q3form10-q.htm
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended September 28, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
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Commission
file number: 1-6615
SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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California
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95-2594729
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer Identification No.)
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7800
Woodley Avenue
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Van
Nuys, California
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91406
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (818) 781-4973
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.
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.
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Large
Accelerated Filer
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o
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Accelerated
Filer
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þ
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Non-Accelerated
Filer
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o
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Smaller
Reporting Company
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o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Number of
shares of no par value common stock outstanding as of October 26, 2008:
26,668,440
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Page
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PART
I
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FINANCIAL
INFORMATION
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5
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13
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19
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PART
II
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OTHER
INFORMATION
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21
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23
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FINANCIAL
INFORMATION
Item
1. Financial Statements
Superior
Industries International, Inc.
Condensed
Consolidated Statements of Operations
(Thousands
of dollars, except per share data)
(Unaudited)
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Thirteen
Weeks Ended
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Thirty-Nine
Weeks Ended
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September
28,
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September
30,
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September
28,
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September
30,
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2008
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2007
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2008
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2007
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As
restated
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As
restated
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NET
SALES
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$ |
163,354 |
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$ |
227,557 |
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$ |
602,977 |
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$ |
727,649 |
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Cost
of sales
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174,545 |
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222,281 |
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592,729 |
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706,650 |
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GROSS
PROFIT (LOSS)
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(11,191 |
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5,276 |
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10,248 |
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20,999 |
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Selling,
general and administrative expenses
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6,187 |
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7,777 |
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19,297 |
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23,729 |
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Impairment
of long-lived assets
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5,044 |
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- |
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5,044 |
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- |
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LOSS
FROM OPERATIONS
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(22,422 |
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(2,501 |
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(14,093 |
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(2,730 |
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Interest
income, net
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649 |
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820 |
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2,335 |
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2,708 |
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Other
income, net
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2,015 |
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581 |
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109 |
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2,469 |
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INCOME
(LOSS) BEFORE INCOME
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TAXES
AND EQUITY EARNINGS
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(19,758 |
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(1,100 |
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(11,649 |
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2,447 |
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Income
tax benefit (provision)
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5,694 |
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(826 |
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3,153 |
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(639 |
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Equity
in earnings (loss) of joint ventures
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(143 |
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1,187 |
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2,562 |
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2,736 |
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NET
INCOME (LOSS)
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$ |
(14,207 |
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$ |
(739 |
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$ |
(5,934 |
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$ |
4,544 |
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EARNINGS
(LOSS) PER SHARE - BASIC
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$ |
(0.53 |
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$ |
(0.03 |
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$ |
(0.22 |
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$ |
0.17 |
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EARNINGS
(LOSS) PER SHARE - DILUTED
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$ |
(0.53 |
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$ |
(0.03 |
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$ |
(0.22 |
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$ |
0.17 |
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DIVIDENDS
DECLARED PER SHARE
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$ |
0.16 |
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$ |
0.16 |
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$ |
0.48 |
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$ |
0.48 |
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See notes
to condensed consolidated financial statements.
Condensed
Consolidated Balance Sheets
(Thousands
of dollars, except per share data)
(Unaudited)
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September
28,
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December
30,
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2008
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2007
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
110,359 |
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$ |
106,769 |
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Accounts
receivable, net
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124,176 |
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125,704 |
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Inventories,
net
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96,173 |
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107,170 |
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Income
taxes receivable
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2,555 |
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6,677 |
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Deferred
income taxes
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6,940 |
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6,569 |
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Other
current assets
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13,085 |
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3,190 |
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Total
current assets
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353,288 |
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356,079 |
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Property,
plant and equipment, net
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272,870 |
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302,253 |
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Investments
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52,611 |
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51,055 |
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Noncurrent
deferred income taxes
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29,539 |
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12,673 |
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Other
assets
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5,477 |
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7,862 |
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Total
assets
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$ |
713,785 |
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$ |
729,922 |
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$ |
34,340 |
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$ |
51,603 |
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Accrued
expenses
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44,903 |
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43,993 |
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Total
current liabilities
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79,243 |
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95,596 |
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Noncurrent
tax liabilities
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61,246 |
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62,223 |
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Noncurrent
deferred income taxes
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15,345 |
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- |
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Executive
retirement liabilities
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21,691 |
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21,530 |
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Commitments
and contingencies (Note 16)
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Shareholders'
equity:
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Preferred
stock, no par value
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Authorized
- 1,000,000 shares
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Issued
- none
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- |
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- |
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Common
stock, no par value
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Authorized
- 100,000,000 shares
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Issued
and outstanding - 26,668,440 shares
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(26,633,440
shares at December 30, 2007)
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53,877 |
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51,833 |
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Accumulated
other comprehensive loss
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(26,206 |
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(28,578 |
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Retained
earnings
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508,589 |
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527,318 |
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Total
shareholders' equity
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536,260 |
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550,573 |
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Total
liabilities and shareholders' equity
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$ |
713,785 |
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$ |
729,922 |
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See notes
to condensed consolidated financial statements.
Condensed
Consolidated Statements of Cash Flows
(Thousands
of dollars)
(Unaudited)
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Thirty-Nine
Weeks Ended
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September
28,
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September
30,
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2008
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2007
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NET
CASH PROVIDED BY OPERATING ACTIVITIES
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$ |
24,369 |
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$ |
31,415 |
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Proceeds
from dissolution of TSL joint venture
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|
152 |
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- |
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Proceeds
from sales of fixed assets
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133 |
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- |
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Proceeds
from a held-to-maturity security
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- |
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9,750 |
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Proceeds
from sale of available-for-sale securities
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- |
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5,397 |
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Additions
to property, plant and equipment
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(8,886 |
) |
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(33,812 |
) |
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NET
CASH USED IN INVESTING ACTIVITIES
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(8,601 |
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(18,665 |
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Cash
dividends paid
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(12,795 |
) |
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(12,769 |
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Proceeds
from stock options exercised
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|
617 |
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|
350 |
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NET
CASH USED IN FINANCING ACTIVITIES
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(12,178 |
) |
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(12,419 |
) |
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Net
increase in cash and cash equivalents
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3,590 |
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|
331 |
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Cash
and cash equivalents at the beginning of the period
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106,769 |
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|
68,385 |
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Cash
and cash equivalents at the end of the period
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$ |
110,359 |
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$ |
68,716 |
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See notes
to condensed consolidated financial statements.
Superior Industries International, Inc.
Condensed
Consolidated Statement of Shareholders’ Equity
(Thousands
of dollars, except per share data)
(Unaudited)
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Accumulated
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Common
Stock
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Other
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Number
of
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Comprehensive
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Retained
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Shares
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Amount
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Income
(Loss)
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Earnings
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Total
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BALANCE
AT
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DECEMBER
30, 2007
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|
26,633,440 |
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$ |
51,833 |
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$ |
(28,578 |
) |
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$ |
527,318 |
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$ |
550,573 |
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Comprehensive
income (loss):
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Net
loss
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|
- |
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|
- |
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|
- |
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(5,934 |
) |
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$ |
(5,934 |
) |
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Other
comprehensive income, net of tax:
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Foreign
currency translation
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|
adjustment
|
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|
- |
|
|
|
- |
|
|
|
2,302 |
|
|
|
- |
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|
$ |
2,302 |
|
Net
actuarial gain on pension obligation
|
|
|
- |
|
|
|
- |
|
|
|
70 |
|
|
|
- |
|
|
$ |
70 |
|
Total
comprehensive loss (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(3,562 |
) |
|
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|
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|
|
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|
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Stock-based
compensation
|
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|
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|
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|
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|
|
|
|
expense
|
|
|
- |
|
|
|
1,731 |
|
|
|
- |
|
|
|
- |
|
|
$ |
1,731 |
|
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|
|
|
|
|
|
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|
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Stock
options exercised
|
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|
35,000 |
|
|
|
617 |
|
|
|
- |
|
|
|
- |
|
|
$ |
617 |
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|
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|
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Tax
impact of stock options
|
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|
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|
|
|
|
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|
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|
exercised
|
|
|
- |
|
|
|
(304 |
) |
|
|
- |
|
|
|
- |
|
|
$ |
(304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.48
per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,795 |
) |
|
|
(12,795 |
) |
BALANCE
AT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEPTEMBER
28, 2008
|
|
|
26,668,440 |
|
|
$ |
53,877 |
|
|
$ |
(26,206 |
) |
|
$ |
508,589 |
|
|
$ |
536,260 |
|
(a)
|
Comprehensive
income, net of tax, was $5,879,000 for the thirty-nine weeks ended
September 30, 2007, which included: net income
|
|
|
of
$4,544,000, foreign currency translation adjustment gain of
$2,810,000, a reclassification of realized gain on available-for-sale
securities
|
|
|
of
$(1,498,000), an unrealized loss on available-for-sale securities of
$26,000 and net actuarial loss on pension obligation of
$(3,000).
|
See notes
to condensed consolidated financial statements.
Superior Industries International, Inc.
Notes
to Condensed Consolidated Financial Statements
September
28, 2008
(Unaudited)
Note
1 – Nature of Operations
Headquartered
in Van Nuys, California, the principal business of Superior Industries
International, Inc. (referred to herein as the “company”, “Superior” or in the
first person notation “we”, “us” and “our”) is the design and manufacture of
aluminum road wheels for sale to original equipment manufacturers (OEM). We are
one of the largest suppliers of cast and forged aluminum wheels to the world’s
leading automobile and light truck manufacturers, with wheel manufacturing
operations in the United States, Mexico and Hungary.
