form10-q.htm
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended June 27, 2010
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
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Commission
file number: 1-6615
SUPERIOR
INDUSTRIES INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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California
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95-2594729
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer Identification No.)
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7800
Woodley Avenue
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Van
Nuys, California
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91406
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (818) 781-4973
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
Accelerated Filer
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o
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Accelerated
Filer
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þ
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Non-Accelerated
Filer
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o
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Smaller
Reporting Company
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o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Number of
shares of no par value common stock outstanding as of August 6, 2010:
26,708,440.
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Page
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PART
I
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FINANCIAL
INFORMATION
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Item
1
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-
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1
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2
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3
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4
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5
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Item
2
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-
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13
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Item
3
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-
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21
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Item
4
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21
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PART
II
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OTHER
INFORMATION
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Item
1
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-
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23
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Item
1A
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23
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Item
2
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23
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Item
6
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23
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24
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PART
I
FINANCIAL
INFORMATION
Superior Industries International, Inc.
Condensed
Consolidated Statements of Operations
(Dollars
in thousands, except per share data)
(Unaudited)
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Thirteen
Weeks Ended
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Twenty-Six
Weeks Ended
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June
27, 2010
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June
28, 2009
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June
27, 2010
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June
28, 2009
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NET
SALES
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$ |
194,562 |
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$ |
80,886 |
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$ |
344,758 |
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$ |
162,434 |
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Cost
of sales
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166,670 |
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92,942 |
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304,238 |
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189,003 |
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GROSS
PROFIT (LOSS)
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27,892 |
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(12,056 |
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40,520 |
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(26,569 |
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Selling,
general and administrative expenses
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7,323 |
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5,838 |
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13,549 |
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10,613 |
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Impairment
of long-lived assets
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- |
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2,894 |
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- |
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11,804 |
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INCOME
(LOSS) FROM OPERATIONS
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20,569 |
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(20,788 |
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26,971 |
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(48,986 |
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Loss
on sale of joint venture
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(4,110 |
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- |
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(4,110 |
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Interest
income, net
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281 |
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359 |
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681 |
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759 |
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Other
expense, net
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(488 |
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(1,153 |
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(1,206 |
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(2,454 |
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INCOME
(LOSS) BEFORE INCOME
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TAXES
AND EQUITY EARNINGS
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16,252 |
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(21,582 |
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22,336 |
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(50,681 |
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Income
tax benefit (provision)
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(4,674 |
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2,817 |
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(501 |
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(23,643 |
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Equity
in losses from joint venture
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(1,489 |
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(2,204 |
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(2,847 |
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(3,146 |
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NET
INCOME (LOSS)
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$ |
10,089 |
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$ |
(20,969 |
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$ |
18,988 |
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$ |
(77,470 |
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INCOME
(LOSS) PER SHARE - BASIC
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$ |
0.38 |
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$ |
(0.79 |
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$ |
0.71 |
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$ |
(2.90 |
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INCOME
(LOSS) PER SHARE - DILUTED
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$ |
0.38 |
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$ |
(0.79 |
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$ |
0.71 |
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$ |
(2.90 |
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DIVIDENDS
DECLARED PER SHARE
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$ |
0.16 |
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$ |
0.16 |
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$ |
0.32 |
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$ |
0.32 |
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See notes
to condensed consolidated financial statements.
Superior Industries International, Inc.
