Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 25, 2016

                                    


Commission file number: 1-6615

SUPERIOR INDUSTRIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
95-2594729
(State or Other Jurisdiction of  Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
26600 Telegraph Road, Suite 400
 
 
Southfield, Michigan
 
48033
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (248) 352-7300

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  þ    No  o

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  þ    No  o

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  o      Accelerated Filer  þ      Non-Accelerated Filer  o      Smaller Reporting Company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  þ

Number of shares of common stock outstanding as of October 25, 2016: 25,445,075





TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page
PART I
-
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
Item 1
-
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
-
 
 
 
 
 
 
 
 
 
 
Item 3
-
 
 
 
 
 
 
 
 
 
 
Item 4
-
 
 
 
 
 
 
 
 
PART II
-
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
Item 1
-
 
 
 
 
 
 
 
 
 
 
Item 1A
-
 
 
 
 
 
 
 
 
 
 
Item 2
-
 
 
 
 
 
 
 
 
 
 
Item 6
-
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

Superior Industries International, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
 
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
 
September 25,
2016
 
September 27,
2015
 
September 25,
2016
 
September 27,
2015
NET SALES
 
$
175,580

 
$
175,656

 
$
544,354

 
$
533,325

Cost of sales:
 
 
 
 
 


 
 
Cost of sales
 
164,537

 
158,004

 
475,869

 
481,093

Restructuring costs (Note 3)
 
62

 
1,168

 
249

 
4,606

 
 
164,599

 
159,172

 
476,118

 
485,699

GROSS PROFIT
 
10,981

 
16,484

 
68,236

 
47,626

Selling, general and administrative expenses
 
5,731

 
8,425

 
24,724

 
24,858

INCOME FROM OPERATIONS
 
5,250

 
8,059

 
43,512

 
22,768

Interest income (expense), net
 
41

 
(55
)
 
152

 
87

Other expenses, net
 
(381
)
 
(389
)
 
(486
)
 
(933
)
INCOME BEFORE INCOME TAXES
 
4,910

 
7,615

 
43,178

 
21,922

Income tax benefit (provision)
 
1,064

 
(2,669
)
 
(9,576
)
 
(6,108
)
NET INCOME
 
$
5,974

 
$
4,946

 
$
33,602

 
$
15,814

EARNINGS PER SHARE - BASIC
 
$
0.24

 
$
0.19

 
$
1.32

 
$
0.59

EARNINGS PER SHARE - DILUTED
 
$
0.23

 
$
0.19

 
$
1.31

 
$
0.59

DIVIDENDS DECLARED PER SHARE
 
$
0.18

 
$
0.18

 
$
0.54

 
$
0.54



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.

1
Table of Contents

Superior Industries International, Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Dollars in thousands)
(Unaudited)

 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
September 25, 2016
 
September 27, 2015
 
September 25, 2016
 
September 27, 2015
 
 
 
 
 
 
 
 
Net income
$
5,974

 
$
4,946

 
$
33,602

 
$
15,814

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation loss, net of tax
(4,211
)
 
(9,098
)
 
(12,877
)
 
(15,134
)
Change in unrecognized losses on derivative instruments:
 
 
 
 
 
 
 
  Change in fair value of derivatives
(2,545
)
 
(6,826
)
 
(7,961
)
 
(9,844
)
Tax benefit (provision)
—

 
1,935

 
(266
)
 
4,144

Change in unrecognized losses on derivative instruments, net of tax
(2,545
)
 
(4,891
)
 
(8,227
)
 
(5,700
)
Defined benefit pension plan:
 
 

 
 
 
 
Actuarial gains on pension obligation, net of curtailments and amortization
84

 
134

 
252

 
402

Tax provision
(31
)
 
(51
)
 
(93
)
 
(151
)
Pension changes, net of tax
53

 
83

 
159

 
251

Other comprehensive loss, net of tax
(6,703
)
 
(13,906
)
 
(20,945
)
 
(20,583
)
Comprehensive (loss) income
$
(729
)
 
$
(8,960
)
 
$
12,657

 
$
(4,769
)

The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.


2
Table of Contents

Superior Industries International, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
 
 
September 25, 2016
 
December 27, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
35,801

 
$
52,036

Short-term investments
750

 
950

Accounts receivable, net
112,569

 
112,588

Inventories
72,989

 
61,769

Income taxes receivable
7,987

 
1,104

Other current assets
14,552

 
14,476

Assets held for sale
2,897

 
2,897

Total current assets
247,545

 
245,820

Property, plant and equipment, net
227,586

 
234,646

Investment in unconsolidated affiliate
2,000

 
2,000

Non-current deferred income taxes, net
25,238

 
25,598

Other non-current assets
30,839

 
31,865

Total assets
$
533,208

 
$
539,929

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
20,240

 
$
20,913

Accrued expenses
44,120

 
46,214

Income taxes payable
2,520

 
6,735

Total current liabilities
66,880

 
73,862

 
 
 
 
Non-current income tax liabilities
4,871

 
4,510

Non-current deferred income tax liabilities, net
7,076

 
8,094

Other non-current liabilities
50,998

 
39,551

Commitments and contingencies (Note 15)
—

 
—

Shareholders' equity:
 

 
 

Preferred stock, $0.01 par value
 

 
 

Authorized - 1,000,000 shares
 

 
 

Issued - none
—

 
—

Common stock, $0.01 par value
 

 
 

Authorized - 100,000,000 shares
 

 
 

Issued and outstanding - 25,441,920 shares
 
 
 
(26,098,895 shares at December 27, 2015)
89,873

 
88,108

Accumulated other comprehensive loss
(122,658
)
 
(101,713
)
Retained earnings
436,168

 
427,517

Total shareholders' equity
403,383

 
413,912

Total liabilities and shareholders' equity
$
533,208

 
$
539,929


The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents

Superior Industries International, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
 
Thirty-nine Weeks Ended
 
September 25, 2016
 
September 27, 2015
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
39,261

 
$
39,205

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Additions to property, plant and equipment
(30,165
)
 
(32,629
)
Proceeds from sales and maturities of investments
200

 
3,750

Purchase of investments
—

 
(950
)
Proceeds from sale of property, plant and equipment
1

 
1,815

Other
—

 
(18
)
NET CASH USED IN INVESTING ACTIVITIES
(29,964
)
 
(28,032
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Cash dividends paid
(13,783
)
 
(14,371
)
Cash paid for common stock repurchase
(13,527
)
 
(14,374
)
Proceeds from exercise of stock options
1,616

 
7,265

NET CASH USED IN FINANCING ACTIVITIES
(25,694
)
 
(21,480
)
 
 
 
 
Effect of exchange rate changes on cash
162

 
(2,196
)
 
 
 
 
Net decrease in cash and cash equivalents
(16,235
)
 
(12,503
)
 
 
 
 
Cash and cash equivalents at the beginning of the period
52,036

 
62,451

 
 
 
 
Cash and cash equivalents at the end of the period
$
35,801

 
$
49,948



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.



4
Table of Contents

Superior Industries International, Inc.
Condensed Consolidated Statement of Shareholders’ Equity
(Dollars in thousands, except per share data)
(Unaudited)



 
Common Stock
 
Accumulated Other Comprehensive (Loss) Income
 
 
 
 
 
Number of Shares
 
Amount
 
Unrecognized Losses on Derivative Instruments
 
Pension Obligations
 
Cumulative Translation Adjustment
 
Retained Earnings
 
Total
Balance at December 27, 2015
26,098,895

 
$
88,108

 
$
(9,289
)
 
$
(4,140
)
 
$
(88,284
)
 
$
427,517

 
$
413,912

Net income
 
 
 
 
 
 
 
 
 
 
33,602

 
33,602

Change in unrecognized losses on derivative instruments, net of tax
 
 
 
 
(8,227
)
 
—

 
—

 
—

 
(8,227
)
Change in employee benefit plans, net of taxes
 
 
 
 
 
 
159

 
—

 
—

 
159

Net foreign currency translation adjustment
 

 
 

 
 
 
—

 
(12,877
)
 
—

 
(12,877
)
Stock options exercised
85,408

 
1,616

 
 
 
—

 
—

 
—

 
1,616

Restricted stock awards granted, net of forfeitures
(2,126
)
 
—

 
 
 
—

 
—

 
—

 
—

Stock-based compensation expense
—

 
2,621

 
 
 
—

 
—

 
—

 
2,621

Common stock repurchased
(740,257
)
 
(2,472
)
 
 
 
—

 
—

 
(11,055
)
 
(13,527
)
Cash dividends declared ($0.54 per share)
—

 
—

 
 
 
—

 
—

 
(13,896
)
 
(13,896
)
Balance at September 25, 2016
25,441,920

 
$
89,873

 
$
(17,516
)
 
$
(3,981
)
 
$
(101,161
)
 
$
436,168

 
$
403,383


The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.


5
Table of Contents

Superior Industries International, Inc.
Notes to Condensed Consolidated Financial Statements
September 25, 2016
(Unaudited)


Note 1 – Nature of Operations

Headquartered in Southfield, Michigan, the principal business of Superior Industries International, Inc. (referred to herein as the “company” or “we,” “us” and “our”) is the design and manufacture of aluminum wheels for sale to original equipment manufacturers ("OEMs"). We are one of the largest suppliers of cast aluminum wheels to the world’s leading automobile and light truck manufacturers, with manufacturing operations in the United States and Mexico.  Customers in North America represent the principal market for our products. As described in Note 6 - Business Segments, the company operates as a single integrated business and, as such, has only one operating segment - automotive wheels.

Ford Motor Company ("Ford"), General Motors Company ("GM") and Toyota Motor Company ("Toyota") were our customers individually accounting for more than 10 percent of our consolidated sales in the first three quarters of 2016 and together represented approximately 82 percent of our trade sales during the first three quarters of 2016. Additionally, Fiat Chrysler Automotive N.V. ("FCA") individually accounted for 6 percent of our consolidated sales during the first three quarters of 2016 and together with Ford, GM and Toyota represented approximately 88 percent of our trade sales during the first three quarters of 2016. We also manufacture aluminum wheels for BMW, Mazda, Nissan, Subaru, Tesla and Volkswagen.  The loss of all or a substantial portion of our sales to Ford, GM or Toyota would have a significant adverse impact on our operating results and financial condition. This risk is partially mitigated by our long-term relationships with these OEM customers and our supply arrangements, which are generally for multi-year periods.

