e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 24, 2006
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 |
For the transition period from _________ to _________
Commission file number 1-6615
SUPERIOR INDUSTRIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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California
(State or Other Jurisdiction of
Incorporation or Organization)
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95-2594729
(IRS Employer
Identification No.) |
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7800 Woodley Avenue,
Van Nuys, California
(Address of Principal Executive Offices)
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91406
(Zip Code) |
(818) 781-4973
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o
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Accelerated Filer x
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Non-Accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date.
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Class of Common Stock |
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Shares Outstanding at October 31, 2006 |
$0.50 Par Value
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26,610,191 |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Superior Industries International, Inc.
Consolidated Condensed Statements of Operations
(Thousands of dollars, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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NET SALES |
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$ |
174,288 |
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$ |
178,289 |
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$ |
577,693 |
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$ |
598,260 |
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Cost of sales |
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177,999 |
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|
173,151 |
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568,005 |
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564,083 |
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GROSS PROFIT (LOSS) |
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(3,711 |
) |
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5,138 |
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9,688 |
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34,177 |
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Selling, general, and administrative expenses |
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6,011 |
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5,583 |
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18,861 |
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15,906 |
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Impairment of long-lived assets |
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4,353 |
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4,353 |
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INCOME (LOSS) FROM OPERATIONS |
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(14,075 |
) |
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(445 |
) |
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(13,526 |
) |
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18,271 |
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Interest income, net |
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1,356 |
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1,331 |
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4,176 |
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3,844 |
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Equity in earnings of joint ventures |
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1,127 |
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1,645 |
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2,750 |
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4,037 |
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Other income (expense), net |
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277 |
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|
396 |
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(514 |
) |
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68 |
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INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES |
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(11,315 |
) |
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2,927 |
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(7,114 |
) |
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26,220 |
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Income tax benefit (provision) |
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2,519 |
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(1,191 |
) |
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1,982 |
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(6,123 |
) |
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INCOME (LOSS) FROM CONTINUING OPERATIONS |
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(8,796 |
) |
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1,736 |
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(5,132 |
) |
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20,097 |
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Discontinued
operations, net of taxes of $(735) and $777 for the three months
ended and $(434) and $2,156 for the nine months ended |
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1,085 |
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(1,869 |
) |
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638 |
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(7,215 |
) |
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INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE |
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(7,711 |
) |
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(133 |
) |
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(4,494 |
) |
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12,882 |
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Cumulative effect of accounting change, net of taxes |
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1,225 |
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NET INCOME (LOSS) |
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$ |
(7,711 |
) |
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$ |
(133 |
) |
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$ |
(4,494 |
) |
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$ |
14,107 |
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EARNINGS (LOSS) PER SHARE BASIC: |
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Income (loss) from continuing operations |
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$ |
(0.33 |
) |
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$ |
0.07 |
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$ |
(0.19 |
) |
|
$ |
0.75 |
|
Discontinued operations |
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0.04 |
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(0.07 |
) |
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0.02 |
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(0.27 |
) |
Cumulative effect of accounting change |
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0.05 |
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Net income (loss) |
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$ |
(0.29 |
) |
|
$ |
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$ |
(0.17 |
) |
|
$ |
0.53 |
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EARNINGS (LOSS) PER SHARE DILUTED: |
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Income (loss) from continuing operations |
|
$ |
(0.33 |
) |
|
$ |
0.07 |
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|
$ |
(0.19 |
) |
|
$ |
0.75 |
|
Discontinued operations |
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0.04 |
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(0.07 |
) |
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0.02 |
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(0.27 |
) |
Cumulative effect of accounting change |
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0.05 |
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Net income (loss) |
|
$ |
(0.29 |
) |
|
$ |
|
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|
$ |
(0.17 |
) |
|
$ |
0.53 |
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DIVIDENDS DECLARED PER SHARE |
|
$ |
0.160 |
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$ |
0.160 |
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$ |
0.480 |
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$ |
0.475 |
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See notes to consolidated condensed financial statements.
1
Superior Industries International, Inc.
Consolidated Condensed Balance Sheets
(Thousands of dollars, except per share data)
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September 30, |
|
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December 31, |
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|
2006 |
|
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2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
58,493 |
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$ |
48,824 |
|
Short-term investments |
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|
24,600 |
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|
58,525 |
|
Accounts receivable, net |
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|
132,033 |
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|
135,501 |
|
Inventories, net |
|
|
109,675 |
|
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|
107,726 |
|
Deferred income taxes |
|
|
7,951 |
|
|
|
2,585 |
|
Other current assets |
|
|
23,976 |
|
|
|
6,579 |
|
|
|
|
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|
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Total current assets |
|
|
356,728 |
|
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|
359,740 |
|
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|
|
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|
Property, plant and equipment, net |
|
|
311,601 |
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|
292,289 |
|
Investments |
|
|
47,866 |
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|
|
59,572 |
|
Other assets |
|
|
8,709 |
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|
7,878 |
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|
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Total assets |
|
$ |
724,904 |
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$ |
719,479 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
|
$ |
69,210 |
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$ |
53,527 |
|
Accrued expenses |
|
|
44,408 |
|
|
|
39,401 |
|
Income taxes payable |
|
|
6,665 |
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|
17,706 |
|
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|
|
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Total current liabilities |
|
|
120,283 |
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|
110,634 |
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Executive retirement liabilities |
|
|
19,423 |
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|
18,747 |
|
Deferred income taxes |
|
|
23,584 |
|
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|
11,950 |
|
Commitments and contingent liabilities (see Note 15) |
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Shareholders equity |
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Preferred stock, $25.00 par value
Authorized 1,000,000 shares
Issued none |
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Common stock, $0.50 par value
Authorized 100,000,000 shares
Issued and outstanding 26,610,191 shares
(26,610,191 shares at December 31, 2005) |
|
|
13,305 |
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|
13,305 |
|
Additional paid-in-capital |
|
|
25,164 |
|
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|
22,996 |
|
Accumulated other comprehensive loss |
|
|
(42,150 |
) |
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(40,717 |
) |
Retained earnings |
|
|
565,295 |
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|
582,564 |
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Total shareholders equity |
|
|
561,614 |
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|
578,148 |
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Total liabilities and shareholders equity |
|
$ |
724,904 |
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|
$ |
719,479 |
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|
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|
See notes to consolidated condensed financial statements.
2
Superior Industries International, Inc.
Consolidated Condensed Statements of Cash Flows
(Thousands of dollars)
(Unaudited)
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Nine Months Ended |
|
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|
September 30, |
|
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|
2006 |
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|
2005 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
45,579 |
|
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$ |
47,297 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from sales of marketable securities |
|
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123,439 |
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|
132,000 |
|
Purchases of marketable securities |
|
|
(79,761 |
) |
|
|
(111,570 |
) |
Additions to property, plant and equipment |
|
|
(66,815 |
) |
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|
(65,781 |
) |
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NET CASH USED IN INVESTING ACTIVITIES |
|
|
(23,137 |
) |
|
|
(45,351 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Cash dividends paid |
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(12,773 |
) |
|
|
(12,513 |
) |
Repurchases of common stock |
|
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|
(377 |
) |
Stock options exercised |
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|
128 |
|
|
|
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NET CASH USED IN FINANCING ACTIVITIES |
|
|
(12,773 |
) |
|
|
(12,762 |
) |
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|
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|
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|
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|
Net increase (decrease) in cash and cash equivalents |
|
|
9,669 |
|
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|
(10,816 |
) |
|
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|
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|
Cash and cash equivalents at the beginning of the period |
|
|
48,824 |
|
|
|
91,344 |
|
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|
Cash and cash equivalents at the end of the period |
|
$ |
58,493 |
|
|
$ |
80,528 |
|
|
|
|
|
|
|
|
See notes to consolidated condensed financial statements.
3
Superior Industries International, Inc.
Consolidated Condensed 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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|
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Paid-In |
|
|
Comprehensive |
|
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Retained |
|
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|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Total |
|
BALANCE AT
DECEMBER 31, 2005 |
|
|
26,610,191 |
|
|
$ |
13,305 |
|
|
$ |
22,996 |
|
|
$ |
(40,717 |
) |
|
$ |
582,564 |
|
|
$ |
578,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,494 |
) |
|
|
(4,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss) net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,563 |
) |
|
|
|
|
|
|
(1,563 |
) |
Minimum pension
liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(594 |
) |
|
|
|
|
|
|
(594 |
) |
Unrealized gain (loss) on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign
currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
80 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
644 |
|
|
|
|
|
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
loss (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
2,168 |
|
|
|
|
|
|
|
|
|
|
|
2,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
($0.48 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,775 |
) |
|
|
(12,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT
SEPTEMBER 30, 2006 |
|
|
26,610,191 |
|
|
$ |
13,305 |
|
|
$ |
25,164 |
|
|
$ |
(42,150 |
) |
|
$ |
565,295 |
|
|
$ |
561,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Comprehensive income, net of tax, was $13,130,000 for the nine months ended September 30, 2005, which included: net income
of $14,107,000, foreign currency translation adjustment income of $912,000, forward foreign currency contract loss of
$(1,768,000), an unrealized loss on pension of $(169,000) and an unrealized gain on marketable securities of $48,000. |
See notes to consolidated condensed financial statements.
4
Notes to Consolidated Condensed Financial Statements
September 30, 2006
(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 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 worlds leading automobile and light truck manufacturers, with wheel manufacturing
operations in the United States, Mexico and Hungary. Customers in North America represent the
principal market for our products, with approximately 14 percent of our products being sold to
international customers.