Condensed
Consolidated Balance Sheets
(Dollars
in thousands, except share amounts)
(Unaudited)
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June
27, 2010
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December
27, 2009
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
133,150
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$ 134,315
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Short
term investments
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10,219
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6,152
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Accounts
receivable, net
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135,719
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88,991
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Inventories,
net
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53,856
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47,612
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Income
taxes receivable
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-
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8,930
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Deferred
income taxes
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1,821
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777
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Assets
held for sale
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6,757
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6,771
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Other
current assets
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9,243
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14,584
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Total
current assets
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350,765
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308,132
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Property,
plant and equipment, net
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171,986
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180,121
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Investment
in joint venture
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-
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23,602
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Non-current
deferred income taxes
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18,324
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7,781
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Other
assets
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19,958
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22,217
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Total
assets
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$ |
561,033
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$ 541,853
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$ |
32,401
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$ 24,574
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Accrued
expenses
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43,623
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42,202
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Income
taxes payable
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76
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Total
current liabilities
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76,100
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66,776
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Non-current
deferred income taxes
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46,437
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22,385
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Non-current
tax liabilities
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29,372
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46,634
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Other
non-current liabilities
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29,144
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32,786
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Commitments
and contingencies (Note 16)
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Shareholders'
equity:
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Preferred
stock, no par value
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Authorized
- 1,000,000 shares
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Issued
- none
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Common
stock, no par value
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Authorized
- 100,000,000 shares
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Issued
and outstanding - 26,708,440 shares
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(26,668,440
shares at December 27, 2009)
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57,902
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56,854
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Accumulated
other comprehensive loss
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(61,369)
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(56,576)
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Retained
earnings
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383,447
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372,994
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Total
shareholders' equity
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379,980
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373,272
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Total
liabilities and shareholders' equity
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$ |
561,033
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$ 541,853
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See notes
to condensed consolidated financial statements.
Superior Industries International, Inc.
Condensed
Consolidated Statements of Cash Flows
(Dollars
in thousands)
(Unaudited)
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Twenty-Six
Weeks Ended
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June
27, 2010
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June
28, 2009
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NET
CASH PROVIDED BY OPERATING ACTIVITIES
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$ |
4,945 |
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$ |
36,642 |
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Proceeds
from sale of joint venture investment
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4,945 |
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- |
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Additions
to property, plant and equipment
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(2,779 |
) |
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(5,746 |
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Proceeds
from sales of fixed assets
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259 |
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51 |
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NET
CASH USED IN INVESTING ACTIVITIES
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2,425 |
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(5,695 |
) |
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Cash
dividends paid
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(8,535 |
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(8,533 |
) |
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NET
CASH USED IN FINANCING ACTIVITIES
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(8,535 |
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(8,533 |
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Net
increase (decrease) in cash and cash equivalents
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(1,165 |
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22,414 |
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Cash
and cash equivalents at the beginning of the period
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134,315 |
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146,871 |
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Cash
and cash equivalents at the end of the period
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$ |
133,150 |
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$ |
169,285 |
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See notes
to condensed consolidated financial statements.
Superior Industries International, Inc.
Condensed
Consolidated Statement of Shareholders’ Equity and Comprehensive Income
(Loss)
(Dollars
in thousands, except per share data)
(Unaudited)
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Accumulated
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Common
Stock
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Other
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Number
of
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Comprehensive
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Retained
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Shares
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Amount
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Income
(Loss)
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Earnings
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Total
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BALANCE
AT
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DECEMBER
27, 2009
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|
26,668,440 |
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$ |
56,854 |
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$ |
(56,576 |
) |
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$ |
372,994 |
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$ |
373,272 |
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Comprehensive
income (loss):
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Net
income
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- |
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- |
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- |
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18,988 |
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18,988 |
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Other
comprehensive income, net of tax:
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Foreign
currency translation loss
|
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|
- |
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|
- |
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(78 |
) |
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- |
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(78 |
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Sale
of investment in joint venture
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- |
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- |
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(4,715 |
) |
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- |
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(4,715 |
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Total
comprehensive income
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14,195 |
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Issuance
of restricted shares
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|
40,000 |
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|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
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|
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Stock-based
compensation expense
|
|
|
- |
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|
|
1,238 |
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|
|
- |
|
|
|
- |
|
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|
1,238 |
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Tax
impact of expired stock options
|
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|
- |
|
|
|
(190 |
) |
|
|
- |
|
|
|
- |
|
|
|
(190 |
) |
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Cash
dividends declared ($0.32 per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,535 |
) |
|
|
(8,535 |
) |
BALANCE
AT
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|
|
JUNE
27, 2010
|
|
|
26,708,440 |
|
|
$ |
57,902 |
|
|
$ |
(61,369 |
) |
|
$ |
383,447 |
|
|
$ |
379,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss, net of tax was $(68,169) for the twenty-six weeks ended June 28,
2009, which included: net loss
|
|
of
$(77,470), foreign currency translation adjustment gain of $9,294 and an
unrealized gain of $7 on our pension obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to condensed consolidated financial statements.
Superior Industries International, Inc.