Ford
Motor Company (Ford), General Motors Corporation (GM) and Chrysler LLC
(Chrysler) together represented approximately 78 percent of our total wheel
sales during the first three fiscal quarters of 2008 and 82 percent of annual
wheel sales for the 2007 fiscal year. The loss of all or a substantial portion
of our sales to Ford, GM or Chrysler would have a significant adverse impact on
our financial results, unless the lost volume could be replaced. This risk is
partially mitigated due to the long term relationships with these customers and
the fact that our supply arrangements with them are generally for multi-year
periods. However, situations such as the recent consumer shift away
from SUVs and trucks to more fuel-efficient vehicles and continued global
competitive pricing pressures may make it more difficult to maintain these
long-term arrangements and there are no guarantees that similar arrangements
could be negotiated in the future. We expect this recent shift to
more fuel-efficient vehicles and the global competitive pricing pressures to
continue in the foreseeable future. Including our 50 percent owned
joint venture in Europe, we also manufacture aluminum wheels for Audi, BMW,
Fiat, Jaguar, Land Rover, Mazda, Mercedes Benz, Mitsubishi, Nissan, Seat, Skoda,
Subaru, Suzuki, Toyota, Volkswagen and Volvo.
The
availability and demand for aluminum wheels are subject to unpredictable
factors, such as changes in the general economy, the automobile industry,
gasoline prices and consumer credit availability and interest rates. The raw
materials used in producing our products are readily available and are obtained
through numerous suppliers with whom we have established trade
relations.
Note
2 – Impairment of Long-lived Assets and Other Charges
On August
19, 2008, we announced the planned closure of our wheel manufacturing facility
located in Pittsburg, Kansas, that will result in a lay off of approximately 600
employees. The planned closure of the Pittsburg facility, which will be
effective December 19, 2008, was approved by our Board of Directors on August
15, 2008. Also included in this announcement was the elimination of 155
positions at our other U.S. facilities, of which 90 were open positions and 65
were layoffs which resulted in recording $0.2 million in severance costs in the
current quarter. These two actions will result in a reduction of 755
positions, or 29 percent of Superior’s U.S. workforce. These actions were
necessary in order to manage costs and balance our manufacturing capacity in the
face of reduced demand for SUVs and light trucks.
Due to
the announced closure of the Pittsburg facility, we recorded in the current
quarter an asset impairment charge against pretax earnings totaling $5.0
million, reducing the carrying value of certain long-lived assets to their
respective fair values. We estimated the fair value of long-lived assets
considering independent appraisals of the assets. These assets are
classified as held and used, in accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, until they are available for
immediate sale, at which time they will be classified as held for sale. In
addition, we recorded severance and other one-time benefit costs totaling $0.7
million which are included in the cost of sales line item of our statement of
operations. We expect to incur additional severance and other one-time benefit
costs related to the closure of this facility of approximately $1.3 million over
the next three months.
Note
3 – Presentation of Condensed Consolidated Financial Statements
The
condensed consolidated balance sheet as of December 30, 2007 is derived from the
audited financial statements as of that date; however, during the current
quarter, we determined that our charter filed with the State of California in
1994 as part of our reincorporation from Delaware to California does not state a
par value for our common or preferred stock. Our prior charter filed
with the state of Delaware did include par values for our common stock and
preferred stock of $0.50 and $25.00, respectively. We have revised
our condensed consolidated balance sheets and our condensed consolidated
statement of shareholders’ equity to eliminate the references to par value and
to eliminate the line item “Additional paid-in capital”, which is now combined
with the line item “Common stock, no par value”. These changes had no
impact on our results of operations, our statements of financial position or the
underlying economics of our business.
Accordingly,
the December 30, 2007 balance has been revised as follows:
Balance
sheet as of December 30, 2007
|
|
As
reported
|
|
|
Adjustments
|
|
|
As
revised
|
|
(Thousands
of dollars)
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
13,317 |
|
|
$ |
38,516 |
|
|
$ |
51,833 |
|
Additional
paid-in capital
|
|
$ |
38,516 |
|
|
$ |
(38,516 |
) |
|
$ |
- |
|
As
discussed in Exhibit 99.1 of our 2007 Annual Report on Form 10-K, we discovered
during the preparation and review of our 2007 income tax provision that we had
not properly reconciled our tax liabilities related to the differences between
the net book basis and the net tax basis of our depreciable property, plant and
equipment. As a result of completing the necessary reconciliations for each year
since 2002, we identified errors that impacted our previously filed financial
statements for the fiscal years 2003 through 2006 and our previously filed
interim financial statements for those years and the first three quarters of
2007 related to our tax liabilities and our income tax provisions.
During
the fourth quarter of 2007, we also determined the cumulative impact of known
differences in our accounting for our equity method investment in Suoftec Light
Metal Products Production and Distribution, Ltd. (Suoftec) and our summary
financial information presented for Suoftec, which we considered to be
immaterial to any individual reporting period, required
restatement. The errors related to the quantification and recording
of the adjustments to report the Suoftec earnings on the basis of accounting
principles generally accepted in the United States of America (U.S. GAAP) versus
the Hungarian accounting rules followed by Suoftec. These differences
principally relate to overhead cost capitalization into inventory and deferred
income taxes on property, plant and equipment. The 2007 U.S. GAAP
differences were immaterial to any one interim period and were recorded in the
fourth quarter of 2007.
The
following tables summarize the impact of the tax basis error corrections to our
condensed consolidated statements of operations for the thirteen and thirty-nine
week periods ended September 30, 2007 and to our condensed consolidated balance
sheet as of September 30, 2007 as previously presented in Exhibit 99.1 of our
2007 Annual Report on Form 10-K. There was no impact to our 2007
interim Net Cash provided by Operating Activities due to the correction of the
above errors.
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands
of dollars)
|
|
For
Thirteen Weeks Ended
|
|
|
For
Thirty-Nine Weeks Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
|
|
As
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
As
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (provision) benefit
|
|
$ |
(731 |
) |
|
$ |
(95 |
) |
|
$ |
(826 |
) |
|
$ |
(938 |
) |
|
$ |
299 |
|
|
$ |
(639 |
) |
Net
income
|
|
$ |
(644 |
) |
|
$ |
(95 |
) |
|
$ |
(739 |
) |
|
$ |
4,245 |
|
|
$ |
299 |
|
|
$ |
4,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.16 |
|
|
$ |
0.01 |
|
|
$ |
0.17 |
|
Diluted
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.16 |
|
|
$ |
0.01 |
|
|
$ |
0.17 |
|
Balance
Sheet as of September 30, 2007
|
|
As
reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
(Thousands
of dollars)
|
|
|
|
|
|
|
|
|
|
Income
tax receivable
|
|
$ |
13,668 |
|
|
$ |
1,027 |
|
|
$ |
14,695 |
|
Investments
|
|
$ |
47,009 |
|
|
$ |
528 |
|
|
$ |
47,537 |
|
Noncurrent
deferred tax asset, net
|
|
$ |
10,409 |
|
|
$ |
1,706 |
|
|
$ |
12,115 |
|
Accumulated
other comprehensive loss
|
|
$ |
(35,798 |
) |
|
$ |
4 |
|
|
$ |
(35,794 |
) |
Retained
earnings
|
|
$ |
523,576 |
|
|
$ |
3,257 |
|
|
$ |
526,833 |
|
During
interim periods, we follow the accounting policies set forth in our 2007 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 U.S. GAAP as indicated below. Users of financial
information produced for interim periods in 2008 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 2007 Annual Report on Form 10-K.
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 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 Form
10-Q and 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 week periods ended September 28, 2008 and September
30, 2007, (ii) the condensed consolidated balance sheets at September 28, 2008
and December 30, 2007, (iii) the condensed consolidated statements of cash flows
for the thirty-nine week periods ended September 28, 2008 and
September 30, 2007, and (iv) the condensed consolidated statement of
shareholders’ equity for the thirty-nine week period ended September 28, 2008.
The condensed consolidated balance sheet as of December 30, 2007 was derived
from our 2007 audited financial statements, but does not include all disclosures
required by U.S. GAAP.
Note
4 – Stock-Based Compensation
Our 2008
Equity Incentive Plan authorizes us to issue incentive and non-qualified stock
options, as well as stock appreciation rights, restricted stock and performance
units to our non-employee directors, officers, employees and consultants
totaling up to 3.5 million shares of common stock. No more than 100,000 shares
may be used under such plan as “full value” awards, which include restricted
stock and performance units. It is our policy to issue shares from
authorized but not issued shares upon the exercise of stock
options. At September 28, 2008, there were 3.5 million shares
available for future grants under this plan. Options are granted at not less
than fair market value on the date of grant and expire no later than ten years
after the date of grant. Options granted under this plan to employees
and non-employee directors require no less than a three year ratable vesting
period.
During
the first three quarters of 2008, we granted options for a total of 616,000
shares, while in the first three quarters of 2007, we granted options for a
total of 120,000 shares. The weighted average fair value at the grant
date for options issued during the first three quarters of 2008 and 2007 was
$5.30 and $6.07 per option, respectively. The fair value of options at the grant
date was estimated utilizing the Black-Scholes valuation model with the
following weighted average assumptions for 2008 and 2007, respectively: (a)
dividend yield on our common stock of 3.23 percent and 3.32 percent; (b)
expected stock price volatility of 30.5 percent and 30.8 percent; (c) a
risk-free interest rate of 3.41 percent and 4.72 percent; and (d) an expected
option term of 7.0 years and 7.3 years. For the thirty-nine weeks
ended September 28, 2008, options for 35,000 shares were exercised compared to
18,749 options exercised during the same fiscal period in year
2007.