Ford Motor Company (Ford), General Motors Corporation (GM) and DaimlerChrysler AG
(DaimlerChrysler) together represented approximately 87 percent of our total sales during the
nine months of 2006 and 85 percent of annual sales in 2005. The loss of all or a substantial
portion of our sales to Ford, GM or DaimlerChrysler would have a significant adverse impact on
our financial results, unless the lost volume could be replaced. This risk is partially mitigated
over the short-term due to the long-term relationships we have with our customers, including
multi-year purchase orders related to approximately 238 different wheel programs. However,
intense global competitive pricing pressure makes it increasingly difficult to maintain these
contractual arrangements and there are no guarantees that similar arrangements could be
negotiated in the future. The ultimate outcome of these pricing pressures is not known at this
time and we expect this trend to continue into the future. Including our 50 percent owned joint
venture in Europe, we also manufacture aluminum wheels for Audi, BMW, Isuzu, Jaguar, Land Rover,
Mazda, MG Rover, Mitsubishi, Nissan, Subaru, Toyota and Volkswagen.
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 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.
We began manufacturing aluminum suspension and related underbody components using the licensed
CobapressTM technology in 1999. Through 2005, we had made a significant investment in
this business and had incurred significant losses since its inception. Due to the intense
competition in the global automotive industry, the decision was made in the fourth quarter of
2005 to focus all of our resources on our core aluminum wheel business. Accordingly, an asset
impairment charge against earnings totaling $34.0 million (pretax) was recorded in the fourth
quarter of 2005 when we estimated that the future undiscounted cash flows of our aluminum
suspension components business would not be sufficient to recover the carrying value of our
long-lived assets attributable to that business.
On September 20, 2006, we entered into an Asset Purchase Agreement (Agreement) with Saint Jean
Industries, Inc., a Delaware corporation, as buyer, and the buyers parent, Saint Jean Industries,
SAS, a French simplified joint stock company, to sell substantially all of the assets and working
capital of our suspension components business located in Heber Springs, Arkansas (Suspension
Components Business). $10.0 million of the $17.0 million purchase price of the suspension
components business, including a $2.0 million promissory note, was funded and the agreement
completed on September 28, 2006 with title, risk and rewards transferring as of September 24, 2006.
Accordingly, the results of operations are presented as
discontinued operations in our consolidated condensed statements of operations for all periods
presented. See Note 16 Discontinued Operations for further discussion of the aluminum
suspension components business.
On June 16, 2006, we announced that we were restructuring our chrome plating business located in
Fayetteville, Arkansas, that would result in a lay off of approximately 225 employees during the
third quarter of 2006. The restructuring of the chrome plating business was the result of a shift
in customer preference to less expensive bright finishing processes that reduced the sales outlook
for chromed wheel products. The shift away from chromed wheel products and the resulting impact on
the companys chrome plating business had been previously disclosed in the fourth quarter of 2005,
when the company estimated that it would not be able to eventually recover the carrying value of
certain machinery and equipment in the chrome plating operation. Accordingly, such assets were
written down to their estimated fair value by recording an asset impairment charge against earnings
of $7.9 million in the fourth quarter of 2005. At the same time, an accrual of $1.3 million was
recorded for potential environmental exposure related to machinery and equipment shutdown and
removal. Any additional environmental costs are not possible to estimate at this time, however an
environmental assessment is currently underway. Any additional non-environmental costs related to
this restructuring are currently estimated to be insignificant.
In light of our decision regarding the chrome plating business, we have decided to out source
current and future customer requirements for chrome plated wheels to a third-party processor. The
transition to the third-party processor was completed by
5
the end of the third quarter of 2006. This restructuring does not affect the companys bright
polish operation, which is located at the same facility.
On September 15, 2006, we announced the planned closure of our wheel manufacturing facility located
in Johnson City, Tennessee, and the resulting lay off of approximately 500 employees. The planned
closure of the Johnson City facility is expected to be completed in the first quarter of 2007.
This was the latest step in our program to rationalize our production capacity after the recent
announcements by our customers of sweeping production cuts, particularly in the light truck and
sport utility platforms, that have reduced our requirements for the near future. We expect to incur
severance and other costs related to the closure of this facility of approximately $1.0 million
over the next six months. Accordingly, an asset impairment charge against earnings totaling $4.4
million (pretax) was recorded in the third quarter of 2006 when we estimated that the future
undiscounted cash flows of this facility would not be sufficient to recover the carrying value of
our long-lived assets attributable to that facility.
Note 2 Presentation of Consolidated Condensed Financial Statements
During interim periods, we follow the accounting policies set forth in our 2005 Annual Report on
Form 10-K and apply appropriate interim financial reporting standards for a fair statement of our
operating results and financial position in conformity with accounting principles generally
accepted in the United States of America, as indicated below. Users of financial information
produced for interim periods in 2006 are encouraged to read this Quarterly Report on Form 10-Q in
conjunction with our Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto filed with the Securities
and Exchange Commission (SEC) in our 2005 Annual Report on Form 10-K.
Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R),
using the modified prospective transition method and, therefore, have not restated results for
prior periods. Under this transition method, stock-based compensation expense for the three and
nine month periods ended September 30, 2006 includes compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006. The compensation
expense is based on the grant date fair value estimated in accordance with the provisions of SFAS
123 and for options granted subsequent to January 1, 2006 in accordance with the provisions of SFAS
No. 123R. We recognize these compensation costs on a straight-line basis over the requisite service
period of the award, which is generally the option vesting term of four years. Prior to the
adoption of SFAS 123R, we recognized stock-based compensation expense in accordance with the
intrinsic value method that followed the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and we
provided pro forma disclosure amounts in accordance with SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure (SFAS 148), as if the fair value method defined by SFAS
123 had been applied to our stock-based compensation. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107) regarding the SECs interpretation of SFAS 123R and the
valuation of share-based payments for public companies. We have applied the provisions of SAB 107
in our adoption of SFAS 123R. See Note 3 Stock-Based Compensation to the consolidated condensed
financial statements for a further discussion on stock-based compensation.
In 2005, we aligned the accounting period for our Suoftec 50-percent owned joint venture with the
fiscal year period reported by our other operations. Our share of the joint ventures net income
was previously recorded one month in arrears. Our share of the joint ventures operating results
for all interim periods in 2005 have been adjusted to be comparable with this change in
accounting principle which was effective in the first quarter of 2005. See Note 9 50 Percent
Owned Joint Venture for further discussion.
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.
Our 2006 fiscal quarters end on the last Sunday of the 13-week periods ending on March
26th, June 25th, September 24th and the 14-week period ending on
December 31st. The fiscal third quarter 2005 comprises the 13-week period ended on
September 25, 2005 and the 2005 fiscal year comprises the 52-week period ended on December 25,
2005. For convenience of presentation in these consolidated condensed financial statements, both
fiscal quarters are referred to as ending September 30 and the fiscal year is referred to as
ending as of December 31.
The accompanying unaudited consolidated condensed financial statements have been prepared in
accordance with the SECs requirements for Form 10-Q and contain all adjustments, of a normal and
recurring nature, which are necessary for a fair
6
statement of (i) the consolidated condensed statements of operations for the three months and
nine months ended September 30, 2006 and 2005, (ii) the consolidated condensed balance sheets at
September 30, 2006 and December 31, 2005, (iii) the consolidated condensed statements of cash
flows for the nine months ended September 30, 2006 and 2005, and (iv) the consolidated condensed
statement of shareholders equity for the nine months ended September 30, 2006. The year-end
condensed balance sheet data was derived from audited financial statements, but does not include
all disclosures required by accounting principles generally accepted in the United States of
America. Certain prior year amounts have been reclassified to conform to the 2006 financial
statement presentation.
Note 3 Stock-Based Compensation
We have stock option plans that authorize us to issue incentive and non-qualified stock options to
our directors, officers and key employees totaling up to 7.2 million shares of common stock. It is
our policy to issue shares from authorized but not issued shares upon the exercise of stock
options. At September 30, 2006, there were 0.9 million shares available for future grants under
these plans. Options are generally 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 generally vest ratably
over a four year period. Prior to January 1, 2006, we provided pro forma disclosure amounts in
accordance with SFAS 148, as if the fair value method defined by SFAS 123 had been applied to our
stock-based compensation.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using the
modified prospective transition method and, therefore, have not restated prior periods results.
Under this transition method, stock-based compensation expense for the three and nine month periods
ended September 30, 2006 included compensation expense for all stock-based compensation awards
granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123. For options granted subsequent to January
1, 2006, stock-based compensation expense was calculated in accordance with the provisions of SFAS
No. 123R. We recognize these compensation costs net of applicable forfeiture rate and recognize the
compensation costs for only those shares expected to vest on a straight-line basis over the
requisite service period of the award, which is generally the option vesting term of four years. We
estimated the forfeiture rate for the three and nine-month periods ended September 30, 2006 based
on our historical experience during the preceding six fiscal years.
Prior to the adoption of SFAS 123R, we presented the tax benefit of stock option exercises as
operating cash flows. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options are classified as financing cash
flows. There were no stock options exercised in the first nine months of 2006. We received cash
proceeds of $128,000 from stock options exercised in the first nine months of 2005.