Demand for automobiles and light trucks (including SUVs and crossover vehicles) in the North American market is subject to many unpredictable factors such as changes in the general economy, gasoline prices, consumer credit availability and interest rates.  Demand for aluminum wheels can be further affected by other factors, including pricing and performance compared to competitive materials such as steel.  Additionally, the demand for our products is influenced by shifts of market share between vehicle manufacturers and the specific market penetration of individual vehicle platforms being sold by our customers.
 
While we historically have had long-term relationships with our customers and our supply arrangements generally are for multi-year periods, maintaining such long-term arrangements on terms acceptable to us remains difficult. Global competitive pricing pressures continue to affect our business negatively as our customers maintain and/or further develop alternative supplier options. Increasingly, global procurement practices and competition, and the pressure for price reductions, may make it more difficult to maintain long-term supply arrangements with our customers. As a result, there can be no guarantees that we will be able to negotiate supply arrangements with our customers on terms acceptable to us in the future.

We are engaged in ongoing programs to reduce our own costs through improved operational and procurement practices in an attempt to mitigate the impact of these pricing pressures. However, these improvement programs may not be sufficient to offset the adverse impact of ongoing pricing pressures and potential reductions in customer demand in future periods. Additional factors such as inconsistent customer ordering patterns, capacity constraints, higher freight costs, increasing product complexity and heightened quality standards also are making it increasingly difficult to reduce our costs. It is also possible that as we incur costs to implement improvement strategies, the initial impact of these strategies on our financial position, results of operations and cash flow may be negative.

The raw materials used in producing our products are readily available and are obtained through suppliers with whom we have, in many cases, relatively long-standing trade relations.


Note 2 – Presentation of Condensed Consolidated Financial Statements

During interim periods, we follow the accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015 (the "2015 Annual Report on Form 10-K") and apply appropriate interim financial reporting standards for a fair statement of our operating results and financial position in conformity with accounting principles generally accepted in the United States of America, as codified by the Financial Accounting Standards Board ("FASB") in the Accounting Standards Codification ("ASC") (referred to herein as "U.S. GAAP"), as indicated below.  Users of financial information produced for interim periods in 2016 are encouraged to read this Quarterly Report on Form 10-Q in conjunction with our consolidated financial statements and notes thereto filed with the Securities and Exchange Commission ("SEC") in our 2015 Annual Report on Form 10-K.

6
Table of Contents


Interim financial reporting standards require us to make estimates that are based on assumptions regarding the outcome of future events and circumstances not known at that time, including the use of estimated effective tax rates.  Inevitably, some assumptions will not materialize, unanticipated events or circumstances may occur which vary from those estimates and such variations may significantly affect our future results. Additionally, interim results may not be indicative of our results for future interim periods or our annual results.

We use a 4-4-5 convention for our fiscal quarters, which are thirteen week periods generally ending on the last Sunday of each calendar quarter.  We refer to these thirteen week fiscal periods as “quarters” throughout this report.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the SEC’s requirements for quarterly reports on Form 10-Q and, in our opinion, contain all adjustments, of a normal and recurring nature, which are necessary for a fair statement of (i) the condensed consolidated statements of operations for the thirteen and thirty-nine week periods ended September 25, 2016 and September 27, 2015, (ii) the condensed consolidated statements of comprehensive (loss) income for the thirteen and thirty-nine week periods ended September 25, 2016 and September 27, 2015, (iii) the condensed consolidated balance sheets at September 25, 2016 and December 27, 2015, (iv) the condensed consolidated statements of cash flows for the thirty-nine week periods ended September 25, 2016 and September 27, 2015, and (v) the condensed consolidated statement of shareholders’ equity for the thirty-nine week period ended September 25, 2016. However, the accompanying unaudited condensed consolidated financial statements do not include all information and notes required by U.S. GAAP.  The condensed consolidated balance sheet as of December 27, 2015, included in this report, was derived from our 2015 audited financial statements, but does not include all disclosures required by U.S. GAAP.

New Accounting Pronouncements

In May 2014, the FASB issued an Accounting Standards Update ("ASU') entitled “Revenue from Contracts with Customers.” The ASU requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a one-year deferral of the effective date. Under the standard it is required to be adopted by public business entities in annual periods beginning on or after December 15, 2017. We are evaluating the impact this guidance will have on our financial position and statement of operations.

In July 2015, the FASB issued an ASU entitled “Simplifying the Measurement of Inventory.” The ASU replaces the current lower of cost or market test with a lower of cost or net realizable value test when cost is determined on a first-in, first-out or average cost basis. The standard is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods therein. It is to be applied prospectively and early adoption is permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.

In February 2016, the FASB issued an ASU entitled "Leases." The ASU requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The ASU offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.

In March 2016, the FASB issued an ASU entitled "Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The objective of the ASU is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.

In August 2016, the FASB issued an ASU entitled "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." The objective of the ASU is to address the diversity in practice in the presentation of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will have on our statement of cash flows.



7
Table of Contents

Note 3 – Restructuring

On July 30, 2014, we announced the planned closure of our manufacturing facility located in Rogers, Arkansas. During the fourth quarter of 2014, we shifted production to our other locations and closed operations at the Rogers facility. The closure resulted in a reduction of the workforce of approximately 500 employees. The action was undertaken in order to reduce costs and enhance our global competitive position. The results for the first three quarters of 2015 reflect $4.6 million of additional costs charged to gross profit due to the closure of our Rogers facility, charges totaling $0.2 million in selling, general and administrative expenses for the write-down of the carrying value of the aircraft we sold in February 2015 and a $0.5 million gain on the sale of the idle warehousing facility located in West Memphis, Arkansas. Additional expenses related to the Rogers facility fixed assets and other closure costs are expected to continue throughout 2016.

As noted above the operations ceased at the Rogers facility during the fourth quarter of 2014. The property is currently held for sale. Based on the current carrying value of the land and building of $2.9 million, we do not expect a loss on sale at this time. In addition, after production ceased at the facility, machinery and equipment to be held and used at our other plants were transferred, with the carrying values depreciating over the remaining estimated useful lives of these assets. We transferred a significant amount of assets to other facilities during 2015 and we determined that some of the assets will not ultimately be transferred. For the assets that were not transferred, we recorded a $2.7 million impairment during 2015.

The total cost expected to be incurred as a result of the Rogers facility closure is $15.6 million, of which $0.2 million and $4.6 million was recognized as of September 25, 2016 and September 27, 2015, respectively. The following table summarizes the Rogers, Arkansas plant closure costs and classification in the condensed consolidated statements of operations for the period ended September 25, 2016:
(Dollars in thousands)
Costs Incurred Through December 27, 2015
 
Costs Incurred During the Thirty-nine Week Period Ended September 25, 2016
 
Costs Remaining
 
Total Expected Costs
 
Classification
Accelerated and other depreciation of assets idled
$
7,006

 
$
209

 
$
566

 
$
7,781

 
Cost of sales, Restructuring costs
Severance costs
2,011

 
—

 
—

 
2,011

 
Cost of sales, Restructuring costs
Equipment removal and impairment, inventory written-down, lease termination and other costs
5,424

 
40

 
338

 
5,802

 
Cost of sales, Restructuring costs
 
$
14,441

 
$
249

 
$
904

 
$
15,594

 
 

The Rogers facility restructuring is almost completed as we anticipate removing the remaining equipment from the facility this year. We had $25 thousand accrued as of December 27, 2015 for restructuring and it has remained at about the same level for the thirty-nine weeks ended September 25, 2016.


Note 4 - Fair Value Measurements

The company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis, while other assets and liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset impairment. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

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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.

Cash and Cash Equivalents

Included in cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal. A debt security is classified as a cash equivalent if it meets these criteria and if it has a remaining time to maturity of three months or less from the date of acquisition. Amounts on deposit and available upon demand, or negotiated to provide for daily liquidity without penalty, are classified as cash and cash equivalents. Time deposits, certificates of deposit, and money market accounts that meet the above criteria are reported at par value on our balance sheet and are excluded from the table below.

Derivative Financial Instruments

Our derivatives are over-the-counter customized derivative transactions and are not exchange traded. We estimate the fair value of these instruments using industry-standard valuation models such as a discounted cash flow model. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates, commodity prices, and the contractual terms of the derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g., LIBOR) plus an adjustment for non-performance risk. In certain cases, market data may not be available and we may use broker quotes and models (e.g., Black-Scholes) to determine fair value. This includes situations where there is lack of liquidity for a particular currency or commodity or when the instrument is longer dated.

Cash Surrender Value
 
The cash surrender value of the life insurance policies is the sum of money the insurance company will pay to the company in the event the policy is voluntarily terminated before its maturity or the insured event occurs. Over the term of the life insurance contracts, the cash surrender value changes as a result of premium payments and investment income offset by investment losses, charges and miscellaneous fees. The amount of the asset recorded for the investment in the life insurance contracts is based on the amount that will be realized under the contract as of the balance sheet date if the insured event occurs.

The following table categorizes items measured at fair value at September 25, 2016:

 
 
 
Fair Value Measurement at Reporting Date Using
 
 
 
Quoted Prices
 
Significant Other
 
Significant
 
 
 
in Active Markets
 
Observable
 
Unobservable
 
 
 
for Identical Assets
 
Inputs
 
Inputs
September 25, 2016
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
(Dollars in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Certificates of deposit
$
750

 
$
—

 
$
750

 
$
—

Cash surrender value
7,385

 
—

 
7,385

 
—

Derivative contracts
28

 
—

 
28

 
—

Total
$
8,163

 
$
—

 
$
8,163

 
$
—

 


 


 


 


Liabilities


 


 


 


Derivative contracts
$
22,616

 
$
—

 
$
22,616

 
$
—

Total
$
22,616

 
$
—

 
$
22,616

 
$
—










9
Table of Contents

The following table categorizes items measured at fair value at December 27, 2015:

 
 
 
Fair Value Measurement at Reporting Date Using
 
 
 
Quoted Prices
 
Significant Other
 
Significant
 
 
 
in Active Markets
 
Observable
 
Unobservable
 
 
 
for Identical Assets
 
Inputs
 
Inputs
December 27, 2015
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
(Dollars in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Certificates of deposit
$
950

 
$
—

 
$
950

 
$
—

Cash surrender value
6,923

 
—

 
6,923

 
—

Derivative contracts
113

 
—

 
113

 
—

Total
$
7,986

 
$
—

 
$
7,986

 
$
—

 


 


 


 


Liabilities


 


 


 


Derivative contracts
$
14,159

 
$
—

 
$
14,159

 
$
—

Total
$
14,159

 
$
—

 
$
14,159

 
$
—



Note 5 - Derivative Financial Instruments

We use derivatives to partially offset our business exposure to foreign currency risk. We may enter into forward contracts, option contracts, swaps, collars or other derivative instruments to offset some of the risk on expected future cash flows and on certain existing assets and liabilities. However, we may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.

