $4.3 million, compared to $15.5 million in
2008. No dividends have been declared since 2007. We believe the
joint venture’s current cash balance is sufficient for its future operating and
capital expenditure requirements.
Net
Income (Loss)
Net loss
in 2009 was ($94.1) million, or (22) percent of net sales, compared to net loss
of ($26.1) million, or (4) percent of net sales, in 2008, and net income of $9.3
million, or 1 percent of net sales, in 2007. Diluted earnings (loss) per share
was ($3.53) per diluted share in 2009 compared to ($0.98) in 2008 and $0.35 in
2007.
Liquidity
and Capital Resources
Our
sources of cash liquidity include cash and cash equivalents, net cash provided
by operating activities, and other external sources of funds. During the three
years ended December 31, 2009, we had no bank or other interest-bearing debt. At
December 31, 2009, our cash and cash equivalents totaled $134.3 million compared
to cash and cash equivalents totaling $146.9 million a year ago and $106.8
million of cash and cash equivalents at the end of 2007. The $12.6 million
decrease in cash and cash equivalents in 2009 was due principally to net cash
provided by operating activities of $22.3 million being offset by net cash used
in investing activities of $17.8 million and net cash used in financing
activities of $17.1 million. Investing activities included the
purchase of $10.2 million in certificates of deposit with various maturity dates
which are not classified as cash equivalents. At December 31, 2009,
$6.2 million of these certificates of deposit were included in short-term
investments and $4.0 million were included in other assets.
The $40.1
million increase in cash and cash equivalents in 2008 was due principally to net
cash provided by operating activities of $67.9 million offsetting net cash used
in investing activities and financing activities of $11.3 million and $16.5
million, respectively. Accordingly, working capital requirements, investing
activities and cash dividend payments during these three years have been funded
from internally generated funds, the exercise of stock options or existing cash
and short-term investments. The following table summarizes the cash flows from
operating, investing and financing activities as reflected in the consolidated
statements of cash flows.
|
Fiscal
Year Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Net
cash provided by operating activities
|
$ | 22,327 | $ | 67,872 | $ | 74,858 | ||||||
|
Net
cash used in investing activities
|
(17,816 | ) | (11,325 | ) | (19,872 | ) | ||||||
|
Net
cash used in financing activities
|
(17,067 | ) | (16,445 | ) | (16,602 | ) | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | (12,556 | ) | $ | 40,102 | $ | 38,384 | |||||
We
generate our principal working capital resources primarily through operations.
Net cash provided by operating activities decreased $45.6 million to $22.3
million in 2009, compared to $67.9 million for the same period a year ago. The
increase in net loss of $68.1 million was further increased by net unfavorable
changes in operating assets and liabilities totaling $23.0 million and offset by
the net favorable changes in non-cash items of $45.5 million. The unfavorable
change in operating assets and liabilities was due principally to unfavorable
changes in accounts receivable of $23.0 million, in income taxes receivable of
$9.8 million and in inventories of $6.1 million, reduced by the favorable change
in funding requirements of accounts payable of $19.2 million. The
principal changes in non-cash items were increases in deferred income taxes of
$49.5 million and losses from joint venture of $25.6 million, offset by a
reduction in depreciation expense of $12.9 million and impairment and other non
cash items of $16.7 million.
The
change in accounts receivable in 2009 was favorable by $4.2 million compared to
a favorable change in 2008 of $27.2 million, resulting in the unfavorable change
of $23.0 million. Sales in the last two months of 2009 changed only
slightly compared with those in the same period in 2008. In 2008, however, net
sales in the last two months were 36 percent lower than in the same period of
2007, due to the sharp decrease in customer demand that began in the third
quarter of 2008. The unfavorable change in funding for income taxes
of $9.8 million compared to the prior year was due primarily to the recording of
an income tax refund receivable of $6.1 million in the fourth quarter of
2009. The unfavorable change in inventories of $6.1 million was due
to a leveling off of inventories as we closed plants and managed inventory
levels to meet reduced customer demand. The favorable change in funding
requirements of accounts payable compared to a year ago of $19.2 million was due
to lower levels of raw material and other purchases, which were also due to
reduced customer demand and the plant closures.
The $22.3
million cash flow from operating activities in 2009, the $146.9 million of cash
and cash equivalents as of the prior year end and the $0.9 million of other cash
proceeds from investing activities were used in part for purchases of
certificates of deposits of $10.2 million, capital expenditures of $8.5 million
and for cash dividends of $17.1 million. The decrease in capital
expenditure requirements in 2009 and 2008 when compared to 2007 was due
primarily to the availability of machinery and equipment from our closed wheel
plants and the completion in 2007 of our newest plant in Mexico.
Net cash
provided by operating activities decreased $7.0 million to $67.9 million in 2008
compared to $74.9 million for the same in 2007. The decrease in net income of
$35.3 million was offset by the favorable change in non-cash items of $12.7
million and favorable changes in operating assets and liabilities totaling $15.6
million. The principal changes in non-cash items were adding back of the
impairment charges of $18.5 million offset by the change in deferred income
taxes of $15.6 million. The favorable change in operating assets and liabilities
was due principally to favorable changes in accounts receivable and inventories
of $20.1 million and $19.1 million, respectively, reduced by unfavorable changes
in funding requirements of accounts payable of $13.4 million and other
liabilities of $8.6 million.
The
favorable change in accounts receivable in 2008 of $20.1 million compared to
2007 was principally due to the 36 percent decline in sales during the last two
months of 2008 compared to the same period in 2007. The favorable change in
inventories of $19.1 million in 2008 compared to the prior year was due
primarily to reduced customer demand in the last half of 2008 and to the closure
of two plants since March of 2007. The unfavorable change in funding
requirements of accounts payable and other liabilities in 2008 was due to lower
levels of raw material and other purchases and lower accruals for operating
expenses.
The $67.9
million cash flow from operating activities in 2008, the $106.8 million of cash
and cash equivalents as of the 2007 year end and the $2.5 million of other cash
proceeds from investing activities were used in part for capital expenditures of
$13.2 million and for cash dividends of $17.1 million in 2008.
Our
liquidity remained strong in 2009. Working capital of $241.4 million
at December 31, 2009 included $134.3 million in cash and cash equivalents and
$6.2 million in short-term certificates of deposit. The current ratio
at year-end was 4.6:1 compared to 5.1:1 a year ago. Accordingly, we
believe we are well positioned to withstand the current economic
climate.
Risk
Management
We are
subject to various risks and uncertainties in the ordinary course of business
due, in part, to the competitive global nature of the industry in which we
operate, to changing commodity prices for the materials used in the manufacture
of our products, and to development of new products.
We have
foreign operations in Mexico and Hungary that, due to the settlement of accounts
receivable and accounts payable, require the transfer of funds denominated in
their respective functional and legal currencies – the Mexican peso and the
euro. The value of the Mexican peso increased by 5 percent in relation to the
U.S. dollar in 2009. The euro experienced a 2 percent decrease versus
the U.S. dollar in 2009. For the years ended December 31, 2009, 2008
and 2007, we had foreign currency transaction (losses) and gains of ($0.8)
million, $5.5 million and $0.5 million, respectively, which are included in
other income (expense) in the consolidated statements of
operations.
Since
1990, the Mexican peso has experienced periods of relative stability followed by
periods of major declines in value. The impact of these changes in value
relative to our Mexico operations has resulted in a cumulative unrealized
translation loss at December 31, 2009 of $61.3 million. Since our initial
investment in our joint venture in Hungary in 1995, the fluctuations in
functional currencies have resulted in a cumulative unrealized translation gains
at December 31, 2009 of $6.7 million. Translation gains and losses are included
in other comprehensive income (loss) in the consolidated statements of
shareholders’ equity.
Our
primary risk exposure relating to derivative financial instruments results from
the periodic use of foreign currency forward contracts to offset the impact of
currency rate fluctuations with regard to foreign-currency-denominated
receivables, payables or purchase obligations. At December 31, 2009 and 2008, we
held no foreign currency forward contracts.
When
market conditions warrant, we may also enter into contracts to purchase certain
commodities used in the manufacture of our products, such as aluminum, natural
gas and other raw materials. Typically, any such commodity commitments are
expected to be purchased and used over a reasonable period of time in the normal
course of business. Accordingly, these contracts qualify for the “normal
purchase” exemption provided for under U.S. GAAP and we are not required to
record any gains and/or losses associated with these commitments in our current
earnings, unless there is a change in the facts or circumstances in regard to
the commitments being used in the normal course of business.
We
currently have several purchase agreements for the delivery of natural gas
through 2012. With the closure of our manufacturing facility in Van
Nuys, California in June 2009, and closure in December 2008 of our manufacturing
facility in Pittsburg, Kansas, we no longer qualified for the normal purchase,
normal sale (NPNS) exemption provided for in accordance with U.S. GAAP for the
remaining natural gas purchase commitments related to those
facilities. In addition, we have concluded that the natural gas
purchase commitments for our manufacturing facility in Arkansas and certain
natural gas commitments for our facilities in Chihuahua, Mexico no longer
qualified for the NPNS exemption provided for under U.S. GAAP since we could no
longer assert that it was probable that we would take full delivery of these
contracted quantities in light of the continued declines of our industry
experienced in the first half of 2009. In accordance with U.S. GAAP
these natural gas purchase commitments are classified as being with “no hedging
designation” and, accordingly, we are required to record any gains and/or losses
associated with the changes in the estimated fair values of these commitments in
our current earnings. The contract and fair values of these purchase
commitments at December 31, 2009 were $8.6 million and $5.6 million,
respectively, which represents a gross liability of $3.0 million, which was
included in accrued expenses in our December 31, 2009 consolidated balance
sheet.
Based on
the quarterly analysis of our estimated future production levels, certain
natural gas purchase commitments with a contract value of $8.7 million and a
fair value of $6.8 million for our manufacturing facilities in Mexico
continue
to qualify for the NPNS exemption since we can assert that it is probable we
will take full delivery of the contracted quantities. The contract
and fair values of all natural gas purchase commitments were $17.3 million and
$12.4 million, respectively, at December 31, 2009. As of December 31,
2008, the aggregate contract and fair values of natural gas commitments were
approximately $28.0 million and $21.1 million,
respectively. Percentage changes in the market prices of natural gas
will impact the fair values by a similar percentage. The recurring
fair value measurement of the natural gas purchase commitments are based on
quoted market prices using the market approach and the fair value is determined
based on Level 1 inputs within the fair value hierarchy provided for under U.S.
GAAP.
Contractual
obligations as of December 31, 2009 are as follows (amounts in
millions):
|
Payments
Due by Fiscal Year
|
|||||||||||||||||||||
|
Contractual
Obligations
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||
|
Commodity
contracts
|
$ |
13
|
$ |
2
|
$ |
2
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
17
|
|||||||
|
Retirement
plans
|
2
|
2
|
2
|
2
|
2
|
56
|
66
|
||||||||||||||
|
Operating
leases
|
3
|
2
|
1
|
-
|
-
|
-
|
6
|
||||||||||||||
|
Total
|
$ |
18
|
$ |
6
|
$ |
5
|
$ |
2
|
$ |
2
|
$ |
56
|
$ |
89
|
|||||||
The table above does not reflect unrecognized tax benefits of $46.6 million, the timing of which is uncertain.
Included
in the contractual obligation for commodity contracts in 2010 are two natural
gas purchase commitments related to our Van Nuys, California and Pittsburg,
Kansas manufacturing operations which were settled in February
2010. The total contractual obligation related to these two contracts
was $2.4 million as of December 31, 2009.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, we had no significant off-balance sheet
arrangements.
Inflation
Inflation
has not had a material impact on our results of operations or financial
condition for the three years ended December 31, 2009. Wage increases have
averaged 2 to 3 percent during this period and, as indicated above, cost
increases of our principal raw material, aluminum, are passed through to our
customers. However, cost increases for our other raw materials and for energy
may not be similarly recovered in our selling prices. Additionally, the
competitive global pricing pressures we have experienced recently are expected
to continue, which may also lessen the possibility of recovering these types of
cost increases.
Critical
Accounting Policies
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to apply significant judgment in making estimates and assumptions
that affect amounts reported therein, as well as financial information included
in this Management’s Discussion and Analysis of Financial Condition and Results
of Operations. These estimates and assumptions, which are based upon historical
experience, industry trends, terms of various past and present agreements and
contracts, and information available from other sources that are believed to be
reasonable under the circumstances, form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
through other sources. There can be no assurance that actual results reported in
the future will not differ from these estimates, or that future changes in these
estimates will not adversely impact our results of operations or financial
condition.
As
described below, the most significant accounting estimates inherent in the
preparation of our financial statements include estimates and assumptions as to
revenue recognition, inventory valuation, impairment of and the estimated useful
lives of our long-lived assets, as well as those used in the determination of
liabilities related to self-insured portions of employee benefits, workers’
compensation, general liability programs and taxation.
Revenue Recognition
– Our
products are manufactured to customer specifications under standard purchase
orders. We ship our products to OEM customers based on release schedules
provided weekly by our customers. Our sales and production levels are highly
dependent upon the weekly forecasted production levels of our customers. Sales
of these products, net of estimated pricing adjustments, and their related costs
are recognized when title and risk of loss transfers to the customer, generally
upon shipment. A portion of our selling prices to OEM customers is
attributable to the aluminum content of our wheels. Our selling
prices are adjusted periodically for changes in the current aluminum market
based upon specified aluminum price indices during specific pricing periods, as
agreed with our customers.
Allowance for Doubtful
Accounts
– We maintain an allowance for doubtful accounts receivable
based upon the expected collectability of all trade receivables. The allowance
is reviewed continually and adjusted for accounts deemed uncollectible by
management.
Inventories
– Inventories are
stated at the lower of cost or market value and categorized as raw material,
work-in-process or finished goods. When necessary, management uses estimates of
net realizable value to record inventory reserves for obsolete and/or
slow-moving inventory. Our inventory values, which are based upon standard costs
for raw materials and labor and overhead established at the beginning of the
year, are adjusted to actual costs on a first-in, first-out (FIFO) basis.
Current raw material prices and labor and overhead costs are utilized in
developing these adjustments.
Pre-Production Costs Related to
Long-Term Supply Arrangements
-
We incur pre-production
engineering and tooling costs related to the products produced for our customers
under long-term supply arrangements. We expense all pre-production engineering
costs for which reimbursement is not contractually guaranteed by the customer or
is in excess of the contractually guaranteed reimbursement amount. In addition,
we expense all pre-production tooling costs related to customer-owned tools for
which reimbursement is not contractually guaranteed by the customer. We amortize
the cost of the customer-owned tooling over the expected life of the wheel
program on a straight line basis. Also, we defer any reimbursements
made to us by our customer and recognize the tooling reimbursement revenue over
the same period in which the tooling is in use. Customer-owned tooling for which
reimbursement is contractually guaranteed by the customer included in our other
assets as of December 31, 2009 was $11.8 million which is net of $15.1 million
of accumulated amortization. Deferred tooling reimbursement revenues
included as part of accrued expenses and other non-current liabilities were $7.0
million and $4.8 million, respectively, as of December 31, 2009
Impairment of Long-Lived Assets and
Investments
– In accordance with U.S. GAAP, we periodically review the
carrying value of our property and equipment, with finite lives, to test whether
current events or circumstances indicate that such carrying value may not be
recoverable. If the tests indicate that the carrying value of the
asset group is greater than the expected undiscounted cash flows to be generated
by such asset group, then an impairment adjustment needs to be
recognized. Such adjustments consist of the amount by which the
carrying value of the asset group exceeds fair value. We generally
measure fair value by considering sale prices for similar assets or by
discounting estimated future cash flows from such asset using an appropriate
discount rate. Considerable management judgment is necessary to
estimate the fair value of assets, and accordingly, actual results could vary
significantly from such estimates. See Note 15 – Impairment of Long-Lived Assets
and Other Charges in Item 8 – Financial Statements and Supplementary Data of
this Annual Report on Form 10-K. Assets to be disposed of are carried
at the lower of their carrying value or fair value less costs to
sell.
The
company’s policy regarding its equity method investment in Suoftec is to
evaluate the investment for an other than temporary impairment (OTTI) when there
are indicators of a loss in value. We generally determine if there is an OTTI by
using a discounted cash flow model and marketplace multiples, and if the present
value of the discounted cash flows is less than the carrying balance of the
investment, then the decline in the fair value of the investment is
considered to be other-than-temporary. If a loss in the value
of the investment is determined to be other-than temporary, then the decline in
value is recognized in earnings.