For the three and nine months ended September 30, 2006, stock-based compensation expense related to
stock option plans under SFAS 123R was allocated as follows:
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
Three and Nine Months Ended September 30, 2006 |
|
Months |
|
|
Months |
|
Cost of sales |
|
$ |
192 |
|
|
$ |
478 |
|
Selling, general and administrative expenses |
|
|
656 |
|
|
|
1,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income taxes |
|
|
848 |
|
|
|
2,168 |
|
Income tax benefit |
|
|
(53 |
) |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes |
|
$ |
795 |
|
|
$ |
1,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.03 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
Since our only equity incentive plans have been, and are currently, stock option plans, the
stock-based compensation expense recorded in 2006 in accordance with SFAS 123R is the impact of
adoption of SFAS 123R. This expense is comparable to the stock-based compensation expense
calculated in accordance with APB 25, previously disclosed as pro forma information in accordance
with SFAS 123 and SFAS 148. The table below reflects the pro forma net earnings and basic and
diluted earnings per share for the three and nine months ended September 30, 2005, had we applied
the fair value recognition provisions of SFAS 123:
7
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
Three and Nine Months Ended September 30, 2005 |
|
Months |
|
|
Months |
|
Reported net income (loss) |
|
$ |
(133 |
) |
|
$ |
14,107 |
|
Stock-based compensation expense included in reported net income, net of tax |
|
|
|
|
|
|
|
|
Stock-based compensation expense determined under fair value method for all
awards, net of tax |
|
|
(716 |
) |
|
|
(6,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
(849 |
) |
|
$ |
7,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
Basic and diluted as reported |
|
$ |
0.00 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
Basic and diluted pro forma |
|
$ |
(0.03 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
The fair value of stock option grants in 2006 were estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
2006 |
|
|
2005 |
|
Expected dividend yield (a) |
|
|
3.48 |
% |
|
|
2.48 |
% |
Expected stock price volatility (b) |
|
|
31.21 |
% |
|
|
31.72 |
% |
Risk-free rate (c) |
|
|
4.88 |
% |
|
|
4.45 |
% |
Expected life of options in years (d) |
|
|
7.48 |
|
|
|
7.79 |
|
Weighted-average grant-date fair value of options granted during the period |
|
$ |
4.98 |
|
|
$ |
8.06 |
|
|
|
|
(a) |
|
Our current intention is to pay cash dividends of $0.16 per share each quarter on our common
stock. |
|
(b) |
|
Expected volatility is based on the historical volatility of our stock price, over the
expected life of the option. |
|
(c) |
|
The risk-free rate is based upon the rate on a U.S. Treasury bill for the period representing
the average remaining contractual life of all options in effect at the time of the grant. |
|
(d) |
|
The expected term of the option is based on historical employee exercise behavior, the
vesting terms of the respective option and a contractual life of ten years. |
The following table summarizes stock option activity pursuant to our stock option plans for the
first nine months of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Life |
|
|
Intrinsic |
|
|
|
Outstanding |
|
|
Price |
|
|
In Years |
|
|
Value |
|
Balance at December 31, 2005 |
|
|
2,367,255 |
|
|
$ |
30.28 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,007,200 |
|
|
|
17.72 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(115,338 |
) |
|
|
29.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
3,259,117 |
|
|
$ |
26.42 |
|
|
|
7.15 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest |
|
|
3,196,419 |
|
|
$ |
26.50 |
|
|
|
7.11 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
1,951,011 |
|
|
$ |
28.90 |
|
|
|
5.77 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the total pretax difference between the closing stock
price on the last trading day of the reporting period and the option exercise price, multiplied by
the number of in-the-money options. This is the amount that would have been received by the option
holders had they exercised and sold their options on that day. This amount varies based on changes
in the fair market value of our common stock. The closing price of our common stock on the last day
of the quarter was $16.38, which was below the exercise price of all outstanding stock options.
Accordingly, there was no intrinsic value as of that date.
As of September 30, 2006, there was $7.4 million of unrecognized stock-based compensation expense
related to nonvested stock options. That cost is expected to be recognized over a weighted-average
period of 3.21 years.
8
Note 4 New Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory
Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. SFAS No. 151 amends
the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and spoilage. This statement requires
that those items be recognized as current period charges regardless of whether they meet the
criterion of so abnormal, which was the criterion specified in ARB No. 43. In addition, this
Statement requires that allocation of fixed production overheads to the cost of production be based
on normal capacity of the production facilities. The new standard shall be effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The adoption of this new
accounting standard did not have a material impact on our financial position or results of
operations.
In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income
Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken on
a tax return. This Interpretation also provides guidance on derecognition, classification,
interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a
tax position in accordance with this Interpretation will be a two-step process. The first step
will determine if it is more likely than not that a tax position will be sustained upon examination
and should therefore be recognized. The second step will measure a tax position that meets the
more likely than not recognition threshold to determine the amount of benefit to recognize in the
financial statements. This Interpretation is effective for fiscal years beginning after December
15, 2006. We are currently evaluating the impact of this Interpretation.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS 157). This
Statement defines fair value as used in numerous accounting pronouncements, establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosure related
to the use of fair value measures in financial statements. The Statement is to be effective for our
financial statements issued in 2008; however, earlier application is encouraged. We are currently
evaluating the timing of adoption and the impact that adoption might have on our financial position
or results of operations.
In September 2006, the FASB released SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R) (FAS 158). Under the new standard, companies must recognize a net liability or asset to
report the funded status of their defined benefit pension and other postretirement benefit plans on
their balance sheets. The recognition and disclosure provisions of FAS 158 will be required to be
adopted as of December 31, 2006. We are currently reviewing the requirements of FAS 158 to
determine the impact on our financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which provides
interpretive guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality assessment. The new
guidance requires additional quantitative testing to determine whether a misstatement is material.
We will implement SAB No. 108 for the filing of our 2006 Annual Report on Form 10-K. We are
currently assessing the impact, if any, of the adoption of SAB No. 108.
Note 5 Business Segments
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, directs
companies to use the management approach for segment reporting. This approach reflects
managements aggregation of business segments and is consistent with how the company and its key
decision-makers assess operating performance, make operating decisions, and allocate resources.
This approach also considers the existence of managers responsible for each business segment and
how information is presented to the companys Board of Directors. Historically, we had
aggregated the automotive wheels and the components operations into one reportable segment based
on the aggregation criteria included in SFAS No. 131, including the expectation that the
long-term financial performance and economic characteristics of the components segment would be
similar to the automotive wheels segment. In late 2005, we concluded that the components segment
would not achieve the expected long-term financial performance initially contemplated and we,
therefore, disaggregated the components operating segment on the basis of dissimilar long-term
economic characteristics. As previously discussed, we sold substantially all of the assets and
working capital of the components business to Saint Jean Industries on September 24, 2006.
Accordingly, the results of operations and the gain on the sale of the components segment is
classified as discontinued operations in our consolidated condensed statements of operations. We
currently have only one reportable operating segment automotive wheels.
9
Net sales and net property, plant and equipment by geographic area are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
118,913 |
|
|
$ |
143,444 |
|
|
$ |
434,936 |
|
|
$ |
468,420 |
|
Mexico |
|
|
55,375 |
|
|
|
34,845 |
|
|
|
142,757 |
|
|
|
129,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales |
|
$ |
174,288 |
|
|
$ |
178,289 |
|
|
$ |
577,693 |
|
|
$ |
598,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
U.S. |
|
$ |
143,995 |
|
|
$ |
170,064 |
|
Mexico |
|
|
167,606 |
|
|
|
122,225 |
|
|
|
|
|
|
|
|
Consolidated property, plant and equipment, net |
|
$ |
311,601 |
|
|
$ |
292,289 |
|
|
|
|
|
|
|
|
Note 6 Revenue Recognition
Sales of products and any related costs are recognized when title and risk of loss transfers to
the purchaser, generally upon shipment. Wheel program development 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. Net sales include wheel program development revenues of
$4.2 million and $4.3 million for the three months ended September 30, 2006 and 2005,
respectively, and $15.1 million and $13.4 million for the nine months ended September 30, 2006
and 2005, respectively.
Note 7 Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the
weighted average number of common shares outstanding for the period. For purposes of calculating
diluted earnings (loss) per share, net income (loss) is divided by the total of the weighted
average shares outstanding plus the dilutive effect of our outstanding stock options under the
treasury stock method (common stock equivalents). Summarized below are the weighted average
number of common shares outstanding for basic earnings (loss) per share, the common stock
equivalents outstanding and the total of the weighted average shares outstanding plus the
dilutive effect of outstanding stock options for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Weighted average shares outstanding basic |
|
|
26,610,000 |
|
|
|
26,610,000 |
|
|
|
26,610,000 |
|
|
|
26,616,000 |
|
Weighted average dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding dilutive |
|
|
26,610,000 |
|
|
|
26,610,000 |
|
|
|
26,610,000 |
|
|
|
26,623,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following potential shares of common stock were excluded from the diluted earnings per share
calculations during the respective periods since they were anti-dilutive: for the three months
ended September 30, 2006, options to purchase 3,259,000 shares at prices ranging from $16.92 to
$42.87 per share; for the three months ended September 30, 2005, options to purchase 2,322,000
shares at prices ranging from $23.25 to $42.87 per share; for the nine months ended September 30,
2006, options to purchase 3,259,000 shares at prices ranging from $16.92 to $42.87 per share;
and, for the nine months ended September 30, 2005, options to purchase 2,286,000 shares at prices
ranging from $24.80 to $42.87 per share. Additionally, 4,629 shares at prices ranging from
$20.63 to $22.88 per share were excluded from the diluted loss per share calculation for the
three months September 30, 2005 because they would have been anti-dilutive due to the net loss
for the period.
10
Note 8 Income Taxes
Income taxes are accounted for pursuant to SFAS No. 109, Accounting for Income Taxes, which
requires use of the liability method and the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. The effect on deferred taxes for a
change in tax rates is recognized in income in the period of enactment. Provision is made for U.S.
income taxes on undistributed earnings of international subsidiaries and 50 percent owned joint
ventures, unless such future earnings are considered permanently reinvested. Tax credits are
accounted for as a reduction of the provision for income taxes in the period in which the credits
arise.