To help protect gross margins from fluctuations in foreign currency exchange rates, certain of our subsidiaries whose functional currency is the U.S. dollar hedge a portion of forecasted foreign currency costs. Generally, we may hedge portions of our forecasted foreign currency exposure associated with costs, typically for up to 39 months.

We record all derivatives in the consolidated balance sheets at fair value. Our accounting treatment for these instruments is based on the hedge designation. The effective portions of cash flow hedges are recorded in Accumulated Other Comprehensive Income ("AOCI") until the hedged item is recognized in earnings. The ineffective portions of cash flow hedges are recorded in cost of sales. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates. All derivatives were designated as hedging instruments at September 25, 2016 and December 27, 2015.

Deferred gains and losses associated with cash flow hedges of foreign currency costs are recognized as a component of cost of sales in the same period as the related cost is recognized. Our foreign currency transactions hedged with cash flow hedges as of September 25, 2016, are expected to occur within 1 month to 39 months.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified immediately into other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions.

We had no gains or losses recognized in other income and expense for foreign currency forward and option contracts not designated as hedging instruments during the thirty-nine week period ended September 25, 2016 or the year ended December 27, 2015.






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The following table displays the fair value of derivatives by balance sheet line item:
 
September 25, 2016
 
December 27, 2015
(Dollars in thousands)
Other Non-current Assets
 
Accrued Liabilities
 
Other Non-current Liabilities
 
Other Non-current Assets
 
Accrued Liabilities
 
Other Non-current Liabilities
Foreign exchange forward contracts and collars designated as hedging instruments
$
28

 
$
10,804

 
$
11,812

 
$
113

 
$
9,629

 
$
4,530

Total derivative financial instruments
$
28

 
$
10,804

 
$
11,812

 
$
113

 
$
9,629

 
$
4,530


The following table summarizes the notional amount and estimated fair value of our derivative financial instruments:
 
 
September 25, 2016
 
 
December 27, 2015
(Dollars in thousands)
 
U.S. Dollar Notional Amount
 
Fair Value
 
U.S. Dollar Notional Amount
 
Fair Value
Foreign exchange forward contracts and collars designated as hedging instruments
 
$
156,528

 
$
22,588

 
$
162,590

 
$
14,046

Total derivative financial instruments
 
$
156,528

 
$
22,588

 
$
162,590

 
$
14,046


Notional amounts are presented on a gross basis. The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates, or commodity volumes and prices.

The following table provides the impact of derivative instruments designated as cash flow hedges on our consolidated income statement:
Thirty-nine Week Period Ended September 25, 2016
 
Amount of Gain or (Loss) Recognized in AOCI on Derivatives (Effective Portion)
 
Amount of Pre-tax Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) 
 
Amount of Pre-tax Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(Dollars in thousands)
 
 
 
 
 
 
Foreign exchange forward contracts and collars
 
$
8,227

 
$
9,777

 
$
133

Total
 
$
8,227

 
$
9,777

 
$
133



Note 6 – Business Segments

The company's Chief Executive Officer is our chief operating decision maker ("CODM") because he has final authority over performance assessment and resource allocation decisions.  The CODM evaluates both consolidated and disaggregated financial information for each of the company's business units in deciding how to allocate resources and assess performance.  Each manufacturing facility manufactures the same products, ships products to the same group of customers, utilizes the same cast manufacturing process and, as a result, production can generally be transferred among our facilities.  Accordingly, we operate as a single integrated business and, as such, have only one operating segment - automotive wheels.  









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Geographic Information

Net sales by geographic location are as follows:
(Dollars in thousands)
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
Net sales:
September 25,
2016
 
September 27,
2015
 
September 25,
2016
 
September 27,
2015
U.S.
$
27,338

 
$
41,935

 
$
95,407

 
$
127,431

Mexico
148,242

 
133,721

 
448,947

 
405,894

Consolidated net sales
$
175,580

 
$
175,656

 
$
544,354

 
$
533,325


Long Lived Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets includes property, plant and equipment, net, by geographic location as follows:
 
 
Property, plant and equipment, net:
 
 
 
 
September 25,
2016
 
December 27,
2015
U.S.
 
 
 
 
$
39,907

 
$
44,274

Mexico
 
 
 
 
187,679

 
190,372

Consolidated property, plant and equipment, net
 
 
 
 
$
227,586

 
$
234,646



Note 7 – Short-Term Investments

The company's short-term investments include certificates of deposit and fixed deposits with original maturities of three months or less. Certificates of deposit and fixed deposits whose original maturity is greater than three months and is one year or less are classified as short-term investments and certificates of deposit and fixed deposits whose maturity is greater than one year at the balance sheet date are classified as non-current assets in our condensed consolidated balance sheets. The purchase of any certificates of deposit or fixed deposits that are classified as short-term investments or non-current assets appear in the investing section of our condensed consolidated statements of cash flows.

Restricted Deposits

We purchase certificates of deposit that mature within twelve months and are used to secure or collateralize letters of credit securing our workers’ compensation obligations.  At September 25, 2016 and December 27, 2015, certificates of deposit totaling $0.8 million and $1.0 million, respectively, were restricted in use and were classified as short-term investments on our condensed consolidated balance sheets. 


Note 8 – Inventories
(Dollars in thousands)
 
 
 
 
September 25, 2016
 
December 27, 2015
Raw materials
$
35,874

 
$
19,148

Work in process
21,527

 
21,063

Finished goods
15,588

 
21,558

Inventories
$
72,989

 
$
61,769


Service wheel and supplies inventory included in other non-current assets in the condensed consolidated balance sheets totaled $6.6 million and $6.9 million at September 25, 2016 and December 27, 2015, respectively. Included in raw materials were operating supplies and spare parts totaling $10.3 million and $9.2 million on September 25, 2016 and December 27, 2015, respectively.


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Note 9 – Property, Plant and Equipment
(Dollars in thousands)
 
 
 
 
September 25, 2016
 
December 27, 2015
Land and buildings
$
68,317

 
$
73,803

Machinery and equipment
483,724

 
486,612

Leasehold improvements and others
4,618

 
4,204

Construction in progress
30,778

 
20,455

 
587,437

 
585,074

Accumulated depreciation
(359,851
)
 
(350,428
)
Property, plant and equipment, net
$
227,586

 
$
234,646


Depreciation expense was $25.9 million and $25.7 million for the thirty-nine weeks ended September 25, 2016 and September 27, 2015, respectively.


Note 10 – Preproduction Costs Related to Long-Term Supply Arrangements

We incur preproduction engineering and tooling costs related to the products produced for our customers under long-term supply agreements. We expense all preproduction engineering costs for which reimbursement is not contractually guaranteed by the customer or which are in excess of the contractually guaranteed reimbursement amount. 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 customers and recognize the tooling reimbursement revenue over the same period in which the tooling is in use. Changes in the facts and circumstances of individual wheel programs may accelerate the amortization of both the cost of customer-owned tooling and the deferred tooling reimbursement revenues. Recognized tooling reimbursement revenues, which totaled $6.2 million and $1.3 million for the thirty-nine weeks ended September 25, 2016 and September 27, 2015, respectively, are included in net sales in the condensed consolidated statements of operations. The following tables summarize the unamortized customer-owned tooling costs included in our non-current assets, and the deferred tooling revenues included in accrued liabilities and other non-current liabilities:
(Dollars in Thousands)
 
September 25, 2016
 
December 27, 2015
Unamortized Preproduction Costs
 
 
 
 
Preproduction costs
 
$
76,648

 
$
73,095

Accumulated amortization
 
(63,417
)
 
(58,632
)
Net preproduction costs
 
$
13,231

 
$
14,463

 
 
 
 
 
Deferred Tooling Revenues
 
 
 
 
Accrued expenses
 
$
2,096

 
$
2,908

Other non-current liabilities
 
6,037

 
1,266

Total deferred tooling revenues
 
$
8,133

 
$
4,174



Note 11 – Earnings Per Share

In accordance with U.S. GAAP, basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period.  For the 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 and time and performance based restricted stock units under the treasury stock method, which includes consideration of stock-based compensation required by U.S. GAAP.

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Table of Contents

(Dollars in thousands, except per share amounts)
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
September 25,
2016
 
September 27,
2015
 
September 25,
2016
 
September 27,
2015
Basic Income Per Share:
 
 
 
 
 
 
 
Reported net income
$
5,974

 
$
4,946

 
$
33,602

 
$
15,814

Basic income per share
$
0.24

 
$
0.19

 
$
1.32

 
$
0.59

Weighted average shares outstanding - Basic
25,424

 
26,557

 
25,482

 
26,708

 

 

 

 

Diluted Income Per Share:

 
 
 

 

Reported net income
$
5,974

 
$
4,946

 
$
33,602

 
$
15,814

Diluted income per share
$
0.23

 
$
0.19

 
$
1.31

 
$
0.59

Weighted average shares outstanding
25,424

 
26,557

 
25,482

 
26,708

Weighted average dilutive stock options and restricted stock units
146

 
27

 
97

 
37

Weighted average shares outstanding - Diluted
25,570

 
26,584

 
25,579

 
26,745


For the first three quarters of 2016 and 2015, no options were excluded from the diluted earnings per share calculation as being anti-dilutive. In addition, the performance shares discussed in Note 16 - Stock-Based Compensation are not included in the diluted earnings per share because the performance metrics had not been met as of the period ended September 25, 2016.