Retirement Plans
– Subject to
certain vesting requirements, our unfunded retirement plan generally provides
for a benefit based on final average compensation, which becomes payable on the
employee’s death or upon attaining age 65, if retired. The net periodic pension
cost and related benefit obligations are based on, among other things,
assumptions of the discount rate, future salary increases and the mortality of
the participants. The net periodic
pension
costs and related obligations are measured using actuarial techniques and
assumptions. See Note 9 – Retirement Plans in Notes to Consolidated
Financial Statements in Item 8 – Financial Statements and Supplementary Data for
a description of these assumptions.
The
following information illustrates the sensitivity to a change in certain
assumptions of our unfunded retirement plans as of December 31,
2009. Note that these sensitivities may be asymmetrical, and
are specific to 2009. They also may not be additive, so the impact of
changing multiple factors simultaneously cannot be calculated by combining the
individual sensitivities shown.
The
effect of the indicated increase (decrease) in selected factors is shown below
(in thousands):
|
Increase
(Decrease) in:
|
|||||||||||||||||
|
Projected
Benefit
|
|
||||||||||||||||
|
Percentage
|
Obligation
|
2010
Net Periodic
|
|||||||||||||||
|
Assumption
|
Change
|
at
December 31, 2009
|
Pension
Cost
|
||||||||||||||
|
Discount
rate
|
+
1.0%
|
$
|
(2,218
|
)
|
$
|
(60
|
)
|
||||||||||
|
Rate
of compensation increase
|
+
1.0%
|
$
|
778
|
$
|
166
|
||||||||||||
Stock-Based Compensation
– We
account for stock-based compensation using the fair value recognition in
accordance with U.S. GAAP. We use the Black-Scholes option-pricing model to
determine the fair value of any options granted, which requires us to make
estimates regarding dividend yields on our common stock, expected volatility in
the price of our common stock, risk free interest rates, forfeiture rates and
the expected life of the option. To the extent these estimates
change, our stock-based compensation expense would change as well. We
recognize these compensation costs net of the applicable forfeiture rate and
recognize the compensation costs for only those shares expected to vest on a
straight-line basis over the requisite service period of the award, which is
generally the option vesting term of four years. We estimated the forfeiture
rate based on our historical experience. No options were exercised
during the current year and the total fair value of shares vested during the
year was approximately $2.3 million.
Workers’ Compensation and Loss
Reserves
– We self-insure any losses arising out of Worker’s Compensation
claims, Workers’ compensation accruals are based upon reported claims in process
and actuarial estimates for losses incurred but not reported. Loss reserves,
including incurred but not reported reserves, are estimated using actuarial
methods and ultimate settlements may vary significantly from such estimates due
to increased claims frequency or the severity of claims.
Accounting for Income Taxes
–
Despite our belief that our tax return positions are consistent with applicable
tax laws, experience has shown that taxing authorities often challenge certain
positions. Settlement of any challenge can result in no change, a complete
disallowance or some partial adjustment reached through negotiations or even
litigation. Accordingly, accounting judgment is required in evaluating our tax
positions, which are adjusted only in light of substantive changes in facts and
circumstances, such as the resolution of an audit by taxing authorities or the
expiration of a statute of limitations. Accordingly, our tax expense for a given
period will include provisions for newly identified uncertainties, as well as
reductions for uncertainties resolved through audit, expiration of a statute of
limitations, audit adjustments, estimates of future earnings, changes in the
valuation allowance, or other substantive changes in facts and
circumstances. We believe that the determination to record a
valuation allowance to reduce a deferred income tax asset is a significant
accounting estimate because it is based on an estimate of future taxable income
in the United States and certain other jurisdictions, which is susceptible to
change and may or may not occur, and because the impact of adjusting a valuation
allowance may be material.
Realization
of any of our deferred tax assets at December 31, 2009 is dependent on the
company generating sufficient taxable income in the future. The
determination of whether or not to record a full or partial valuation allowance
on our deferred tax assets is a critical accounting estimate requiring a
significant amount of judgment on the part of management. We perform
our analysis on a jurisdiction by jurisdiction basis.
In
considering whether a valuation allowance was required for our U.S. federal
deferred tax assets, we considered all available positive and negative
evidence. Positive evidence considered included reversing taxable
temporary
differences
and restructuring our operations in line with the deteriorating automotive
industry and moving wheel production to our lower cost operations in
Mexico. This restructuring began with the closure of the Pittsburg
facility in December 2008 and with the closure of our Van Nuys facility in June
of 2009. These closures allowed us to realign capacity within our
remaining plants and reduce our total fixed costs. During 2009, we began our
international tax restructuring plan, which is currently being
implemented. We expect that the new tax structure will be in effect
in 2010. Based on its nature, implementation of this tax strategy
will enable us to generate domestic taxable income, thereby allowing us to
utilize our federal deferred tax assets and, at the same time, reduce world-wide
tax payments.
Negative
evidence considered included the taxable losses in the U.S. recorded during the
three year period ended December 31, 2009, on both an annual and cumulative
basis, the continued deterioration of the automotive industry into 2009 and the
uncertainty as to the timing of recovery of both the automotive industry and
global economy.
Based on the weight of all available evidence discussed above, we have concluded that the negative evidence outweighs the positive and that it is more likely than not that the federal U.S. and state deferred tax asset, net of valuation allowance, will not be realized within the carryforward period and we also concluded that based on the weight of all available evidence the foreign net operating loss carryforwards will not be realized within the carryforward period. This is because we can not look to future taxable income as a source of income given our cumulative losses. We therefore established a full valuation allowance against this deferred tax asset. However, we will continue to assess the need for a valuation allowance in the future.
The
company adopted the U.S. GAAP method of accounting for uncertain tax positions
during 2007. The purpose of this method is to clarify accounting for
uncertain tax positions recognized. The U.S. GAAP method of
accounting for uncertain tax positions utilizes a two-step approach to evaluate
tax positions. Recognition, step one, requires evaluation of the tax
position to determine if based solely on technical merits it is more likely than
not to be sustained upon examination. Measurement, step two, is
addressed only if a position is more likely than not to be
sustained. In step two, the tax benefit is measured as the largest
amount of benefit, determined on a cumulative probability basis, which is more
likely than not to be realized upon ultimate settlement with tax
authorities. If a position does not meet the more likely than not
threshold for recognition in step one, no benefit is recorded until the first
subsequent period in which the more likely than not standard is met, the issue
is resolved with the taxing authority, or the statute of limitations
expires. Positions previously recognized are derecognized when a
Company subsequently determines the position no longer is more likely than not
to be sustained. Evaluation of tax positions, their technical
merits, and measurement using cumulative probability are highly subjective
management estimates. Actual results could differ materially from
these estimates.
As a
result of adopting the U.S. GAAP method of accounting for uncertain tax
positions, we recognized a reduction in retained earnings of $16.8 million at
January 1, 2007. The initial recording of the liability applying the
U.S. GAAP method of accounting for uncertain tax positions did not impact our
effective rate. The effect was recorded as a cumulative effect of
accounting change, the recording of a deferred tax asset, a reclassification in
our reserve for taxes account, and an increase to our valuation
allowance.
Included
in the unrecognized tax benefits of $46.6 million at December 31, 2009 was $20.5
million of tax benefit that, if recognized, would reduce our annual effective
tax rate.
Within
the next twelve-month period ending December 31, 2010, it is reasonably possible
that up to $0.2 million of unrecognized tax benefits will be recognized due to
the expiration of certain statues of limitation.
New
Accounting Standards
In
December 2007, the Financial Accounting Standards Board (FASB) issued FASB
Accounting Standards Codification (ASC) 805 Business Combinations. This
statement defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control. ASC 805 applies to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The adoption of the applicable provisions of ASC 805 as of
January 1, 2009 did not have a material impact on our consolidated results of
operations or statement of financial position or disclosures.
In
February 2008, the FASB issued a final Staff Position to allow a one-year
deferral of adoption of ASC 820 for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The ASC 820 excludes FASB ASC 840
Leases and its related interpretive accounting pronouncements that address
leasing transactions. We adopted ASC 820 effective January 1, 2009
for nonrecurring fair value measurements of nonfinancial assets and
liabilities.
In March
2008, the FASB issued FASB ASC 815 Derivatives and Hedging (ASC
815). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. Entities with instruments
subject to ASC 815 must provide more robust qualitative disclosures and expanded
quantitative disclosures. ASC 815 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application permitted. We adopted the
provisions of ASC 815 as of January 1, 2009.
In
November 2008, the FASB ratified ASC 323, which clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. ASC 323 is effective for fiscal years beginning after
December 15, 2008. The adoption of the applicable provisions of
ASC 323 as of January 1, 2009, did not have a material impact on our
consolidated results of operations or statement of financial position or
disclosures.
In June
2009, the FASB issued FASB ASC 810 Consolidation (ASC 810)
which
changes the approach in determining the primary beneficiary of a variable
interest entity (VIE) and requires companies to more frequently assess whether
they must consolidate VIEs. ASC 810 is effective for annual periods beginning
after November 15, 2009. We are evaluating the impact, if any, the
adoption of ASC 810 will have on our consolidated financial
statements.
Information
related to Quantitative and Qualitative Disclosures About Market Risk are set
forth in Item 1A – Risk Factors and Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operation, under the caption
“Risk Management”.
|
Index
to the Consolidated Financial Statements of Superior Industries
International, Inc.
|
||||
|
PAGE
|
||||
|
Reports
of Independent Registered Public Accounting Firms
|
36
|
|||
|
Financial
Statements
|
||||
|
Consolidated
Statements of Operations for the Fiscal Years
2009,
2008 and 2007
|
38 | |||
|
Consolidated
Balance Sheets as of Fiscal Year End 2009 and 2008
|
39
|
|||
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income
(Loss)
for the Fiscal Years 2009, 2008 and 2007
|
40 | |||
|
Consolidated
Statements of Cash Flows for the Fiscal Years
2009,
2008 and 2007
|
41 | |||
|
Notes
to Consolidated Financial Statements
|
42
|
|||
To the
Board of Directors and Shareholders of
Superior
Industries International, Inc.
We have
audited the accompanying consolidated balance sheet of Superior Industries
International, Inc. and subsidiaries (the "Company") as of December 27, 2009,
and the related consolidated statements of operations, shareholders equity, and
cash flows for the year then ended. Our audit also included the financial
statement schedule for the year ended December 27, 2009 listed in the Index at
Item 15. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audit.
We
conducted our audit 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such 2009 consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 27,
2009, and the results of operations and cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 27, 2009, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 12, 2010, expressed an
unqualified opinion on the Company's internal control over financial
reporting.
/s/
Deloitte and Touche, LLP
Los
Angeles, California
March 12,
2010
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of
Superior
Industries International, Inc.
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Superior Industries International, Inc. and its subsidiaries at
December 28, 2008 and the results of their operations and their cash flows for
each of the two years in the period ended December 28, 2008 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements 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 misstatements. An audit includes 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.
We believe that our audits provide a reasonable basis for our
opinion.
/s/PricewaterhouseCoopers
LLP
Los
Angeles, California
March 10,
2009
SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Thousands
of dollars, except share amounts)
|
Fiscal
Year Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
NET
SALES
|
$ | 418,846 | $ | 754,894 | $ | 956,892 | ||||||
|
Cost
of sales
|
429,015 | 748,317 | 924,400 | |||||||||
|
GROSS
PROFIT (LOSS)
|
(10,169 | ) | 6,577 | 32,492 | ||||||||
|
Selling,
general and administrative expenses
|
22,645 | 25,744 | 29,171 | |||||||||
|
Impairments
of long-lived assets
|
11,804 | 18,501 | - | |||||||||
|
INCOME
(LOSS) FROM OPERATIONS
|
(44,618 | ) | (37,668 | ) | 3,321 | |||||||
|
Interest
income, net
|
2,155 | 2,917 | 3,684 | |||||||||
|
Other
income (expense), net
|
(792 | ) | 6,178 | 3,195 | ||||||||
|
INCOME
(LOSS) BEFORE INCOME TAXES AND
|
||||||||||||
|
EQUITY
EARNINGS
|
(43,255 | ) | (28,573 | ) | 10,200 | |||||||
|
Income
tax (provision) benefit
|
(26,047 | ) | 1,778 | (6,263 | ) | |||||||
|
Equity
in earnings (loss) of joint ventures
|
(24,840 | ) | 742 | 5,355 | ||||||||
|
NET
INCOME (LOSS)
|
$ | (94,142 | ) | $ | (26,053 | ) | $ | 9,292 | ||||
|
EARNINGS
(LOSS) PER SHARE - BASIC AND DILUTED
|
$ | (3.53 | ) | $ | (0.98 | ) | $ | 0.35 | ||||
See notes
to consolidated financial statements.
SUPERIOR INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
(Thousands
of dollars, except per share amounts)
|
Fiscal
Year Ended December 31,
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 134,315 | $ | 146,871 | ||||
|
Short
term investments
|
6,152 | - | ||||||
|
Accounts
receivable, net
|
88,991 | 89,426 | ||||||
|
Inventories,
net
|
47,612 | 70,115 | ||||||
|
Income
taxes receivable
|
8,930 | 3,901 | ||||||
|
Deferred
income taxes
|
777 | 5,995 | ||||||
|
Assets
held for sale
|
6,771 | - | ||||||
|
Other
current assets
|
14,584 | 2,981 | ||||||
|
Total
current assets
|
308,132 | 319,289 | ||||||
|
Property,
plant and equipment, net
|
180,121 | 216,209 | ||||||
|
Investment
in joint venture
|
23,602 | 48,196 | ||||||
|
Non-current
deferred tax asset, net
|
7,781 | 39,152 | ||||||
|
Other
assets
|
22,217 | 5,693 | ||||||
|
Total
assets
|
$ | 541,853 | $ | 628,539 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 24,574 | $ | 26,318 | ||||
|
Accrued
expenses
|
42,202 | 35,239 | ||||||
|
Income
taxes payable
|
- | 644 | ||||||
|
Total
current liabilities
|
66,776 | 62,201 | ||||||
|
Non-current
tax liabilities (Note 7)
|
46,634 | 51,330 | ||||||
|
Non-current
deferred tax liabilities, net
|
22,385 | 22,535 | ||||||
|
Other
non-current liabilities
|
32,786 | 20,880 | ||||||
|
Commitments
and contingent liabilities (Note 11)
|
||||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock, no par value
|
||||||||
|
Authorized
- 1,000,000 shares
|
||||||||
|
Issued
- none
|
- | - | ||||||
|
Common
stock, no par value
|
||||||||
|
Authorized
- 100,000,000 shares
|
||||||||
|
Issued
and outstanding - 26,668,440 shares
|
||||||||
|
(26,668,440
shares at December 31, 2008)
|
56,854 | 54,634 | ||||||
|
Accumulated
other comprehensive loss
|
(56,576 | ) | (67,244 | ) | ||||
|
Retained
earnings
|
372,994 | 484,203 | ||||||
|
Total
shareholders' equity
|
373,272 | 471,593 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 541,853 | $ | 628,539 | ||||
See notes
to consolidated financial statements.
SUPERIOR INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHESIVE INCOME (LOSS)
(Thousands
of dollars, except per share amounts)
|
Common
Stock
|
Accumulated
Other
|
|||||||||||||||||||
|
Number
of
|
Comprehensive
|
Retained
|
||||||||||||||||||
|
Shares
|
Amount
|
Income
(Loss)
|
Earnings
|
Total
|
||||||||||||||||
|
BALANCE
AT FISCAL
|
||||||||||||||||||||
|
YEAR
END 2006
|
26,610,191 | $ | 48,399 | $ | (37,129 | ) | $ | 551,844 | $ | 563,114 | ||||||||||
|
Cumulative
effect of adoption of
|
||||||||||||||||||||
|
U.S.