Stock-based
compensation expense related to our stock option plans under Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based
Payment” (SFAS 123R), was allocated as follows:
(Thousands
of dollars)
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
September
28,
|
|
|
September
30,
|
|
|
September
28,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
34 |
|
|
$ |
87 |
|
|
$ |
243 |
|
|
$ |
519 |
|
Selling,
general and administrative
|
|
|
490 |
|
|
|
544 |
|
|
|
1,488 |
|
|
|
2,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense before income taxes
|
|
|
524 |
|
|
|
631 |
|
|
|
1,731 |
|
|
|
2,643 |
|
Income
tax benefit
|
|
|
(154 |
) |
|
|
(222 |
) |
|
|
(508 |
) |
|
|
(950 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense after income taxes
|
|
$ |
370 |
|
|
$ |
409 |
|
|
$ |
1,223 |
|
|
$ |
1,693 |
|
As of
September 28, 2008, a total of $5.4 million of unrecognized compensation cost
related to non-vested awards is expected to be recognized over a weighted
average period of approximately 3.0 years. There were no significant
capitalized stock-based compensation costs at September 28, 2008 and December
30, 2007. We received cash totaling $617,000 and $350,000 from stock
options exercised during the first three quarters of 2008 and 2007,
respectively.
Note
5 - New Accounting Standards
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, “Fair Value Measurements” (SFAS No. 157). SFAS
No. 157 establishes a common definition for fair value to be applied to U.S.
GAAP guidance requiring use of fair value, establishes a framework for measuring
fair value, and expands disclosure about such fair value measurements. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. The
adoption of the applicable provisions of SFAS No. 157 as of January 1 2008, did
not have an impact on our consolidated results of operations or statement of
financial position or disclosures. In February 2008, the FASB decided
to issue a final Staff Position to allow a one-year deferral of adoption of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities that are recognized
or disclosed at fair value in the financial statements on a nonrecurring
basis. The FASB also decided to amend SFAS No. 157 to exclude FASB
Statement No. 13 and its related interpretive accounting pronouncements that
address leasing transactions. We do not expect that the adoption of
the provisions of SFAS No. 157 for nonfinancial assets and liabilities measured
on a nonrecurring basis will have a material impact on our consolidated results
of operations or statement of financial position.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.” This Statement replaces SFAS No. 141, “Business
Combinations,” (SFAS No. 141), and defines the acquirer as the entity that
obtains control of one or more business in the business combination and
establishes the acquisition date as the date that the acquirer achieves control.
This Statement’s scope is broader than that of SFAS No. 141, which applied only
to business combinations in which control was obtained by transferring
consideration. This Statement applies to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
Note
6 – Business Segments
We have
only one reportable segment – automotive road wheels. Each of our
plants manufactures similar aluminum automotive road wheels, utilizes similar
production processes and distribution methods, sells to many of the same OEM
customers and faces similar variations in product demand levels. In order to
effectively manage our overall business, we must maintain the ability to
allocate production and resources interchangeably among our plants, as
necessary. We assess operating performance and make operating decisions at this
segment level and allocate resources among individual plants as deemed necessary
to meet both customer requirements and our overall segment financial
objectives.
Net sales
and net property, plant and equipment by geographic area are summarized
below:
(Thousands
of dollars)
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
September
28,
|
|
|
September
30,
|
|
|
September
28,
|
|
|
September
30,
|
|
Net
sales:
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
U.S.
|
|
$ |
96,568 |
|
|
$ |
132,501 |
|
|
$ |
342,030 |
|
|
$ |
430,421 |
|
Mexico
|
|
|
66,786 |
|
|
|
95,056 |
|
|
|
260,947 |
|
|
|
297,228 |
|
Consolidated
net sales
|
|
$ |
163,354 |
|
|
$ |
227,557 |
|
|
$ |
602,977 |
|
|
$ |
727,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
28,
|
|
|
December
30,
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
$ |
96,326 |
|
|
$ |
116,599 |
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
176,544 |
|
|
|
185,654 |
|
Consolidated
property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
$ |
272,870 |
|
|
$ |
302,253 |
|
Note
7 - Revenue Recognition
Sales of
products and any related costs are recognized when title and risk of loss
transfers to the purchaser, generally upon shipment. Tooling reimbursement revenues, representing
internal development expenses and initial tooling that are reimbursable by our
customers, are recognized as such related costs and expenses are incurred and
recoverability is probable, generally upon receipt of a customer purchase
order. Tooling reimbursement revenues totaled $4.0
million and $2.5 million for the third quarter of 2008 and 2007, respectively;
and $14.3 million and $8.7 million for the thirty-nine weeks ended September 28,
2008 and September 30, 2007, respectively.
Note
8 – Earnings Per Share
In
accordance with the provisions of SFAS No. 128, “Earnings Per Share,” basic net
income (loss) per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share includes the dilutive effect of outstanding stock
options, calculated using the treasury stock method.
Of the
3.5 million stock options outstanding at September 28, 2008, 2.7 million shares
had an exercise price greater than the weighted average market price of the
stock for the thirteen weeks ended September 28, 2008, and 2.4 million shares
had an exercise price greater than the weighted average price of the stock for
the thirty-nine week period ending September 28, 2008. Accordingly,
these options were excluded in the calculations of diluted earnings per share
for these periods. In addition, options to purchase the remaining 0.8
million shares and 1.1 million shares for the thirteen and thirty-nine week
periods ended September 28, 2008, respectively, were excluded from diluted loss
per share calculation, because they were anti-dilutive due to the net loss for
those periods.
Of the
3.0 million stock options outstanding at September 30, 2007, 2.2 million shares
had an exercise price greater than the weighted average market price of the
stock and were excluded in the calculations of diluted earnings (loss) per share
for both the thirteen week and thirty-nine week periods ended September 30,
2007. In addition, options to purchase the remaining 0.8 million
shares were excluded from diluted loss per share calculation for the thirteen
week period ended September 30, 2007, because they were anti-dilutive due to the
net loss for the period.
Summarized
below are the calculations of basic and diluted earnings per share for the
respective periods:
(In
thousands, except per share amounts)
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
September
28,
|
|
|
September
30,
|
|
|
September
28,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic Earnings (Loss) per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
net income (loss)
|
|
$ |
(14,207 |
) |
|
$ |
(738 |
) |
|
$ |
(5,934 |
) |
|
$ |
4,544 |
|
Weighted
average shares outstanding - Basic
|
|
|
26,661 |
|
|
|
26,614 |
|
|
|
26,650 |
|
|
|
26,612 |
|
Basic
earnings (loss) per share
|
|
$ |
(0.53 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.22 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
net income (loss)
|
|
$ |
(14,207 |
) |
|
$ |
(738 |
) |
|
$ |
(5,934 |
) |
|
$ |
4,544 |
|
Weighted
average shares outstanding
|
|
|
26,661 |
|
|
|
26,614 |
|
|
|
26,650 |
|
|
|
26,612 |
|
Weighted
average dilutive stock options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19 |
|
Weighted
average shares outstanding - Diluted
|
|
|
26,661 |
|
|
|
26,614 |
|
|
|
26,650 |
|
|
|
26,631 |
|
Diluted
earnings (loss) per share
|
|
$ |
(0.53 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.22 |
) |
|
$ |
0.17 |
|
Note
9 – Income Taxes
The
income tax (provision) benefit on income before income taxes and equity earnings
for the third quarter of 2008 was a benefit of $5.7 million compared to a
provision of $(0.8) million for the same period in 2007.
For the
first three quarters of 2008, the income tax benefit was $3.2 million, comprised
of a benefit on losses of $1.8 million and reversal of discrete items totaling
$1.4 million. These discrete items were principally a $0.7 million
reversal of uncertain tax positions and a reduction of $0.8 million in valuation
reserves. For the first three quarters of 2007, we recorded an income
tax provision of $(0.6) million comprised of provision on earnings of
$(2.0) million, offset by a benefit of $1.4 million consisting primarily of tax
return and prior year adjustments and changes in valuation reserves and
uncertain items.
We
conduct business internationally and, as a result, some of our subsidiaries file
income tax returns in U.S. federal, U.S. state and certain foreign
jurisdictions. In the normal course of business, we are subject to
examination by taxing authorities in Hungary, Mexico, the Netherlands and the
United States. We are no longer subject to U.S. federal, state and local, or
Mexico (our major filing jurisdictions) income tax examinations for years before
1999.
We are
under audit for 2004 through 2006 tax years by the Internal Revenue
Service. The examination phase of the audit concluded early in the
fourth quarter of 2008. We anticipate receiving a tax refund of
approximately $1.2 million, and the release of approximately $0.8 million of
general business and alternative minimum tax credits. The examination
is subject to final review by the taxing authorities.
In
addition, the 2003 income tax return of Superior Industries de Mexico S.A. de
C.V is under review by Mexico’s Tax Administration Service (Servicio de
Administracion Tributaria). However, it is not reasonably possible at
this time to quantify any adjustments related to this audit or to predict the
date of completion.
Within
the next twelve month period ending September 27, 2009, we anticipate that
unrecognized tax benefits in the amount of $8.5 million will be recognized due
to the expiration of statutes of limitations and completion of related tax
examinations.