Note 12 – Income Taxes

The estimated annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates and applied to year-to-date ordinary income (loss). The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances, settlements with taxing authorities and effects of changes in tax laws or rates, are reported in the interim period in which they occur.

The income tax benefit for the thirteen weeks ended September 25, 2016 was $1.1 million, representing an effective income tax benefit of 22 percent. The income tax provision for the thirty-nine weeks ended September 25, 2016, was $9.6 million, representing an effective income tax rate of 22 percent. The effective tax rate for the thirty-nine weeks ended September 25, 2016 decreased to 22 percent from 28 percent for the first six months of 2016 due to a decrease in forecasted earnings, which resulted in the third quarter of 2016 being a tax benefit. The effective tax rates for the thirteen and thirty-nine weeks ended September 25, 2016 were lower than the statutory rate due to the mix of income before taxes for entities included in our effective income tax rate calculation, the effect of the business restructuring to realign our operations, which was implemented in the fourth quarter of 2015 and discrete tax benefits due to the release of certain liabilities related to uncertain tax positions as a result of settlements with various tax jurisdictions.

The income tax provision for the thirteen weeks ended September 27, 2015 was $2.7 million, representing an effective income tax rate of 35 percent. The income tax provision for the thirty-nine weeks ended September 27, 2015, was $6.1 million, representing an effective income tax rate of 28 percent. The effective tax rates for the thirteen and thirty-nine weeks ended September 27, 2015 were lower than the statutory rate due to the release of certain liabilities related to uncertain tax positions as a result of the expiration of statute of limitations, partially offset by certain non-deductible expenses, state income taxes (net of federal tax benefit) and interest and penalties on unrecognized tax benefits.


Note 13 – Retirement Plans

We have an unfunded salary continuation plan covering certain directors, officers and other key members of management.  We purchase life insurance policies on certain participants to provide in part for future liabilities. Cash surrender value of these policies, totaling $7.4 million and $6.9 million at September 25, 2016 and December 27, 2015, respectively, are included in other non-current assets in the company's condensed consolidated balance sheets. 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.  The plan was closed to new participants effective February 3, 2011. We have measured the plan assets and obligations of our salary continuation plan for all periods presented.

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Table of Contents


For the thirty-nine weeks ended September 25, 2016, payments to retirees or their beneficiaries totaled approximately $1.2 million.  We presently anticipate benefit payments in 2016 to total approximately $1.6 million.  The following table summarizes the components of net periodic pension cost for the first three quarters of 2016 and 2015.

(Dollars in thousands)
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
September 25, 2016
 
September 27, 2015
 
September 25, 2016
 
September 27, 2015
Service cost
$
—

 
$
11

 
$
—

 
$
33

Interest cost
304

 
307

 
912

 
923

Net amortization
84

 
134

 
252

 
401

Net periodic pension cost
$
388

 
$
452

 
$
1,164

 
$
1,357



Note 14 - Line of Credit

On December 19, 2014, we entered into a senior secured credit agreement (the "Credit Agreement") with J.P. Morgan Securities LLC, JP Morgan Chase Bank, N.A. (“JPMCB”) and Wells Fargo Bank, National Association (together with JPMCB, the “Lenders”).

The Credit Agreement consists of a senior secured revolving credit facility in an initial aggregate principal amount of $100.0 million (the “Facility”). In addition, the company is entitled to request, subject to certain terms and conditions and the agreement of the Lenders, an increase in the aggregate revolving commitments under the Facility or to obtain incremental term loans in an aggregate amount not to exceed $50.0 million, which currently is uncommitted to by any lenders. As of September 25, 2016, the company had $97.2 million of availability under the Facility after giving effect to $2.8 million in outstanding letters of credit.

The Credit Agreement expires on December 19, 2019 and borrowings under the Facility accrue interest at (i) a London interbank offered rate plus a margin of between 0.75 percent and 1.25 percent based on the total leverage ratio of Superior and its subsidiaries on a consolidated basis, (ii) a rate based on JPMCB’s prime rate plus a margin of between 0.00 percent and 0.25 percent based on the total leverage ratio of the company and its subsidiaries on a consolidated basis or (iii) a combination thereof. Commitment fees are 0.2 percent on the unused portion of the facility. The commitment fees are included as interest expense in our consolidated financial statements.

Generally, all amounts under the Facility are guaranteed by certain of the U.S. subsidiaries of the company and are secured by a first priority security interest in and lien on the personal property of the company and the U.S. guarantors (as defined in the Credit Agreement) and a pledge of and first perfected security interest in the equity interests of the company’s existing and future U.S. subsidiaries and 65 percent of the equity interests in certain non-U.S. direct material subsidiaries of the company and the U.S. guarantors under the Facility.

The Credit Agreement contains certain customary restrictive covenants, including, among others, financial covenants requiring the maintenance of a maximum total leverage ratio and a minimum fixed charge coverage ratio, and also includes, without limitation, covenants, in each case with certain exceptions and allowances, limiting the ability of the company and its subsidiaries to incur indebtedness, grant liens, make investments, dispose of assets, make certain restrictive payments, make optional payments and modifications of subordinated debt instruments, enter into certain transactions with affiliates, enter into swap agreements, make capital expenditures or make changes to its lines of business. At September 25, 2016, we were in compliance with all covenants contained in the Credit Agreement. At September 25, 2016, we had no borrowings under this facility other than the outstanding letters of credit referred to above.

The Credit Agreement contains customary default provisions, representations and warranties and restrictive covenants.  The Credit Agreement also contains a provision permitting the lenders to accelerate the repayment of all loans outstanding under the Facility during an event of default.





15
Table of Contents

Note 15 – Commitments and Contingencies

Derivatives and Purchase Commitments

In order to hedge exposure related to fluctuations in foreign currency rates and the cost of certain commodities used in the manufacture of our products, we periodically may purchase derivative financial instruments such as forward contracts, options or collars to offset or mitigate the impact of such fluctuations. Programs to hedge currency rate exposure may address ongoing transactions including foreign-currency-denominated receivables and payables, as well as specific transactions related to purchase obligations. Programs to hedge exposure to commodity cost fluctuations would be based on underlying physical consumption of such commodities.

In accordance with our corporate risk management policies, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions and forecasted future cash flows. We have implemented a program to hedge a portion of our material foreign exchange exposures for up to approximately 39 months. We do not use derivative contracts for trading, market-making, or speculative purposes. For additional information on our derivatives, see Note 5 - Derivative Financial Instruments.

When market conditions warrant, we may also enter into purchase commitments to secure the supply of certain commodities used in the manufacture of our products, such as aluminum, natural gas and other raw materials. We had several purchase commitments in place for the delivery of natural gas through 2015. These natural gas contracts are considered to be derivatives under U.S. GAAP, and when entering into these contracts, it was expected that we would take full delivery of the contracted quantities of natural gas over the normal course of business. Accordingly, at inception, these contracts qualified for the normal purchase, normal sale ("NPNS") exemption provided for under U.S. GAAP. As such, we do not account for these purchase commitments as derivatives unless there is a change in facts or circumstances in regard to the company's intent or ability to use the contracted quantities of natural gas over the normal course of business.

Other

We are party to various 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.


Note 16 – Stock-Based Compensation

2008 Equity Incentive Plan

Our 2008 Equity Incentive Plan, as amended (the "Plan"), authorizes us to issue up to 3.5 million shares of common stock, along with non-qualified stock options, stock appreciation rights, restricted stock and performance units to our officers, key employees, non-employee directors and consultants.  At September 25, 2016, there were 1.8 million shares available for future grants under this Plan. No more than 600,000 shares may be used under the Plan as “full value” awards, which include restricted stock and performance stock units.  It is our policy to issue shares from authorized but not issued shares upon the exercise of stock options. 

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 and restricted shares granted under this Plan generally require no less than a three year ratable vesting period. During the first nine months of 2016 no stock options were granted, 34,750 stock options expired, 85,408 stock options were exercised and 24,750 options were canceled.

Restricted stock awards, or “full value” awards, generally vest ratably over no less than a three year period. Shares of restricted stock granted under the Plan are considered issued and outstanding at the date of grant, have the same dividend and voting rights as other outstanding common stock, are subject to forfeiture if employment terminates prior to vesting, and are expensed ratably over the vesting period. Dividends paid on the restricted shares granted under the Plan are non-forfeitable if the restricted shares do not ultimately vest.


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Table of Contents

During the first quarter of 2015, the company implemented a long term incentive program for the benefit of certain members of company management. The program was designed to strengthen employee retention and to provide a more structured incentive program to stimulate improvement in future company results. Per the terms of the program, participants were granted, in 2016 and 2015, time value restricted stock units (“RSUs”), vesting ratably over a three year time period, and performance restricted stock units (“PSUs”), with a three year cliff vesting. Upon vesting, each restricted stock award is exchangeable for one share of the company’s common stock, with accrued dividends. The PSUs are categorized further into three individual categories whose vesting is contingent upon the achievement of certain targets as follows:

•
40% of the PSUs vest upon certain Return on Invested Capital targets for 2016 and 2015 units
•
40% of the PSUs vest upon certain Cumulative EPS targets for 2016 units
•
40% of the PSUs vest upon certain EBITDA margin targets for 2015 units
•
20% of the PSUs vest upon certain market based Shareholder Return targets for 2016 and 2015 units.

In the aggregate, the company granted a total of 343,428 RSUs and PSUs in 2016 and 2015, net of forfeitures, comprising:
       
2016 Grants

•
26,841 time value based RSUs with a grant date fair value of $22.82 per unit
•
32,051 time value based RSUs with a grant date fair value of $18.72 per unit
•
20,629 time value based RSUs with a grant date fair value of $25.45 per unit
•
901 time value based RSUs with a grant date fair value of $30.22 per unit
•
42,946 PSUs with an initial grant date fair value of $22.82 per unit
•
51,282 PSUs with an initial grant date fair value of $18.72 per unit
•
1,440 PSUs with a grant date fair value of $30.22 per unit
•
10,736 market based PSUs with a grant date fair value of $22.82 per unit
•
12,821 market based PSUs with a grant date fair value of $18.72 per unit
•
361 market based PSUs with a grant date fair value of $30.22 per unit

2015 Grants

•
43,367 time value based RSUs with a grant date fair value of $18.78 per unit
•
80,044 PSUs with an initial grant date fair value of $18.78 per unit
•
20,010 market based PSUs with a grant date fair value of $24.81 per unit.