We have a reserve for taxes (included in income taxes payable) that may become payable as a result
of audits in future periods with respect to previously filed tax returns. It is our policy to
establish reserves for taxes that are probable and may become payable in future years as a result
of an examination by taxing authorities. We established the reserves based upon managements
assessment of exposure associated with permanent tax differences, tax credits and interest expense
on adjustments to temporary tax differences. The tax reserves are analyzed quarterly, and
adjustments are made as events occur to warrant adjustment to the reserve. For example, if the
statutory period for assessing taxes on a given tax return lapses, the reserve associated with that
period will be reduced. In addition, the reserve will be increased based on current calculations
for additional exposures identified. Similarly, if tax authorities provide administrative guidance
or a decision is rendered in the courts, appropriate adjustments will be made to the tax reserve.
The income tax benefit (provision) on income from continuing operations for the three-month periods
ended September 30, 2006 and 2005 were $2.5 million, or 22.3 percent, and $(1.2) million, or 40.7
percent, respectively. These rates reflect cumulative changes in the estimated effective tax rates
for the year, as calculated at the end of the third quarter, and any changes in the current quarter
to our contingent tax reserves. The income tax benefit (provision) on income from continuing
operations for the nine-month periods ended September 30, 2006 and 2005 were $2.0 million, or 27.9
percent and $(6.1) million, or 23.4 percent, respectively. The 2006 year-to-date tax benefit on
income from continuing operations included a tax provision of $0.0 million at the estimated annual
effective tax rate of less than one percent and discrete items related to reductions in previously
estimated tax reserves and other tax adjustments totaling $2.0 million, including the $0.9 million
reduction of reserves due to the expiration of a tax statute that was reported in the first
quarter. The less than one percent estimated annual effective tax rate was the result of the net tax
benefit from the federal statutory rate, foreign income tax rate differences and tax credits being
offset by tax provisions from permanent tax differences, changes in contingency reserves and state
income taxes. The 2005 year-to-date tax provision on income from continuing operations included a
tax provision of $6.1 million at an effective tax rate of 23.4 percent.
Note 9 50-Percent Owned Joint Venture
Included below are summary statements of operations for Suoftec Light Metal Products, Ltd.
(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. The
elimination of intercompany profits in inventory adjusted our share of the joint ventures net
income for
11
the third quarter of 2006 and 2005 to $1.1 million and $1.7 million, respectively, and for the
first nine months of 2006 and 2005 to $2.7 million and $4.0 million, respectively.
In 2005, we aligned the accounting period for our Suoftec 50-percent owned joint venture with the
fiscal year period reported by our other operations. Our share of the joint ventures net income
was previously recorded one month in arrears. The impact of this change in accounting principle
added $1.2 million, or $0.05 per diluted share, to our net income in the first quarter of 2005,
representing our share of Suoftecs earnings for the month of December 2004. Additionally, our
share of the joint ventures operating results for all interim periods in 2005 have been adjusted
to be comparable with this change in accounting principle effective in the first quarter of 2005.
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
30,490 |
|
|
$ |
25,994 |
|
|
$ |
94,072 |
|
|
$ |
79,829 |
|
Gross profit |
|
$ |
3,699 |
|
|
$ |
3,892 |
|
|
$ |
9,578 |
|
|
$ |
11,731 |
|
Net income |
|
$ |
1,915 |
|
|
$ |
2,796 |
|
|
$ |
5,578 |
|
|
$ |
8,105 |
|
Superiors share of net income |
|
$ |
958 |
|
|
$ |
1,398 |
|
|
$ |
2,789 |
|
|
$ |
4,053 |
|
Note 10 Cash and Short-Term Investments
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash and cash equivalents |
|
$ |
58,493 |
|
|
$ |
48,824 |
|
Short-term investments |
|
$ |
24,600 |
|
|
$ |
58,525 |
|
During the nine month period ended September 30, 2006, we purchased $79.7 million of short-term
investments, sold $123.4 million of short-term investments, and reclassified to short-term from
long-term investments, $9.8 million representing a corporate debt security maturing within twelve
months, for a net decrease of $33.9 million. Short-term investments include high-grade interest
bearing debt securities that are classified as held-to-maturity, which are carried at cost. We do
not hold securities for speculation or trading purposes.
Note 11 Accounts Receivable
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Trade receivables |
|
$ |
120,377 |
|
|
$ |
120,646 |
|
Wheel program development receivables |
|
|
7,357 |
|
|
|
6,842 |
|
Other receivables |
|
|
6,563 |
|
|
|
10,013 |
|
|
|
|
|
|
|
|
|
|
|
134,297 |
|
|
|
137,501 |
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
(2,264 |
) |
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
$ |
132,033 |
|
|
$ |
135,501 |
|
|
|
|
|
|
|
|
12
Note 12 Inventories
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
14,280 |
|
|
$ |
26,513 |
|
Work in process |
|
|
29,284 |
|
|
|
24,590 |
|
Finished goods |
|
|
66,111 |
|
|
|
56,623 |
|
|
|
|
|
|
|
|
|
|
$ |
109,675 |
|
|
$ |
107,726 |
|
|
|
|
|
|
|
|
Inventories, which include material, labor and factory overhead, are stated at the lower of cost
or market, using the first-in, first-out (FIFO) method of valuation.
Note 13 Property, Plant and Equipment
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Land and buildings |
|
$ |
92,734 |
|
|
$ |
76,578 |
|
Machinery and equipment |
|
|
478,378 |
|
|
|
473,962 |
|
Leasehold improvements and others |
|
|
13,816 |
|
|
|
12,506 |
|
Construction in progress |
|
|
70,826 |
|
|
|
74,574 |
|
|
|
|
|
|
|
|
|
|
|
655,754 |
|
|
|
637,620 |
|
Accumulated depreciation |
|
|
(344,153 |
) |
|
|
(345,331 |
) |
|
|
|
|
|
|
|
|
|
$ |
311,601 |
|
|
$ |
292,289 |
|
|
|
|
|
|
|
|
Depreciation expense was $8.6 million and $10.8 million for the three months ended September 30,
2006 and 2005, respectively. These amounts include depreciation expense related to the components
business of $0.3 million and $1.2 million for the three months ended September 30, 2006 and 2005,
respectively, which was included in loss from discontinued operations. Depreciation expense was
$28.9 million and $32.1 million for the nine months ended September 30, 2006 and 2005,
respectively. These amounts include depreciation expense related to the components business of
$0.8 million and $3.6 million for the nine months ended September 30, 2006 and 2005, respectively,
which was included in loss from discontinued operations. See Note 16 Discontinued Operations
for further discussion of the aluminum suspension components business.
Note 14 Retirement Plans
We have an unfunded supplemental executive retirement plan covering our directors, officers, and
other key members of management. We purchase life insurance policies on each of the participants
to provide for future liabilities. Subject to certain vesting requirements, the plan provides
for a benefit based on the final average compensation, which becomes payable on the employees
death or upon attaining age 65, if retired. For the three and nine months ended September 30,
2006, payments to retirees of approximately $133,000 and $398,000, respectively, have been made
in accordance with this plan. We presently anticipate payments to retirees totaling $541,000 for
2006. The increase in the 2006 net periodic pension cost over 2005 is due to the addition of
several new participants to the plan with atypical short vesting periods, a reduction in the
discount rate from 6.0% to 5.5% and an update to a more current mortality table.
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
225 |
|
|
$ |
183 |
|
|
$ |
682 |
|
|
$ |
550 |
|
Interest cost |
|
|
253 |
|
|
|
227 |
|
|
|
769 |
|
|
|
681 |
|
Net amortization |
|
|
82 |
|
|
|
40 |
|
|
|
249 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
560 |
|
|
$ |
450 |
|
|
$ |
1,700 |
|
|
$ |
1,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Note 15 Commitments and Contingencies
We are party to various legal and environmental proceedings incidental to our business. Certain
claims, suits and complaints arising in the ordinary course of business have been filed or are
pending against us. Based on facts now known, we believe all such matters are adequately
provided for, covered by insurance, are without merit, and/or involve such amounts that would not
materially adversely affect our consolidated results of operations, cash flows or financial
position. For additional information concerning contingencies, risks and uncertainties, see Note
18 Risk Management.
Note 16 Discontinued Operations
Through 2005, we had made a significant investment and incurred significant losses since the
inception of the aluminum suspension components business. Our plan was to improve profitability by
increasing sales to our OEM customers and by improving our production capabilities. However,
following the launch of a major program in the second half of 2005 and updating our long-range
forecasts for this business, it became apparent that we would not be able to recover our investment
in this business. Accordingly, in the fourth quarter of 2005, we recorded a pretax impairment
charge of $34.0 million in our components segment to reduce to their respective fair values, the
carrying value of its assets, which were classified as held-and-used as of December 31, 2005.
On January 9, 2006, our Board of Directors approved managements plan to dispose of the aluminum
suspension components business before the end of 2006 and authorized us to engage an investment
banker and/or other advisors to explore options for the sale of this business. Due to the intense
competition in the global automotive wheel industry, the decision was made to focus all of our
resources on our core aluminum wheel business.
On September 20, 2006, we entered into an agreement with Saint Jean Industries, Inc., a
Delaware corporation, as buyer, and the buyers parent, Saint Jean Industries, SAS, a French
simplified joint stock company, to sell substantially all of the assets and working capital of our
suspension components business for $17.0 million, including a $2.0 million promissory note.
Although title to the assets of this business transferred to the buyer on September 24, 2006,
because the consideration we received on that date consisted of a $15.0 million unsecured
commitment and a $2.0 promissory note, we could not recognize this transfer as a sale for
accounting purposes at that point in time. The $15.0 million of cash consideration was received
within two weeks after the September 24, 2006 transfer, and the sale was recognized for accounting
purposes at that time. At September 24, 2006, $15.0 million, representing the net assets of the
business transferred under the contractual arrangement, was included as a component of other
current assets in our balance sheet. The $2.0 million promissory note is due in two equal
installments on the 24th and 36th month anniversary date of the completion date, and bears interest
at LIBOR plus 1%, adjusted quarterly.