GAAP method of accounting
|
||||||||||||||||||||
|
for
uncertain tax positions
|
- | - | - | (16,786 | ) | (16,786 | ) | |||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
- | - | - | 9,292 | 9,292 | |||||||||||||||
|
Other
comprehensive income
|
- | - | 8,551 | - | 8,551 | |||||||||||||||
|
Comprehensive
income
|
17,843 | |||||||||||||||||||
|
Stock-based
compensation expense
|
- | 3,073 | - | - | 3,073 | |||||||||||||||
|
Stock
options exercised
|
23,249 | 430 | - | - | 430 | |||||||||||||||
|
Repricing
of stock option grants
|
- | (57 | ) | - | - | (57 | ) | |||||||||||||
|
Tax
impact of stock options
|
- | (12 | ) | - | - | (12 | ) | |||||||||||||
|
Cash
dividend declared ($0.64 per share)
|
- | - | - | (17,032 | ) | (17,032 | ) | |||||||||||||
|
BALANCE
AT FISCAL
|
||||||||||||||||||||
|
YEAR
END 2007
|
26,633,440 | $ | 51,833 | $ | (28,578 | ) | $ | 527,318 | $ | 550,573 | ||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||
|
Net
loss
|
- | - | - | (26,053 | ) | (26,053 | ) | |||||||||||||
|
Other
comprehensive loss
|
- | - | (38,666 | ) | - | (38,666 | ) | |||||||||||||
|
Comprehensive
loss
|
(64,719 | ) | ||||||||||||||||||
|
Stock-based
compensation expense
|
- | 2,407 | - | - | 2,407 | |||||||||||||||
|
Stock
options exercised
|
35,000 | 617 | - | - | 617 | |||||||||||||||
|
Tax
impact of stock options
|
- | (223 | ) | - | - | (223 | ) | |||||||||||||
|
Cash
dividend declared ($0.64 per share)
|
- | - | - | (17,062 | ) | (17,062 | ) | |||||||||||||
|
BALANCE
AT FISCAL
|
||||||||||||||||||||
|
YEAR
END 2008
|
26,668,440 | $ | 54,634 | $ | (67,244 | ) | $ | 484,203 | $ | 471,593 | ||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||
|
Net
loss
|
- | - | - | (94,142 | ) | (94,142 | ) | |||||||||||||
|
Other
comprehensive income
|
- | - | 10,668 | - | 10,668 | |||||||||||||||
|
Comprehensive
loss
|
(83,474 | ) | ||||||||||||||||||
|
Stock-based
compensation expense
|
- | 2,380 | - | - | 2,380 | |||||||||||||||
|
Tax
impact of stock options
|
- | (160 | ) | - | - | (160 | ) | |||||||||||||
|
Cash
dividend declared ($0.64 per share)
|
- | - | - | (17,067 | ) | (17,067 | ) | |||||||||||||
|
BALANCE
AT FISCAL
|
||||||||||||||||||||
|
YEAR
END 2009
|
26,668,440 | $ | 56,854 | $ | (56,576 | ) | $ | 372,994 | $ | 373,272 | ||||||||||
See notes
to consolidated financial statements.
SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
(Thousands
of dollars)
|
Fiscal
Year Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
NET
INCOME (LOSS)
|
$ | (94,142 | ) | $ | (26,053 | ) | $ | 9,292 | ||||
|
Adjustment
to reconcile net income (loss) to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
30,779 | 43,712 | 42,925 | |||||||||
|
Deferred
income taxes
|
39,776 | (9,705 | ) | 5,890 | ||||||||
|
Equity
in earnings of joint ventures, net of dividends received
|
24,840 | (742 | ) | 258 | ||||||||
|
Impairments
of long-lived assets
|
11,804 | 18,501 | - | |||||||||
|
Stock-based
compensation
|
2,380 | 2,407 | 3,073 | |||||||||
|
Other
non-cash items
|
1,528 | 11,433 | 3,667 | |||||||||
|
Gain
on sale of available for sale securities
|
- | - | (2,906 | ) | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
4,212 | 27,192 | 7,136 | |||||||||
|
Inventories
|
24,064 | 30,148 | 11,037 | |||||||||
|
Other
assets
|
(11,616 | ) | (120 | ) | 2,330 | |||||||
|
Accounts
payable
|
(3,530 | ) | (22,755 | ) | (9,310 | ) | ||||||
|
Income
taxes
|
(5,879 | ) | 3,891 | 350 | ||||||||
|
Other
liabilities
|
5,035 | (8,379 | ) | 241 | ||||||||
|
Non-current
tax liabilities
|
(6,924 | ) | (1,658 | ) | 875 | |||||||
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
22,327 | 67,872 | 74,858 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase
of investments
|
(10,217 | ) | - | - | ||||||||
|
Additions
to property, plant and equipment
|
(8,484 | ) | (13,227 | ) | (37,639 | ) | ||||||
|
Proceeds
from sale of fixed assets
|
885 | 144 | 1,530 | |||||||||
|
Proceeds
from collection of notes receivable
|
- | 1,606 | - | |||||||||
|
Proceeds
from dissolution of TSL joint venture
|
- | 152 | - | |||||||||
|
Proceeds
from a held-to-maturity security
|
- | - | 9,750 | |||||||||
|
Proceeds
from sale of available-for-sale securities
|
- | - | 5,198 | |||||||||
|
Proceeds
from affordable-housing partnership investment
|
- | - | 1,289 | |||||||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(17,816 | ) | (11,325 | ) | (19,872 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Cash
dividends paid
|
(17,067 | ) | (17,062 | ) | (17,032 | ) | ||||||
|
Stock
options exercised
|
- | 617 | 430 | |||||||||
|
NET
CASH USED IN FINANCING ACTIVITIES
|
(17,067 | ) | (16,445 | ) | (16,602 | ) | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(12,556 | ) | 40,102 | 38,384 | ||||||||
|
Cash
and cash equivalents at the beginning of the year
|
146,871 | 106,769 | 68,385 | |||||||||
|
Cash
and cash equivalents at the end of the year
|
$ | 134,315 | $ | 146,871 | $ | 106,769 | ||||||
See notes
to consolidated financial statements.
SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Business
Description
Headquartered
in Van Nuys, California, our principal business is the design and manufacture of
aluminum road wheels for sale to OEMs. We are one of the largest suppliers of
cast and forged aluminum wheels to the world’s leading automobile and light
truck manufacturers, with wheel manufacturing operations in the United States,
Mexico and Hungary. Customers in North America represent the principal market
for our products, with approximately 18 percent of annual sales to international
customers.
GM, Ford
and Chrysler together represented approximately 82 percent of our annual sales
in each of the years 2009, 2008 and 2007. Although the loss of all or a
substantial portion of our sales to any of these customers would have a
significant adverse impact on our financial results, unless the lost volume
could be replaced, we believe this risk is partially offset due to long-term
relationships with each, including multi-year program arrangements. However,
current global economic and financial markets conditions, including severe
disruptions in the credit markets and the potential for a significant and
prolonged global economic recession, decreased demand for our products due to
the financial position of our OEM customers and general declines in the level of
automobile demand have put these multi-year arrangements at risk. Including our
50 percent-owned joint venture in Europe, we also manufacture aluminum wheels
for, Audi, BMW, Jaguar, Land Rover, Mercedes Benz, Mitsubishi, Nissan, Seat,
Skoda, Subaru, Suzuki, Toyota, Volkswagen and Volvo.
During
2008 and 2009, we took actions to reduce costs and more closely align our
capacity with sharply lower demand for aluminum wheels by the automobile and
light truck manufacturers. As a result of these actions and the
current economic environment, we have closed certain facilities, incurred
restructuring costs, and have recorded impairment charges on certain of our
long-lived assets. See Note 15 – Impairment of Long-lived Assets and
Other Charges for a discussion of these items.
Presentation
of Consolidated Financial Statements
The
consolidated financial statements include the accounts of the company and its
wholly owned subsidiaries. All significant intercompany transactions are
eliminated in consolidation. Affiliated 50 percent-owned joint ventures are
recorded in the financial statements using the equity method of accounting. The
carrying value of these equity investments is reported in long-term investments
and the company’s equity in net earnings of these investments is reported
separately in the consolidated statements of operations.
We have
made a number of estimates and assumptions related to the reporting of assets,
liabilities, revenues and expenses to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of
America. Generally, assets and liabilities that are subject to estimation and
judgment include the allowance for doubtful accounts, inventory valuation
allowance, depreciation and amortization periods of long-lived assets,
self-insurance accruals, fair value of stock-based compensation and income
taxes. While actual results could differ, we believe such estimates to be
reasonable.
Our
fiscal year is the 52- or 53-week period ending on the last Sunday of the
calendar year. The fiscal years 2009, 2008 and 2007 comprised the
52-week periods ended on December 27, 2009, December 28, 2008 and December 30,
2007, respectively. For convenience of presentation, all fiscal years
are referred to as beginning as of January 1 and ending as of December 31, but
actually reflect our financial position and results of operations for the
periods described above.
Cash
and Cash Equivalents
Cash and
cash equivalents generally consist of cash, certificates of deposit, and money
market funds with original maturities of three months or less. Our
cash and cash equivalents are not subject to significant interest rate risk due
to the short maturities of these investments. Certificates of deposit
whose original maturity is three months or less are
classified
as a cash equivalent, certificates of deposit whose original maturity is between
four months and one year are classified as a short-term investment and
certificates of deposit whose original maturity is greater than one year are
classified as other assets in our consolidated balance sheet. The
purchase of any certificate of deposit that is classified as short-term
investments or other assets appear in the investing section of our consolidated
statement of cash flows. At times throughout the year and at
year-end, cash balances held at financial institutions were in excess of
federally insured limits.
Restricted
Deposits
Due to
the tightened credit conditions and the recent turmoil in the automotive
industry, the financial institutions that we do business with have required that
we maintain various deposits as a compensating balance in the event of our
default on our workers compensation and natural gas obligations. We
purchased a total of $6.2 million in certificates of deposit during 2009 that
mature within the next twelve months that are used to secure our workers’
compensation obligations in lieu of collateralized letters of
credit. These certificates of deposit are classified as short term
investments on our consolidated balance sheet and are restricted in
use. We also purchased $4.1 million in certificates of deposit during
the 2009 that mature after the end of our fiscal year 2010 that are used to
secure our natural gas contracts in Mexico and are restricted in
use. These certificates of deposit are classified as long-term
investments in the other assets line of our consolidated balance
sheet. All of the aforementioned cash deposits were either not
required or were not the most economical form to secure our obligations during
the previous years. It is our intention to eliminate any restricted
cash deposits in the future when credit conditions return to normal and other
forms of securitization become more economically feasible.
Fair
Values of Financial Instruments and Commitments
The
company adopted the new GAAP accounting guidance relating to fair value
measurements and disclosures effective January 1, 2008. The new guidance
clarifies the definition of fair value, prescribes methods for measuring fair
value, establishes a fair value hierarchy based on the inputs used to measure
fair value and expands disclosures about the use of fair value
measurements. The valuation techniques utilized are based upon
observable and unobservable inputs. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect
internal market assumptions. These two types of inputs create the following fair
value hierarchy:
Level 1 –
Quoted prices for identical instruments in active markets.
Level 2 –
Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level 3 –
Significant inputs to the valuation model are unobservable.
The
carrying amounts for cash and cash equivalents, investments in certificates of
deposit, accounts receivable, accounts payable and accrued expenses approximate
their fair values due to the short period of time until maturity. Fair values of
our natural gas contracts are discussed further in Note 11 – Commitments and
Contingent Liabilities, and are based upon quoted market prices using the market
approach on a recurring basis and are considered Level 1 inputs within the fair
value hierarchy provided in accordance with Generally Accepted Accounting
Principles in the United States of America (U.S. GAAP).
Inventories
Inventories,
which are categorized as raw materials, work-in-process or finished goods, are
stated at the lower of cost or market using the first-in, first-out
method.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost, less accumulated depreciation. The cost
of additions, improvements and interest during construction, if any, are
capitalized. Our maintenance and repair costs are charged to expense
when incurred. Depreciation is calculated generally on the straight-line method
based on the estimated useful lives of the assets.
|
Classification
|
|
Expected
Useful Life
|
||||||
|
Computer
equipment
|
3
to 5 years
|
|||||||
|
Production
machinery and equipment
|
7
to 10 years
|
|||||||
|
Buildings
|
25
years
|
|||||||
When
property, plant and equipment is replaced, retired or disposed of, the cost and
related accumulated depreciation are removed from the accounts. Property, plant
and equipment no longer used in operations, which are generally insignificant in
amount, are stated at the lower of cost or estimated net realizable value. Gains
and losses, if any, are recorded as a component of operating income if the
disposition relates to an operating asset. If a non-operating asset
is disposed of, any gains and losses are recorded in other income or expense in
the period of disposition or write down.
Pre-Production
Costs Related to Long-Term Supply Arrangements
We incur
pre-production engineering and tooling costs related to the products produced
for our customers under long-term supply agreements. We expense all
pre-production engineering costs for which reimbursement is not contractually
guaranteed by the customer or is in excess of the contractually guaranteed
reimbursement amount. In addition, we expense all pre-production tooling costs
related to customer-owned tools for which reimbursement is not contractually
guaranteed by the customer. We amortize the cost of the customer-owned tooling
over the expected life of the wheel program on a straight line
basis. Also, we defer any reimbursements made to us by our customer
and recognize the tooling reimbursement revenue over the same period in which
the tooling is in use. Customer-owned tooling for which reimbursement is
contractually guaranteed by the customer included in our long-term other assets
as of December 31, 2009 was $11.8 million which is net of $15.1 million of
accumulated amortization. Deferred tooling reimbursement revenues
classified as part of accrued expenses and other non-current liabilities were
$7.0 million and $4.8 million, respectively, as of December 31,
2009.
Impairment
of Long-Lived Assets and Investments
The
company’s policy regarding long-lived assets is to evaluate the recoverability
of its assets at least annually or when the facts and circumstances suggest that
the assets may be impaired. This assessment of recoverability is
performed based on the estimated undiscounted cash flows compared to the
carrying value of the assets. If the future cash flows (undiscounted
and without interest charges) are less than the carrying value, a write-down
would be recorded to reduce the related asset to its estimated fair
value. See Note 15 – Impairment of Long-Lived Assets and Other
Charges for further discussion of asset impairments.
The
company’s policy regarding its equity method investment is to evaluate the
investment for an other than temporary impairment (OTTI) when there are
indicators of a loss in value. We generally determine if there is an OTTI by
using a discounted cash flow model and marketplace multiples, and if the present
value of the discounted cash flows is less than the carrying balance of the
investment, then the decline in the fair value of the investment is
considered to be other-than-temporary. If a loss in the value
of the investment is determined to be other-than temporary, then the decline in
value is recognized in earnings.
Derivative
Instruments and Hedging Activities
We may
periodically enter into foreign currency forward contracts to reduce the risk
from exchange rate fluctuations associated with future purchase commitments,
such as wheel purchases denominated in euros from our 50 percent-owned joint
venture in Hungary. This type of risk management activity, which attempts to
protect our planned gross margin as of the date of the purchase commitment, may
qualify as a cash flow hedge under U.S. GAAP. Accordingly, we assess
whether the cash flow hedge is effective both at inception and periodically
thereafter. The effective portion of the related gains and losses is recorded as
an asset or liability in the consolidated balance sheets with the offset as a
component of other comprehensive income (loss) in shareholders’ equity. The
ineffective portion of related gains or losses, if any, is reported in current
earnings. As hedged transactions are consummated, amounts previously accumulated
in other comprehensive income (loss) are reclassified into current earnings. At
December 31, 2009 and 2008, we held no foreign currency forward
contracts.
We also
enter into contracts to purchase certain commodities used in the manufacture of
our products, such as aluminum, natural gas, and other raw materials. Typically,
any such commodity commitments are expected to be purchased and used over a
reasonable period of time in the normal course of business. Accordingly, under
U.S. GAAP, such commodity commitments would not be accounted for as a
derivative, unless there is a change in the facts or circumstances that causes
management to believe that these commitments would not be used in the normal
course of business. See Note 11 – Commitments and Contingent
Liabilities for additional information pertaining to these purchase
commitments.
Foreign
Currency Transactions and Translation
We have
foreign subsidiaries with operations in Mexico and Hungary whose functional
currency is the peso and the euro, respectively. These subsidiaries
have monetary assets and liabilities that are denominated in currencies that are
different than the functional and are translated into the functional currency of
the entity using the exchange rate in effect at the end of each accounting
period. Any gains and losses recorded as a result of the
remeasurement of monetary assets and liabilities into the functional currency
are reflected as transaction gains and losses and included in other income
(expense) in the consolidated statement of operations. For the years ended
December 31, 2009, 2008 and 2007, we had foreign currency transaction (losses)
and gains of ($0.8) million, $5.5 million and $0.5 million, respectively, which
are included in other income (expense) in the consolidated statements of
operations.
When our
foreign subsidiaries translate their financial statements from the functional
currency to the reporting currency, the balance sheet accounts are translated
using the exchange rates in effect at the end of the accounting period, and
retained earnings is translated using historical rates. The income statement
accounts are translated at the weighted average of exchange rates during the
period and the cumulative effect of translation is recorded as a separate
component of accumulated other comprehensive income (loss) in shareholders'
equity, as reflected in Note 14 – Other Comprehensive Income
(Loss). The value of the Mexican peso increased by 5 percent in
relation to the U.S. dollar in 2009. The euro experienced a 2 percent
increase versus the U.S. dollar in 2009.
Revenue
Recognition
Sales of
products and any related costs are recognized when title and risk of loss
transfers to the purchaser, generally upon shipment. Tooling reimbursement
revenues and initial tooling that are reimbursed by our customers are deferred
and recognized over the expected life of the wheel program on a straight line
basis. Changes in the facts and circumstances of individual wheel programs may
accelerate the amortization of deferred tooling reimbursement
revenues. Recognized tooling reimbursement revenues totaled $10.0
million in 2009, $16.5 million in 2008, and $12.4 million in 2007, and are
included in net sales in the consolidated statements of operations.