We
currently believe that we are likely to have taxable income in the future
sufficient to realize the benefit of our deferred tax assets (consisting
primarily of foreign tax credits, competent authority adjustments, reserves and
accruals that are not currently deductible for tax purposes, as well as net
operating loss carryforwards from losses we previously incurred). However, some
or all of these deferred tax assets could expire unused if we are unable to
generate taxable income in the future sufficient to utilize them or we enter
into transactions that limit our right to use them. If it becomes more likely
than not that our deferred tax assets will expire unused, we will have to
recognize a valuation allowance, which may materially increase our income tax
expense, and therefore adversely affect our results of operations and financial
condition in the period in which it is recorded.
At
December 30, 2007 and September 30, 2008, our net deferred tax asset was $19.2
million and $23.2 million, respectively. Based upon our assessment, it appears
more likely than not that the net deferred tax asset will be realized through
future taxable earnings. Accordingly, no valuation allowance has been
established for our net deferred tax asset. We will continue to assess the need
for a valuation allowance in the future.
Note
10 – Equity in Earnings of Joint Ventures
Included
below are summary statements of operations for Suoftec, our 50 percent owned
joint venture in Hungary, which manufactures cast and forged aluminum wheels
principally for the European automobile industry. Being 50 percent
owned and non-controlled, Suoftec is not consolidated, but accounted for using
the equity method.
(Thousands
of dollars)
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
September
28,
|
|
|
September
30,
|
|
|
September
28,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
$ |
30,350 |
|
|
$ |
35,695 |
|
|
$ |
113,495 |
|
|
$ |
106,853 |
|
Cost
of sales
|
|
|
30,658 |
|
|
|
31,963 |
|
|
|
106,804 |
|
|
|
98,095 |
|
Gross
profit (loss)
|
|
|
(308 |
) |
|
|
3,732 |
|
|
|
6,691 |
|
|
|
8,758 |
|
Selling,
general and administrative expenses
|
|
|
623 |
|
|
|
487 |
|
|
|
2,084 |
|
|
|
1,509 |
|
Income
(loss) from operations
|
|
|
(931 |
) |
|
|
3,245 |
|
|
|
4,607 |
|
|
|
7,249 |
|
Other
income (expense), net
|
|
|
(331 |
) |
|
|
145 |
|
|
|
702 |
|
|
|
264 |
|
Income
(loss) before income taxes
|
|
|
(1,262 |
) |
|
|
3,390 |
|
|
|
5,309 |
|
|
|
7,513 |
|
Income
tax benefit (provision)
|
|
|
291 |
|
|
|
(676 |
) |
|
|
(930 |
) |
|
|
(1,480 |
) |
Net
income (loss)
|
|
$ |
(971 |
) |
|
$ |
2,714 |
|
|
$ |
4,379 |
|
|
$ |
6,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Superior's
share of Suoftec net income (loss)
|
|
$ |
(485 |
) |
|
$ |
1,357 |
|
|
$ |
2,189 |
|
|
$ |
3,017 |
|
Intercompany
profit elimination
|
|
|
342 |
|
|
|
(235 |
) |
|
|
373 |
|
|
|
(456 |
) |
Superior's
equity in earnings (loss) of Suoftec
|
|
|
(143 |
) |
|
|
1,122 |
|
|
|
2,562 |
|
|
|
2,561 |
|
Equity
in earnings of Topy-Superior Ltd
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
|
|
175 |
|
Total
equity in earnings (loss) of joint ventures
|
|
$ |
(143 |
) |
|
$ |
1,187 |
|
|
$ |
2,562 |
|
|
$ |
2,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2008, the Topy-Superior Limited joint venture with Topy Industries was
terminated. The termination of the joint venture did not have a
material impact on our financial condition or results of
operations.
Note
11 – Other Income
Foreign
currency transaction gains (losses), which are included in other income, net,
were $1.2 million for the thirteen weeks ended September 28, 2008 compared to
$0.4 million for the same period a year ago and a loss of $(0.5) million for the
thirty-nine weeks ended September 28, 2008 compared to a gain of $0.6 million
for the same thirty-nine week period in 2007. In the first quarter of
2007, we sold available-for-sale corporate equity securities realizing a $2.4
million gain that was included in other income, net.
Note
12 – Accounts Receivable
|
|
September
28,
|
|
|
December
30,
|
|
(Thousands
of dollars)
|
|
2008
|
|
|
2007
|
|
Trade
receivables
|
|
$ |
112,249 |
|
|
$ |
119,175 |
|
Tooling
reimbursement receivables
|
|
|
7,179 |
|
|
|
5,102 |
|
Current
portion of notes receivable
|
|
|
2,565 |
|
|
|
- |
|
Receivables
from joint ventures
|
|
|
1,600 |
|
|
|
557 |
|
Other
receivables
|
|
|
3,233 |
|
|
|
3,297 |
|
|
|
|
126,826 |
|
|
|
128,131 |
|
Allowance
for doubtful accounts
|
|
|
(2,650 |
) |
|
|
(2,427 |
) |
Accounts
receivable, net
|
|
$ |
124,176 |
|
|
$ |
125,704 |
|
Note
13 – Inventories
(Thousands
of dollars)
|
|
September
28,
|
|
|
December
30,
|
|
|
|
2008
|
|
|
2007
|
|
Raw
materials
|
|
$ |
12,232 |
|
|
$ |
16,482 |
|
Work
in process
|
|
|
34,589 |
|
|
|
30,004 |
|
Finished
goods
|
|
|
49,352 |
|
|
|
60,684 |
|
Inventories,
net
|
|
$ |
96,173 |
|
|
$ |
107,170 |
|
Note
14 – Property, Plant and Equipment
(Thousands
of dollars)
|
|
September
28,
|
|
|
December
30,
|
|
|
|
2008
|
|
|
2007
|
|
Land
and buildings
|
|
$ |
96,058 |
|
|
$ |
94,610 |
|
Machinery
and equipment
|
|
|
519,570 |
|
|
|
519,869 |
|
Leasehold
improvements and others
|
|
|
13,425 |
|
|
|
14,055 |
|
Construction
in progress
|
|
|
21,307 |
|
|
|
29,739 |
|
|
|
|
650,360 |
|
|
|
658,273 |
|
Accumulated
depreciation
|
|
|
(377,490 |
) |
|
|
(356,020 |
) |
Property,
plant and equipment, net
|
|
$ |
272,870 |
|
|
$ |
302,253 |
|
Depreciation
expense was $11.4 million for the thirteen weeks ended September 28, 2008
compared to $11.0 million for the same period ended September 30,
2007. Depreciation expense was $34.3 million for the
thirty-nine weeks ended September 28, 2008 compared to $31.7 million for the
same period ended September 30, 2007.
Note
15 – Retirement Plans
We
previously had individual Salary Continuation Agreements with each of our
directors, officers, and other key members of management who are participants in
our unfunded supplemental executive retirement program. Due to recent changes in
the tax laws, payments made under this program could be subject to substantial
new taxes for the participants, which may be avoided if these agreements are
amended or are replaced by a plan that complies with such law changes. In the
first quarter of 2008, we offered affected participants the opportunity to
terminate their individual Salary Continuation Agreements and become a
participant in a new unfunded Salary Continuation Plan (Plan), which now covers
all subsequent participants. Similar to the terms of the Salary
Continuation Agreements, the Plan provides to those participants meeting
specified vesting requirements a monthly benefit amount equal to 30 percent of
the participant’s final average compensation during the last thirty-six months
of service.
Plan
benefits become payable upon the participant’s death or disability, if still an
active employee, or upon attaining the specified retirement date - age 65, if no
longer employed by the company. Benefit payments will generally commence on the
first day of the month coinciding with or next following the participant’s
retirement date, and shall continue for a period of not less than 120 months or
until participant’s death, if later. However, in the case of certain
participants who are specified employees, as defined in the Plan, on their
retirement date, all or a portion of their benefit payments will not begin until
six months following the date of separation from service. For the
thirty-nine weeks ended September 28, 2008, payments to retirees or their
beneficiaries approximating $624,000 have been made in accordance with our
supplemental executive retirement program. We presently anticipate
benefit payments in 2008 to total approximately $0.9 million.
(Thousands
of dollars)
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
September
28,
|
|
|
September
30,
|
|
|
September
28,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
118 |
|
|
$ |
137 |
|
|
$ |
353 |
|
|
$ |
410 |
|
Interest
cost
|
|
|
289 |
|
|
|
280 |
|
|
|
867 |
|
|
|
841 |
|
Net
amortization
|
|
|
42 |
|
|
|
48 |
|
|
|
126 |
|
|
|
143 |
|
Net
periodic pension cost
|
|
$ |
449 |
|
|
$ |
465 |
|
|
$ |
1,346 |
|
|
$ |
1,394 |
|
Note
16 – Commitments and Contingencies
Derivative
Litigation
In late
2006, two shareholder derivative complaints were filed, one each by plaintiffs
Gary B. Eldred and Darrell D. Mack, based on allegations concerning some of our
past stock option grants and practices. These cases were subsequently
consolidated as In re Superior
Industries International, Inc. Derivative Litigation, which is pending in
the United States District Court for the Central District of
California. In the plaintiffs’ consolidated complaint, filed on March
23, 2007, we were named only as a nominal defendant from whom the plaintiffs
sought no monetary recovery. In addition to naming us as a nominal
defendant, the plaintiffs named various present and former employees, officers
and directors of the company as individual defendants from whom they sought
monetary and/or equitable relief, purportedly for the benefit of the
company.