Note 17 Impairment of Long-Lived Assets and Other Charges
On June 16, 2006, we announced that we were restructuring our chrome plating business located in
Fayetteville, Arkansas, that would result in a lay off of approximately 225 employees during the
third quarter of 2006. The restructuring of the chrome plating business was the result of a shift
in customer preference to less expensive bright finishing processes that reduced the sales outlook
for chromed wheel products. The shift away from chromed wheel products and the resulting impact on
the companys chrome plating business had been previously disclosed in the fourth quarter of 2005,
when the company estimated that it would not be able to eventually recover the carrying value of
certain machinery and equipment in the chrome plating operation. Accordingly, such assets were
written down to their estimated fair value by recording an asset impairment charge
14
against earnings of $7.9 million in the fourth quarter of 2005. At the same time, an accrual of
$1.3 million was recorded for potential environmental exposure related to machinery and equipment
shutdown and removal. Any additional environmental costs are not possible to estimate at this time,
however an environmental assessment is currently underway. Any additional non-environmental costs
related to this restructuring are currently estimated to be insignificant. In addition, our
decision to out source current and future customer requirements for chrome plated wheels to a
third-party processor was completed by the end of the third quarter of 2006. This restructuring
does not affect the companys bright polish operation, which is located at the same facility.
On September 15, 2006, we announced the planned closure of our wheel manufacturing facility located
in Johnson City, Tennessee, and the resulting lay off of approximately 500 employees. The planned
closure of the Johnson City facility is expected to be completed in the first quarter of 2007.
This was the latest step in our program to rationalize our production capacity after the recent
announcements by our customers of sweeping production cuts, particularly in the light truck and
sport utility platforms, that have reduced our requirements for the near future. We expect to incur
severance and other costs related to the closure of this facility of approximately $1.0 million
over the next six months. Accordingly, an asset impairment charge against earnings totaling $4.4
million (pretax), reducing the carrying value of certain assets at the Johnson City facility to
their respective fair values, was recorded in the third quarter of 2006 when we estimated that the
future undiscounted cash flows of our facility would not be sufficient to recover the carrying
value of our long-lived assets attributable to that facility. We estimated the fair value of the
long-lived assets based on an independent appraisal 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.
Note 18 Accounting Change
During the first quarter of 2006, we elected to change our interim reporting method of
accounting for planned major maintenance activities during annual plant shutdown periods. Prior to
2006, these costs, which were fully expensed for annual reporting purposes, were recognized on a
pro rata basis in each interim period of the fiscal year through the use of accruals or deferrals.
At the end of any annual period, there were no remaining accruals or deferrals, and this policy
only impacted the allocation of expense within the interim periods. Beginning with the first
quarter of 2006, we decided to apply the same method of accounting for planned major maintenance
activities in our interim financial reporting periods as we had historically used in our annual
financial reporting periods, which is to expense these costs as incurred with no accrual or
deferral. We believe this change to a preferable method of accounting is consistent with the
predominant practice of our direct competitors. The effects of the change are immaterial to all
previously reported interim periods and therefore no retrospective application to prior interim
periods has been reflected.
Note 19 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 declined by 4 percent for the first nine months of 2006. The Euro experienced,
approximately, an 8 percent increase in value relative to the U.S. dollar for the first nine
months of 2006. Foreign currency transaction gains and losses, which are included in other income
(expense) in the consolidated condensed statements of operations, have not been material.
Our primary risk exposure relating to derivative financial instruments results from the periodic
use of foreign currency forward contracts to offset the impact of currency rate fluctuations from
foreign denominated receivables, payables or purchase obligations. At September 30, 2006, we held
open foreign currency Euro forward contracts totaling $1.0 million, with an unrealized loss of
$9,500. At December 31, 2005, we held open foreign currency Euro forward contracts totaling
$10.7 million, with an unrealized loss of $200,000. Any unrealized gains and losses are included
in other comprehensive income (loss) in shareholders equity until the actual contract settlement
date. Percentage changes in the Euro/U.S. Dollar exchange rate will impact the unrealized
gain/loss by a similar percentage of the current market value. We do not have similar derivative
instruments for the Mexican Peso.
When market conditions warrant, we will also enter into contracts to purchase certain commodities
used in the manufacture of our products, such as aluminum, natural gas, environmental emission
credits and other raw materials. Any such
15
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 a derivative. We currently
have several purchase agreements for the delivery of natural gas over the next two years. The
contract value and fair value of these purchase commitments approximated $17.4 million and $14.7
million, respectively, at September 30, 2006. 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. Managements Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Operating results in the third quarter continue to be impacted by lower production levels at our
major customers. Overall production of passenger cars and light trucks in the third quarter was
reported as being down approximately 9.2 percent versus the same period a year ago. However,
production of the specific vehicles using our wheels was down approximately 17.0 percent, compared
to a 16.4 percent decline for our unit shipments. Accordingly, our results were again impacted by
low capacity utilization, particularly in our U.S. wheel plants, due to increasing volatility of
our customers production and shipping requirements. Several of our customers have also recently
announced severe production cuts in SUVs and other vehicle platforms that are important to us.
Additionally, start-up costs associated with our new plant in Mexico will continue into our fourth
quarter, when the new plant should begin its initial production phase .
In conjunction with our progress to rationalize our production capacity to more effectively balance
plant utilization and cost against our customers changing requirements for pricing, wheel size,
design, scheduling and volume, in mid-September, we announced the planned closure in the first
quarter of 2007 of our wheel manufacturing facility in Johnson City, Tennessee. Our third quarter
results include a pretax charge for the impairment of certain long-lived assets at that facility.
We also expect to incur severance and other costs related to layoffs of approximately $1.0 million
over the next six months.
In light of the additional capacity coming on line in our new facility in Mexico over the next
twelve months, if North American production of passenger cars and light trucks using our wheel
programs continues to decrease, it is possible that we will be unable to recover the full value of
certain other production assets in our U.S. plants. We will continue to monitor the recoverability
of these assets.
During the third quarter of 2006, we sold our aluminum suspension components business, which has
been reported in discontinued operations during 2006, and completed the restructuring of our Van
Nuys, California wheel manufacturing facility and the chrome plating operation in Fayetteville,
Arkansas. The restructurings had a minimal impact on our results of operations. The operating
results of the discontinued components business, prior to its sale at the end of September, was a
slight profit.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using the
modified prospective transition method and, therefore, have not restated prior periods results.
Under this transition method, stock-based compensation expense in 2006 includes compensation
expense for all stock-based compensation awards granted prior to, but not yet vested as of, January
1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS
123. For options granted subsequent to December 31, 2005, stock-based compensation expense is
recognized in accordance with the provisions of SFAS No. 123R. We recognize these compensation
costs net of a forfeiture rate and recognize the compensation costs for only those shares expected
to vest on a straight-line basis over the requisite service period of the award, which is generally
the option vesting term of four years. See Note 3 to the consolidated condensed financial
statements for a further discussion on stock-based compensation.
16
Results of Operations
(Thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Selected data |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
174,288 |
|
|
$ |
178,289 |
|
|
$ |
577,693 |
|
|
$ |
598,260 |
|
Gross profit (loss) |
|
$ |
(3,711 |
) |
|
$ |
5,138 |
|
|
$ |
9,688 |
|
|
$ |
34,177 |
|
Percentage of net sales |
|
|
-2.1 |
% |
|
|
2.9 |
% |
|
|
1.7 |
% |
|
|
5.7 |
% |
Income (loss) from operations |
|
$ |
(14,075 |
) |
|
$ |
(445 |
) |
|
$ |
(13,256 |
) |
|
$ |
18,271 |
|
Percentage of net sales |
|
|
-8.1 |
% |
|
|
-0.2 |
% |
|
|
-2.3 |
% |
|
|
3.1 |
% |
Net income (loss) from continuing operations |
|
$ |
(8,796 |
) |
|
$ |
1,736 |
|
|
$ |
(5,132 |
) |
|
$ |
20,097 |
|
Percentage of net sales |
|
|
-5.0 |
% |
|
|
1.0 |
% |
|
|
-0.9 |
% |
|
|
3.4 |
% |
Diluted earnings per share continuing operations |
|
$ |
(0.33 |
) |
|
$ |
0.07 |
|
|
$ |
(0.17 |
) |
|
$ |
0.75 |
|
Consolidated revenues in the third quarter of 2006 decreased $4.0 million, or 2.2 percent, to
$174.3 million from $178.3 million in the same period a year ago. Excluding wheel program
development revenues, which totaled $4.2 million in the third quarter of 2006 and $4.3 million in
the third quarter of 2005, wheel sales decreased $3.9 million, or 2.2 percent, to $170.1 million
from $174.0 million in the third quarter a year ago, as our wheel shipments decreased by 16.4
percent. The average selling price of our wheels increased 17.0 percent in the current quarter, as
the pass-through price of aluminum increased the average selling price by approximately 13.1
percent, with the majority of the remaining increase due principally to a shift in sales mix to
larger, higher-priced wheels in the current quarter.
Consolidated revenues in the first nine months of 2006 decreased $20.6 million, or 3.4 percent, to
$577.7 million from $598.3 million in the same period a year ago. Excluding wheel program
development revenues, which totaled $15.1 million in 2006 and $13.4 million in the first nine
months of 2005, wheel sales decreased $22.3 million, or 3.8 percent, to $562.6 million from $584.9
million in the same period a year ago, as our wheel shipments decreased by 12.8 percent. The
average selling price of our wheels increased 10.2 percent in the current period, with the
pass-through price of aluminum increasing the average selling price by approximately 8.2 percent.