Research
and Development
Research
and development costs (primarily engineering and related costs), which are
expensed as incurred, are included in cost of sales in the consolidated
statements of operations. Amounts expended during each of the three
years in the period ended December 31, 2009 were $3.1 million in 2009, $4.7
million in 2008, and $6.3 million in 2007. The decrease experienced
in 2008 was due to closure of our engineering center in Van Nuys, California,
and the reduction of wheel program development activities in the current
year.
Stock-Based
Compensation
Our 2008
Equity Incentive Plan authorizes us to issue incentive and non-qualified stock
options, as well as stock appreciation rights, restricted stock and performance
units to our non-employee directors, officers, employees and consultants
totaling up to 3.5 million shares of common stock. No more than 100,000 shares
may be used under such plan as “full value” awards, which include restricted
stock and performance units. It is our policy to issue shares from
authorized but not issued shares upon the exercise of stock
options. At December 31, 2009, there were 2.9 million shares
available for future grants under this plan. Options are granted at not less
than fair market value on the date of grant and expire no later than ten years
after the date of grant. Options granted under this plan to employees
and non-employee directors require no less than a three year ratable vesting
period if vesting is based on continuous service. Vesting periods may
be shorter than three years if performance based.
We
account for stock-based compensation using the fair value recognition method in
accordance with U.S. GAAP. We recognize these compensation costs net
of the applicable forfeiture rate and recognize the compensation costs for only
those shares expected to vest on a straight-line basis over the requisite
service period of the award, which is generally the option vesting term of four
years. We estimate the forfeiture rate based on our historical
experience.
Income
Taxes
We
account for income taxes using the asset and liability method. The asset and
liability method requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of temporary differences that currently
exist between the tax basis and financial reporting basis of our assets and
liabilities. We calculate current and deferred tax provisions based on estimates
and assumptions that could differ from actual results reflected on the income
tax returns filed during the following years. Adjustments based on filed returns
are recorded when identified in the subsequent years.
The
effect on deferred taxes for a change in tax rates is recognized in income in
the period of enactment. In assessing the realizability of deferred tax assets,
we consider whether it is more likely than not that some portion of the deferred
tax assets will not be realized. A valuation allowance is provided for deferred
income taxes when, in our judgment, based upon currently available information
and other factors, it is more likely than not that all or a portion of such
deferred income tax assets will not be realized. The determination of the need
for a valuation allowance is based on an on-going evaluation of current
information including, among other things, historical operating results,
estimates of future earnings in different taxing jurisdictions and the expected
timing of the reversals of temporary differences. We believe that the
determination to record a valuation allowance to reduce a deferred income tax
asset is a significant accounting estimate because it is based on an estimate of
future taxable income in the United States and certain other jurisdictions,
which is susceptible to change and may or may not occur, and because the impact
of adjusting a valuation allowance may be material.
The
company adopted the U.S. GAAP method of accounting for uncertain tax positions
during 2007. The purpose of this method is to clarify accounting for
uncertain tax positions recognized. The U.S. GAAP method of
accounting for uncertain tax positions utilizes a two-step approach to evaluate
tax positions. Recognition, step one, requires evaluation of the tax
position to determine if based solely on technical merits it is more likely than
not to be sustained upon examination. Measurement, step two, is
addressed only if a position is more likely than not to be
sustained. In step two, the tax benefit is measured as the largest
amount of benefit, determined on a cumulative probability basis, which is more
likely than not to be realized upon ultimate settlement with tax
authorities. If a position does not meet the more likely than not
threshold for recognition in step one, no benefit is recorded until the first
subsequent period in which the more likely than not standard is met, the issue
is resolved with the taxing authority, or the statute of limitations
expires. Positions previously recognized are derecognized when we
subsequently determine the position no longer is more likely than not to be
sustained. Evaluation of tax positions, their technical merits,
and measurement using cumulative probability are highly subjective management
estimates. Actual results could differ materially from these
estimates.
Presently
we have not recorded a deferred tax liability for temporary differences related
to investments in foreign subsidiaries that are essentially permanent in
duration. These temporary differences may become taxable upon a repatriation of
earnings from the subsidiaries or a sale or liquidation of the subsidiaries. At
this time the company does not have any plans to repatriate income from its
foreign subsidiaries.
Earnings
(Loss) Per Share
As
summarized below, basic earnings (loss) per share is computed by dividing net
income (loss) for the period by the weighted average number of common shares
outstanding for the period. For purposes of calculating diluted
earnings per share, net income is divided by the total of the weighted average
shares outstanding plus the dilutive effect of our outstanding stock options
under the treasury stock method, which includes consideration of stock-based
compensation required by U.S. GAAP.
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars, except per share amounts)
|
||||||||||||
|
Basic Earnings (Loss) Per
Share
|
||||||||||||
|
Reported
net income (loss)
|
$ | (94,142 | ) | $ | (26,053 | ) | $ | 9,292 | ||||
|
Weighted
average shares outstanding
|
26,668 | 26,655 | 26,617 | |||||||||
|
Basic
earnings (loss) per share
|
$ | (3.53 | ) | $ | (0.98 | ) | $ | 0.35 | ||||
|
Diluted Earnings (Loss) Per
Share
|
||||||||||||
|
Reported
net income (loss)
|
$ | (94,142 | ) | $ | (26,053 | ) | $ | 9,292 | ||||
|
Weighted
average shares outstanding
|
26,668 | 26,655 | 26,617 | |||||||||
|
Weighted
average dilutive stock options
|
- | - | 18 | |||||||||
|
Weighted
average shares outstanding - diluted
|
26,668 | 26,655 | 26,635 | |||||||||
|
Diluted
earnings (loss) per share
|
$ | (3.53 | ) | $ | (0.98 | ) | $ | 0.35 | ||||
The
following potential shares of common stock were excluded from the diluted
earnings per share calculations because they would have been anti-dilutive due
to their exercise prices exceeding the market prices for the respective periods:
for the year ended December 31, 2009, options to purchase 3,466,575 shares at
prices ranging from $13.15 to $43.22; for the year ended December 31, 2008,
options to purchase 3,214,737 shares at prices ranging from $17.55 to $43.22 per
share; and for the year ended December 31, 2007, options to purchase 3,147,792
shares at prices ranging from $21.72 to $43.22 per
share. Additionally, stock options to purchase 135,000 shares of
common stock were excluded from the 2009 diluted earning per share because they
would have been anti-dilutive due to our net loss position.
New
Accounting Standards
In
December 2007, the Financial Accounting Standards Board (FASB) issued FASB
Accounting Standards Codification (ASC) 805 Business Combinations. This
statement defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control. ASC 805 applies to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The adoption of the applicable provisions of ASC 805 as of
January 1, 2009 did not have a material impact on our consolidated results of
operations or statement of financial position or disclosures.
In
February 2008, the FASB issued a final Staff Position to allow a one-year
deferral of adoption of ASC 820 for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The ASC 820 excludes FASB ASC 840
Leases and its related interpretive accounting pronouncements that address
leasing transactions. We adopted ASC 820 effective January 1, 2009
for nonrecurring fair value measurements of nonfinancial assets and
liabilities.
In March
2008, the FASB issued FASB ASC 815 Derivatives and Hedging (ASC
815). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. Entities with instruments
subject to ASC 815 must provide more robust qualitative disclosures and expanded
quantitative disclosures. ASC 815 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application permitted. We adopted the
provisions of ASC 815 as of January 1, 2009.
In
November 2008, the FASB ratified ASC 323, which clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. ASC 323 is effective for fiscal years beginning after
December 15, 2008. The adoption of the applicable provisions of
ASC 323 as of January 1, 2009, did not have a material impact on our
consolidated results of operations or statement of financial position or
disclosures.
In June
2009, the FASB issued FASB ASC 810 Consolidation (ASC 810)
which
changes the approach in determining the primary beneficiary of a variable
interest entity (VIE) and requires companies to more frequently assess whether
they must consolidate VIEs. ASC 810 is effective for annual periods beginning
after November 15, 2009. We are evaluating the impact, if any, the
adoption of ASC 810 will have on our consolidated financial
statements.
The
Chairman and Chief Executive Officer is our chief operating decision maker
(CODM). The CODM evaluates both consolidated and disaggregated
financial information at each manufacturing facility in deciding how to allocate
resources and assess performance. Each manufacturing facility
functions as a separate cost center, manufactures the same products, ships
product to the same group of customers, utilizes the same cast manufacturing
process and as a result, production can be transferred among our
facilities. Accordingly, we operate as a single integrated business
and, as such, have only one operating segment - automotive
wheels.
|
Net
sales and net property, plant and equipment by geographic area are
summarized below:
|
|||||||||||||||
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||||
|
(Thousands
of dollars)
|
|||||||||||||||
|
Net
sales:
|
|||||||||||||||
|
U.S.
|
$
|
144,970
|
$
|
415,059
|
$
|
568,489
|
|||||||||
|
Mexico
|
273,876
|
339,835
|
388,403
|
||||||||||||
|
Consolidated
net sales
|
$
|
418,846
|
$
|
754,894
|
$
|
956,892
|
|||||||||
|
December
31,
|
2009
|
2008
|
|||||||||||||
|
(Thousands
of dollars)
|
|||||||||||||||
|
Property,
plant and equipment, net:
|
|||||||||||||||
|
U.S.
|
$
|
48,311
|
$
|
80,016
|
|||||||||||
|
Mexico
|
131,810
|
136,193
|
|||||||||||||
|
Consolidated
property, plant and equipment, net
|
$
|
180,121
|
$
|
216,209
|
|||||||||||
|
December
31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Trade
receivables
|
$ | 82,065 | $ | 82,647 | ||||
|
Receivable
from joint venture
|
2,764 | 482 | ||||||
|
Unbilled
tooling reimbursement receivables
|
2,767 | 4,628 | ||||||
|
Other
receivables
|
1,881 | 4,797 | ||||||
| 89,477 | 92,554 | |||||||
|
Allowance
for doubtful accounts
|
(486 | ) | (3,128 | ) | ||||
|
Accounts
receivable, net
|
$ | 88,991 | $ | 89,426 | ||||
The following percentages of our consolidated net sales were made to GM, Ford and Chrysler: 2009 - 34 percent, 35 percent and 12 percent; 2008 - 40 percent, 28 percent and 14 percent; and 2007 - 36 percent, 33 percent and 13 percent, respectively. These three customers represented 90 percent and 79 percent of trade receivables at December 31, 2008 and 2007, respectively. Shortly after the bankruptcy filings by Chrysler on April 30, 2009 and by GM on June 1, 2009, both customers designated us as a key supplier, indicating that all pre- and post-petition accounts receivable would be paid in accordance with payment terms existing prior to the bankruptcy filing dates. As of December 31, 2009, all of the pre-petition accounts receivable balances for both GM and Chrysler were substantially paid.
|
December
31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Raw
materials
|
$ | 7,281 | $ | 12,755 | ||||
|
Work-in-process
|
19,230 | 22,266 | ||||||
|
Finished
goods
|
21,101 | 35,094 | ||||||
|
Inventories,
net
|
$ | 47,612 | $ | 70,115 | ||||
|
December
31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Land
and buildings
|
$ | 69,589 | $ | 86,600 | ||||
|
Machinery
and equipment
|
386,785 | 464,674 | ||||||
|
Leasehold
improvements and others
|
8,379 | 9,359 | ||||||
|
Construction
in progress
|
8,444 | 18,728 | ||||||
| 473,197 | 579,361 | |||||||
|
Accumulated
depreciation
|
(293,076 | ) | (363,152 | ) | ||||
|
Property,
plant and equipment, net
|
$ | 180,121 | $ | 216,209 | ||||
The asset impairment charges of $11.8 million in 2009 and, $18.5 million in 2008 were recorded in the appropriate fixed asset cost categories in the table above as discussed in Note 15 – Impairment of Long-Lived Assets and Other Charges. The net book values of all assets available for sale at the Pittsburg and Johnson City plants subsequent to impairment were $4.6 million and $2.2 million, respectively which have been included in assets held for sale in the consolidated balance sheet as of December 31, 2009.
In 1995,
we entered into a joint venture with Otto Fuchs, to form Suoftec to manufacture
cast and forged aluminum wheels in Hungary for the European automobile industry.
During each of the three years in the period ended December 31, 2009, we
acquired cast and forged wheels from this joint venture, totaling $1.3 million
in 2009, $21.0 million in 2008 and $50.0 million in 2007. At December
31, 2009, accounts payable owed to Suoftec totaled $0.9 million. There were no
payables to Suoftec for wheel purchases at the end of 2008.
Because our 50 percent-owned joint venture in Hungary was also affected by similar economic conditions impacting the European automotive industry, management has tested the long-lived assets of the Hungarian joint venture, Suoftec, for impairment at the end of each fiscal quarter in 2009 in accordance with U.S. GAAP. Due to the general decline in the European automotive industry, during the fourth quarter of 2009, the projected future shipments declined sharply compared to the projections prepared earlier in the year. The impairment analysis performed at the end of the year indicated that the estimated undiscounted future cash flows from the reduced projected shipments of our joint venture facility would not be sufficient to recover the carrying value of long-lived assets attributable to that facility. As a result, our joint venture recorded a $28.8 million pretax impairment charge against their long-lived assets reducing the carrying value of the asset grouping of $76.0 million to the asset grouping’s fair value. We recorded our share of the charge, or $14.4 million, in our equity in earnings (losses) from joint ventures during the fourth quarter of 2009. The estimated fair value of the Suoftec asset group was determined using a discounted cash flow model with the resulting value compared with comparable valuation multiples and was determined using Level 3 inputs within the fair value hierarchy in accordance with U.S. GAAP. The discounted cash flow analysis included several key assumptions including the timing of cost savings initiatives that will be implemented and realized, resolution of certain production and quality issues, and margin improvement on new business all of which may never materialize or may not be sufficient to offset the impact of on-going pricing pressures and reductions in customer demand in future periods. There is no guarantee that we will achieve our estimated results or that future impairment charges will not be recorded.
We have
also tested our investment in Suoftec for an OTTI by using a discounted cash
flow model and marketplace multiples to determine the fair value of our
investment in Suoftec. This analysis indicated that there was not an OTTI as of
December 31, 2009 primarily due to the reduction in the investment during the
current year caused by the impairment recorded by Suoftec during the fourth
quarter of 2009 discussed above.