The
plaintiffs purported to base their claims against the individual defendants on
allegations that the grant dates for some of the options granted to certain
directors, officers and employees occurred prior to upward movements in the
stock price, and that the stock
option grants were not properly accounted for in our financial reports and not
properly disclosed in our SEC filings. We, along with the individual
defendants, filed motions to dismiss plaintiffs’ consolidated complaint on May
14, 2007. In an order dated August 9, 2007, the court granted our
motion to dismiss the consolidated complaint, and granted the plaintiffs leave
to file an amended complaint.
On August
29, 2007, the plaintiffs filed an amended consolidated complaint that was
substantially similar to the prior consolidated complaint. In
response, we, along with the individual defendants, filed motions to dismiss on
September 21, 2007. In an order dated April 14, 2008, the court
granted again our motion to dismiss the amended consolidated complaint. On May
5, 2008, the plaintiff filed a verified second amended consolidated shareholder
derivative complaint that alleges claims substantially similar to the prior
complaints. Once again, we, along with the individual defendants,
filed motions to dismiss on May 30, 2008. The court heard the motions
to dismiss on September 15, 2008, but has not yet issued its
ruling. Because this litigation remains at a preliminary stage, it
would be premature to anticipate the probable outcome of this case and whether
such an outcome would be materially adverse to the company.
Environmental
Compliance
The South
Coast Air Quality Management District (the “AQMD”) issued to us a notice of
violation, dated December 14, 2007, alleging violations of certain air quality
rules at our Van Nuys, California facility. After researching the
history of the air quality permits and other facts, we met with the AQMD on May
1, 2008 and October 17, 2008, to resolve the issues raised in the notice of
violation and address other compliance issues.
We
subsequently remedied three of the five issues set forth in the notice of
violation. The notice of violation further alleged that we failed to
submit permit applications to modify the burners for three of the plant’s
furnaces and failed to update the nitrogen oxide (NOx) emission factors for the
same three furnaces. We agreed to conduct source testing to update
the NOx emission factors and to submit new permit applications for the furnaces,
which we did on June 6, 2008.
We have
proposed that in lieu of penalties, the violations be resolved through a
Supplemental Environmental Program (“SEP”) to enhance air quality controls and
compliance. However, it is premature to anticipate what the probable
SEP may be and its associated cost. We anticipate that the resolution
of this matter will not have a material adverse effect on our financial position
or results of operation.
Other
Proceedings
We are
party to various other legal and environmental proceedings incidental to our
business. Certain claims, suits and complaints arising in the
ordinary course of business have been filed or are pending against
us. Based on facts now known, we believe all such matters are
adequately provided for, covered by insurance, are without merit, and/or involve
such amounts that would not materially adversely affect our consolidated results
of operations, cash flows or financial position.
Note
17 – Risk Management
We are
subject to various risks and uncertainties in the ordinary course of business
due, in part, to the competitive global nature of the industry in which we
operate, to changing commodity prices for the materials used in the manufacture
of our products, and to development of new products.
We have
foreign operations in Mexico and Hungary that, due to the settlement of accounts
receivable and accounts payable, require the transfer of funds denominated in
their respective functional currencies – the Mexican peso and the euro. The
value of the Mexican peso relative to the U.S. dollar for the first three
quarters of 2008 increased approximately one percent. The value of
the euro relative to the U.S. dollar decreased approximately one percent during
the first three quarters of 2008. Foreign currency transaction gains
and losses are included in other income, net in the condensed consolidated
statements of operations.
When
market conditions warrant, we may also enter into contracts to purchase certain
commodities used in the manufacture of our products, such as aluminum, natural
gas and other raw materials. Any such commodity commitments are expected to be
purchased and used over a reasonable period of time in the normal course of
business. Accordingly, pursuant to SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” they are not accounted for
as derivatives. We currently have several purchase agreements for the delivery
of natural gas through 2010. The contract value and fair value of
these purchase commitments approximated $31.4 million and $27.1 million,
respectively, at September 28, 2008. Percentage changes in the market
prices of natural gas will impact the fair value by a similar percentage. We do
not hold or purchase any natural gas forward contracts for trading
purposes.
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 may from time to time
make written or oral statements that are “forward-looking”, within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, including statements contained
in this report and other filings with the Securities and Exchange Commission and
reports and other public statements to our shareholders. These statements may,
for example, express expectations or projections about future actions or results
that we may anticipate but, due to developments beyond our control, do not
materialize. Actual results could differ materially because of issues and
uncertainties such as those listed herein, which, among others, should be
considered in evaluating our financial outlook. The principal factors that could
cause our actual performance and future events and actions to differ materially
from such forward-looking statements include, but are not limited to, changes in
the automotive industry, increased global competitive pressures, our dependence
on major customers and third party suppliers and manufacturers, our exposure to
foreign currency fluctuations, increasing fuel prices and other factors or
conditions described in Item 1A – Risk Factors in Part II of this Quarterly
Report on Form 10-Q and in Item 1A – Risk Factors in Part I of our 2007 Annual
Report on Form 10-K. We assume no obligation to update publicly any
forward-looking statements.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the accompanying Condensed Consolidated Financial
Statements and notes thereto.
Executive
Overview
There
have been unprecedented recent announcements of North American automotive plant
closures and other restructuring activities by our customers, which have and
will continue to have a negative impact on our business. At the time
of this filing, our customers are still providing us with specific dates and
timing of plant closures and restructuring activities and information on the
likely impact on their demand for our products. Accordingly, we are
continuing our strategic planning and the determination of our near-term course
of action to respond to such developments in our industry.
Overall
North American production of passenger cars and light trucks in the third
quarter was reported by industry publications as being down approximately 16
percent versus the same period a year ago, with production of passenger cars
increasing 4 percent while production of light trucks and SUVs decreased 33
percent. The U.S. automotive industry was impacted negatively by the continued
dramatic shift away from full-size trucks and SUVs caused by continuing high
fuel prices, rapidly rising commodity prices and the tightening of consumer
credit, due to the deteriorating U.S. financial markets.
All of
our major customers announced that, due to these severe pressures, they were
reducing North American production, delaying the introduction of several 2009
model year platforms, planning further manufacturing capacity realignments,
additional cost reductions and changes to their model mix in order to bring more
fuel-efficient passenger cars and crossovers to market faster. In some cases,
they announced certain brands would undergo strategic reviews, ranging from a
complete revamping of the full product line to the possibility of the sale of
the brand. Accordingly, we and our customers continue to confront an extremely
weak economy with a lack of consumer credit and continuing high fuel prices that
have reduced demand, especially for SUVs and light trucks. Having assessed a
variety of strategic initiatives and additional cost-reductions required to
address the changing circumstances we now face, on August 19, 2008, we announced
the planned closure in December 2008 of our wheel manufacturing facility in
Pittsburg, Kansas, as well as a reduction in work force at several other
locations. These actions are described in detail below.
Consolidated
revenues in the third quarter of 2008 decreased $64.2 million, or 28 percent, to
$163.4 million from $227.6 million in the same period a year ago. Wheel sales
decreased $65.8 million, or 29 percent, to $159.3 million from $225.1 million in
the third quarter a year ago, as our wheel shipments decreased 29 percent to
approximately 2.2 million. This was the lowest level of shipments in a
non-strike period since the third quarter of 1995. This decrease profoundly
impacted our ability to absorb fixed costs during the quarter, resulting in a
gross margin loss of $(11.2) million. The loss from operations for the period,
including the pretax impairment charge of $5.0 for the announced plant closure,
was $(22.4) million, compared to a loss from operations in 2007 of $(2.5)
million. The net loss after income taxes and equity earnings for the period was
$(14.2) million, or $(0.53) per diluted share, compared to a net loss in 2007 of
$(0.7) million, or $(0.03) per diluted share.
Results
of Operations
(Thousands
of dollars, except per share amounts)
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
September
28,
|
|
|
September
30,
|
|
|
September
28,
|
|
|
September
30,
|
|
Selected data
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
$ |
163,354 |
|
|
$ |
227,557 |
|
|
|
602,977 |
|
|
$ |
727,649 |
|
Gross
profit (loss)
|
|
$ |
(11,191 |
) |
|
$ |
5,276 |
|
|
|
10,248 |
|
|
$ |
20,999 |
|
Percentage
of net sales
|
|
|
-6.9 |
% |
|
|
2.3 |
% |
|
|
1.7 |
% |
|
|
2.9 |
% |
Loss
from operations
|
|
$ |
(22,422 |
) |
|
$ |
(2,501 |
) |
|
|
(14,093 |
) |
|
$ |
(2,730 |
) |
Percentage
of net sales
|
|
|
-13.7 |
% |
|
|
-1.1 |
% |
|
|
-2.3 |
% |
|
|
-0.4 |
% |
Net
income (loss)
|
|
$ |
(14,207 |
) |
|
$ |
(739 |
) |
|
|
(5,934 |
) |
|
$ |
4,544 |
|
Percentage
of net sales
|
|
|
-8.7 |
% |
|
|
-0.3 |
% |
|
|
-1.0 |
% |
|
|
0.6 |
% |
Diluted
earnings (loss) per share
|
|
$ |
(0.53 |
) |
|
$ |
(0.03 |
) |
|
|
(0.22 |
) |
|
$ |
0.17 |
|
Impairment
of Long-Lived Assets and Other Charges
On August
19, 2008, we announced the planned closure of our wheel manufacturing facility
located in Pittsburg, Kansas, that will result in a lay off of approximately 600
employees. The planned closure of the Pittsburg facility, which will be
effective December 19, 2008, was approved by our Board of Directors on August
15, 2008. Also included in this announcement was the elimination of 155
positions at our other U.S. facilities, of which 90 were open positions and 65
were layoffs which resulted in recording $0.2 million in severance costs in the
current quarter. These two actions will result in a reduction of 755
positions, or 29 percent of Superior’s U.S. workforce. These actions were
necessary in order to manage costs and balance our manufacturing capacity in the
face of reduced demand for SUVs and light trucks.