Stock-based compensation expense related to our equity incentive plans in accordance with U.S. GAAP was allocated as follows:
(Dollars in thousands)
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
September 25,
2016
 
September 27,
2015
 
September 25,
2016
 
September 27,
2015
Cost of sales
$
6

 
$
97

 
$
364

 
$
293

Selling, general and administrative expenses
338

 
692

 
2,294

 
1,766

Stock-based compensation expense before income taxes
344

 
789

 
2,658

 
2,059

Income tax benefit
(123
)
 
(277
)
 
(771
)
 
(577
)
Total stock-based compensation expense after income taxes
$
221

 
$
512

 
$
1,887

 
$
1,482


As of September 25, 2016, a total of $4.8 million of unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted average period of approximately 1.8 years.  There were no significant capitalized stock-based compensation costs at September 25, 2016 and December 27, 2015.






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Table of Contents

Note 17 - Common Stock Repurchase Programs
In October 2014, our Board of Directors approved a new stock repurchase program (the "2014 Repurchase Program") which authorized the repurchase of up to $30.0 million of our common stock. Under the 2014 Repurchase Program, we repurchased common stock from time to time on the open market or in private transactions. Shares repurchased under the 2014 Repurchase Program totaled 1,056,954 at a cost of $19.6 million, all of which were repurchased during 2015. The 2014 Repurchase Program was completed in January 2016, with purchases since December 27, 2015 of 585,970 shares at a cost of $10.3 million. The repurchased shares described above were either canceled and retired or added to treasury stock after the reincorporation in Delaware in 2015.

In January 2016, our Board of Directors approved a new stock repurchase program (the “2016 Repurchase Program”), authorizing the repurchase of up to $50.0 million of common stock.  Under the 2016 Repurchase Program, we may repurchase common stock from time to time on the open market or in private transactions. The timing and extent of the repurchases under the 2016 Repurchase Program will depend upon market conditions and other corporate considerations in our sole discretion. Shares repurchased under the 2016 Repurchase Program totaled 154,287 shares of company stock at a cost of $3.2 million in the first three quarters of 2016.


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Table of Contents


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations


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 have included or incorporated by reference in this Quarterly Report on Form 10-Q (including in the sections entitled "Risk Factors" and “Management's Discussion and Analysis of Financial Condition and Results of Operations”) and from time to time our management may make statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Act of 1934. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and costs and potential liability for environmental-related matters. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expects,” “anticipates,” “believes,” “will,” “will likely result,” “will continue,” “plans to” and similar expressions. These statements include our belief regarding general automotive industry and market conditions and growth rates, as well as general domestic and international economic conditions.
 
Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the company, which could cause actual results to differ materially from such statements and from the company's historical results and experience. These risks, uncertainties and other factors include, but are not limited to, those described in Part I - Item 1A - "Risk Factors" and Part II - Item 7 - “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 27, 2015 and Part II - Item 1A - "Risk Factors" and Part I - Item 2 - “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and elsewhere in the Quarterly Report and those described from time to time in our other reports filed with the Securities and Exchange Commission.

Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the risks described herein should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto and with the audited Consolidated Financial Statements, notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2015 Annual Report on Form 10-K.


Executive Overview

Historically our business focus primarily was on providing wheels for relatively high-volume programs with lower degrees of competitive differentiation. In order to improve our strategic position, we are in the process of augmenting our product portfolio with wheels containing higher technical content and greater differentiation. We believe this direction is consistent with the trend of the market and needs of our customers. In connection with this strategic advancement, we opened a new plant in Mexico in 2015 and continue to invest in new manufacturing processes targeting the more sophisticated and larger diameter products which typically have more value. Because the majority of our customer programs are planned two or three years in advance, the upgrade of our product portfolio will occur over time.

Results in the third quarter of 2016 include an estimated $10.4 million in costs reflecting the impact of significant operating inefficiencies incurred in one of our manufacturing facilities. The inefficiencies stemmed from a variety of issues that reduced production rates. These issues began late in the second quarter but grew in complexity and magnitude during the third quarter. Contributing factors to the third quarter inefficiencies included a third quarter electricity outage and unanticipated equipment reliability issues which reduced finished goods and work-in-process inventories. We also experienced several new product launches and significant ramp up in demand for newer products in the third quarter for which unusually high scrap rates are occurring. Lower than normal production yields coupled with the loss of inventory safety stock resulted in a series of expedited shipments to customers. The higher than normal costs for the third quarter included $5.9 million in freight expediting costs and an estimated $3.8 million of higher plant labor expense related to the production inefficiency.



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We have expedited investments to alleviate production bottlenecks which contributed to the third quarter challenges. We also performed significant levels of maintenance to address equipment reliability issues. Reducing high scrap rates being incurred is being addressed through a series of ongoing actions which are expected to continue throughout the fourth quarter. While higher costs related to production and shipping challenges are expected to decline in the fourth quarter, there is some uncertainty as to the pace of improvement.

The chart below shows the positive trend we have been experiencing in gross profit as a percentage of sales over the last two years. Our gross profit as a percentage of sales decreased to 6.3 percent in the third quarter of 2016 due to the aforementioned inefficiencies. The impact of the third quarter inefficiencies in the one plant in the third quarter of 2016 are highlighted below.

q32016plantinefficienciesv31.jpg

Despite the decrease in profitability in the third quarter of 2016, our sales volume and profitability for the first nine months of 2016 significantly exceeded last year. Our nine-month unit volume increased by 14.1% when compared to the same period last year. The volume increase was driven by our new passenger car programs as well as by continued strength in our largest light truck programs. Our gross profit as a percentage of sales for the first nine months of 2016 increased to 12.5 percent compared to 8.9 percent for the same period last year. Adjusted EBITDA as a percent of value added sales improved, growing to 23.1 percent in the first nine months of 2016 from 19.7 percent in the first nine months of 2015. The margin expansion largely resulted from cost improvement in the first six months of 2016, aided significantly by greater allocation of production to our Mexico facilities, including our newest factory which was in the earlier stages of production ramp-up during the first half of 2015. The charts below on the left illustrates the trend of year-to-date income from operations measured as a percent of sales and adjusted EBITDA measured as a percent of value added sales. The graph on the lower right shows the trend of our stock price for the same time period.


20
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ebitdaandstockpricechartsq32.jpg

Our industry is mainly driven by production levels in North America and to a much lesser extent in South America. The North American production level, in the first nine months of 2016, was 13.5 million vehicles, a 2.9 percent, or 0.4 million unit, increase over the comparable period a year ago. We track annual production rates based on information from Ward's Automotive Group. The North American annual production levels of automobiles and light-duty trucks (including SUV's, vans and "crossover vehicles") continued the trend of growth since the 2009 recession. Current economic conditions, low consumer interest rates and relatively inexpensive gas prices have been generally supportive of market growth and, in addition, the record high average age of vehicles on the road appears to be contributing to higher rates of vehicle replacement. It was reported at the end of 2015 that the average age of all light vehicles in the U.S. increased to an all-time high of 11.5 years, according to IHS Automotive.

As part of our commitment to enhancing shareholder value, we have been repurchasing our common stock. Beginning in 2013 through the end of our fiscal year 2015, we have repurchased 2,567,713 shares for a cost of $49.6 million. Thus far in 2016, we have repurchased 740,257 shares for a cost of $13.5 million.



21
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Results of Operations
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
 
Thirty-nine Weeks Ended
 
Selected data
 
September 25,
2016
 
September 27,
2015
 
Change
September 25,
2016
 
September 27,
2015
Change
Net sales
 
$
175,580

 
$
175,656

 
$
(76
)
$
544,354

 
$
533,325

$
11,029

Value added sales (1)
 
$
98,799

 
$
87,905

 
$
10,894

$
302,328

 
$
257,837

$
44,491

Gross profit
 
$
10,981

 
$
16,484

 
$
(5,503
)
$
68,236

 
$
47,626

$
20,610

Percentage of net sales
 
6.3
%
 
9.4
%
 
(3.1
)%
12.5
%
 
8.9
%
3.6
%
Income from operations
 
$
5,250

 
$
8,059

 
$
(2,809
)
$
43,512

 
$
22,768

$
20,744

Percentage of net sales
 
3.0
%
 
4.6
%
 
(1.6
)%
8.0
%
 
4.3
%
3.7
%
Adjusted EBITDA (2)
 
$
13,770

 
$
17,094

 
$
(3,324
)
$
69,817

 
$
50,771

$
19,046

Percentage of net sales (2) (3)
 
7.8
%
 
9.7
%
 
(1.9
)%
12.8
%
 
9.5
%
3.3
%
Percentage of value added sales (1) (2) (4)
 
13.9
%
 
19.4
%
 
(5.5
)%
23.1
%
 
19.7
%
3.4
%
Net income
 
$
5,974

 
$
4,946

 
$
1,028

$
33,602

 
$
15,814

$
17,788

Percentage of net sales
 
3.4
%
 
2.8
%
 
0.6
 %
6.2
%
 
3.0
%
3.2
%
Diluted income per share
 
$
0.23

 
$
0.19

 
$
0.04

$
1.31

 
$
0.59

$
0.72

Unit shipments in thousands
 
2,912

 
2,778

 
134

9,163

 
8,030

1,133


(1) Value added sales is a key measure that is not calculated according to GAAP. In the discussion of operating results, we provide information regarding value added sales. Value added sales represents net sales less the value of aluminum and services provided by outside service providers that are included in net sales. As discussed further below, arrangements with our customers allow us to pass on changes in aluminum prices and outside service provider costs; therefore, fluctuations in underlying aluminum prices and the use of outside service providers generally do not directly impact our profitability. Accordingly, value added sales is worthy of being highlighted for the benefit of users of our financial statements. Our intent is to allow users of the financial statements to consider our net sales information both with and without the aluminum and outside service provider cost components thereof. Management utilizes value added sales as a key metric to determine growth of the company because it eliminates the volatility of aluminum prices. See the Non-GAAP Financial Measures section of this quarterly report for a reconciliation of value added sales to net sales.