Included
below are summary statements of operations and balance sheets for Suoftec, which
is 50 percent-owned, non-controlled and, therefore, not consolidated but
accounted for using the equity method.
|
Year
Ended December 31,
|
||||||||||||
|
Summary
Statements of Operations
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Net
sales
|
$ | 83,068 | $ | 137,173 | $ | 145,707 | ||||||
|
Cost
of sales
|
100,418 | 134,226 | 130,769 | |||||||||
|
Gross
profit
|
(17,350 | ) | 2,947 | 14,938 | ||||||||
|
Selling,
general and administrative expenses
|
1,895 | 2,612 | 2,011 | |||||||||
|
Impairment
of long-lived assets
|
28,759 | - | - | |||||||||
|
Income
from operations
|
(48,004 | ) | 335 | 12,927 | ||||||||
|
Other
income (expense), net
|
(1,046 | ) | 165 | 812 | ||||||||
|
Income
before income taxes
|
(49,050 | ) | 500 | 13,739 | ||||||||
|
Income
tax provision
|
(1,079 | ) | (111 | ) | (2,569 | ) | ||||||
|
Net
income
|
$ | (50,129 | ) | $ | 389 | $ | 11,170 | |||||
|
Superior's
share of Suoftec net income (loss)
|
$ | (25,065 | ) | $ | 195 | $ | 5,585 | |||||
|
Intercompany
profit elimination
|
225 | 547 | (428 | ) | ||||||||
|
Superior's
equity in earnings (loss) of Suoftec
|
(24,840 | ) | 742 | 5,157 | ||||||||
|
Equity
in earnings of Topy-Superior Ltd
|
- | - | 198 | |||||||||
|
Total
equity in earnings (loss) of joint ventures
|
$ | (24,840 | ) | $ | 742 | $ | 5,355 | |||||
|
Summary
Balance Sheets as of December 31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Cash
and cash equivalents
|
$ | 14,898 | $ | 25,403 | ||||
|
Accounts
receivable, net
|
14,827 | 11,984 | ||||||
|
Inventories,
net
|
17,189 | 20,750 | ||||||
|
Total
current assets
|
46,914 | 58,137 | ||||||
|
Property,
plant and equipment, net
|
13,897 | 47,435 | ||||||
|
Other
assets
|
1,169 | 1,281 | ||||||
|
Total
assets
|
61,980 | 106,853 | ||||||
|
Current
liabilities
|
14,413 | 11,311 | ||||||
|
Non-current
liabilities
|
363 | 148 | ||||||
|
Total
liabilities
|
14,776 | 11,459 | ||||||
|
Net
assets
|
$ | 47,204 | $ | 95,394 | ||||
|
Superior's
share of net assets
|
$ | 23,602 | $ | 47,697 | ||||
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Income
(loss) from continuing operations before income
|
||||||||||||
|
taxes
and equity earnings:
|
||||||||||||
|
Domestic
|
$ | (51,932 | ) | $ | (41,407 | ) | $ | (13,168 | ) | |||
|
International
|
8,677 | 12,834 | 23,368 | |||||||||
| $ | (43,255 | ) | $ | (28,573 | ) | $ | 10,200 | |||||
The
(provision) benefit for income taxes is comprised of the following:
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Current
Taxes
|
||||||||||||
|
Federal
|
$ | 18,765 | $ | (758 | ) | $ | (41 | ) | ||||
|
State
|
183 | (213 | ) | 1,040 | ||||||||
|
Foreign
|
(5,218 | ) | (6,956 | ) | (1,372 | ) | ||||||
|
Total
Current
|
13,730 | (7,927 | ) | (373 | ) | |||||||
|
Deferred
Taxes
|
||||||||||||
|
Federal
|
(35,154 | ) | 12,832 | 2,714 | ||||||||
|
State
|
(400 | ) | 1,077 | (605 | ) | |||||||
|
Foreign
|
(4,222 | ) | (4,204 | ) | (7,999 | ) | ||||||
|
Total
Deferred Taxes
|
(39,776 | ) | 9,705 | (5,890 | ) | |||||||
|
(Provision)
benefit for income taxes:
|
$ | (26,046 | ) | $ | 1,778 | $ | (6,263 | ) | ||||
The following is a reconciliation
of the United States federal tax rate to our effective income tax
rate:
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||||
|
Statutory
rate - (provision) benefit
|
35.0
|
%
|
35.0
|
%
|
(35.0)
|
%
|
|||||||||
|
State
tax (provisions), net of federal income tax benefit
(1)
|
10.6
|
5.0
|
(0.6)
|
||||||||||||
|
Permanent
differences
(2)
|
(5.0)
|
(12.0)
|
(20.9)
|
||||||||||||
|
Tax
credits
|
0.1
|
0.7
|
0.7
|
||||||||||||
|
Foreign
income taxed at rates other than the statutory rate
(3)
|
1.4
|
(0.3)
|
19.6
|
||||||||||||
|
Valuation
allowance
(4)
|
(106.4)
|
(25.2)
|
(6.5)
|
||||||||||||
|
Changes
in tax liabilities, net
(5)
|
7.3
|
(0.6)
|
(18.3)
|
||||||||||||
|
Other
|
(3.2)
|
3.6
|
(0.4)
|
||||||||||||
|
Effective
income tax rate
|
(60.2)
|
%
|
6.2
|
%
|
(61.4)
|
%
|
|||||||||
|
1)
|
Actual
state tax provisions and benefits, net of federal income tax benefit
during 2007, 2008, and 2009, were a provision of $0.1 million, a
benefit of $1.4 million, and a benefit of $4.6 million,
respectively. The primary driver in the increase in state
provision for 2009 is the result of generating net state income tax losses
during those periods.
|
|
2)
|
Actual
permanent differences impacting the income tax provisions during 2007,
2008 and 2009 were $2.1 million, $3.4 million, and $2.2 million,
respectively. There were no material changes in the permanent
differences for each of the periods presented. The primary
drivers of the percentage changes in the effective income tax rate related
to permanent differences were the fluctuating levels of income (loss) from
continuing operations before income taxes and equity
earnings.
|
|
3)
|
During
2007, a greater proportion of our income was generated in foreign
jurisdictions when compared to 2008 and 2009. The impact of foreign
income taxed at rates other than the statutory rate on our reported tax
provisions was $2.0 million in 2007, $0.1 million in 2008, and $0.6
million in 2009. During these same periods, our income (loss) from
continuing operations before income taxes and equity earnings was $10.2
million in 2007, ($28.6) million in 2008, and ($43.3) million in 2009.
The higher proportion of foreign earnings in 2007 as a percentage of
the lower consolidated income from continuing operations before taxes and
equity earnings in that year resulted in the significant impact on the
effective income tax rate in 2007.
|
|
4)
|
During
2007, 2008, and 2009, increases in our valuation allowances resulted in
additional tax expense of $0.7 million, $7.2 million, and $45.5 million,
respectively. The significant increase in the tax expense
related to valuation allowances during 2009 was due to an increase in the
valuation allowance recorded for our beginning federal deferred tax assets
in the amount of $37.4 million, an increase related to current year
deferred tax items for which a valuation allowance was established in the
amount of $7.5 million, and an increase in the valuation allowance
recorded for our foreign net operating loss carryforwards of $0.6 million
for which we have determined that it was more likely than not that the
benefit would not be realized. The significant increase
in the tax expense related to valuation
allowance during
2008 was due to an increase in the valuation allowances recorded for our
foreign net operating loss carryforwards and foreign tax credit
carryforwards for which we determined that it was more likely than not
that the benefit would not be
realized.
|
|
5)
|
The
impact of changes in our tax liabilities resulted in additional tax
expense of $1.9 million, expense of $0.2 million, and a benefit of $3.2
million during 2007, 2008, and 2009, respectively. Effective
January 1, 2007, we adopted the U.S. GAAP method of accounting for
uncertain tax positions. The increase in tax liabilities during
2007 relates to accruals for interest and penalties on the liability
established upon adoption of the U.S. GAAP method of accounting for
uncertain tax positions at the beginning of that year. In 2008,
we continued to accrue interest and penalties on the tax liabilities
established for uncertain tax positions. However, also during
2008, we decreased the tax liabilities as a result of the expiration of
statutes of limitations on years for which a liability had originally been
established upon adoption of the U.S. GAAP method of accounting for
uncertain tax positions. The increase in tax liabilities
due to accruals for interest and penalties, minus the decrease due to the
expiration of statutes of limitations, resulted in a net increase of $0.2
million to our 2008 income tax provision. During 2009, we
continued to accrue interest and penalties on beginning tax liabilities
which resulted in increases to our tax provision in the amount of $4.3
million. During 2009, we completed certain audits that resulted
in a net reduction to the tax liability which decreased our tax provision
in the amount of $7.5 million.
|
We are a
multinational company subject to taxation in many jurisdictions. We
record liabilities dealing with uncertainty in the application of complex tax
laws and regulations in the various taxing jurisdictions in which we
operate. If we determine that payment of these liabilities will be
unnecessary, we reverse the liability and recognize the tax benefit during the
period in which we determine the liability no longer
applies. Conversely, we record additional tax liabilities or
valuation allowances in a period in which we determine that a recorded liability
is less than
we expect
the ultimate assessment to be or that a tax asset is impaired. The
effects of recording liability increases and decreases are included in the
effective income tax rate.
Tax
effects of temporary differences that gave rise to significant portions of the
deferred tax assets and deferred liabilities at December 31, 2009 and
2008:
|
December
31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Deferred
Tax Assets
|
||||||||
|
Other
comprehensive income and loss adjustments
|
$ | - | $ | 847 | ||||
|
Liabilities
deductible in the future
|
6,569 | 5,940 | ||||||
|
Deferred
compensation
|
13,948 | 12,463 | ||||||
|
Net
loss carryforward
|
24,255 | 22,632 | ||||||
|
Tax
credit carryforward
|
6,640 | 12,813 | ||||||
|
Financial
and tax accounting differences associated with foreign
operations
|
26,308 | 25,256 | ||||||
|
Other
|
877 | 114 | ||||||
|
Total
before valuation allowances
|
78,597 | 80,065 | ||||||
|
Valuation
allowances
|
(66,143 | ) | (19,357 | ) | ||||
|
Net
deferred tax assets
|
12,454 | 60,708 | ||||||
|
Deferred
Tax Liabilities
|
||||||||
|
Differences
between the book and tax basis of property, plant
|
||||||||
|
and
equipment
|
(17,286 | ) | (34,885 | ) | ||||
|
Differences
between financial and tax accounting associated
|
||||||||
|
with
foreign operations
|
(8,556 | ) | (2,813 | ) | ||||
|
Other
|
(439 | ) | (398 | ) | ||||
|
Deferred
tax liabilities
|
(26,281 | ) | (38,096 | ) | ||||
|
Net
Deferred Tax Assets (Liabilities)
|
$ | (13,827 | ) | $ | 22,612 | |||
As of December 31, 2009 and 2008, we had approximately $13.8 million of deferred tax liability and $22.6 million of deferred tax assets, respectively, the majority of which are in Mexico and the U.S. We have recorded valuation allowances of $66.1 million and $19.4 million against our deferred tax assets at December 31, 2009 and 2008, respectively, based on our assessment of our ability to utilize these deferred tax assets. The valuation allowances established relate to all U. S. and state deferred tax assets, and foreign net operating loss carryforwards for which we have determined that it is more likely than not that a benefit will not be realized.
Realization
of any of our deferred tax assets at December 31, 2009 is dependent on the
company generating sufficient taxable income in the future. The
determination of whether or not to record a full or partial valuation allowance
on our deferred tax assets is a critical accounting estimate requiring a
significant amount of judgment on the part of management. We perform
our analysis on a jurisdiction by jurisdiction basis.
In
considering whether a valuation allowance was required for our U.S. federal
deferred tax assets, we considered all available positive and negative
evidence. Positive evidence considered included reversing taxable
temporary differences and restructuring our operations in line with the
deteriorating automotive industry and moving wheel production to our lower cost
operations in Mexico. This restructuring began with the closure of
the Pittsburg facility in December 2008 and with the closure of our Van Nuys
facility in June of 2009. These closures allowed us to realign
capacity within our remaining plants and reduce our total fixed costs. During
2009, we began our international tax restructuring plan, which is currently
being implemented. We expect that the new tax structure will be in
effect in 2010. Based on its nature, implementation of this tax
strategy will enable us to generate domestic taxable income, thereby allowing us
to utilize our federal deferred tax assets and, at the same time, reduce
world-wide tax payments.
Negative
evidence considered included the taxable losses in the U.S. recorded during the
three year period ended December 31, 2009, on both an annual and cumulative
basis, the continued deterioration of the automotive industry into 2009 and the
uncertainty as to the timing of recovery of both the automotive industry and
global economy.
Based on the weight of all available evidence discussed above, we have concluded that the negative evidence outweighs the positive and that it is more likely than not that 1) the federal U.S. and state deferred tax asset, net of valuation allowance, will not be realized within the carryforward period and 2) the foreign net operating loss carryforwards will not be realized within the carryforward period. This is because we can not look to future taxable income as a source of income given our cumulative losses. We, therefore, established full valuation allowances against those deferred tax assets. However, we will continue to assess the need for valuation allowances in the future.
As of
December 31, 2009, we have federal tax credit carryforwards of $5.7 million that
begin to expire in 2014. As of December 31, 2009, we have cumulative
federal and state net operating loss carryforwards of $37.7 million and $84.8
million, respectively, that begin to expire in 2029 and 2016,
respectively. As of December 31, 2009, we have cumulative foreign net
operating loss carryforwards of $26.3 million that begin to expire in
2017. We have state tax credit carryforwards for 2009 and 2008 of
$1.4 million and $1.4 million, respectively. The state tax credit
carryforwards begin to expire in 2014.
The
valuation allowances established relate to all U. S. and state deferred tax
assets, and foreign net operating loss carryforwards for which we have
determined that it is more likely than not that a benefit will not be
realized.
We have not provided for deferred income taxes or foreign withholding tax on basis differences in our non-U.S. subsidiaries of $146.8 million that result primarily from undistributed earnings the company intends to reinvest indefinitely. Determination of the deferred income tax liability on these basis differences is not reasonably estimable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
We
adopted the U.S. GAAP method of accounting for uncertain tax positions on
January 1, 2007. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
Year
Ended December 31,
|
||||||||||||
|
Summary
of Unrecognized Tax Benefits
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Beginning
balance
|
$ | 28,568 | $ | 34,804 | $ | 36,521 | ||||||
|
Increases
(decreases) due to foreign currency translations
|
1,002 | (4,709 | ) | (58 ) | ||||||||
|
Increases
(decreases) as a result of positions taken
during:
|
||||||||||||
|
Prior
period
|
- | 2,229 | - | |||||||||
|
Current
period
|
- | - | - | |||||||||
|
Settlements
with taxing authorities
|
(10,355 | ) | - | - | ||||||||
|
Expiration
of applicable statutes of limitation
|
(169 | ) | (3,756 | ) | (1,659 ) | |||||||
|
Ending
balance
(1)
|
$ | 19,046 | $ | 28,568 | $ | 34,804 | ||||||
|
(1)
Excludes $27.6 million, $22.8 million and $27.4 million of
potential interest and penalties associated with uncertain tax
positions
in 2009, 2008 and 2007, respectively.
|
||||||||||||
At December 31, 2009, we had unrecognized tax benefits in the amount of $19.0 million. During 2009, we accrued potential interest and penalties of $3.5 million and $0.8 million, respectively, related to unrecognized tax benefits. As of December 31, 2009, we have recorded liabilities for potential interest and penalties of $15.7 million and $11.9 million, respectively.
Included
in the unrecognized tax benefits of $46.6 million at December 31, 2009, was
$20.5 million of tax benefit that, if recognized, would reduce our annual
effective tax rate. Within the next twelve-month period ending
December 31, 2010, it is reasonably possible that up to $9.5 million of
unrecognized tax benefits will be recognized due to the expiration of certain
statutes of limitation.
Our
policy regarding interest and penalties related to unrecognized tax benefits is
to record interest and penalties as an element of income tax expense.
The cumulative amounts related to interest and penalties are added to
the total unrecognized tax liabilities on the balance sheet.
Accordingly, the total amount on the balance sheet includes the unrecognized tax
benefits, cumulative interest and penalties accrued on the
liabilities.
We
conduct business internationally and, as a result, one or more of our
subsidiaries files income tax returns in U.S. federal, U.S. state and certain
foreign jurisdictions. Accordingly, in the normal course of business,
we are subject to examination by taxing authorities throughout the world,
including Hungary, Mexico, the Netherlands, and the United States. We are no
longer subject to U.S. federal, state and local, or Mexico (our major filing
jurisdictions) income tax examinations for years before 2002.
Superior
Industries International, Inc. and subsidiaries are under audit by Mexico’s Tax
Administration Service (Servicio de Administracion Tributaria) in relation to
Superior Industries de Mexico S.A. de C.V. for the 2003 tax year.
During
2009, Mexico’s Tax Administration Service began a review of the outside
auditor’s documentations for the years 2004 and 2007. A review of the
outside auditor’s documentations often leads to a full examination of
that tax period.
Total
income tax payments made were $5.9 million in 2009, $2.2 million in 2008, and
$4.9 million in 2007.
We lease
certain land, facilities and equipment under long-term operating leases expiring
at various dates through 2014. Total lease expense for all operating
leases amounted to $3.2 million in 2009, $3.1 million in 2008 and $3.8 million
in 2007.
Our
corporate office and former manufacturing and warehouse facility in Van Nuys,
California are leased from the Louis L. Borick Trust and the Juanita A. Borick
Management Trust (the Trusts). The Trusts are controlled by Mr. L.
Borick, Founding Chairman and a Director of the company, and Juanita A.
Borick
,
Mr. L. Borick’s
former spouse, respectively. The current operating lease expires in June 2012.
An option to extend the lease for ten years was exercised as of July 2002. There
is one additional ten-year lease extension option remaining. The current annual
lease payment is $1.9 million. The facilities portion of the lease
agreement requires rental increases every five years based upon the change in a
specific Consumer Price Index. The last such adjustment was as of
July 1, 2006. The future minimum lease payments that are payable to
Mr. Borick for the Van Nuys corporate office and manufacturing facility lease is
$5.0 million. Total lease payments to these related entities were
$1.9 million in 2009, $2.0 million for 2008 and $1.6 million for
2007. During 2007, a $1.0 million payment was made to the Trusts as
settlement for a retroactive rental rate adjustment on the ground lease portion
of the agreement for our Van Nuys, California, property for the five year period
ended June 30, 2007.
Due to
the closure of manufacturing operations at our Van Nuys, California facility in
June of 2009, we entered into negotiations to amend the lease of this facility
to include only the office space occupied by our corporate office. We
expect these negotiations to result in an executed amendment to the existing
lease some time in the first quarter of 2010.