Due to
the announced closure of the Pittsburg facility, we recorded in the current
quarter an asset impairment charge against pretax earnings totaling $5.0
million, reducing the carrying value of certain long-lived assets to their
respective fair values. We estimated the fair value of long-lived assets
considering independent appraisals of the assets. These assets are
classified as held and used, in accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, until they are available for
immediate sale at which time they will be classified as held for sale. In
addition, we recorded severance and other one-time benefit costs totaling $0.7
million which are included in the cost of sales line item of our statement of
operations. We expect to incur additional severance and other one-time benefit
costs related to the closure of this facility of approximately $1.3 million over
the next three months.
Sales
Consolidated
revenues in the third quarter of 2008 decreased $64.2 million, or 28.2 percent,
to $163.4 million from $227.6 million in the same period a year
ago. Wheel sales decreased $65.8 million, or 29.2 percent, to $159.3
million from $225.1 million in the third quarter a year ago, as our wheel
shipments decreased by 29.3 percent. Tooling reimbursement revenues totaled $4.0
million in the third quarter of 2008 and $2.5 million in the third quarter of
2007. The average selling price of our wheels increased approximately
1 percent in the current quarter as a 3 percent increase in the pass-through
price of aluminum in the current quarter was offset by a 2 percent shift in
sales mix to smaller wheels, reversing the trend from the first two quarters of
2008.
Consolidated
revenues in the first three quarters of 2008 decreased $124.6 million, or 17.1
percent, to $603.0 million from $727.6 million in the same period a year ago.
Wheel sales decreased $130.3 million, or 18.1 percent, to $588.7 million from
$719.0 million in the first three quarters a year ago, as our wheel shipments
decreased by 18.4 percent. Tooling reimbursement revenues totaled
$14.3 million in the first three quarters of 2008 and $8.7 million in the same
period of 2007. The average selling price of our wheels during the
first nine months of 2008 increased approximately 1 percent as a shift in sales
mix to larger, higher-priced wheels offset the 1 percent decrease in the
pass-through price of aluminum during the first three quarters.
As
reported by industry publications, North American production of passenger cars
and light trucks in the third quarter was down approximately 16 percent compared
to the same quarter in the previous year. Our wheel shipments on these
vehicles fell 29 percent for the same period. The decline of North
American production included an increase of 4 percent for passenger cars while
light trucks fell by 33 percent. During the same period, our shipments of
passenger car wheels increased by 11 percent while light truck wheel shipments
decreased by 50 percent. The large drop in light truck shipments was
primarily a result of decreased production on the GMT 900 and Ford F-150
programs, as further described below. Even with the significant drop in
overall vehicle production, Superior was able to gain market share in the
passenger car group.
Our
shipments to GM decreased 21 percent in the current quarter to 45 percent of
total unit shipments from 40 percent in the third quarter of 2007, as light
truck wheel shipments decreased 41 percent while shipments of passenger car
wheels increased 104 percent. The major unit shipment decreases were for the
GMT800/900, Trail Blazer and Hummer H3, while the largest increases were for
Chevrolet’s Malibu and Cobalt and Cadillac’s CTS. Shipments to Ford decreased 46
percent and were 21 percent of total unit shipments, compared to 27 percent a
year ago, as light truck wheel shipments decreased 77 percent and shipments of
passenger car wheel shipments increased 5 percent. The major unit shipment
decreases were for the F Series trucks, the Explorer and the Mustang, while the
largest increases were for the Focus and the Lincoln Town Car. Shipments to
Chrysler decreased 14 percent versus the prior year, but increased to 14 percent
of total unit shipments during the quarter compared to 12 percent a year ago.
Light truck shipments to Chrysler decreased 18 percent, while shipments of
passenger car wheels decreased 11 percent. The major decreases in unit shipments
were for Sebring and the Dodge Nitro, while the largest increases were for the
Dodge’s Magnum, Charger and Journey platforms. Shipments to international
customers decreased 33 percent compared to a year ago to 20 percent of total
unit shipments from 21 percent a year ago. The principal unit shipment decreases
to international customers in the current period compared to a year ago were for
Nissan’s Frontier and Xterra and the Mazda 6, while the largest increases were
for the Nissan Altima and the Toyota Vibe.
Gross
Profit (Loss)
Consolidated
gross profit (loss) decreased $16.5 million for the third quarter of 2008 to a
loss of $(11.2) million, or (6.9) percent of net sales, compared to a profit of
$5.3 million, or 2.3 percent of net sales, for the same period a year ago. As
indicated above, actual unit shipments in the third quarter of 2008 decreased
29.3 percent compared to the same period a year ago, and decreased 23.7 percent
from the prior quarter in 2008. The sharp decrease in customer
requirements resulted in wheel production decreasing 20.9 percent versus the
prior quarter and 25.4 percent compared to the same period a year ago,
significantly impacting absorption of plant fixed costs. This, along with the
lost margin on the 29.3 percent decrease in unit shipments contributed to the
operating margin of our wheel plants in the third quarter of 2008 decreasing
approximately 7.6 percent. Severance costs related to the planned plant closure
and workforce reductions during the quarter totaled approximately $1.0
million.
Consolidated
gross profit for the first three quarters of 2008 decreased $10.8 million to
$10.2 million, or 1.7 percent of net sales, compared to a $21.0 million, or 2.9
percent of net sales, for the same period a year ago. For the first half of
2008, our gross profit, including the impact of the American Axle strike, had
increased approximately $5.7 million compared to the prior year. Continued
progress made towards resolving certain production inefficiencies in several of
our facilities contributed to the improved margin. The significant decrease in
unit shipments and production in the third quarter more than offset the first
half margin improvements.
We are
continuing to implement action plans to improve operational performance and
mitigate the impact of the declines in U.S. auto industry production and the
continuing pricing environment in which we now operate. We must emphasize,
however, that while we continue to reduce costs through process automation and
identification of industry best practices, the pace of auto production declines
and global pricing pressures may continue at a rate faster than our progress on
achieving cost reductions for an indefinite period of time. This is
due to the methodical nature of developing and implementing these cost reduction
programs. In addition, although we have a portion of our natural gas
requirements covered by fixed-price contracts expiring through 2010, costs may
increase to a level that cannot be immediately recouped in selling prices. The
impact of these factors on our future financial position, results of operations
and cash flows may be negative, to an extent that cannot be predicted, and we
may not be able to implement sufficient cost-saving strategies to mitigate any
future impact.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the third quarter of 2008 decreased $1.6
million to $6.2 million, or 3.8 percent of net sales, from $7.8 million, or 3.4
percent of net sales, in the same period in 2007. The third quarter
of 2007 included a pretax charge of $2.2 million for the potential settlement of
a labor related lawsuit, which was partially offset by a reduction in other
professional fees of $0.4 million related to the derivative lawsuit. This
favorable variance versus the prior year was partially offset by increased
payroll tax expenses in the current quarter of $0.3 million related to our
deferred compensation plans. For the first three quarters of 2008, selling,
general and administrative expenses were $19.3 million, or 3.2 percent of net
sales, compared to $23.7 million, or 3.3 percent of net sales, for the same
period in 2007. The principal reductions in the current year-to-date
period were in professional fees related to the derivative lawsuit and the
potential settlement of the labor related lawsuit, totaling $3.6 million. Other
significant reductions versus the prior year were $0.7 million in stock-based
compensation and $0.4 million in bonus expense.
Interest
Income, Net and Other Income, Net
Net
interest income for the third quarter decreased to $0.6 million from $0.8
million a year ago, due to the weighted average rate of interest earned on our
cash investments declining to 2.4 percent from 5.6 percent a year ago. For the
first three quarters of 2008 net interest income decreased to $2.3 million from
$2.7 million a year ago, due to the weighted average rate of interest declining
to 3.0 percent from 4.9 percent a year ago.
Other
income, net for the third quarter was $2.0 million compared to $0.6 million a
year ago, due principally to an increase of $1.1 million in foreign exchange
transaction gains on the Mexican peso. Other income, net for the first three
quarters of 2008 was $0.1 million compared to $2.5 million in 2007. The first
three quarters of 2007 included a $2.4 million gain on sale of an
available-for-sale equity security.
Equity
in Earnings of Joint Ventures
As
indicated below, equity in earnings of joint ventures is represented principally
by our share of the equity earnings of our 50-percent owned joint venture in
Hungary, Suoftec. Our share of Suoftec’s net loss in the third quarter of 2008
was $(0.5) million compared to income of $1.4 million for the same period in
2007. Our share of Suoftec’s net income totaled $2.2 million for the
first three quarters of 2008 compared to $3.0 million for the same period in
2007. Including an adjustment for the elimination of intercompany profits in
inventory, our adjusted equity earnings of this joint venture was a loss of $0.1
million in the third quarter of 2008 and income of $1.1 million in the third
quarter of 2007. For the first three quarters of 2008, our adjusted equity
earnings of this joint venture totaled $2.6 million, the same as for the same
period in 2007. The balance of our equity earnings of joint ventures
in 2007 was from our Topy-Superior Limited joint venture, which was terminated
as of March 31, 2008.