According to WARDs AutoInfoBank, an industry data publication, overall North American production
of light trucks and passenger cars during the third quarter of 2006 decreased approximately 9.2
percent, compared to our 16.4 percent decrease in aluminum wheel shipments. However, production of
the specific light trucks and passenger cars using our wheel programs decreased approximately 17.0
percent, compared to our 16.4 percentage decrease in unit shipments. The principal unit shipment
decreases in the current period compared to a year ago were for GMs GMT 800 platform, Fords F
Series, Mustang and Expedition vehicles, and DaimlerChryslers Dodge Durango. The principal unit
shipment increases in the current period compared to a year ago were for GMs Trail Blazer and G6,
Fords Montego and DaimlerChryslers Dodge Magnum. Shipments to Ford increased to 31.0 percent of
total OEM unit shipments from 30.6 percent a year ago, while GM decreased to 38.0 percent from 40.5
percent in 2005, and DaimlerChrysler decreased to 15.7 percent from 16.9 percent a year ago.
Shipments to international customers increased to 15.3 percent from 12.0 percent a year ago, due
principally to increased shipments for Nissans Altima, Subarus Outback and Toyotas Camry
platforms.
Consolidated gross profit decreased $8.8 million for the third quarter to a loss of $3.7 million,
or (2.1) percent of net sales, compared to a profit of $5.1 million, or 2.9 percent of net sales,
for the same period a year ago. However, the gross profit loss in 2006 includes $3.4 million of
preproduction start-up costs of our new wheel plant in Mexico, compared to $0.2 million of such
costs in the same period a year ago. The comparability of gross profit for the quarter was also
affected by the methods used to recognize the impact of major maintenance activities during both
periods. Beginning with the first quarter of 2006, we utilized the direct expense method to
recognize these costs in interim periods, while in 2005 we used the accrual and deferral methods,
which were acceptable methods under accounting principles generally accepted in the United States.
The decision to change methods, which only affects interim reporting periods and not annual
periods, was based on published views of the SEC and the accounting profession that the accrue in
advance method will no longer be allowable. Had we used the direct expense method in 2005, gross
profit in the third quarter would have been lower by $0.5 million. Accordingly, eliminating the
preproduction costs from both periods and adjusting cost of sales in 2005 to the direct expense
method for the major maintenance activities, the gross profit loss in the third quarter of 2006 was
$0.3 million, or (0.2) percent of net sales, compared to a
profit of $4.4 million, or 2.5% percent
of net sales, a year ago, a decrease of $4.7 million.
The principal reasons for the decline in gross profit were the 16.4 percent decrease in unit
shipments and the resulting similar decrease in production. Additionally, erratic customer ordering
patterns that change weekly, if not more often, make it very difficult to plan production and staff
facilities, which can lead to higher costs due to the required use of overtime. In this type of
environment, it is extremely difficult to reduce costs while attempting to maintain a stable,
experienced work force able to
17
react to sudden changes in production requirements. Due to this situation, our plants were forced
to shutdown for significant periods in excess of three weeks in some cases. The costs of these
shutdowns were fully expensed in the current quarter. Accordingly, gross profit was impacted by
lower profit margins in many of our plants, due to plant utilization rates falling below historical
levels, which resulted in our inability to absorb fixed costs.
Consolidated gross profit decreased $24.5 million for the first nine months of 2006 to $9.7
million, or 1.7 percent of net sales, compared to $34.2 million, or 5.7 percent of net sales, for
the same period a year ago. Preproduction costs included in gross profit in 2006 were $6.8 million,
compared to $0.4 million in 2005. Adjusting the major maintenance activities expense in 2005 to the
direct expense method would reduce the year-to-date gross profit by $0.9 million. Accordingly,
eliminating the preproduction costs from both periods and adjusting cost of sales in 2005 to the
direct expense method for the major maintenance activities, the gross profit for the nine months of
2006 was $16.5 million, or 2.9 percent of net sales, compared to $33.7 million, or 5.6 percent of
net sales, a year ago, a decrease of $17.2 million. The decline in year-to-date profitability was
caused by the same factors that impacted profitability in the third quarter, as described above.
We are continuing to implement action plans to improve operational performance and mitigate the
impact of the severe 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 curve of customer price reductions may continue to be steeper than our progress on
these cost reductions for an indefinite period of time, due to the slow and methodical nature of
these cost reduction programs. In addition, fixed price natural gas contracts that expire in the
next two years may expose us to higher costs that cannot be immediately recouped in selling prices.
The impact of these factors on our future financial position and results of operations will 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 for the third quarter of 2006 were $6.0 million, or
3.4 percent of net sales, compared to $5.6 million in the same period in 2005, or 3.1 percent of
net sales. For the nine-month periods, selling, general and administrative expenses were $18.9
million, or 3.3 percent of net sales, for 2006 compared to $15.9 million, or 2.7 percent of net
sales, for the same period in 2005. In accordance with a recent accounting rule change related to
stock options, as of the beginning of 2006, we began recording stock-based compensation expense
related to our outstanding unvested stock options. Previously, the pro forma impact of stock-based
compensation expense was included in a footnote to our interim and annual financial statements. The
impact on selling, general and administrative expenses in the three and nine month periods ended
September 30, 2006 was $0.7 million and $1.7 million, respectively. See Note 3 Stock-Based
Compensation of this Quarterly Report on Form 10-Q for further discussion of this change and the
pro forma impact on the prior year. In addition, there were several accruals related to plant
rationalization actions and increased professional fees, principally audit fees.
On September 15, 2006, we announced the planned closure of our wheel manufacturing facility located
in Johnson City, Tennessee, and the resulting lay off of approximately 500 employees. The planned
closure of the Johnson City facility is expected to be completed in the first quarter of 2007.
This was the latest step in our program to rationalize our production capacity after the recent
announcements by our customers of sweeping production cuts, particularly in the light truck and
sport utility platforms, that have reduced our requirements for the near future. We expect to incur
severance and other costs related to the closure of this facility of approximately $1.0 million
over the next six months. Accordingly, an asset impairment charge against earnings totaling $4.4
million (pretax), reducing the carrying value of certain assets to their respective fair values,
was recorded in the third quarter of 2006 when we estimated that the future undiscounted cash flows
of our facility would not be sufficient to recover the carrying value of our long-lived assets
attributable to that facility. We estimated the fair value of the long-lived assets based on
independent appraisals of the assets.
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. In 2005, we aligned the accounting period for our
Suoftec 50-percent owned joint venture with the fiscal year period reported by our other
operations. Our share of the joint ventures net income was previously recorded one month in
arrears. The impact of this change in accounting principle added $1.2 million, or $0.05 per diluted
share, to our net income in the first quarter of 2005, representing our share of Suoftecs earnings
for the month of December 2004. Additionally, our share of the joint ventures operating results
for all interim periods in 2005 have been adjusted to be comparable with this change in accounting
principle effective in the first quarter of 2005. Our share of the joint ventures net income, net
of an adjustment for intercompany profit elimination, totaled $1.1 million in the third quarter of
2006 compared to $1.7 million in 2005. For the nine months, our share of the joint ventures net
income, net of an adjustment for intercompany profit elimination, was $2.7 million for 2006 and
$4.0 million for 2005. The principal reason for the lower profitability in the current nine-month
period was the timing of selling price adjustments for the change in aluminum cost increases. See
Note 9 50-Percent Owned Joint Venture of this Quarterly Report on Form 10-Q for additional
information regarding the Suoftec joint venture.
Net interest income for the third quarter increased slightly to $1.4 million from $1.3 million a
year ago and was $4.2 million for the nine- month period in 2006, compared to $3.8 million for the
same period in 2005. The increased net interest income in
18
the 2006 periods was due primarily to an increase in the average rate of interest earned offsetting
a decrease in the amount of cash invested during the respective periods.
The effective tax rate for the nine-month period of 2006 on the consolidated loss from continuing
operations before taxes of $7.1 million was a benefit of 27.9 percent, or $2.0 million, compared to
a tax provision of 23.4 percent in the same period a year ago. The tax benefit in the current
period included a tax provision of $0.0 million at an effective
tax rate of less than one percent, which
was offset by a net reduction of tax reserves totaling $2.0 million, including the $0.9 million
reduction of reserves due to the expiration of a tax statute that was reported in the first
quarter. Accounting judgment is required when reserving for probable disallowance of identified tax
exposures. Accounting rules dictate that general reserves are not allowed and that changed
substantive facts or specific events must exist to change reserve amounts. The resolution of an
audit by taxing authorities or the expiration of a statute of limitations governs when a reserve is
no longer required for a given purpose. The principal reasons for the decrease in the 2006 expected
annual effective tax rate, before discrete items, to less than one percent from the 23.4 percent a year ago
were due to a decrease in federal tax credits, increase in state taxes and changes in permanent tax
and foreign income rate differences resulting from a lower estimated pretax earnings in the current
year.
As a result of the above, loss from continuing operations for the third quarter was $8.8 million
compared to income of $1.7 million last year and loss of $5.1 million for the first nine months of
2006 compared to income of $20.1 million for the same period last year. Diluted earnings (loss) per
share for continuing operations in the third quarter of 2006 was $(0.33) compared to $0.07 per
diluted share in the same period a year ago and $(0.19) per diluted share for the first nine months
of 2006 compared to $0.75 per diluted share last year.