The
following are summarized future minimum payments under all
leases. The table below contains the current annual lease payments of
$2.1 million for the entire Van Nuys, California facility through June 30,
2012.
|
Year
Ended December 31,
|
Operating
Leases
|
|||
|
(Thousands
of dollars)
|
||||
|
2010
|
$ | 2,707 | ||
|
2011
|
2,411 | |||
|
2012
|
1,209 | |||
|
2013
|
32 | |||
|
2014
|
12 | |||
|
Thereafter
|
- | |||
| $ | 6,371 | |||
We have
an unfunded supplemental executive retirement plan covering our directors,
officers and other key members of management. We purchase life
insurance policies on the participants to provide for future
liabilities. Cash surrender value of these policies, totaling $5.9
million at December 31, 2009 and $4.6 million as of December 31, 2008, are
included in Other Assets as general assets of the company. Subject to
certain vesting requirements, the plan provides for a benefit based on final
average compensation, which becomes payable on the employee's death or upon
attaining age 65, if retired. We have measured the plan assets and
obligations of our supplemental executive retirement plan as of our fiscal year
end for all periods presented.
The
following table summarizes the changes in plan benefit obligations:
|
Year
Ended December 31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Change
in benefit obligation
|
||||||||
|
Beginning
benefit obligation
|
$ | 20,379 | $ | 20,795 | ||||
|
Service
cost
|
921 | 471 | ||||||
|
Interest
cost
|
1,242 | 1,156 | ||||||
|
Actuarial
(gain) loss
|
(843 | ) | (1,179 | ) | ||||
|
Benefit
payments
|
(913 | ) | (864 | ) | ||||
|
Ending
benefit obligation
|
$ | 20,786 | $ | 20,379 | ||||
The following table summarizes the balance sheet components:
|
Year
Ended December 31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Change
in plan assets
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$ | - | $ | - | ||||
|
Employer
contribution
|
913 | 864 | ||||||
|
Benefit
payments
|
(913 | ) | (864 | ) | ||||
|
Fair
value of plan assets at end of year
|
$ | - | $ | - | ||||
|
Funded
Status
|
$ | (20,787 | ) | $ | (20,379 | ) | ||
|
Amounts
recognized in the Consolidated Balance Sheets consist of:
|
||||||||
|
Current
liabilities
|
$ | (1,017 | ) | $ | (1,004 | ) | ||
|
Non-current
liabilities
|
(19,770 | ) | (19,375 | ) | ||||
|
Net
amount recognized
|
$ | (20,787 | ) | $ | (20,379 | ) | ||
|
Amounts
recognized in Accumulated Other Comprehensive Loss consist
of:
|
||||||||
|
Net
actuarial loss
|
$ | 2,004 | $ | 2,911 | ||||
|
Prior
service cost
|
- | - | ||||||
|
Net
amount recognized, before tax effect
|
$ | 2,004 | $ | 2,911 | ||||
|
Weighted
average assumptions used to determine benefit obligations:
|
||||||||
|
Discount
rate
|
6.25 | % | 6.25 | % | ||||
|
Rate
of compensation increase
|
3.00 | % | 3.00 | % | ||||
Components
of net periodic pension cost are:
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Components
of net periodic pension cost
|
||||||||||||
|
Service
cost
|
$ | 921 | $ | 471 | $ | 567 | ||||||
|
Interest
cost
|
1,242 | 1,156 | 1,121 | |||||||||
|
Contractual
termination benefits
|
- | - | - | |||||||||
|
Amortization
of actuarial loss
|
64 | 168 | 192 | |||||||||
|
Net
periodic pension cost
|
$ | 2,227 | $ | 1,795 | $ | 1,880 | ||||||
|
Weighted
average assumptions used to determine net periodic pension
cost
|
||||||||||||
|
Discount
rate
|
6.25 | % | 5.75 | % | 5.75 | % | ||||||
|
Rate
of compensation increase
|
3.00 | % | 3.50 | % | 3.50 | % | ||||||
|
Benefit
payments during the next ten years, which reflect applicable future
service, are as follows:
|
||||
|
Year
Ended December 31,
|
Amount
|
|||
|
(Thousands
of dollars)
|
||||
|
2010
|
$ | 1,054 | ||
|
2011
|
1,156 | |||
|
2012
|
1,268 | |||
|
2013
|
1,381 | |||
|
2014
|
1,434 | |||
|
Years
2015 - 2019
|
7,415 | |||
|
The
following is an estimate of the components of net periodic pension cost in
2010:
|
||||
|
Estimated
Year Ended December 31,
|
2010 | |||
|
(Thousands
of dollars)
|
||||
|
Service
cost
|
$ | 583 | ||
|
Interest
cost
|
1,267 | |||
|
Amortization
of actuarial loss
|
- | |||
|
Estimated
2009 net periodic pension cost
|
$ | 1,850 | ||
The $0.4 million decrease in the 2010 estimated net periodic pension cost compared to the 2009 cost is due to the termination of unvested participants in 2009.
Other
Retirement Plans
We also
have a contributory employee retirement savings plan covering substantially all
of our employees. The employer contribution was determined at the
discretion of the company and totaled $1.3 million, $2.2 million and $2.9
million for the three years ended December 31, 2009, 2008 and 2007,
respectively. The reduced employer contribution in 2009 was due to
fewer employees in the plan in addition to utilizing forfeitures to fund a
portion of the employer contributions.
Pursuant
to the deferred compensation provision of his 1994 Employment Agreement
(Agreement), Mr. Louis L. Borick, Founding Chairman and a Director, was paid an
annual amount of $1.0 million in 26 equal payments through 2009. The Agreement
calls for one-half of such payments to be made starting in 2010 for up to 10
years, or until his death. As of December 31, 2009, the actuarial present value
of the remaining payments under the Agreement, totaling $2.0 million, has been
accrued for and is included in accrued expenses and other non-current
liabilities in the consolidated balance sheet.
|
December
31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Payroll
and related benefits
|
$ | 8,423 | $ | 8,129 | ||||
|
Dividends
|
4,267 | 4,267 | ||||||
|
Taxes,
other than income taxes
|
9,478 | 7,234 | ||||||
|
Loss
on natural gas commodity contracts
|
2,961 | 1,632 | ||||||
|
Other
plant shutdown costs
|
2,471 | 107 | ||||||
|
Current
portion of executive retirement liabilities
|
1,510 | 1,976 | ||||||
|
Other
|
13,092 | 11,894 | ||||||
|
Accrued
expenses
|
$ | 42,202 | $ | 35,239 | ||||
Derivative
Litigation
In late
2006, two shareholder derivative complaints were filed, one each by plaintiffs
Gary B. Eldred and Darrell D. Mack, based on allegations concerning some of the
company’s past stock option grants and practices. These cases were subsequently
consolidated as
In re Superior
Industries International, Inc. Derivative Litigation
, which is pending in
the United States District Court for the Central District of California. In the
plaintiffs’ consolidated complaint, filed on March 23, 2007, the company was
named only as a nominal defendant from whom the plaintiffs sought no monetary
recovery. In addition to naming the company as a nominal defendant, the
plaintiffs named various present and former employees, officers and directors of
the company as individual defendants from whom they sought monetary and/or
equitable relief, purportedly for the benefit of the company.
Plaintiffs
purported to base their claims against the individual defendants on allegations
that the grant dates for some of the options granted to certain company
directors, officers and employees occurred prior to upward movements in the
stock price, and that the stock option grants were not properly accounted for in
the company’s financial reports and not properly disclosed in the company’s SEC
filings. The company and the individual defendants filed motions to dismiss
plaintiffs’ consolidated complaint on May 14, 2007. In an order dated August 9,
2007, the court granted our motion to dismiss the consolidated complaint, and
granted the plaintiffs leave to file an amended complaint.
On August
29, 2007, the plaintiffs filed an amended consolidated complaint that was
substantially similar to the prior consolidated complaint. In response, the
company and the individual defendants filed motions to dismiss on September 21,
2007. In an order dated April 14, 2008, the court again granted our motion to
dismiss the amended consolidated complaint, with leave to amend. On May 5, 2008,
the plaintiff filed a second amended consolidated shareholder derivative
complaint that alleges claims substantially similar to the prior complaints.
Once again, the company and the individual defendants filed motions to dismiss
on May 30, 2008. The court conducted a hearing on the motions to dismiss on
September 15, 2008, but before the Court ruled on the motions, the parties
reached an agreement in principle to settle the litigation. The
settlement received the preliminary approval of the Court on November 9, 2009
and, after notice was given as directed by the Court, the Court gave its final
approval of the settlement on February 3, 2010, and entered its Order and Final
Judgment dismissing the litigation, with prejudice. The terms of the
settlement provide that, among other things: the Company will adopt
and/or maintain for a specified period certain procedures related to the
granting and administration of stock options, as well as certain corporate
governance measures; counsel for the plaintiffs in the litigation will receive a
specified dollar amount for their fees and expenses, which amount shall be paid
by the Company’s insurance carrier; the Company and its past and present
officers, directors and employees are released from any claims related to the
matters alleged in the litigation; and the plaintiffs and their counsel are
released from any claims related to the filing, prosecution, and settlement of
the litigation.
Air
Quality Matters
The South
Coast Air Quality Management District (the SCAQMD) issued to us notices of
violation, dated December 14, 2007 and December 5, 2008, alleging violations of
certain permitting and air quality rules at our Van Nuys, California
manufacturing facility. The December 2007 notice involved operating
three facility furnaces with different burners than those described on the
permit to operate the furnaces. The December 2008 notice was
issued after the
company
self-disclosed and corrected certain discrepancies associated with the manner
that the facility reported nitrogen oxide (NOx) emissions in 2004 and
2005. To resolve the violation notices, throughout 2008 and 2009, the
company worked closely with the SCAQMD to achieve compliance and took all steps
necessary to remedy the issues associated with these violations, including the
submission of permit applications to modify the description of the burners for
three of the plant’s furnaces
.
The company also
took steps to ensure that all required reporting and other regulatory
obligations to SCAQMD were made. On September 22, 2009, Superior
entered into a settlement agreement with the SCAQMD. The salient
terms of the agreement required the company to pay a civil penalty of fifty
thousand dollars in exchange for a release from all liability with regard to any
condition at the facility prior to June 30, 2009. The September 22,
2009 settlement agreement serves as a global resolution of the notices of
violations as well as any other past compliance issues associated with the
facility.
Other
We are
party to various other legal and environmental proceedings incidental to our
business. Certain claims, suits and complaints arising in the
ordinary course of business have been filed or are pending against
us. Based on facts now known, we believe all such matters are
adequately provided for, covered by insurance, are without merit, and/or involve
such amounts that would not materially adversely affect our consolidated results
of operations, cash flows or financial position.
Our
primary risk exposure relating to derivative financial instruments results from
the periodic use of foreign currency forward contracts to offset the impact of
currency rate fluctuations with regard to foreign-currency-denominated
receivables, payables or purchase obligations. At December 31, 2009 and 2008, we
held no foreign currency forward contracts.
When
market conditions warrant, we may also enter into contracts to purchase certain
commodities used in the manufacture of our products, such as aluminum, natural
gas and other raw materials. Typically, any such commodity commitments are
expected to be purchased and used over a reasonable period of time in the normal
course of business. Accordingly, these contracts qualify for the “normal
purchase” exemption provided for under U.S. GAAP and we are not required to
record any gains and/or losses associated with these commitments in our current
earnings, unless there is a change in the facts or circumstances in regard to
the commitments being used in the normal course of business.
We
currently have several purchase agreements for the delivery of natural gas
through 2012. With the closure of our manufacturing facility in Van
Nuys, California in June 2009, and closure in December 2008 of our manufacturing
facility in Pittsburg, Kansas, we no longer qualified for the normal purchase,
normal sale (NPNS) exemption provided for in accordance with U.S. GAAP for the
remaining natural gas purchase commitments related to those
facilities. In addition, we have concluded that the natural gas
purchase commitments for our manufacturing facility in Arkansas and certain
natural gas commitments for our facilities in Chihuahua, Mexico no longer
qualified for the NPNS exemption provided for under U.S. GAAP since we can no
longer assert that it is probable we will take full delivery of these contracted
quantities in light of the continued decline of our industry. In
accordance with U.S. GAAP these natural gas purchase commitments are classified
as being with “no hedging designation” and, accordingly, we are required to
record any gains and/or losses associated with the changes in the estimated fair
values of these commitments in our current earnings. The contract and
fair values of these purchase commitments at December 31, 2009 were $8.6 million
and $5.6 million, respectively, which represents a gross liability of $3.0
million, which was included in accrued expenses in our December 31, 2009
consolidated balance sheet.
Based on
the quarterly analysis of our estimated future production levels, certain
natural gas purchase commitments with a contract value of $8.7 million and a
fair value of $6.8 million for our manufacturing facilities in Mexico continue
to qualify for the NPNS exemption since we can assert that it is probable we
will take full delivery of the contracted quantities. The contract
and fair values of all natural gas purchase commitments were $17.3 million and
$12.4 million, respectively, at December 31, 2009. As of December 31,
2008, the aggregate contract and fair values of natural gas commitments were
approximately $28.0 million and $21.1 million,
respectively. Percentage changes in the market prices of natural gas
will impact the fair values by a similar percentage. The recurring
fair value measurement of the natural gas purchase commitments are based on
quoted market prices using the market approach and the fair value is determined
based on Level 1 inputs within the fair value hierarchy provided for under U.S.
GAAP.
At December 31, 2009 and 2008, we had
outstanding letters of credit of approximately $9.2 million and $6.5 million,
respectively.
Our 2008
Equity Incentive Plan authorizes us to issue incentive and non-qualified stock
options, as well as stock appreciation rights, restricted stock and performance
units to our non-employee directors, officers, employees and consultants
totaling up to 3.5 million shares of common stock. No more than 100,000 shares
may be used under such plan as “full value” awards, which include restricted
stock and performance units. It is our policy to issue shares from
authorized but not issued shares upon the exercise of stock
options. At December 31, 2009, there were 2.9 million shares
available for future grants under this plan. Options are granted at not less
than fair market value on the date of grant and expire no later than ten years
after the date of grant. Options granted under this plan to employees
and non-employee directors require no less than a three year ratable vesting
period if vesting is based on continuous service. Vesting periods may
be shorter than three years if performance based.
We
account for stock-based compensation using the fair value recognition provisions
in accordance with U.S. GAAP. We recognize these compensation costs
net of the applicable forfeiture rate and recognize the compensation costs for
only those shares expected to vest on a straight-line basis over the requisite
service period of the award, which is generally the option vesting term of four
years. We estimated the forfeiture rate based on our historical
experience. No options were exercised during the fiscal year 2009 and
the total fair value of shares vested during the year was approximately $2.3
million.
We have
elected to adopt the alternative transition method for calculating the initial
pool of excess tax benefits and to determine the subsequent impact of the tax
effects of employee stock-based compensation awards that are outstanding on
shareholders’ equity and consolidated statements of cash flow.
|
Weighted
|
||||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
|
Outstanding
|
Price
|
Life
in Years
|
Value
|
|||||||||||||
|
Balance
at December 31, 2008
|
3,214,737 | $ | 25.79 | |||||||||||||
|
Granted
|
622,500 | 14.10 | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Cancelled
|
(235,662 | ) | 24.20 | |||||||||||||
|
Balance
at December 31, 2009
|
3,601,575 | $ | 23.87 | 6.34 | $ | 745,935 | ||||||||||
|
Options
vested or expected to vest
|
3,503,858 | $ | 24.06 | 4.19 | $ | 745,935 | ||||||||||
|
Exercisable
at December 31, 2009
|
2,257,469 | $ | 27.79 | 5.02 | $ | - | ||||||||||
Options
outstanding at December 31, 2009:
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Options
|
Average
|
Average
|
Options
|
Average
|
|||||||||||||||
|
Range
of
|
Outstanding
|
Remaining
|
Exercise
|
Exercisable
|
Exercise
|
||||||||||||||
|
Exercise
Prices
|
at
12/31/09
|
Contractual
Life
|
Price
|
at
12/31/09
|
Price
|
||||||||||||||
|
(in
years)
|
|||||||||||||||||||
|
$
|
10.09
|
-
|
$
|
15.61
|
609,500
|
9.52
|
$
|
14.08
|
-
|
$
|
-
|
||||||||
|
$
|
15.62
|
-
|
$
|
21.13
|
1,019,900
|
7.17
|
17.90
|
664,545
|
17.86
|
||||||||||
|
$
|
21.14
|
-
|
$
|
26.65
|
1,047,075
|
6.83
|
22.97
|
667,824
|
23.61
|
||||||||||
|
$
|
26.66
|
-
|
$
|
32.17
|
71,453
|
1.16
|
28.61
|
71,453
|
28.61
|
||||||||||
|
$
|
32.18
|
-
|
$
|
37.69
|
492,526
|
2.30
|
35.50
|
492,526
|
35.50
|
||||||||||
|
$
|
37.70
|
-
|
$
|
43.22
|
361,121
|
3.68
|
43.08
|
361,121
|
43.08
|
||||||||||
|
3,601,575
|
6.34
|
$
|
23.87
|
2,257,469
|
$
|
27.79
|
|||||||||||||
The aggregate intrinsic value represents the total pretax difference between the closing stock price on the last trading day of the reporting period and the option exercise price, multiplied by the number of in-the-money options. This is the amount that would have been received by the option holders had they exercised and sold their options on that day. This amount varies based on changes in the fair market value of our common stock. The closing price of our common stock on the last trading day of our fiscal year was $16.04.