Suoftec Joint
Venture
Net sales
of our 50 percent owned joint venture, Suoftec, decreased $5.3 million, or 15.0
percent, to $30.4 million in the third quarter of 2008 compared to $35.7 million
for the same period last year. The decrease in net sales was due to
an 18.1 percent decrease in units shipped, partially offset by a 3.8 percent
decrease in the average selling price. Net sales for the first three
quarters of 2008 increased by $6.6 million, or 6.2 percent, to $113.5 million
compared to $106.9 million for the same period in 2007. The increase
in net sales for the year-to-date period was due to a 7.5 percent increase in
the average selling price being offset by a 1.2 percent decrease in units
shipped.
Gross
profit in the third quarter decreased to a loss of $(0.3) million, or (1.0)
percent of net sales, compared to gross profit of $3.7 million, or 10.5 percent
of net sales, for the same quarter of last year. The main
contributors to the decrease in gross profit this quarter compared to the same
quarter last year were the 6.0 percent decrease in average euro selling prices
resulting from a shift in mix to lower-priced, lower-margin wheels and continued
increases in utility costs and operating supplies, which partially offset the
11.2 percent increase in the average euro to U.S. dollar exchange
rate. Gross profit for the first three quarters of 2008 decreased to
$6.7 million, or 5.9 percent of net sales, compared to $8.8 million, or 8.2
percent of net sales for the same period in 2007. The main
contributors to the decreased gross profit in 2008 were the 1.2 percent decrease
in units shipped, and a 5.4 percent decrease in the average euro selling price,
related to the shift in mix to lower-priced lower-margin wheels in
2008.
Selling,
general and administrative expenses this quarter increased to $0.6 million from
$0.5 million in the same quarter last year. The $0.1 million increase
in selling, general and administrative expenses was principally due to the
increase in the average euro to U.S. dollar exchange rate. Selling,
general and administrative expenses for the first three quarters of 2008
increased to $2.1 million from $1.5 million in the same period last
year. The $0.6 million increase in selling, general and
administrative expenses was principally due to the increase in the average euro
to U.S. dollar exchange rate and increased sales commissions.
Due
principally to the decrease in gross profit explained above, Suoftec’s net
income decreased to a loss of $1.0 million in the third quarter of 2008 from
$2.7 million in the same quarter last year. Suoftec’s net income was
$4.4 million for the first three quarters of 2008 compared to $6.0 million in
the same period last year. The increase in the average euro to U.S.
dollar exchange rate impacted Suoftec’s net income for the first three quarters
favorably by approximately $0.5 million.
Income
Tax (Provision) Benefit
The
income tax (provision) benefit on income before income taxes and equity earnings
for the third quarter of 2008 was a benefit of $5.7 million compared to a
provision of $(0.8) million for the same period in 2007. For the
first three quarters of 2008, the income tax benefit was $3.2 million, comprised
of a benefit on losses of $1.8 million and reversal of discrete items totaling
$1.4 million. These discrete items were principally a $0.7 million
reversal of uncertain tax positions and a reduction of $0.8 million in valuation
reserves. For the first three quarters of 2007, we recorded an income
tax provision of $(0.6) million comprised of provision on earnings of
$(2.0) million, offset by a benefit of $1.4 million consisting primarily of tax
return and prior year adjustments and changes in valuation reserves and
uncertain items.
Within
the next twelve month period ending September 27, 2009, we anticipate that
unrecognized tax benefits in the amount of $8.5 million will be recognized due
to the expiration of statutes of limitations and completion of related tax
examinations.
We
currently believe that we are likely to have taxable income in the future
sufficient to realize the benefit of our deferred tax assets (consisting
primarily of foreign tax credits, competent authority adjustments, reserves and
accruals that are not currently deductible for tax purposes, as well as net
operating loss carryforwards from losses we previously incurred). However, some
or all of these deferred tax assets could expire unused if we are unable to
generate taxable income in the future sufficient to utilize them or we enter
into transactions that limit our right to use them. If it becomes more likely
than not that our deferred tax assets will expire unused, we will have to
recognize a valuation allowance, which may materially increase our income tax
expense, and therefore adversely affect our results of operations and financial
condition in the period in which it is recorded.
At
December 30, 2007 and September 30, 2008, our net deferred tax asset was $19.2
million and $23.2 million, respectively. Based upon our assessment, it appears
more likely than not that the net deferred tax asset will be realized through
future taxable earnings. Accordingly, no valuation allowance has been
established for our net deferred tax asset. We will continue to assess the need
for a valuation allowance in the future.
Financial
Condition, Liquidity and Capital Resources
Our
sources of liquidity include cash and cash equivalents, net cash provided by
operating activities and other external sources of funds. Working capital and
the current ratio were $274.0 million and 4.5:1, respectively, at September 28,
2008, versus $260.5 million and 3.7:1 at December 31, 2007. We have no long-term
debt. As of September 28, 2008, our cash and cash equivalents totaled $110.4
million compared to $106.8 million at December 31, 2007, and $68.7 million at
September 30, 2007. The increase in cash and cash equivalents since September
30, 2007, was due principally to reduced funding requirements of capital
expenditures related to our wheel facility in Chihuahua, Mexico. For the
foreseeable future, we expect all working capital requirements, funds required
for investing activities, cash dividend payments and repurchases of our common
stock to be funded from internally generated funds or existing cash and cash
equivalents.
Net cash
provided by operating activities decreased $7.0 million to $24.4 million for the
thirty-nine weeks ended September 28, 2008, compared to $31.4 million provided
during the same period a year ago. The change in net income, including the
changes in non-cash items, decreased net cash provided by operating activities
by $12.6 million. This decrease was partially offset by the net change in
working capital requirements and other operating assets and liabilities,
totaling $5.6 million. Funding requirements for accounts receivable decreased
$41.1 million, due to the significant decrease in sales during the last two
months of the current quarter compared to the same period a year ago, and
funding for income taxes decreased $11.8 million, due to the decline in net
earnings. Offsetting these favorable changes in working capital were increased
funding requirements for accounts payable and other assets, totaling $36.3
million and $9.9 million, respectively. These changes were due to the timing of
capital expenditures payments for our newest plant in Mexico and to changes in
payment terms with our major raw material vendors.
The
principal investing activity during the thirty-nine weeks ended September 28,
2008, was funding $8.9 million of capital expenditures. Similar investing
activities during the same period a year ago included funding of $33.8 million
of capital expenditures, offset by proceeds from held-to-maturity securities of
$9.8 million and proceeds from the sale of available-for-sale securities of $5.4
million. Capital expenditures in the current period include approximately
$5.6 million for our new wheel manufacturing facility in Chihuahua, Mexico,
compared to $20.8 million in the same period a year ago. The remainder of the
capital expenditures in both periods was for ongoing improvements to our
existing facilities, none of which were individually significant.
Financing
activities during the thirty-nine weeks ended September 28, 2008 and September
30, 2007 consisted primarily of the payment of cash dividends on our common
stock totaling $12.8 million in both periods. In addition, $0.6
million was received from the exercise of stock options during the thirty-nine
weeks ended September 28, 2008 compared to $0.4 million received during the same
period in 2007.
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.
New
Accounting Standards
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS
No. 157 establishes a common definition for fair value to be applied to U.S.
GAAP guidance requiring use of fair value, establishes a framework for measuring
fair value, and expands disclosure about such fair value measurements. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. The
adoption of the applicable provisions of SFAS No. 157 as of January 1, 2008 did
not have a material impact on our consolidated results of operations or
statement of financial position or disclosures. In February 2008, the
FASB decided to issue a final Staff Position to allow a one-year deferral of
adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. The FASB also decided to amend SFAS No. 157 to
exclude FASB Statement No. 13 and its related interpretive accounting
pronouncements that address leasing transactions. We do not expect
that the adoption of the provisions of SFAS No. 157 for nonfinancial assets and
liabilities measured on a nonrecurring basis will have a material impact on our
consolidated results of operations or statement of financial
position.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.” This Statement replaces SFAS No. 141, “Business
Combinations,” (SFAS No. 141), and defines the acquirer as the entity that
obtains control of one or more business in the business combination and
establishes the acquisition date as the date that the acquirer achieves control.
This Statement’s scope is broader than that of SFAS No. 141, which applied only
to business combinations in which control was obtained by transferring
consideration. This Statement applies to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We do not expect the
adoption of SFAS No. 141 will have a material impact on our consolidated results
of operations and statement of financial position.
Risk
Management
We are
subject to unusual risks and uncertainties during the current quarter as our
principal customers are facing risks and uncertainties of their
own. There have been unprecedented recent announcements of North
American automotive plant closures and other restructuring activities by our
customers, which have and will continue to have a negative impact on our
business. At the time of this filing, our customers are still
providing us with specific dates and timing of plant closures and restructuring
activities and information on the likely impact on their demand for our
products. Accordingly, we are continuing our strategic planning and
the determination of our near-term course of action to respond to such
developments in our industry.
We are
subject to various risks and uncertainties in the ordinary course of business
due, in part, to the competitive global nature of the industry in which we
operate, to changing commodity prices for the materials used in the manufacture
of our products, and to development of new products.
We have
foreign operations in Mexico and Hungary that, due to the settlement of accounts
receivable and accounts payable, require the transfer of funds denominated in
their respective functional currencies – the Mexican peso and the euro. The
value of the Mexican peso relative to the U.S. dollar for the first three
quarters of 2008 increased approximately one percent. The value of
the euro relative to the U.S. dollar decreased approximately one percent during
the first three quarters of 2008. Foreign currency transaction gains
and losses are included in other income, net in the condensed consolidated
statements of operations.