Notes
to Condensed Consolidated Financial Statements
June
27, 2010
(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 aluminum wheels to the world’s leading automobile and
light truck manufacturers, with wheel manufacturing operations in the United
States, Mexico and, until we sold our joint venture investment in June 2010 in
Hungary. See Note 3 – Investment in Joint Ventures for further
discussion of the sale of our joint venture investment in
Hungary. Customers headquartered in North America represent the
principal market for our products. In addition, the majority of our sales to
international customers are delivered primarily to their assembly operations in
North America.
Ford
Motor Company (Ford), General Motors Company (GM) and Chrysler Group LLC
(Chrysler), together represented approximately 81 percent of our total wheel
sales during the first two quarters of 2010 and 82 percent for the 2009 fiscal
year. We also manufacture aluminum wheels for BMW, Mitsubishi, Nissan, Subaru,
Toyota and Volkswagen. The loss of all or a substantial portion of
our sales to Ford, GM or Chrysler would have a significant adverse impact on our
operating results and financial condition, unless the lost volume could be
replaced. This risk is partially mitigated by our long-term relationships with
these OEM customers and our supply arrangements which are generally for
multi-year periods.
Beginning
with the third quarter of 2008, the automotive industry was negatively impacted
by the continued dramatic shift away from full-size trucks and SUVs caused by
continuing high fuel prices, rapidly rising commodity prices and the tightening
of consumer credit due to the then deteriorating financial
markets. Accordingly, our OEM customers announced unprecedented
restructuring actions, including assembly plant closures, significant reductions
in production of light trucks and SUVs, delayed launches of key 2009 model-year
light truck programs and movement toward more fuel-efficient passenger cars and
crossover vehicles. These restructuring actions culminated in the
bankruptcy reorganizations of Chrysler and GM in 2009. In addition to
the financial uncertainty of several of our key customers, we also continue to
face continued global competitive pricing pressures. While we have
had long-term relationships with our customers and our supply arrangements are
generally for multi-year periods, the continued uncertainty of the automotive
industry and pricing pressures may continue to negatively impact our
business. These factors may make it more difficult to maintain
long-term supply arrangements with our customers and there are no guarantees
that supply arrangements will be negotiated on terms acceptable to us in the
future.
Our
customers continue to request price reductions as they work through their own
financial challenges. We are engaged in ongoing programs to reduce
our own costs through process automation and identification of industry best
practices in an attempt to mitigate these pricing pressures. However,
it has become increasingly more difficult to react quickly enough given these
continuing pricing pressures, reductions in customer orders, and the lengthy
transitional periods necessary to reduce labor and other costs. We
will continue to strive to increase our operating margins from current operating
levels by aligning our plant capacity with industry demand and aggressively
implementing cost-saving strategies to enable us to meet customer-pricing
expectations. However, as we incur costs to implement these
strategies, the initial impact on our future financial position, results of
operations and cash flow may be negative. Additionally, even if
successfully implemented, these strategies may not be sufficient to offset the
impact of on-going pricing pressures and additional reductions in customer
demand in future periods.
While we
have seen improvement in the U.S. automotive industry in recent quarters,
production levels still remain below what would be considered normal levels and
there is no guarantee that the recent improvements will be sustained or that
reductions in current production levels will not occur in future
periods. Our customer’s reactions to continued uncertainty in the
overall health of the U.S. economy and their own financial challenges may have
an adverse impact on our results of operations and cash flows in future
periods.
The
availability and demand for aluminum wheels are subject to unpredictable
factors, such as changes in the general economy, the automobile industry,
gasoline prices and consumer credit availability and interest rates. The raw
materials used in producing our products are readily available and are obtained
through numerous suppliers with whom we have established trade
relations.
Note
2 – Presentation of Condensed Consolidated Financial Statements
During
interim periods, we follow the accounting policies set forth in our Annual
Report on Form 10-K for the fiscal year ended December 27, 2009 and apply
appropriate interim financial reporting standards for a fair statement of our
operating results and financial position in conformity with accounting
principles generally accepted in the United States of America, as codified in
the Financial Accounting Standards Board’s (FASB) Accounting Standards
Codification (ASC) (referred to herein as U.S. GAAP), as indicated
below. Users of financial information produced for interim periods in
2010 are encouraged to read this Quarterly Report on Form 10-Q in conjunction
with our consolidated financial statements and notes thereto filed with the
Securities and Exchange Commission (SEC) in our 2009 Annual Report on Form 10-K
and the amendments thereto.