Stock-based
compensation expense related to stock option plans in accordance with U.S. GAAP
was allocated as follows:
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Cost
of sales
|
$ | 388 | $ | 353 | $ | 487 | ||||||
|
Selling,
general and administrative expenses
|
1,992 | 2,054 | 2,586 | |||||||||
|
Stock-based
compensation expense before income taxes
|
2,380 | 2,407 | 3,073 | |||||||||
|
Income
tax benefit
|
- | (694 | ) | (1,038 | ) | |||||||
|
Total
stock-based compensation expense after income taxes
|
$ | 2,380 | $ | 1,713 | $ | 2,035 | ||||||
As of
December 31, 2009, there was $4.5 million of unrecognized stock-based
compensation expense expected to be recognized related to unvested stock
options. That cost is expected to be recognized over a weighted-average period
of 2.49 years.
There
were no stock options exercised in 2009. We received cash proceeds of
$617,000 and $430,000 from stock options exercised in 2008 and 2007,
respectively.
The fair
value of each option grant was estimated as of the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||||||
|
Expected
dividend yield (a)
|
3.7
|
%
|
3.2
|
%
|
3.3
|
%
|
||||||||||
|
Expected
stock price volatility (b)
|
37.3
|
%
|
30.2
|
%
|
30.1
|
%
|
||||||||||
|
Risk-free
interest rate (c)
|
3.0
|
%
|
3.5
|
%
|
4.0
|
%
|
||||||||||
|
Expected
option lives (d)
|
6.9
|
yrs
|
7.1
|
yrs
|
7.3
|
yrs
|
||||||||||
|
Weighted
average grant date fair value of
|
||||||||||||||||
|
options
granted during the period
|
$3.95
|
$5.30
|
$5.14
|
|||||||||||||
|
(a)
|
This
assumes that cash dividends of $0.16 per share are paid each quarter on
our common stock.
|
|
(b)
|
Expected
volatility is based on the historical volatility of our stock price, over
the expected life of the option.
|
|
(c)
|
The
risk-free rate is based upon the rate on a U.S. Treasury note for the
period representing the average remaining contractual life of all options
in effect at the time of the grant.
|
|
(d)
|
The
expected term of the option is based on historical employee exercise
behavior, the vesting terms of the respective option and a contractual
life of ten years.
|
Since
1995, our Board of Directors has authorized several common stock repurchase
programs totaling 8.0 million shares, under which we have repurchased
approximately 4.8 million shares for approximately $130.9 million, or $27.16 per
share. Under the latest authorization to repurchase up to 4.0 million shares,
approved in March 2000, to date we have repurchased a total of 818,000 shares
for a total cost of $26.9 million at an average cost per share of
$32.82. All repurchased shares are immediately cancelled and retired.
There have been no stock repurchases since 2005. As of December 31,
2009, approximately 3.2 million additional shares can be repurchased under the
current authorization.
Components
of other comprehensive income (loss) as reflected in the consolidated statements
of shareholders’ equity as follows:
|
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Net
foreign currency translation gains (losses)
|
$ | 10,872 | $ | (39,567 | ) | $ | 10,113 | |||||
|
Actuarial
gains on pension obligation
|
907 | 1,346 | 220 | |||||||||
|
Income
tax (provision)
|
(1,111 | ) | (445 | ) | (82 | ) | ||||||
|
Net
actuarial gains on pension obligation
|
(204 | ) | 901 | 138 | ||||||||
|
Unrealized
gain on marketable securities
|
- | - | 40 | |||||||||
|
Income
tax (provision)
|
- | - | (15 | ) | ||||||||
|
Net
unrealized gain on marketable securities
|
- | - | 25 | |||||||||
|
Realized
gains from marketable securities
|
- | - | (2,720 | ) | ||||||||
|
Income
tax benefit
|
- | - | 995 | |||||||||
|
Net
realized gains from marketable securities
|
- | - | (1,725 | ) | ||||||||
|
Other
comprehensive income (loss)
|
$ | 10,668 | $ | (38,666 | ) | $ | 8,551 | |||||
Accumulated balances of other comprehensive income (loss) as reflected in the consolidated balance sheets and statements of shareholders’ equity as follows:
|
December
31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Thousands
of dollars)
|
||||||||||||
|
Net
accumulated foreign currency translation gains (losses)
|
$ | (54,572 | ) | $ | (65,444 | ) | $ | (25,877 | ) | |||
|
Accumulated
actuarial (loss) on pension obligation
|
(2,004 | ) | (2,911 | ) | (4,257 | ) | ||||||
|
Income
tax benefit
|
- | 1,111 | 1,556 | |||||||||
|
Net
accumulated actuarial (loss) on pension obligation
|
(2,004 | ) | (1,800 | ) | (2,701 | ) | ||||||
|
Accumulated
other comprehensive loss
|
$ | (56,576 | ) | $ | (67,244 | ) | $ | (28,578 | ) | |||
During the year 2009, the value of the Mexican peso increased by 5 percent in relation to the U.S. dollar, resulting in a gain of $10.1 million in foreign currency translation adjustments related to our operations in Mexico. Despite the euro decreasing by 2 percent relative to the U.S. dollar, there was a gain for the year of $1.0 million in foreign currency translation adjustments related to our 50 percent-owned joint venture in Hungary. At December 31, 2009, cumulative unrealized foreign currency translation losses related to our operations in Mexico was $61.3 million, compared to the cumulative unrealized foreign currency translation gains of $6.7 million related to our joint venture in Hungary.
Due to
the deteriorating financial condition of our major customers and other changes
in the automotive industry, we performed impairment analyses at the end of each
fiscal quarter at the end of the year 2009 on all long-lived assets in our
operating plants, in accordance with U.S. GAAP. Our estimated
undiscounted cash flow projections as of the end of the year exceeded the asset
carrying values in all of our wheel manufacturing plants in North America;
therefore, no impairment was required to be made to our long-lived assets in our
operating plants in the fourth quarter of 2009.
Based on
the impairment analyses conducted at the end of the first quarter of 2009, we
concluded that the estimated future undiscounted cash flows of our Fayetteville,
Arkansas manufacturing facility would not be sufficient to recover the carrying
value of our long-lived assets attributable to that facility. As a
result, we recorded a pretax asset impairment charge against earnings totaling
$8.9 million during the first quarter of 2009, reducing the $18.2 million
carrying
value of certain assets at this facility to their respective estimated fair
values. The estimated fair values of the long-lived assets at our
Fayetteville, Arkansas manufacturing facility were determined with the
assistance of estimated fair values of comparable properties and independent
third party appraisals of the machinery and equipment. These assets
are classified as held and used in accordance with U.S. GAAP. We have
classified the inputs to the nonrecurring fair value measurement of these assets
as being Level 2 within the fair value hierarchy in accordance with U.S.
GAAP.
In
January 2009, we announced the planned closure of our wheel manufacturing
facility located in Van Nuys, California in an effort to further reduce costs
and more closely align our capacity with sharply lower demand for aluminum
wheels by the automobile and light truck manufacturers. The facility ceased
operations at the end of the second quarter of 2009, resulting in the layoff of
approximately 290 employees. A pretax asset impairment charge against earnings
totaling $10.3 million, reducing the $10.8 million carrying value of certain
assets at the Van Nuys manufacturing facility to their respective fair values,
was recorded in the fourth quarter of 2008, when we concluded that the estimated
future undiscounted cash flows of that operation would not be sufficient to
recover the carrying value of our long-lived assets attributable to that
facility. We used an independent third party appraiser to assist us
in determining the fair values of these assets.
During
the second quarter of 2009, we received an offer for the sale of our Johnson
City, Tennessee facility which was subsequently cancelled. We believe
this offer was the best indicator of the current fair value of the property and
we recorded a reduction in our carrying value of this facility by $0.6 million
to the $2.2 million offer. Additionally, we received some
indications, based on equipment sales that occurred subsequent to June 28, 2009,
that the carrying values of the held for sale equipment from our Pittsburg,
Kansas, and Van Nuys, California, facilities, totaling $2.6 million, were higher
than their current market values. Consequently, we recorded an
additional impairment charge of $1.9 million to reduce the carrying value of
this equipment to their new estimated fair values in the second quarter
also. We have classified the above nonrecurring fair value
measurements as Level 2 inputs within the fair value hierarchy utilizing the
market approach in accordance with U.S. GAAP. Due to plant shutdowns
and the realignment of our business to match our current production needs, we
have identified, and are in the process of selling, specific long-lived assets
from our former manufacturing operations in Johnson City, Tennessee, and
Pittsburg, Kansas. These assets, which totaled $6.8 million at
December 31, 2009, are classified as assets held for sale in accordance with
U.S. GAAP.
In August
2008, we announced the planned closure of our wheel manufacturing facility
located in Pittsburg, Kansas, in an effort to eliminate excess wheel capacity
and enhance overall efficiency. The closure, which was completed in December
2008, resulted in the layoff of approximately 600 employees. A pretax asset
impairment charge against earnings totaling $5.0 million, reducing the carrying
value of certain assets at the Pittsburg facility to their respective fair
values, was recorded in the third quarter of 2008, when we concluded that the
estimated future undiscounted cash flows of that operation would not be
sufficient to recover the carrying value of our long-lived assets attributable
to that facility. In the fourth quarter of 2008, when it was determined that the
carrying values of additional long-lived assets would not be recovered, the
impairment charge was increased by an additional $2.4 million. We
used an independent third party appraiser to assist us in determining the fair
values of the assets at the Pittsburg, Kansas, facility.
For the
periods between the announced plant closures and the date operations actually
ceased, these assets are classified as held-and-used, in accordance with U.S.
GAAP. Upon termination of plant operations, the remaining assets are classified
as held-for-sale.
One-time
termination benefits and other shutdown costs related to the above plant
closures and workforce reductions in our other North American facilities were
$19.1 million in 2009, of which $18.8 million was included in cost of sales and
$0.3 million was included in selling, general and administrative
expenses. One-time termination benefits and
other
shutdown costs were $4.7 million in 2008 and were included in costs of
sales. One-time termination benefits were derived from the individual
agreements with each employee and were accrued ratably over the requisite
service period. The following table summarizes the expenses, payments
and resulting liabilities that were included in accrued expenses for one-time
termination benefits and other shutdown costs:
|
Year
Ended December 31,
|
2009
|
2008
|
||||||
|
(Thousands
of dollars)
|
||||||||
|
Beginning
liability balance
|
$ | 107 | $ | - | ||||
|
One-time
termination benefit expenses
|
5,066 | 2,728 | ||||||
|
Other
plant closure costs
|
13,990 | 2,000 | ||||||
|
Total
expenses
|
19,056 | 4,728 | ||||||
|
Payments
|
(16,692 | ) | (4,621 | ) | ||||
|
Ending
liability balance
|
$ | 2,471 | $ | 107 | ||||
(Thousands
of dollars, except per share amounts)
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
|
Year
2009
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||||||
|
Net
sales
|
$ | 81,548 | $ | 80,886 | $ | 111,371 | $ | 145,041 | $ | 418,846 | ||||||||||
|
Gross
profit (loss)
|
$ | (14,513 | ) | $ | (12,056 | ) | $ | 4,222 | $ | 12,178 | $ | (10,169 | ) | |||||||
|
Impairment
of long-lived assets (Note 15)
|
$ | 8,910 | $ | 2,894 | $ | - | $ | - | $ | 11,804 | ||||||||||
|
Income
(loss) from operations
|
$ | (28,198 | ) | $ | (20,788 | ) | $ | (1,559 | ) | $ | 5,927 | $ | (44,618 | ) | ||||||
|
Income
(loss) before income taxes
|
||||||||||||||||||||
|
and
equity earnings
|
$ | (29,099 | ) | $ | (21,582 | ) | $ | 103 | $ | 7,323 | $ | (43,255 | ) | |||||||
|
Income
tax (provision) benefit
(1)
|
$ | (26,460 | ) | $ | 2,817 | $ | (8,772 | ) | $ | 6,368 | $ | (26,047 | ) | |||||||
|
Equity
earnings (losses) (Note 6)
|
$ | (942 | ) | $ | (2,204 | ) | $ | (4,072 | ) | $ | (17,622 | ) | $ | (24,840 | ) | |||||
|
Net
loss
|
$ | (56,501 | ) | $ | (20,969 | ) | $ | (12,741 | ) | $ | (3,931 | ) | $ | (94,142 | ) | |||||
|
Loss
per share:
|
||||||||||||||||||||
|
Basic
|
$ | (2.12 | ) | $ | (0.79 | ) | $ | (0.48 | ) | $ | (0.15 | ) | $ | (3.53 | ) | |||||
|
Diluted
|
$ | (2.12 | ) | $ | (0.79 | ) | $ | (0.48 | ) | $ | (0.15 | ) | $ | (3.53 | ) | |||||
|
Dividends
declared per share
|
$ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.64 | ||||||||||
1) Includes income tax (provision) benefit of ($25.3) million, ($18.5) million and $0.8 million for the first, third and fourth quarters of 2009, respectively, due to changes in the valuation allowances against deferred tax assets. The third quarter of 2009 also includes $11.1 million of income tax benefit related to the termination of certain tax examinations.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
|
Year
2008
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||||||
|
Net
sales
|
$ | 222,238 | $ | 217,385 | $ | 163,354 | $ | 151,917 | $ | 754,894 | ||||||||||
|
Gross
profit (loss)
|
$ | 9,386 | $ | 12,054 | $ | (11,191 | ) | $ | (3,672 | ) | $ | 6,577 | ||||||||
|
Impairment
of long-lived assets (Note 15)
|
$ | - | $ | - | $ | 5,044 | $ | 13,457 | $ | 18,501 | ||||||||||
|
Income
(loss) from operations
|
$ | 3,176 | $ | 5,154 | $ | (22,422 | ) | $ | (23,576 | ) | $ | (37,668 | ) | |||||||
|
Income
(loss) before income taxes
|
||||||||||||||||||||
|
and
equity earnings
|
$ | 3,714 | $ | 4,396 | $ | (19,758 | ) | $ | (16,925 | ) | $ | (28,573 | ) | |||||||
|
Income
tax (provision) benefit
|
$ | (2,620 | ) | $ | 79 | $ | 5,694 | $ | (1,375 | ) | $ | 1,778 | ||||||||
|
Equity
earnings (losses)
|
$ | 2,085 | $ | 620 | $ | (143 | ) | $ | (1,820 | ) | $ | 742 | ||||||||
|
Net
income (loss)
|
$ | 3,179 | $ | 5,095 | $ | (14,207 | ) | $ | (20,120 | ) | $ | (26,053 | ) | |||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.12 | $ | 0.19 | $ | (0.53 | ) | $ | (0.76 | ) | $ | (0.98 | ) | |||||||
|
Diluted
|
$ | 0.12 | $ | 0.19 | $ | (0.53 | ) | $ | (0.76 | ) | $ | (0.98 | ) | |||||||
|
Dividends
declared per share
|
$ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.64 | ||||||||||
On May 7,
2009, PricewaterhouseCoopers LLP (PwC) was dismissed as the company’s
independent registered public accounting firm. The company's Audit Committee of
the Board of Directors (the Audit Committee) participated in and approved the
decision to change its independent registered public accounting
firm.
The
reports of PwC on the company’s financial statements for the fiscal years ended
December 31, 2008 and December 31, 2007 did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principle.
During
the fiscal years ended December 31, 2008 and December 31, 2007, and through May
7, 2009, there have been no disagreements with PwC on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of PwC would
have caused them to make reference thereto in their reports on the financial
statements for such years.
During
the fiscal years ended December 31, 2008 and December 31, 2007, and through May
7, 2009, there have been no "reportable events" (as defined in Item 304(a)(1)(v)
of Regulation S-K), except for the identification of a material weakness in
internal control over financial reporting related to the completeness, accuracy
and valuation of the accounting and disclosure of income taxes as of December
31, 2007 which was remediated as of December 31, 2008.