When
market conditions warrant, we may also enter into contracts to purchase certain
commodities used in the manufacture of our products, such as aluminum, natural
gas and other raw materials. Any such commodity commitments are expected to be
purchased and used over a reasonable period of time in the normal course of
business. Accordingly, pursuant to SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” they are not accounted for
as derivatives. We currently have several purchase agreements for the delivery
of natural gas through 2010. The contract value and fair value of
these purchase commitments approximated $31.4 million and $27.1 million,
respectively, at September 28, 2008. Percentage changes in the market
prices of natural gas will impact the fair value by a similar percentage. We do
not hold or purchase any natural gas forward contracts for trading
purposes.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
See Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – “Risk Management”.
Item 4. Controls and Procedures
Evaluation of Disclosure
Controls and Procedures
The
company's management, with the participation of the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), 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 28, 2008. Based on
this evaluation, the CEO and CFO concluded that, as of September 28, 2008, the
company's disclosure controls and procedures were not effective based on the
material weakness described below.
Notwithstanding
the material weakness that existed at September 28, 2008 as described below,
management has concluded that the condensed consolidated financial
statements, and other financial information included in this report, fairly
present in all material respects in accordance with accounting principles
generally accepted in the United States of America our financial condition,
results of operations and cash flows as of, and for, the periods presented in
this report.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changing conditions, or that the degree of compliance with
policies or procedure may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely
basis. Management has determined that the following material weakness
continued to exist in the company’s internal control over financial reporting as
of September 28, 2008:
We did
not maintain effective controls over the completeness, accuracy and valuation of
the accounting for and disclosure of income taxes. Specifically, we
did not have effective controls to ensure that the income tax provision and
related taxes payable and deferred tax liabilities were properly reconciled to
the differences between the net book basis and net tax basis of our depreciable
property, plant and equipment subsidiary ledgers. Also, we did not
have sufficient resources to enable us to properly consider and apply GAAP for
income taxes. These control deficiencies resulted in the misstatement
of our deferred income tax provision and deferred tax liabilities accounts and
related financial disclosures in the consolidated financial statements, and in
the restatement of our annual consolidated financial statements for 2006 and
2005, each of the quarters of 2006 and the first three quarters of
2007. Additionally, these control deficiencies could result in the
misstatement of the aforementioned accounts and disclosures that would result in
a material misstatement in our annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management has determined that these control deficiencies constitute a material
weakness.
The
material weakness above, as reported in our 2007 Annual Report on Form 10-K, was
originally identified during management’s evaluation of the effectiveness of our
internal control over financial reporting as of December 30, 2007.
Remediation Steps to Address
the Material Weakness
Summarized
below are the measures we will undertake in an effort to remediate the material
weakness described above. We will continue to evaluate the effectiveness of our
internal controls over financial reporting on an ongoing basis and will take
further action as appropriate.
We are
developing a documented workflow process to ensure that the appropriate
procedures relating to the completion of an accurate income tax provision and
recording of the required adjustments to the related tax accounts take place on
a quarterly basis. These procedures will include a review by our Director of
Tax, who has the requisite knowledge and experience in accounting for income
taxes, as well as an independent review of the process and final income tax
provision by our CFO.
Changes in Internal Control
Over Financial Reporting
No
changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter
ended September 28, 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART
II
OTHER
INFORMATION
Information
regarding reportable legal proceedings is contained in Item 3 - Legal
Proceedings in Part I of our 2007 Annual Report on Form 10-K and in Note 16
– Commitments and Contingencies of this Quarterly Report on Form
10-Q. On August 29, 2007, the plaintiffs filed an amended
consolidated complaint that was substantially similar to the prior consolidated
complaint in the matter In re
Superior Industries International, Inc. Derivative
Litigation. In response, we and the individual defendants
filed motions to dismiss on September 21, 2007. In an order dated
April 14, 2008, the court granted again our motion to dismiss the amended
consolidated complaint. On May 5, 2008, the plaintiff filed a verified second
amended consolidated shareholder derivative complaint that alleges claims
substantially similar to the prior complaints. Once again, the
company and the individual defendants filed motions to dismiss on May 30,
2008. The court heard the motions to dismiss on September 15, 2008,
but has yet to rule on the motions. Because this litigation remains
at a preliminary stage, it would be premature to anticipate the probable outcome
of this case and whether such an outcome would be materially adverse to the
company.
The South
Coast Air Quality Management District (the “AQMD”) issued to us a notice of
violation, dated December 14, 2007, alleging violations of certain air quality
rules at our Van Nuys, California facility. After researching the
history of the air quality permits and other facts, we met with the AQMD on May
1, 2008 and October 17, 2008, to resolve the issues raised in the notice of
violation and address other compliance issues.
We
subsequently remedied three of the five issues set forth in the notice of
violation. The notice of violation further alleged that we failed to
submit permit applications to modify the burners for three of the plant’s
furnaces and failed to update the nitrogen oxide (NOx) emission factors for the
same three furnaces. We agreed to conduct source testing to update
the NOx emission factors and to submit new permit applications for the furnaces,
which we did on June 6, 2008.
We have
proposed that in lieu of penalties, the violations be resolved through a
Supplemental Environmental Program (“SEP”) to enhance air quality controls and
compliance. However, it is premature to anticipate what the probable
SEP may be and its associated cost. We anticipate that the resolution
of this matter will not have a material adverse effect on our financial position
or results of operation.
Other
than the above, there were no material developments during the current quarter
that require us to amend or update descriptions of legal proceedings previously
reported in our 2007 Annual Report on Form 10-K.
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 2007
Annual Report on Form 10-K, which could materially affect our business,
financial condition or future results. The risks described in this
report and in our Annual Report on Form 10-K are not the only risks we
face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may adversely affect our business,
financial condition or future results. The following are the material
changes to the risk factors contained in Item 1A – Risk Factors in our 2007
Annual Report on Form 10-K.
Current Economic and Financial
Market Conditions - Current global economic and financial markets
conditions, including severe disruptions in the credit markets and the potential
for a significant and prolonged global economic recession, may materially and
adversely affect our results of operations and financial condition. These
conditions may materially impact the automotive industry generally and the
financial stability of our customers, suppliers and other parties with whom we
do business. Specifically, the impact of these volatile and negative
conditions may include: decreased demand for our products due to the financial
position of our OEM customers and general declines in the level of automobile
demand; our decreased ability to accurately forecast future product trends and
demand; and a negative impact on our ability to timely collect receivables from
our customers and, conversely, reductions in the level and tightening of terms
of trade credit available to us.
The
foregoing economic and financial conditions, including decreased access to
credit, may lead to increased levels of restructurings, bankruptcies,
liquidations and other unfavorable events for our customers, suppliers and other
service providers and financial institutions with whom we do
business. Such events could, in turn, negatively affect our business
either through loss of sales or inability to meet our commitments (or inability
to meet them without excess expense) because of loss of suppliers or other
providers. There are no assurances that government responses to these
disruptions will restore consumer confidence or improve the state of the current
economic and financial conditions. In addition, several of our major
customers, GM and Chrysler, are undergoing unprecedented financial distress
which may result in such customers undergoing major restructuring,
reorganization or other significant changes. The occurrence of any such event
could have further adverse consequences to our business including a decrease in
demand for our products and modifications of our existing customer
agreements.
The Impairment of Financial
Institutions - We routinely execute transactions with
companies in the financial services industry, including commercial banks,
investment banks and other investment funds and institutions. Many of these
transactions expose us to risk in the event of default by one of these financial
service companies. We routinely maintain cash balances at financial
institutions in excess of federally insured limits and in money market funds
which are subject to risks that may result in losses and affect the liquidity of
these funds. We may also on occasion have exposure to these financial
institutions in the form of an unsecured line of credit, insurance contracts and
investments. There can be no assurance that any such losses or impairments to
the carrying value of these assets would not materially and adversely affect our
business and results of operations.
Valuation of Deferred Tax
Assets – We currently believe that we are likely to have taxable income
in the future sufficient to realize the benefit of our deferred tax assets
(consisting primarily of foreign tax credits, competent authority adjustments,
reserves and accruals that are not currently deductible for tax purposes, as
well as net operating loss carryforwards from losses we previously incurred).
However, some or all of these deferred tax assets could expire unused if we are
unable to generate taxable income in the future sufficient to utilize them or we
enter into transactions that limit our right to use them. If it becomes more
likely than not that our deferred tax assets will expire unused, we will have to
recognize a valuation allowance, which may materially increase our income tax
expense, and therefore adversely affect our results of operations and financial
condition in the period in which it is recorded.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
There
were no repurchases of our common stock during the third quarter of
2008.
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31.1
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Certification
of Steven J. Borick, Chairman, 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).
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31.2
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Certification
of Erika H. Turner, 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).
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32.1
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Certification
of Steven J. Borick, Chairman, Chief Executive Officer and President, and
Erika H. Turner, 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).
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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.
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SUPERIOR INDUSTRIES
INTERNATIONAL, INC.
(Registrant)
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Date: November
7, 2008
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/s/
Steven J. Borick
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Steven
J. Borick
Chairman,
Chief Executive Officer and President
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Date: November
7, 2008
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/s/
Erika H. Turner
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Erika
H. Turner
Chief
Financial Officer
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