(2) Adjusted EBITDA is a key measure that is not calculated according to GAAP. Adjusted EBITDA is defined as earnings before interest income and expense, income taxes, depreciation, amortization, restructuring and other closure costs and impairments of long-lived assets and investments. We use Adjusted EBITDA as an important indicator of the operating performance of our business. We use Adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our Board of Directors and evaluating short-term and long-term operating trends in our operations. We believe the Adjusted EBITDA financial measure assists in providing a more complete understanding of our underlying operational measures to manage our business, to evaluate our performance compared to prior periods and the marketplace, and to establish operational goals. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. See the Non-GAAP Financial Measures section of this quarterly report for a reconciliation of our Adjusted EBITDA to net income.

(3) Adjusted EBITDA: Percentage of net sales is a key measure that is not calculated according to GAAP. Adjusted EBITDA as a percentage of net sales is defined as Adjusted EBITDA divided by net sales. See the Non-GAAP Financial Measures section of this quarterly report for a reconciliation of Adjusted EBITDA.

(4) Adjusted EBITDA: Percentage of value added sales is a key measure that is not calculated according to GAAP. Adjusted EBITDA as a percentage of value added sales is defined as Adjusted EBITDA divided by value added sales. See the Non-GAAP Financial Measures section of this quarterly report for a reconciliation of Adjusted EBITDA and value added sales.


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Net Sales Comparison

 
 
 
 
(Dollars in thousands)
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
Period ending September 27, 2015
 
$
175,656

 
$
533,325

Volume
 
9,179

 
76,373

Aluminum prices
 
(11,147
)
 
(64,961
)
Sales mix and other
 
1,892

 
(383
)
Period ending September 25, 2016
 
$
175,580

 
$
544,354


Net sales for the third quarter decreased marginally by $0.1 million from the comparable period a year ago. The decrease in net sales primarily reflected a significant decline in the value of aluminum offset partially by an increase in unit shipments. The largest unit shipment increases were for GM, Nissan and Toyota with offsetting decreases for Ford and Chrysler. A higher value sales mix also occurred in the current year period.  Value added sales increased $10.9 million to $98.8 million in the third quarter of 2016 due to the increase in unit shipments. The average selling price on value added sales of our wheels increased marginally.

Net sales in the first nine months of 2016 increased $11.0 million, or 2.1 percent over the comparable period a year ago. Net sales in the first nine months of 2016 increased due to a 14.1 percent increase in shipments in the first nine months of 2016, translating to approximately $76.4 million more in revenue. The decrease in aluminum value resulted in $65.0 million lower revenues in the first nine months of 2016 when compared to 2015. Additionally, value added sales increased $44.5 million to $302.3 million from $257.8 million over the comparable period a year ago. The average selling price on value added sales of our wheels increased 7.2 percent.

Geographic Sales

 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Thirteen Weeks Ended
 
 
 
Thirty-nine Weeks Ended
 
 
 
September 25, 2016
 
September 27, 2015
 
Change
 
September 25, 2016
 
September 27, 2015
 
Change
Selected data
 
 
 
 
 
 
 
 
 
 
 
U.S. Operational sales
$
27,338

 
$
41,935

 
$
(14,597
)
 
$
95,407

 
$
127,431

 
$
(32,024
)
Mexico Operational sales
148,242

 
133,721

 
14,521

 
448,947

 
405,894

 
43,053

   Net sales
$
175,580

 
$
175,656

 
$
(76
)
 
$
544,354

 
$
533,325

 
$
11,029


U.S. Operations
In the third quarter of 2016, net sales of our U.S. plant decreased due to a 37.8 percent unit decline in comparison to the third quarter of 2015. The decline in unit sales was due to a shift of production from our U.S. plant to our plants in Mexico. A lower aluminum value decreased revenues by approximately $1.4 million in 2016 when compared to 2015.

During the first nine months of 2016, net sales of our U.S. plant decreased due to a 20.1 percent unit decline in comparison to the same period last year. The decrease in aluminum value further reduced sales by approximately $10.5 million in the first nine months of 2016 when compared to the first nine months of 2015.

Mexico Operations
Sales increased due to higher unit shipments in the current year period, offset partially by a decline in the value of aluminum. Unit shipments increased 17.6 percent in the third quarter of 2016, contributing $23.6 million to the revenue increase. The decrease in aluminum value reduced sales by approximately $9.7 million in the third quarter of 2016 when compared to the third quarter of 2015.

During the first nine months of 2016, net sales of our Mexico operations increased due to a 24.2 percent unit shipment increase, contributing $98.1 million to the revenue increase. The decrease in aluminum value reduced sales by approximately $54.5 million in the first nine months of 2016 when compared to the first nine months of 2015.



23
Table of Contents


Customer Comparisons
As reported by industry publications, North American production of passenger cars and light trucks/ cross-overs in the third quarter of 2016 increased approximately 1.7 percent compared to the same quarter in the previous year, while our unit wheel shipments increased 4.8 percent for the comparable period. The overall increase in North American light vehicle production included a 3.2 percent increase in the light-duty truck/cross-over category and a 0.7 percent decrease for passenger cars. Comparing the same time periods for Superior, our shipments of passenger car wheels increased 42.4 percent and light-duty truck wheels decreased 9.1 percent.

OEM unit shipment composition by customer was as follows:
q32016percentofshipmentsv2.jpg

At the customer level, unit shipments to Ford in the third quarter of 2016 were 21.6 percent lower when compared to the third quarter last year, as decreases occurred in both light-duty truck and passenger car wheel shipments. At the program level, the major unit shipment decreases were for the F-Series, Fiesta, Escape, Fusion and Focus and were partially offset by higher shipments for the Edge, MKZ, Explorer, Continental and Flex.

Shipments to GM in the third quarter of 2016 increased 30.8 percent compared to the third quarter of 2015, as higher shipments for passenger car programs were partially offset by a decline in light-duty truck wheel shipments. The largest shipment increases were for the Malibu and the K2XX. The increases were partially offset by unit shipment declines for the Cadillac SRX and Colorado.

Shipments to Toyota in the third quarter of 2016 increased 15.6 percent compared to the third quarter last year, as higher shipments of light-duty truck wheels were offset partially by a decline in shipments of passenger car wheels. The major unit shipment increases were for the Highlander, Tacoma and Sienna. The increases were partially offset by unit shipment decreases for the Avalon, Corolla and Camry.

Shipments to Nissan, FCA and other customers in the third quarter of 2016 increased 22.8 percent compared to the third quarter of 2015, as higher shipments for passenger car programs were partially offset by a decline in shipments of light-duty truck wheels. At the program level, the largest unit shipment increases were for the Nissan Sentra, Nissan Kicks/Extreme, Nissan Altima, Nissan Note, Ram Truck, Challenger and Subaru Legacy/Outback, offset partially by a unit shipment decreases for the Chrysler Town & Country, Dodge Durango, Volkswagen Jetta and Dodge Magnum/Charger.

Cost of Sales
Aluminum, natural gas and other direct material costs are a significant component of our costs to manufacture wheels. These costs are substantially the same for all of our plants since many common suppliers service both our U.S. and Mexico operations. Consolidated cost of sales includes costs for both our U.S. and international operations, which are principally our wheel manufacturing operations in Mexico, and certain costs that are not allocated to a specific operation. These unallocated expenses include corporate services that are primarily incurred in the U.S. but are not charged directly to our world-wide operations, such as engineering services for wheel program development and manufacturing support, as well as environmental and other governmental compliance services.

Consolidated cost of sales increased $5.4 million in the third quarter of 2016 compared to the third quarter of 2015. Results in the third quarter of 2016 include an estimated $10.4 million in costs reflecting the impact of significant operating inefficiencies incurred

24
Table of Contents

in one of our manufacturing facilities. The inefficiencies stemmed from a variety of issues that reduced production rates. These issues began late in the second quarter but grew in complexity and magnitude during the third quarter. Contributing factors to the third quarter inefficiencies included a third quarter electricity outage and unanticipated equipment reliability issues which reduced finished goods and work-in-process inventories. We also experienced several new product launches and significant ramp up in demand for newer products in the third quarter for which unusually high scrap rates are occurring. Lower than normal production yields coupled with the loss of inventory safety stock resulted in a series of expedited shipments to customers. The higher than normal costs for the third quarter included $5.9 million in freight expediting costs and an estimated $3.8 million of higher plant labor expense related to the production inefficiency. We also performed significant levels of maintenance to address equipment reliability issues. Maintenance expense increased $1.6 million for the third quarter of 2016. While higher costs related to production and shipping challenges are expected to decline in the fourth quarter, there is some uncertainty as to the pace of improvement. Partially offsetting the increased costs relate to freight, repairs, maintenance, and labor inefficiencies was the impact of lower aluminum prices of approximately $11.4 million.

For the first nine months of 2016, our consolidated cost of sales decreased $9.6 million compared to cost of sales in the first nine months of 2015. Cost of sales in 2016 mainly reflects a decrease in aluminum prices of $71.0 million, which we mainly pass through to our customers, partially offset by higher unit shipments and higher costs related to freight costs and plant inefficiencies occurring in the third quarter as described above. The year-to-date decline also reflects the impact of higher allocation of overall production to Mexico and improved efficiency at our new facility in Mexico, which was still ramping up in the first nine months of 2015.

U.S. Operations
Cost of sales for our U.S. operations decreased by $16.0 million or 33 percent, in the third quarter of 2016 as compared to the third quarter of 2015 primarily due to the impact of reduced unit shipments and declining aluminum prices. The decline in unit shipments was due to a shift in production to our facilities in Mexico. For the first nine months of 2016, cost of sales for our U.S. operations decreased $36.6 million or 25 percent when compared to the first nine months of 2015.  Lower cost of sales for the 2016 period primarily reflects a decrease in unit shipments, decreases in labor and other costs and a decrease in aluminum prices, which we primarily pass on to our customers.

Mexico Operations
Cost of sales for our Mexico operations in the third quarter of 2016 increased by $21.4 million or 19 percent when compared to the third quarter of 2015, due to the inefficiencies at one plant as described above and an increase in unit shipments. Lower aluminum prices in 2016 resulted in a $9.1 million decline in comparison to the third quarter of 2015.