On May
28, 2009, the Audit Committee approved the engagement of Deloitte & Touche
LLP (D&T) as its independent registered public accounting firm for the
fiscal year ending December 31, 2009.
During
the two fiscal years ended December 31, 2008 and the subsequent interim period
prior to engaging D&T, neither the company nor anyone acting on behalf of
the company, consulted D&T regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or (ii) the type of audit opinion that might be rendered on the company’s
financial statements; or (iii) any matter that was either the subject of a
disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K) or a reportable event (as defined in
Item 304(a)(1)(v) of Regulation S-K).
Evaluation
of Disclosure Controls
The
company's management, with the participation of the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2009. Our disclosure controls
and procedures are designed to ensure that information required to be disclosed
in reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decision regarding required disclosures.
Based on
our evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2009, our disclosure controls and procedures
were effective.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. As defined in Rule 13a-15(f) under the Exchange
Act, internal control over financial reporting is a process designed 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. The company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) 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 (iii) 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 its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changing conditions, or that the degree of
compliance with policies or procedures may deteriorate.
Management
performed an assessment of the effectiveness of the company’s internal control
over financial reporting as of December 31, 2009 based upon criteria established
in
Internal Control --
Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on their assessment,
management determined that our internal control over financial reporting was
effective as of December 31, 2009 based on the criteria in the
Internal Control -- Integrated
Framework
issued by COSO. The effectiveness of the company’s
internal control over financial reporting as of December 31, 2009 has been
audited by Deloitte and Touche LLP, an independent registered public accounting
firm, as stated in their report, which is included in this Annual Report on Form
10-K.
Changes
in Internal Control Over Financial Reporting
On
October 2, 2009, Erika H. Turner, our Chief Financial Officer resigned,
effective October 23, 2009, and Emil J. Fanelli, Vice President and Corporate
Controller since 1997, was named acting Chief Financial Officer pending the
recruitment of a permanent successor. Other than these changes, there
were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Statement
Regarding New York Stock Exchange (NYSE) Mandated Disclosures
The
company has filed with the SEC as exhibits to its 2009 Annual Report on Form
10-K the certifications of the company's Chief Executive Officer and its Chief
Financial Officer required under Section 302 of the Sarbanes-Oxley Act and SEC
Rule 13a-14(a) regarding the company's financial statements, disclosure controls
and procedures and other matters. On June 26, 2009, following its
2009 annual meeting of stockholders, the company submitted to the
NYSE the
annual certificate of the company's Chief Executive Officer required under
Section 303A.12(a) of the NYSE Listed Company Manual, that he was not aware of
any violation by the company of the NYSE's corporate governance listing
standards.
None.
Except as
set forth herein, the information required by this Item is incorporated by
reference to our 2010 Annual Proxy Statement.
Executive
Officers
The names
of corporate executive officers as of fiscal year end who are not also Directors
are listed at the end of Part I of this Annual Report on Form
10-K. Information regarding executive officers who are Directors is
contained in our 2010 Annual Proxy Statement under the caption “Election of
Directors.” Such information is incorporated herein by
reference. With the exception of the Chief Executive Officer (CEO),
all executive officers are appointed annually by the Board of Directors and
serve at the will of the Board of Directors. For a description of the
CEO’s employment agreement, see “Employment Agreements” in our 2010 Annual Proxy
Statement, which is incorporated herein in reference.
Code of
Ethics
Included
on our website, www.supind.com, under “Investors,” is our Code of Business
Conduct and Ethics, which, among others, applies to our Chief Executive Officer,
Chief Financial Officer and Chief Accounting Officer. Copies of our Code of
Business Conduct and Ethics are available, without charge, from Superior
Industries International, Inc., Shareholder Relations, 7800 Woodley Avenue, Van
Nuys, CA 91406.
Information
relating to Executive Compensation is set forth under the captions “Compensation
of Directors” and “Compensation Discussion and Analysis” in our 2010 Annual
Proxy Statement, which is incorporated herein by reference.
MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information
related to Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters is set forth under the caption “Voting Securities
and Principal Holders” in our 2010 Annual Proxy Statement. Also see
Note 12- Stock Based Compensation in Notes to the Consolidated Financial
Statements in Item 8 – Financial Statements and Supplementary Data of this
Annual Report on Form 10-K.
Information
related to Certain Relationships and Related Transactions is set forth under the
captions, “Election of Directors” and “Transactions with Related Persons,” in
our 2010 Annual Proxy Statement, and in Note 8 - Leases and Related Parties in
Notes to the Consolidated Financial Statements in Item 8 – Financial Statements
and Supplementary Data of this Annual Report on Form 10-K.
Information
related to Principal Accountant Fees and Services is set forth under the caption
“Audit Fees,” “Audit Related Fees” and “Tax Fees” in our 2010 Annual Proxy
Statement and is incorporated herein by reference.
|
(a)
|
The
following documents are filed as a part of this
report:
|
|
|
1.
|
Financial
Statements: See the “Index to the Consolidated Financial Statements and
Financial Statement Schedule” in Item 8 of this Annual
Report.
|
|
|
2.
|
Financial
Statement Schedule
|
Page
|
|
|
|
Schedule
II – Valuation and Qualifying Accounts for the Years Ended December 31,
2009, 2008 and 2007
|
S-1
|
|
|
3.
|
Exhibits
|
|
|
3.1
|
Restated
Articles of Incorporation of the Registrant (Incorporated by reference to
Exhibit 3.1 to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 1994)
|
|
|
3.2
|
Amended
and Restated By-Laws of the Registrant (Incorporated by reference to
Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on September
5, 2007.
|
|
|
10.1
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Lease
dated March 2, 1976 between the Registrant and Louis L. Borick filed on
Registrant’s Current Report on Form 8-K dated May 1976 (Incorporated by
reference to Exhibit 10.2 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1983) *
|
|
|
10.2
|
Supplemental
Executive Individual Retirement Plan of the Registrant (Incorporated by
reference to Exhibit 10.20 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1987.)
*
|
|
|
10.3
|
Employment
Agreement dated January 1, 1994 between Louis L. Borick and the Registrant
(Incorporated by reference to Exhibit 10.32 to Registrant’s Annual Report
on Form 10-K for the year ended December 31, 1993, as amended)
*
|
|
|
10.4
|
1993
Stock Option Plan of the Registrant (Incorporated by reference to Exhibit
28.1 to Registrant’s Form S-8 filed June 10, 1993, as
amended. Registration No. 33-64088.)
*
|
|
|
10.5
|
Stock
Option Agreement dated March 9, 1993 between Louis L. Borick and the
Registrant (Incorporated by Reference to Exhibit 28.2 to Registrant's Form
S-8 filed June 10, 1993. Registration No. 33-64088)
*
|
|
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10.6
|
Chief
Executive Officer Annual Incentive Program dated May 9, 1994 between Louis
L. Borick and the Registrant (Incorporated by reference to Exhibit 10.39
to Registrant’s Annual Report on Form 10-K for the year ended December 31,
1994) *
|
|
|
10.7
|
Executive
Employment Agreement dated January 1, 2005 between Steven J. Borick and
the registrant (Incorporated by reference to Exhibit 10.1 to Registrant’s
Quarterly Report on Form 10-Q for the first quarter of
2005 ended March 27, 2005)
*
|
|
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10.8
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Executive
Annual Incentive Plan dated January 1, 2005 between Steven J. Borick and
the registrant (Incorporated by reference to Exhibit A to Registrant’s
Definitive Proxy Statement on Schedule 14A filed on April 19, 2005
*
|
|
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10.9
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2006
Option Repricing Agreement entered into between the Registrant and each of
the following persons separately: Raymond C. Brown, Philip C. Colburn, V.
Bond Evans, R. Jeffery Ornstein, Emil J. Fanelli, Stephen H. Gamble and
Kola Phillips dated December 28, 2006; Sheldon I. Ausman, Steven J.
Borick, Jack H. Parkinson, Robert H. Bouskill, Bob Bracy, Parveen Kakar,
Michael J.
O’Rourke
and Gabriel Soto dated December 29, 2006 (Incorporated by reference to
Exhibit 10.45 to Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2006) *
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|
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10.10
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2006
Option Correction Amendment entered into between the Registrant and each
of the following persons separately: Louis L. Borick, James H.
Ferguson and William B. Kelley dated December 29, 2006 (Incorporated by
reference to Exhibit 10.46 to Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2006) *
|
|
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10.11
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Amendment
to Stock Option Agreement entered into between the Registrant and each of
the following persons separately: Robert A. Earnest, Razmik
Perian and Cameron Toyne dated October 9, 2007 (Incorporated by reference
to Exhibit 10.47 to Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2007) *
|
|
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10.12
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Salary
Continuation Plan of The Registrant, amended and restated as of November
14, 2008 (Incorporated by reference to Exhibit 10.12 to Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2008)
*
|
|
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10.13
|
2008
Equity Incentive Plan of the Registrant (Incorporated by reference to
Exhibit A to Registrant’s Definitive Proxy Statement on Schedule 14A filed
on April 28, 2008)
|
|
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10.14
|
2008
Equity Inventive Plan Notice of Stock Option Grant and Agreement
(Incorporated by reference to Exhibit 10.2 to Registrant’s Form S-8 filed
November 10, 2008. Registration No.
333-155258)
|
|
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10.15
|
Agreement
entered into between the Registrant and Emil J. Fanelli, Vice President
and Corporate Controller of the Registrant to compensate Mr. Fanelli for
serving as acting Chief Financial Officer of the Registrant pending the
appointment of a permanent successor (Incorporated by reference to Exhibit
10.1 to Registrant’s Current Report on Form 8-K filed on February 18,
2010)*
|
|
|
11
|
Computation
of Earnings Per Share (contained in Note 1 – Summary of Significant
Accounting Policies in Notes to Consolidated Financial Statements in Item
8 – Financial Statements and Supplementary Data of this Annual Report on
Form 10-K)
|
|
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14
|
Code
of Business Conduct and Ethics (posted on the Registrant’s Internet
Website pursuant to Regulation S-K, item 406
(c)(2))
|
|
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16
|
Letter
from PricewaterhouseCoopers LLP (Incorporated by reference to Exhibit 16.1
to Registrant's Form 8-K filed on May 12,
2009)
|
|
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21
|
List
of Subsidiaries of the Company (filed
herewith)
|
|
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23
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Consent
of Deloitte and Touche LLP, our Independent Registered Public Accounting
Firm (filed herewith)
|
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23.1
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Consent
of PricewaterhouseCoopers LLP, our former Independent Registered Public
Accounting Firm (filed herewith)
|
|
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31.1
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Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
(filed herewith)
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|
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31.2
|
Chief
Accounting Officer and acting Chief Financial Officer Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
|
32
|
Certification
of Steven J. Borick, Chairman, Chief Executive Officer and President, and
Emil J. Fanelli, Chief Accounting Officer and acting Chief Financial
Officer, Pursuant to 18 U.S.C.
Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
|
*
Indicates management contract or compensatory plan or arrangement.
SUPERIO
R INDUSTRIES INTERNATIONAL, INC.
ANNUAL
REPORT OF FORM 10-K
Schedule II
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Thousands
of dollars)
|
Additions
|
||||||||||||||||||||||||
|
Balance
at
|
Charge
to
|
Adoption
of
|
Other
|
Deductions
|
Balance
at
|
|||||||||||||||||||
|
Beginning
of
|
Costs
and
|
New
Accounting
|
Comprehensive
|
From
|
End
of
|
|||||||||||||||||||
|
Year
|
Expenses
|
Principles
|
Income
(Loss)
|
Reserves
|
Year
|
|||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Allowance
for doubtful
|
||||||||||||||||||||||||
|
accounts
|
$ | 3,128 | $ | 485 | $ | - | $ | - | $ | (3,127 | ) | $ | 486 | |||||||||||
|
Inventory
reserves
|
$ | 2,232 | $ | 1,719 | $ | - | $ | - | $ | (185 | ) | $ | 3,766 | |||||||||||
|
Valuation
allowances for
|
||||||||||||||||||||||||
|
deferred
tax assets
|
$ | 19,357 | $ | 46,028 | $ | - | $ | 758 | $ | - | $ | 66,143 | ||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Allowance
for doubtful
|
||||||||||||||||||||||||
|
accounts
|
$ | 2,427 | $ | 1,164 | $ | - | $ | - | $ | (463 | ) | $ | 3,128 | |||||||||||
|
Inventory
reserves
|
$ | 1,651 | $ | 806 | $ | - | $ | - | $ | (225 | ) | $ | 2,232 | |||||||||||
|
Valuation
allowances for
|
||||||||||||||||||||||||
|
deferred
tax assets
|
$ | 12,083 | $ | 7,274 | $ | - | $ | - | $ | - | $ | 19,357 | ||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Allowance
for doubtful
|
||||||||||||||||||||||||
|
accounts
|
$ | 2,789 | $ | 95 | $ | - | $ | - | $ | (457 | ) | $ | 2,427 | |||||||||||
|
Inventory
reserves
|
$ | 1,204 | $ | 896 | $ | - | $ | - | $ | (449 | ) | $ | 1,651 | |||||||||||
|
Valuation
allowances for
|
||||||||||||||||||||||||
|
deferred
tax assets
|
$ | 1,418 | $ | 665 | $ | 10,000 | $ | - | $ | - | $ | 12,083 | ||||||||||||
S-1
SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
ANNUAL
REPORT OF FORM 10-K
SIGNA
TURES
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.
|
SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
|
|||||
|
(Registrant)
|
|||||
|
By
|
/s/ Steven J. Borick
|
March
12, 2010
|
|||
|
Steven
J. Borick
|
|||||
|
Chairman,
Chief Executive Officer and President
|
|||||
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and
in
the capacity and on the dates indicated.
|
/s
/ Louis L.
Borick
|
Founding
Chairman and Director
|
March
12, 2010
|
|||||
|
Louis
L. Borick
|
|||||||
|
/s
/ Steven J.
Borick
|
Chairman,
Chief Executive Officer and President
|
March
12, 2010
|
|||||
|
Steven
J. Borick
|
(Principal
Executive Officer)
|
||||||
|
/s
/ Emil J.
Fanelli
|
Vice
President and Corporate Controller
|
March
12, 2010
|
|||||
|
Emil
J. Fanelli
|
(Principal
Accounting Officer and acting Chief Financial Officer)
|
||||||
|
/s
/ Sheldon I.
Ausman
|
Lead
Director
|
March
12, 2010
|
|||||
|
Sheldon
I. Ausman
|
|||||||
|
/s
/ Philip W.
Colburn
|
Director
|
March
12, 2010
|
|||||
|
Philip
W. Colburn
|
|||||||
|
/s
/ Margaret S.
Dano
|
Director
|
March
12, 2010
|
|||||
|
Margaret
S. Dano
|
|||||||
|
/s
/ V. Bond
Evans
|
Director
|
March
12, 2010
|
|||||
|
V.
Bond Evans
|
|||||||
|
/s
/ Michael J.
Joyce
|
Director
|
March
12, 2010
|
|||||
|
Michael
J. Joyce
|
|||||||
|
/s
/ Francisco S.
Uranga
|
Director
|
March
12, 2010
|
|||||
|
Francisco
S. Uranga
|
TABLE OF CONTENTS
Part IItem 1 - BusinessItem 1A Risk FactorsItem 1B Unresolved Staff CommentsItem 2 PropertiesItem 3 - Legal ProceedingsItem 4 - ReservedPart IIItem 5 - Market For Registrant's Common Equity, Related StockholderItem 6 - Selected Financial DataItem 7 - Management's Discussion and Analysis Of Financial ConditionItem 7A Quantitative and Qualitative Disclosures About Market RiskItem 8 Financial Statements and Supplementary DataNote 1 - Summary Of Significant Accounting PoliciesNote 2 Business SegmentsNote 3 Accounts ReceivableNote 4 InventoriesNote 5 Property, Plant and EquipmentNote 6 Investment in Joint VentureNote 7 Income TaxesNote 8 - Leases and Related PartiesNote 9 Retirement PlansNote 10 Accrued ExpensesNote 11 - Commitments and Contingent LiabilitiesNote 12 Stock-based CompensationNote 13 - Common Stock Repurchase ProgramsNote 14 - Other Comprehensive Income (loss)Note 14 - OtherNote 15 Impairment Of Long-lived Assets and Other ChargesNote 16 - Quarterly Financial Data (unaudited)Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A - Controls and ProceduresItem 9B Other InformationPart IIIItem 10 Directors, Executive Officers and Corporate GovernanceItem 11 - Executive CompensationItem 12 - Security Ownership Of Certain Beneficial Owners andItem 13 - Certain Relationships and Related Transactions, and Director IndependenceItem 14 Principal Accountant Fees and ServicesPart IVItem 15 Exhibits and Financial Statement Schedules