On September 20, 2006, we entered into an Asset Purchase Agreement with Saint Jean Industries,
Inc., for substantially all of the assets and liabilities of the components segment. Accordingly,
the results of operations for the suspension components business is classified as discontinued
operations in our consolidated condensed statements of operations. Discontinued operations
for the third quarter of 2006 was income of $1.1 million, or
$0.04 per
diluted share, compared to a loss of $1.9 million, or $(0.07) per diluted share for the same period
in 2005. This improvement was due to a reduction of $0.9 million of depreciation expense related
to assets written off at December 31, 2005, to the net reimbursable component development costs
improving by $0.9 million compared to a year ago and to improved plant utilization and increased
trade sales. For the nine month periods, discontinued operations, was
income of $0.6 million, or $0.02 per diluted share, compared to a loss of $7.2 million, or $(0.27)
per diluted share, for the same period in 2005.
The resulting net loss for the third quarter of 2006 was $7.7 million, or $(0.29) per diluted
share, compared to net loss of $0.1 million, or $0.00 per diluted share. For the nine-month
periods, the net loss for 2006 was $4.5 million, or $(0.17) per diluted share, compared to net
income of $14.1 million, or $0.53 per diluted share, for the same period last year.
Financial Condition, Liquidity and Capital Resources
Our sources of liquidity include cash and short-term investments, net cash provided by operating
activities and other external sources of funds. Working capital and the current ratio were $236.4
million and 3.0:1, respectively, at September 30, 2006 versus $249.1 million and 3.3:1 at December
31, 2005. We have no long-term debt. As of September 30, 2006, our cash and short-term investments
totaled $83.1 million compared to $107.3 million at December 31, 2005 and $117.4 million at
September 30, 2005. The decrease in cash and short-term investments since September 30, 2005 was
due principally to our funding a higher level of capital expenditures, primarily for our new
state-of-the-art wheel facility being constructed in Chihuahua, Mexico. With the planned closing of
our Johnson City wheel facility in early 2007, much of that plants recently purchased equipment
will be transferred to other wheel facilities, thereby reducing future capital requirements.
Accordingly, despite the reduced profitability experienced the last few years, 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 short-term investments.
Net cash provided by operating activities decreased $1.7 million to $45.6 million for the nine
months ended September 30, 2006, compared to $47.3 million for the same period a year ago, due
principally to an unfavorable change in working capital requirements during the current period
offsetting the $18.6 million decrease in net income. Favorable changes in accounts payable of $15.3
million, due primarily to the timing of payments for raw materials, capital expenditures and wheel
purchases from our joint venture in Hungary and other assets and liabilities of $12.9 million,
offset unfavorable changes in inventories of $16.4 million and income taxes payable of $11.9
million.
19
The principal investing activities during the nine months ended September 30, 2006 were acquiring
$79.8 million in short-term investments, funding $66.8 million of capital expenditures and selling
$123.4 million of short-term investments. Similar investing activities during the same period a
year ago included funding $65.8 million of capital expenditures, acquiring $111.6 million of
short-term investments and selling $132.0 million of short-term investments. Capital expenditures
in the current period include approximately $51.7 million for our new wheel manufacturing facility
in Chihuahua, Mexico, compared to $30.4 million in the same period a year ago. The balance of the
2006 and 2005 capital expenditures were for ongoing improvements to our existing facilities, none
of which were individually significant.
Financing activities during the nine months ended September 30, 2006 were for the payment of cash
dividends on our common stock totaling $12.8 million. Similar financing activities during the same
period a year ago including cash dividend payments of $12.5 million.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to apply significant
judgment in making estimates and assumptions that affect amounts reported therein, as well as
financial information included in this Managements 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. The
following represent what we believe are the critical accounting policies most affected by
significant management estimates and judgments.
As described below, the most significant accounting estimates inherent in the preparation of our
financial statements include estimates and assumptions as to revenue recognition, inventory
valuation, impairment of and the estimated useful lives of our long-lived assets, as well as those
used in the determination of liabilities related to self-insured portions of employee benefits,
workers compensation, general liability programs and taxation.
Revenue Recognition - Our products are manufactured to customer specification under standard
purchase orders. We ship our products to OEM customers based on release schedules provided weekly
by our customers. Our sales and production levels are highly dependent upon these weekly forecasted
production levels of our customers. Sales of these products, net of estimated pricing adjustments,
and their related costs are recognized when title and risk of loss transfers to the customer,
generally upon shipment. A portion of our selling prices to OEM customers is attributable to the
aluminum content of our wheels. Our selling prices are adjusted periodically for changes in the
current aluminum market based upon specified aluminum price indices during specific pricing
periods, as agreed with our customers. Wheel program development revenues for the development of
wheels and related initial tooling that are reimbursable by our customers are recognized as such
related costs and expenses are incurred and recoverability is confirmed by the issuance of a
customer purchase order.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful accounts receivable based
upon the expected collectibility of all trade receivables. The allowance is reviewed continually
and adjusted for accounts deemed uncollectible by management.
Inventories - Inventories are stated at the lower of cost or market value and categorized as raw
material, work-in-process or finished goods. When necessary, management uses estimates of net
realizable value to record inventory reserves for obsolete and/or slow-moving inventory. Our
inventory values, which are based upon standard costs for raw materials and labor and overhead
established at the beginning of the year, are adjusted to estimated actual costs through the
recording of a first-in, first-out (FIFO) adjustment. Current raw material prices and labor and
overhead costs are utilized in developing these adjustments.
Impairment of Long-Lived Assets Our policy regarding long-lived assets is to evaluate the
recoverability of its assets at least annually or when the facts and circumstances suggest that the
assets may be impaired. This assessment of fair value is performed based on the estimated
undiscounted cash flows compared to the carrying value of the assets. If the future cash flows
(undiscounted and without interest charges) are less than the carrying value, a write-down would be
recorded to reduce the related asset to its estimated fair value. See Note 17 Impairment of
Long-Lived Assets and Other Charges in the notes to the consolidated condensed financial statements
of this Quarterly Report on Form 10-Q for additional information.
20
Retirement Plans - Subject to certain vesting requirements, our unfunded retirement plans generally
provide for a benefit based on final average compensation, which becomes payable on the employees
death or upon attaining age 65, if retired. The net pension cost and related benefit obligations
are based on, among other things, assumptions of the discount rate, future salary increases and the
mortality of the participants. The periodic costs and related obligations are measured using
actuarial techniques and assumptions.
Product Liability and Loss Reserves - Workers compensation accruals are based upon reported claims
in process and actuarial estimates for losses incurred but not reported. Loss reserves, including
incurred but not reported reserves, are based on estimates developed by third party administrators
and actuaries, and ultimate settlements may vary significantly from such estimates due to increased
claims frequency or the severity of claims.
Income Tax Reserves Despite our belief that our tax return positions are consistent with
applicable tax laws, experience has shown that taxing authorities can challenge certain positions.
Settlement of any challenge can result in no change, a complete disallowance or some partial
adjustment reached through negotiations or even litigation. Accordingly, accounting judgment is
required in evaluating our tax reserves, which are adjusted only in light of substantive changes in
facts and circumstances, such as the resolution of an audit by taxing authorities or the expiration
of a statute of limitations. Accordingly, our tax expense for a given period will include reserve
provisions for newly identified exposures, as well as reserve reductions for exposures resolved
through audit, expiration of a statute of limitations or other substantive changes in facts and
circumstances. See Note 8 Income Taxes in the notes to the consolidated condensed financial
statements of this Quarterly Report on Form 10-Q for further discussion.
New Accounting Standards
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting
Research Bulletin (ARB) No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and spoilage. This statement requires that those items be recognized as
current period charges regardless of whether they meet the criterion of so abnormal, which was
the criterion specified in ARB No. 43. In addition, this Statement requires that allocation of
fixed production overheads to the cost of production be based on normal capacity of the production
facilities. The new standard shall be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this new accounting standard did not have a material
impact on our financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income
Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken on
a tax return. This Interpretation also provides guidance on derecognition, classification,
interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a
tax position in accordance with this Interpretation will be a two-step process. The first step
will determine if it is more likely than not that a tax position will be sustained upon examination
and should therefore be recognized. The second step will measure a tax position that meets the
more likely than not recognition threshold to determine the amount of benefit to recognize in the
financial statements. This Interpretation is effective for fiscal years beginning after December
15, 2006. We are currently evaluating the impact of this Interpretation.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS 157). This
Statement defines fair value as used in numerous accounting pronouncements, establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosure related
to the use of fair value measures in financial statements. The Statement is to be effective for our
financial statements issued in 2008; however, earlier application is encouraged. We are currently
evaluating the timing of adoption and the impact that adoption might have on our financial position
or results of operations.
In September 2006, the FASB released SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R) (FAS 158). Under the new standard, companies must recognize a net liability or asset to
report the funded status of their defined benefit pension and other postretirement benefit plans on
their balance sheets. The recognition and disclosure provisions of FAS 158 will be required to be
adopted as of December 31, 2006. We are currently reviewing the requirements of FAS 158 to
determine the impact on our financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which provides
interpretive guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality assessment. The new
guidance requires additional quantitative testing to determine whether a misstatement is
21
material. We will implement SAB No. 108 for the filing of our 2006 Annual Report on Form 10-K. We
are currently assessing the impact, if any, of the adoption of SAB No. 108.
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 declined by 4 percent for the first nine months of 2006. The Euro experienced,
approximately, an 8 percent increase in value relative to the U.S. dollar for the first nine
months of 2006. Foreign currency transaction gains and losses, which are included in other income
(expense) in the consolidated condensed statements of operations, have not been material.