For the first nine months of 2016, cost of sales for our Mexico operations increased by $27.0 million or 8 percent when compared to the first nine months of 2015. The 2016 increase mainly reflects a 24 percent increase in unit shipments and higher freight costs mainly offset by an approximate $61.3 million decrease in aluminum prices.

Gross Profit
(Dollars in thousands)
Thirteen Weeks Ended
 
 
 
Thirty-nine Weeks Ended
 
 
 
September 25, 2016
 
September 27, 2015
 
Change
 
September 25, 2016
 
September 27, 2015
 
Change
Selected data
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
175,580

 
$
175,656

 
$
(76
)
 
$
544,354

 
$
533,325

 
$
11,029

Cost of sales
164,599

 
159,172

 
5,427

 
476,118

 
485,699

 
(9,581
)
Gross profit
$
10,981

 
$
16,484

 
$
(5,503
)
 
$
68,236

 
$
47,626

 
$
20,610

   Percentage of net sales
6.3
%
 
9.4
%
 

 
12.5
%
 
8.9
%
 


Consolidated gross profit decreased $5.5 million for the third quarter of 2016 compared to the same period last year. The decrease in gross profit was due mainly to inefficiency related freight and other costs at one of our plants in Mexico as described previously.

For the first nine months of 2016, consolidated gross profit increased $20.6 million compared to the same period last year due to higher unit shipments, cost structure improvement and lower cost associated with a closed manufacturing facility. Unit shipments increased 14 percent in the first nine months of 2016 as compared to the same period last year, in addition to the improvements in the company’s cost structure associated with the reallocation of production to the lower cost Mexico facilities, as well as improved efficiency of the new wheel manufacturing plant in Mexico which was in a ramp up mode in the first half of 2015. These costs were offset by higher freight costs and inefficiency costs in the third quarter of 2016 at one of our plants in Mexico.

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Table of Contents


The cost of aluminum is a component of our selling prices to OEM customers and a significant component of the overall cost of a wheel. The price for aluminum we purchase is adjusted monthly based primarily on changes in certain published market indices. Our selling prices are adjusted periodically based upon aluminum market price changes, but the timing of such adjustments is based on specific customer agreements and can vary from monthly to quarterly. Even if aluminum selling price adjustments were to perfectly match changes in aluminum purchase prices, an increasing aluminum price will result in a declining gross margin percentage - i.e., the same gross profit dollars divided by increased sales dollars equals a lower gross profit percentage. The opposite is true in periods during which the price of aluminum decreases. In addition, although our sales are continuously adjusted for aluminum price changes, these adjustments rarely will match exactly the changes in our aluminum purchase prices and cost of sales. As estimated by the company, the favorable impact on gross profit related to such differences in timing of aluminum adjustments was approximately $0.3 million in the third quarter of 2016 and for the first nine months of 2016 there was a favorable impact on gross profit of $6.1 million, as compared to the same periods in 2015.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the third quarter of 2016 decreased to $5.7 million, or 3.3 percent of net sales, from $8.4 million, or 4.8 percent of net sales, for the comparable period in 2015. The decrease primarily reflects a decrease in compensation expense reflective of the unanticipated earnings decline which necessitated lowering accruals for our long-term stock based incentive compensation expense and short-term incentive compensation costs.

For the first nine months of 2016, selling, general and administrative expenses were $24.7 million, or 4.5 percent of net sales, compared to $24.9 million, or 4.7 percent of net sales for the comparable period last year.

Income from Operations

As described in the discussion of cost of sales above, aluminum, natural gas and other direct material costs are substantially the same for all our plants since many common 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 interchangeable manufacturing processes and provide the same basic end product. Consolidated income from operations includes results for both our U.S. and international operations, which are principally our wheel manufacturing operations in Mexico, and certain costs that are not allocated to a specific operation. These unallocated 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.

Consolidated income from operations was $5.3 million or 3.0 percent of net sales in the third quarter of 2016, a decrease of $2.8 million from operating income of $8.1 million, or 4.6 percent of net sales, in the comparable period in 2015. The decrease was due mainly to the lower gross margin as described previously.

Consolidated income from operations increased $20.7 million to $43.5 million, or 8.0 percent of net sales, in the first nine months of 2016 from $22.8 million, or 4.3 percent of net sales, in the comparable period in 2015.  The increase was due to the higher gross margin.

Included below are the major items that impacted income from operations for our U.S. and Mexico operations during the first nine months of 2016.

U.S. Operations
Operating results from our U.S. operations in the third quarter of 2016 improved $0.9 million when compared to the third quarter of last year. Gross profit improved $1.3 million over the comparable period in 2015 and costs for the closed Rogers facility were less than $0.1 million in the third quarter of 2016 compared to $1.2 million in the comparable period in 2015.

For the first nine months of 2016, operating results for our U.S. operations improved $4.1 million when compared to the first nine months of last year due to a gross profit improvement of $4.0 million over the comparable period in 2015. The prior year included $4.6 million of costs for the closed Rogers facility, while the current year includes only $0.2 million of such costs.

Mexico Operations
Income from our Mexico operations decreased $5.9 million in the third quarter of 2016 as compared to the third quarter of 2015 reflective of the $6.2 million gross profit decline.


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Table of Contents

For the first nine months of 2016, income from our Mexico operations increased $17.7 million when compared to the first nine months of 2015.  Income from operations in 2016 reflects an improvement in gross profit of $17.7 million over the comparable period in 2015.

U.S. versus Mexico Shipments

During the third quarter of 2016, wheels shipped by our Mexico and U.S. operations accounted for 85 percent and 15 percent, respectively, of our total shipments. For the third quarter of 2015, wheels shipped by our Mexico and U.S. operations accounted for 77 percent and 23 percent, respectively, of our total shipments. The shift of shipments to the Company’s Mexico facilities is largely attributable to the change in the overall production capacity footprint and resulting realignment of production to our Mexico facilities.

Interest Income, net and Other Income (Expense), net

Net interest income for the third quarter of 2016 was income of less than $0.1 million and for the third quarter of 2015 net interest income was an expense of less than $0.1 million.

Net interest income was income of $0.2 million and $0.1 million in the first nine months of 2016 and 2015, respectively.

Net other income (expense) was an expense of $0.4 million in the third quarter of 2016 and 2015. Foreign exchange gains and (losses) included in net other income (expense) were exchange losses of $0.4 million in the third quarter of 2016 and 2015.

Net other income (expense) was an expense of $0.5 million and $0.9 million in the first nine months of 2016 and 2015, respectively. Foreign exchange gains and (losses) included in net other income (expense) were exchange losses of $0.6 million and $0.9 million in the first nine months of 2016 and 2015, respectively.

Income Taxes

The income tax benefit for the third quarter ended September 25, 2016 was $1.1 million, representing an effective income tax benefit of 22 percent. For the nine months ended September 25, 2016, the income tax provision was $9.6 million, representing an effective income tax rate of 22 percent. The effective tax rate for the thirty-nine weeks ended September 25, 2016 decreased to 22 percent from 28 percent for the first six months of 2016 due to a decrease in forecasted earnings, which resulted in the third quarter of 2016 being a tax benefit. The effective tax rate for the third quarter and the nine months ended September 25, 2016 were lower than the statutory rate due to the mix of income before taxes for entities included in our effective income tax rate calculation, effect of the business restructuring to realign our operations, which was implemented in the fourth quarter of 2015 and the release of certain liabilities related to uncertain tax positions as a result of settlements with various tax jurisdictions.

The income tax provision for the third quarter ended September 27, 2015 was $2.7 million, representing an effective income tax rate of 35 percent. For the nine months ended September 27, 2015, the income tax provision was $6.1 million, representing an effective income tax rate of 28 percent. The income tax provision for the third quarter and nine months ended September 27, 2015 resulted from the release of certain liabilities related to uncertain tax positions as a result of the expiration of a statute of limitations, partially offset by certain non-deductible expenses, state income taxes (net of federal tax benefit) and interest and penalties on unrecognized tax benefits.

Net Income

Net income in the third quarter of 2016 was $6.0 million, or $0.23 per diluted share, compared to net income in the third quarter of 2015 of $4.9 million, or $0.19 per diluted share. Net income in the first nine months of 2016 was $33.6 million, or $1.31 per diluted share, compared to net income in the first three quarters of 2015 of $15.8 million, or $0.59 per diluted share.


Financial Condition, Liquidity and Capital Resources

Our sources of liquidity primarily include cash, cash equivalents and short-term investments and net cash provided by operating activities and, from time to time, other external sources of funds.  Working capital (current assets minus current liabilities) and our current ratio (current assets divided by current liabilities) were $180.7 million and 3.7:1, respectively, at September 25, 2016, versus $172.0 million and 3.3:1 at December 27, 2015.  As of September 25, 2016, our cash, cash equivalents and short-term investments totaled $36.6 million compared to $53.0 million at December 27, 2015.


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Table of Contents

Our working capital requirements, investing activities and cash dividend payments have historically been funded from internally generated funds, proceeds from the exercise of stock options or existing cash, cash equivalents and short-term investments, and we believe these sources will continue to meet our capital requirements in the foreseeable future.

As part of our commitment to enhancing shareholder value, we have been repurchasing our common stock. Beginning in 2013 through the end of our fiscal year 2015, we have repurchased 2,567,713 shares for a cost of $49.6 million. Thus far in 2016, we have repurchased 740,257 shares for a cost of $13.5 million.

The following table presents a summary of the net decrease in cash and cash equivalents in the periods presented:

(Dollars in thousands)
 
Thirty-nine Weeks Ended
 
 
September 25, 2016
 
September 27, 2015
 
Change
Net cash provided by operating activities
 
$
39,261

 
$
39,205

 
$
56

Net cash used in investing activities
 
(29,964
)
 
(28,032
)
 
(1,932
)
Net cash used in financing activities
 
(25,694
)
 
(21,480
)
 
(4,214
)
Effect of exchange rate changes on cash
 
162

 
(2,196
)
 
2,358

Net decrease in cash and cash equivalents
 
$
(16,235
)
 
$
(12,503
)
 
$
(3,732
)

Operating Activities

Net cash provided by operating activities was $39.3 million for the thirty-nine week period ended September 25, 2016, compared to $39.2 million for the comparable period a year ago.  The slight increase in cash flow provided by operating activities was mainly due to higher net income of $17.8 million and a lower use of cash for accounts receivable of $4.5 million in the first nine months of 2016 compared to an $18.3 million use in the comparable period a year ago. Offsetting the major increases was an inventory use of cash of $12.2 million in the first nine months of 2016 compared to a $12.3 million source of cash in the comparable period a year ago.