Interim
financial reporting standards require us to make estimates that are based on
assumptions regarding the outcome of future events and circumstances not known
at that time, including the use of estimated effective tax
rates. Inevitably, some assumptions will not materialize,
unanticipated events or circumstances may occur which vary from those estimates
and such variations may significantly affect our future results. Additionally,
interim results may not be indicative of our results for future interim periods
or our annual results.
We use a
4-4-5 convention for our fiscal quarters, which are thirteen week periods
generally ending on the last Sunday of each calendar quarter. We
refer to these thirteen week fiscal periods as “quarters” throughout this
report. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the SEC’s requirements for Form
10-Q and contain all adjustments, of a normal and recurring nature, which are
necessary for a fair statement of (i) the condensed consolidated statements of
operations for the thirteen and twenty-six week periods ended June 27, 2010 and
June 28, 2009, (ii) the condensed consolidated balance sheets at June 27, 2010
and December 27, 2009, (iii) the condensed consolidated statements of cash flows
for the twenty-six week periods ended June 27, 2010 and June 28, 2009, and (iv)
the condensed consolidated statement of shareholders’ equity and comprehensive
income (loss) for the twenty-six week period ended June 27, 2010. However, the
accompanying unaudited condensed consolidated financial statements do not
include all information and notes required by U.S. GAAP. The
condensed consolidated balance sheet as of December 27, 2009 was derived from
our 2009 audited financial statements, but does not include all disclosures
required by U.S. GAAP.
Note
3 – Investment in Joint Ventures
Joint
Venture in Hungary
On June
18, 2010, we sold our 50-percent ownership interest in Suoftec Light Metal
Products Production & Distribution Ltd. (Suoftec), the company’s joint
venture manufacturing facility in Hungary, to our partner in the joint venture,
Otto Fuchs Kg, based in Meinerzhagen, Germany. Suoftec manufactures
cast and forged aluminum wheels principally for the European automobile
industry. Being 50-percent owned and non-controlled, Suoftec was not
consolidated, and accounted for using the equity method of
accounting. During the second quarter of 2010, we made a strategic
decision to liquidate our investment in Suoftec. The total sales
price of our investment was 4 million euros, or $4.9 million, in cash which was
received during the second quarter of 2010, and 3 million euros, or $3.7
million, worth of machinery and equipment. As of June 27, 2010, we
have recorded a receivable in the amount of $3.7 million which represents our
unconditional right to receive machinery and equipment from
Suoftec. This receivable has been included in accounts receivable in
the condensed consolidated balance sheet as of June 27, 2010. The net
investment, including amounts included in other comprehensive income in Suoftec,
as of the date of sale was approximately $12.8 million, resulting in a loss on
the sale of our investment of $4.1 million. Legal and other costs
related to the sale of our investment in Suoftec were minimal.
Included
below are summary statements of operations for Suoftec for the second quarters
and first two quarters ended June 27, 2010 and June 28, 2009. The
2010 periods include one week less than the 2009 periods, due to the date of
sale of our investment. For ease of presentation in the table below,
we are showing thirteen and twenty-six week periods for both 2010 and
2009.