Our primary risk exposure relating to derivative financial instruments results from the periodic
use of foreign currency forward contracts to offset the impact of currency rate fluctuations from
foreign denominated receivables, payables or purchase obligations. At September 30, 2006, we held
open foreign currency Euro forward contracts totaling $1.0 million, with an unrealized loss of
$9,500. At December 31, 2005, we held open foreign currency Euro forward contracts totaling
$10.7 million, with an unrealized loss of $200,000. Any unrealized gains and losses are included
in other comprehensive income (loss) in shareholders equity until the actual contract settlement
date. Percentage changes in the Euro/U.S. Dollar exchange rate will impact the unrealized
gain/loss by a similar percentage of the current market value. We do not have similar derivative
instruments for the Mexican Peso.
When market conditions warrant, we will also enter into contracts to purchase certain commodities
used in the manufacture of our products, such as aluminum, natural gas, environmental emission
credits 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 a derivative. We currently have several purchase agreements for the delivery of
natural gas over the next two years. The contract value and fair value of these purchase
commitments approximated $17.4 million and $14.7 million, respectively, at September 30, 2006.
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.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements made by us or on our behalf. We may from time to time make written or oral statements
that are forward-looking, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, (Exchange Act)
including statements contained in this report and other filings with the SEC 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 under Item 1A Risk Factors in Part II of this Quarterly Report
on Form 10-Q and in Item 1A Risk Factors in Part I in our 2005 Annual Report on Form 10-K,
which, among others, should be considered in evaluating our financial outlook. We assume no
obligation to update publicly any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Risk Management.
22
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The companys management, with the participation of the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), evaluated the effectiveness of the companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30,
2006. Our disclosure controls and procedures are designed to ensure that information required to
be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time period specified in SEC rules and forms and that such information is
accumulated and communicated to our management, including our CEO and CFO, to allow timely
decisions regarding required disclosures. Based on the material weaknesses described below, the
CEO and CFO have concluded that the companys disclosure controls and procedures were not effective
as of September 30, 2006.
Notwithstanding the material weaknesses that existed at September 30, 2006 as describe below,
management believes that the 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 control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of annual or interim financial
statements will not be prevented or detected. Management identified the following material
weaknesses in the companys internal control over financial reporting as of September 30, 2006:
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We did not maintain a sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application of accounting principles
generally accepted in the United States of America commensurate with the companys
financial reporting requirements. Specifically, we did not have several accounting and
finance positions staffed with individuals who possess the appropriate skills, training and
experience to meet the objectives required in these roles with respect to the period-end
financial reporting process including the completeness and accuracy of stock-based
compensation footnote disclosures. This material weakness contributed to the material
weaknesses described below. Additionally, this control deficiency could result in a
misstatement of substantially all accounts and disclosures that would result in a material
misstatement to our interim or annual consolidated financial statements that would not be
prevented or detected. Accordingly, management has determined that this control deficiency
constitutes a material weakness. |
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2) |
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We did not maintain effective controls over the accounting for income taxes.
Specifically, we did not have effective controls to ensure the completeness and accuracy of
income taxes payable, the current and deferred income tax provision and the related
deferred tax assets and liabilities in conformity with generally accepted accounting
principles. This control deficiency resulted in audit adjustments to our 2005 annual
consolidated financial statements and the interim consolidated financial statements for
each of the 2005 quarters. Additionally, this control deficiency could result in a
misstatement of income taxes payable, the current and deferred income tax provision and the
related deferred tax assets and liabilities that would result in a material misstatement to
our interim or annual consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined that this control deficiency constitutes a
material weakness. |
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3) |
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We did not maintain effective controls over the valuation of inventory. Specifically,
we did not have effective controls to ensure that the period-end valuation of our aluminum
inventory was determined in accordance with generally accepted accounting principles. This
control deficiency resulted in an audit adjustment to our 2005 annual consolidated
financial statements and the interim consolidated financial statements for each of the 2005
quarters. Additionally, this control deficiency could result in a misstatement of inventory
and cost of goods sold that would result in a material misstatement to our interim or
annual consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency constitutes a material
weakness. |
The material weaknesses above were originally identified during managements evaluation of the
effectiveness of our disclosure controls and procedures as of December 31, 2005.
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Remediation Steps to Address the Material Weaknesses
Summarized below are some of the remediation measures that have been implemented or are being
implemented in response to the material weaknesses discussed above. We also describe the interim
measures we undertook in an effort to mitigate the possible risks of these material weaknesses in
connection with the preparation of the consolidated condensed financial statements included in this
Quarterly Report on Form 10-Q. During the nine months ended September 30, 2006 and through the
date of the filing of this Form 10-Q, we have taken the following steps in an effort to remediate
the deficiencies in our disclosure controls and procedures and the material weaknesses identified
above. We will continue to evaluate the effectiveness of our internal controls and procedures on
an ongoing basis and will take further action as appropriate:
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We have hired key employees with the appropriate level of knowledge, experience and
training in the application of accounting principles generally accepted in the United
States of America commensurate with the companys financial reporting requirements. These
individuals have filled open positions within the accounting, finance and tax accounting
areas. During the period of initial training and familiarization with our procedures, they
were provided proper support from within the company or, if necessary, from outside
advisors. |
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2) |
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Under the supervision and direction of the CFO, we have increased the level of
involvement of external tax advisors in the fiscal year 2006 interim reporting process.
Specifically, we have adopted the methodology recommended by our external tax advisors used
in the determination of the current and deferred income tax provision and the related
deferred tax assets and liabilities, and have increased the level of review by our external
tax advisors in an effort to ensure the completeness and accuracy of the various tax data
presented in our consolidated condensed financial statements. |
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3) |
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We have standardized our process of period-end valuation of our aluminum inventory and
have conducted a detailed review to ensure that the period-end valuation of our aluminum
inventory reported in our consolidated condensed financial statements included in this
Quarterly Report on Form 10-Q was determined in accordance with accounting principles
generally accepted in the United States of America. |
We have instituted in the third quarter of 2006 a quarterly business performance review in order to
detect and research variances greater than $250,000. We will continue to develop new policies and
procedures and educate and train our employees on our existing policies and procedures in a
continual effort to improve our internal control over financial reporting, and will take further
actions as appropriate. However, neither these new policies and procedures, nor the remediation
plan described above, are certain to remedy our material weaknesses in internal control over
financial reporting.
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 24, 2006 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1A. Risk Factors
The following are the material changes to the risk factors contained in Item 1A Risk Factors
in our 2005 Annual Report on Form 10-K.
Effective Internal Controls Over Financial Reporting Management is responsible for establishing
and maintaining adequate internal control over financial reporting. Many of our key controls rely
on maintaining a sufficient complement of personnel with an appropriate level of accounting
knowledge, experience and training in the application of accounting principles generally accepted
in the United States of America in order to operate effectively. If we are unable to attract,
hire, train and retain a sufficient complement of qualified personnel required to operate these
controls effectively, our financial statements may contain material misstatements, unintentional
errors, or omissions that are not prevented or detected and late filings with regulatory agencies
may occur. In addition, we may continue to report material weaknesses in our internal controls
over financial reporting similar to the material weaknesses reported in our 2005 Annual Report on
Form 10-K and in Item 4 in Part I of this Quarterly Report on Form 10-Q. Continued reporting of
material weaknesses may result in negative perceptions of our business among our customers,
suppliers, investors and others, which may have a material adverse impact our business.
Impact of Aluminum Pricing - The cost of aluminum is a significant component in the overall
production cost of a wheel. Additionally, a portion of our selling prices to OEM customers is tied
to the cost of aluminum. Our selling prices are adjusted periodically to current aluminum market
conditions based upon market price changes during specific pricing periods. Theoretically, assuming
selling price adjustments and raw material purchase prices move at the same rate, as the price of
aluminum increases, the effect is an overall decrease in the gross margin percentage, since the
gross profit in absolute dollars would be the same. The opposite would then be true in periods
during which the price of aluminum decreases.
However, since the pricing periods and pricing methodologies during which selling prices are
adjusted for changes in the market prices of aluminum differ for each of our customers, and the
selling price changes are fixed for various periods, our selling price adjustments may not entirely
offset the increases or decreases experienced in our aluminum raw material purchase prices. This is
especially true during periods of frequent increases or decreases in the market price of aluminum
and when a portion of our aluminum purchases is via long-term fixed purchase agreements.
Accordingly, our gross profit is subject to fluctuations, since the change in the aluminum content
of selling prices does not necessarily match the change in the aluminum raw material purchase
prices during the period being reported, which may have a material adverse effect on our operating
results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases of our common stock during the third quarter of 2006.
Item 6. Exhibits
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2 |
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Asset Purchase Agreement with Saint Jean Industries, Inc. and
Saint Jean Industries, SAS (filed herewith). The disclosure schedules
referenced in such agreement have been omitted in reliance on Item 601(b)(2)
of Regulation S-K under the Securities Act of 1933, and the issuer agrees to
furnish supplementally a copy of such schedules to the SEC upon its request. |
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Preferability Letter from PriceWaterhouseCoopers, LLP, our
Independent Registered Accounting Firm (filed herewith). |
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31.1 |
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Certification of Steven J. Borick, President and Chief
Executive 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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31.2 |
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Certification of R. Jeffrey Ornstein, Vice President and Chief
Financial Officer, Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed
herewith). |
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32 |
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Certification of Steven J. Borick, President and Chief
Executive Officer, and R. Jeffrey Ornstein, Vice President and Chief Financial
Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SUPERIOR INDUSTRIES INTERNATIONAL, INC. |
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(Registrant)
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Date November 8, 2006 |
/s/ Steven J. Borick
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Steven J. Borick |
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President and Chief Executive Officer |
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Date November 8, 2006 |
/s/ R. Jeffrey Ornstein
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R. Jeffrey Ornstein |
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Vice President and Chief Financial Officer |
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26