Investing Activities

Net cash used in investing activities was $30.0 million for the first nine months of 2016 compared to $28.0 million in the comparable period last year. Net cash used in investing activities was lower in 2015 due to cash generated from the sale of a warehousing facility in West Memphis, Arkansas and from the sale of some short-term investments.

Financing Activities

Financing activities during the first nine months of 2016 consisted of the payment of cash dividends on our common stock totaling $13.8 million and the repurchase of our common stock for cash totaling $13.5 million, partially offset by the receipt of cash proceeds from the exercise of stock options totaling $1.6 million.

Non-GAAP Financial Measures

In this quarterly report, we discuss two important measures that are not calculated according to GAAP, value added sales and Adjusted EBITDA.

Value added sales is a key measure that is not calculated according to GAAP. In the discussion of operating results, we provide information regarding value added sales. Value added sales represent net sales less the value of aluminum and services provided by outside service providers that are included in net sales. As discussed further below, arrangements with our customers allow us to pass on changes in aluminum prices and outside service provider costs; therefore, fluctuations in underlying aluminum price and the use of outside service providers generally does not directly impact our profitability. Accordingly, value added sales is worthy of being highlighted for the benefit of users of our financial statements. Our intent is to allow users of the financial statements to consider our net sales information both with and without the aluminum and outside service provider cost components thereof. Management utilizes value added sales as a key metric to determine growth of the company because it eliminates the volatility of aluminum prices.

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(Dollars in thousands)
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
September 25, 2016
 
September 27, 2015
 
September 25, 2016
 
September 27, 2015
Net Sales
$
175,580

 
$
175,656

 
$
544,354

 
$
533,325

Less, aluminum value and outside service provider costs
(76,781
)
 
(87,751
)
 
(242,026
)
 
(275,488
)
Value added sales
$
98,799

 
$
87,905

 
$
302,328

 
$
257,837


Adjusted EBITDA is a key measure that is not calculated according to GAAP. Adjusted EBITDA is defined as earnings before interest income and expense, income taxes, depreciation, amortization, restructuring charges and other closure costs and impairments of long-lived assets and investments. We use Adjusted EBITDA as an important indicator of the operating performance of our business. Adjusted EBITDA is used in our internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our Board of Directors and evaluating short-term and long-term operating trends in our operations. We believe the Adjusted EBITDA financial measure assists in providing a more complete understanding of our underlying operational measures to manage our business, to evaluate our performance compared to prior periods and the marketplace, and to establish operational goals. Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.

Adjusted EBITDA as a percentage of net sales is a key measure that is not calculated according to GAAP. Adjusted EBITDA as a percentage of net sales is defined as Adjusted EBITDA divided by net sales.

Adjusted EBITDA as a percentage of value added sales is a key measure that is not calculated according to GAAP. Adjusted EBITDA as a percentage of value added sales is defined as Adjusted EBITDA divided by value added sales.

The following table reconciles our net income, the most directly comparable GAAP financial measure, to our Adjusted EBITDA:
(Dollars in thousands)
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
September 25, 2016
 
September 27, 2015
 
September 25, 2016
 
September 27, 2015
Net income
$
5,974

 
$
4,946

 
$
33,602

 
$
15,814

Interest (income), net
(41
)
 
55

 
(152
)
 
(87
)
Income tax provision (benefit)
(1,064
)
 
2,669

 
9,576

 
6,108

Depreciation
8,607

 
8,672

 
25,888

 
25,696

Closure costs (excluding accelerated depreciation)
294

 
752

 
903

 
3,240

Adjusted EBITDA
$
13,770

 
$
17,094

 
$
69,817

 
$
50,771

Adjusted EBITDA as a percentage of net sales
7.8
%
 
9.7
%
 
12.8
%
 
9.5
%
Adjusted EBITDA as a percentage of value added sales
13.9
%
 
19.4
%
 
23.1
%
 
19.7
%

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP 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.





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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, changing commodity prices for the materials used in the manufacture of our products and the development of new products.

The functional currency of certain foreign operations in Mexico is the Mexican peso.  The settlement of accounts receivable and accounts payable for these operations requires the transfer of funds denominated in the Mexican peso, the value of which decreased 6 percent in relation to the U.S. dollar in the first nine months of 2016.  Foreign currency transaction losses totaled $0.6 million in the first nine months of 2016 and $0.9 million during the first nine months of 2015.  All transaction gains and losses are included in other income (expense) in the condensed consolidated statements of operations.

As it relates to foreign currency translation gains and losses, however, 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 resulted in a cumulative unrealized translation loss at September 25, 2016 of $101.2 million. Translation gains and losses are included in other comprehensive income in the condensed consolidated statements of comprehensive (loss) income.

When market conditions warrant, we may also enter into purchase commitments to secure the supply of certain commodities used in the manufacture of our products, such as aluminum, natural gas and other raw materials. We currently have no purchase commitments in place for the delivery of aluminum, natural gas or other raw materials in 2016.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency.  A significant portion of our business operations are conducted in Mexico. As a result, we have a certain degree of market risk with respect to our cash flows due to changes in foreign currency exchange rates when transactions are denominated in currencies other than our functional currency, including inter-company transactions.

In accordance with our corporate risk management policies, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions and forecasted future cash flows. We have implemented a program to hedge a portion of our material foreign exchange exposures, for up to approximately 39 months. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures. We do not use derivative contracts for trading, market-making, or speculative purposes. For additional information on our derivatives, see Note 5 - Derivative Financial Instruments.

At September 25, 2016, the fair value liability of foreign currency exchange derivatives was $22.6 million. The potential loss in fair value for such financial instruments from a 10 percent adverse change in quoted foreign currency exchange rates would be $13.5 million at September 25, 2016.

During the first nine months of 2016, the Mexican peso to U.S. dollar exchange rate averaged 18.23 pesos to $1.00. Based on the balance sheet at September 25, 2016 the value of net assets for our operations in Mexico was 2,323 million pesos. Accordingly, a 10 percent change in the relationship between the peso and the U.S. dollar may result in a translation impact of between $11.6 million and $14.2 million, which would be recognized in other comprehensive (loss) income.

Our business requires us to settle transactions between currencies in both directions - i.e., peso to U.S. dollar and vice versa. To the greatest extent possible, we attempt to match the timing of transaction settlements between currencies to create a “natural hedge.” For the first nine months of 2016, we had a $0.6 million net foreign exchange transaction loss related to the peso. Based on the current business model and levels of production and sales activity, the net imbalance between currencies depends on specific circumstances. As discussed above, while changes in the terms of the contracts with our customers will be creating an imbalance between currencies that we are hedging with foreign currency forward contracts, there can be no assurances that our hedging program will effectively offset the impact of the imbalance between currencies or that the net transaction balance will not change significantly in the future.

Commodity Purchase Commitments.  When market conditions warrant, we enter into purchase commitments to secure the supply of certain commodities used in the manufacture of our products, such as aluminum, natural gas and other raw materials. However, we do not enter into derivatives or other financial instrument transactions for speculative purposes. At September 25, 2016, we had no purchase commitments in place for the delivery of aluminum, natural gas or other raw materials in 2016.


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Also see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in Part II of our 2015 Annual Report on Form 10-K and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Risk Management” in this Quarterly Report on Form 10-Q.


Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 September 25, 2016.  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 decisions regarding required disclosures.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 25, 2016, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting
 
There has been no change in our internal control over financial reporting during the fiscal quarter ended September 25, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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Table of Contents

PART II
OTHER INFORMATION


Item 1.  Legal Proceedings

We are party to various 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.  


Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A – Risk Factors in Part I of our 2015 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results.  There have been no material changes from the risk factors described in our 2015 Annual Report on Form 10-K.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

During the first nine months of 2016, there were no sales of unregistered securities.


Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In January 2016, our Board of Directors approved a new stock repurchase program (the “2016 Repurchase Program”), authorizing the repurchase of up to $50.0 million of common stock.  Under the 2016 Repurchase Program, we may repurchase common stock from time to time on the open market or in private transactions. The timing and extent of the repurchases under the 2016 Repurchase Program will depend upon market conditions and other corporate considerations in our sole discretion. Shares repurchased under the 2016 Repurchase Program totaled 154,287 shares of company stock at a cost of $3.2 million in the first nine months of 2016.

The following table provides common stock repurchases made by or on behalf of the company during the three months ended September 25, 2016:
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans and Programs
 
Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
(Thousands of dollars, except per share amounts)
 
 
 
 
 
 
 
June 27, 2016 - July 24, 2016
16,588

 
$
25.85

 
16,588

 
 
July 25, 2016 - August 21, 2016
—

 
$
—

 
—

 
 
August 22, 2016 - September 25, 2016
—

 
$
—

 
—

 
 
Total
16,588

 
 
 
16,588

 
$
46,747



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Item 6.  Exhibits

3.1

Bylaws of Superior Industries International, Inc. as adopted on October 25, 2016 (incorporated by reference to the Registrant's Form 8-K filed on October 25, 2016).
10.1

Amended and Restated Employment Agreement, dated August 10, 2016, between Superior Industries International, Inc. and Donald J. Stebbins (incorporated by reference to the Registrant's Form 8-K filed on August 11, 2016).*
31.1

Certification of Donald J. Stebbins, Chief Executive Officer and President, Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2

Certification of Kerry A. Shiba, Executive Vice President and Chief Financial Officer, Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1

Certification of Donald J. Stebbins, Chief Executive Officer and President, and Kerry A. Shiba, Executive Vice President and 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).
101

Interactive data file (furnished electronically herewith pursuant to Rule 406T of Regulation S-T).
* Indicates management contract or compensatory plan or arrangement.


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SIGNATURES

Pursuant to the requirements 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)

Date:
October 28, 2016
 
/s/ Donald J. Stebbins
 
 
 
 
Donald J. Stebbins
Chief Executive Officer and President
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
October 28, 2016
 
/s/ Kerry A. Shiba
 
 
 
 
Kerry A. Shiba
Executive Vice President and Chief Financial Officer
 

34