(Dollars
in thousands)
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
Net
sales
|
|
$ |
18,859 |
|
|
$ |
19,940 |
|
|
$ |
39,456 |
|
|
$ |
38,642 |
|
Cost
of sales
|
|
|
20,681 |
|
|
|
24,614 |
|
|
|
43,347 |
|
|
|
45,102 |
|
Gross
loss
|
|
|
(1,822 |
) |
|
|
(4,674 |
) |
|
|
(3,891 |
) |
|
|
(6,460 |
) |
Selling,
general and administrative expenses
|
|
|
534 |
|
|
|
387 |
|
|
|
1,145 |
|
|
|
902 |
|
Loss
from operations
|
|
|
(2,356 |
) |
|
|
(5,061 |
) |
|
|
(5,036 |
) |
|
|
(7,362 |
) |
Other
expense, net
|
|
|
(549 |
) |
|
|
(289 |
) |
|
|
(1,089 |
) |
|
|
(417 |
) |
Loss
before income taxes
|
|
|
(2,905 |
) |
|
|
(5,350 |
) |
|
|
(6,125 |
) |
|
|
(7,779 |
) |
Income
tax benefit
|
|
|
125 |
|
|
|
870 |
|
|
|
3 |
|
|
|
1,351 |
|
Net
loss
|
|
$ |
(2,780 |
) |
|
$ |
(4,480 |
) |
|
$ |
(6,122 |
) |
|
$ |
(6,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Superior's
share of Suoftec net loss
|
|
$ |
(1,390 |
) |
|
$ |
(2,240 |
) |
|
$ |
(3,061 |
) |
|
$ |
(3,214 |
) |
Intercompany
profit elimination
|
|
|
(99 |
) |
|
|
36 |
|
|
|
214 |
|
|
|
68 |
|
Equity
losses from Suoftec
|
|
$ |
(1,489 |
) |
|
$ |
(2,204 |
) |
|
$ |
(2,847 |
) |
|
$ |
(3,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in India
On June
28, 2010, subsequent to the close of the second quarter of 2010, we executed a
share subscription agreement (Agreement) with Synergies Casting Limited
(Synergies), and made a $2.5 million investment in
Synergies. Synergies is a private aluminum wheel manufacturer based
in Visakhapatnam, India. The Agreement allows us to make a series of
additional investments totaling $7.0 million through December 31, 2010, if
certain conditions are met by Synergies. If these conditions are met
and we make the additional investments in Synergies, we will own approximately
26 percent of Synergies on a fully diluted basis. We will be
accounting for our investment in Synergies under the equity method of
accounting.
Note
4 – Impairment of Long-Lived Assets and Equity Method Investments
Due to
the financial condition of our major customers and others in the automotive
industry, we tested our long-lived assets for impairment during each quarter of
2009. During the first two quarters of 2010, we closely monitored our
long-lived assets for indicators of impairment in accordance with U.S. GAAP and
did not identify any indicators that triggered the need for impairment testing
during those periods.
The
long-lived asset impairment test performed during the first quarter of 2009
demonstrated that the estimated future undiscounted cash flows of our
Fayetteville, Arkansas manufacturing facility would not be sufficient to recover
the carrying value of our long-lived assets attributable to that
facility. As a result, we recorded a pretax asset impairment charge
against earnings totaling $8.9 million during the first quarter of 2009,
reducing the $18.2 million carrying value of certain assets at this facility to
their respective estimated fair values. We have classified the inputs
to the nonrecurring fair value measurement of these assets as being Level 2
within the fair value hierarchy in accordance with U.S. GAAP. The
estimated fair values of the long-lived assets at our Fayetteville, Arkansas
manufacturing facility were determined with the assistance of estimated fair
values of comparable properties and independent third party appraisals of the
machinery and equipment. During the second quarter of 2009, we also
recorded additional impairment charges totaling $2.9 million to reduce the
carrying value of certain assets held for sale to their estimated fair values.
We have also classified the inputs to the nonrecurring fair value measurement of
these assets as being Level 2 within the fair value hierarchy in accordance with
U.S. GAAP.
Additionally,
our 50-percent owned joint venture in Hungary (Suoftec) had also been affected
by these same economic conditions. As a result, management of the
joint venture tested their long-lived assets for impairment during each quarter
of 2009 and through the first quarter of 2010 and we tested our investment in
Suoftec for and other-than-temporary impairment (OTTI) during these same
periods. The long-lived asset impairment test performed during the
fourth quarter of 2009 indicated that the estimated undiscounted future cash
flows would not be sufficient to cover the carrying value of the asset group,
which resulted in an impairment of the long-lived assets of the group. We
recorded our share of the impairment charge, or $14.4 million, in our equity in
earnings (losses) from joint ventures in the fourth quarter of
2009. During the first quarter of 2010, Suoftec’s management did not
identify any additional indicators of impairment that triggered an impairment
test of Suoftec’s long-lived assets under U.S. GAAP. In connection
with our OTTI testing for Suoftec, we have used a discounted cash flow model to
determine if our investment in Suoftec was recoverable. This test,
including the first quarter 2010 test, indicated that our investment in Suoftec
was recoverable. During the second quarter of 2010, we recorded a
$4.1 million loss on the sale of our investment due to the fact that the price
received for our investment was based on liquidation value of the investment as
opposed to being based on a held-in-use value determined by discounting future
cash flows.
Note
5 – Stock-Based Compensation
Our 2008
Equity Incentive Plan authorizes us to issue incentive and non-qualified stock
options, as well as stock appreciation rights, restricted stock and performance
units to our non-employee directors, officers, employees and consultants
totaling up to 3.5 million shares of common stock. No more than 100,000 shares
may be used under such plan as “full value” awards, which include restricted
stock and performance units. It is our policy to issue shares from
authorized but not issued shares upon the exercise of stock
options. At June 27, 2010, there were 2.4 million shares available
for future grants under this plan. Options are granted at not less than fair
market value on the date of grant and expire no later than ten years after the
date of grant. Options granted under this plan require no less than a
three year ratable vesting period.
During
the first two quarters of 2010, we granted options for a total of 433,500
shares, compared to 135,000 options granted during the first two quarters of
2009. The weighted average fair values at the grant dates for options
issued during the first two quarters of 2010 and 2009 were $4.07 per option and
$2.91 per option, respectively. The fair value of options at the grant date was
estimated utilizing the Black-Scholes valuation model with the following
weighted average assumptions for 2010 and 2009, respectively: (i) dividend yield
on our common stock of 4.22 percent and 3.27 percent; (ii) expected stock price
volatility of 36.67 percent and 37.0 percent; (iii) a risk-free interest rate of
2.92 percent and 2.50 percent; and (iv) an expected option term of 7.0 years and
6.9 years. During the first two quarters of 2010 and 2009, no stock
options were exercised.
During
the second quarter of 2010, we also granted 40,000 shares of restricted shares,
or “full value” awards, which vest ratably over a four-year
period. The fair value of each issued restricted share on the date of
grant was $16.32. Restricted share awards, which are subject to
forfeiture if employment terminates prior to the shares vesting, are expensed
ratably over the vesting period. Shares of restricted stock are
considered issued and outstanding shares at the date of grant and have the same
dividend and voting rights as other common stock. Dividends paid on
the restricted shares are non-forfeitable if the restricted shares do not
ultimately vest.
Stock-based
compensation expense related to our unvested stock options and restricted share
awards during the thirteen and twenty-six week periods ended June 27, 2010 and
June 28, 2009 was allocated as follows:
(Dollars
in thousands)
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
122 |
|
|
$ |
72 |
|
|
$ |
213 |
|
|
$ |
160 |
|
Selling,
general and administrative
|
|
|
528 |
|
|
|
472 |
|
|
|
1,025 |
|
|
|
958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense before income taxes
|
|
|
650 |
|
|
|
544 |
|
|
|
1,238 |
|
|
|
1,118 |
|
Income
tax (benefit)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense after income taxes
|
|
$ |
650 |
|
|
$ |
544 |
|
|
$ |
1,238 |
|
|
$ |
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
discussed in Note 10 – Income Taxes, we have provided valuation allowances on
our U.S. deferred tax assets. Consequently, the income tax benefit on
our stock-based compensation expense in each of the first two quarters of 2010
and 2009 was entirely offset by changes in valuation allowances. As
of June 27, 2010, a total of $5.4 million of unrecognized compensation cost
related to non-vested awards is expected to be recognized over a weighted
average period of approximately 2.82 years. There were no significant
capitalized stock-based compensation costs at June 27, 2010 and December 27,
2009.
Note
6 - New Accounting Standards
During
June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17,
Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 amended
the consolidation guidance applicable to variable interest entities (VIE), and
changed the approach for determining the primary beneficiary of a VIE. Among
other things, the new guidance requires a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a VIE; requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE;
enhances disclosures about an enterprise’s involvement with a VIE; and amends
certain guidance for determining whether an entity is a VIE. This accounting
guidance is effective for annual periods beginning after November 15, 2009
and was effective beginning in the first quarter of 2010. The
adoption of this standard had no impact on our operations or financial
position.
During
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 requires new disclosures around transfers into and
out of Levels 1 and 2 in the fair value hierarchy and separate disclosures about
purchases, sales, issuances and settlements related to Level 3 measurements. ASU
2010-06 was effective in the first quarter of 2010, except for disclosures
regarding purchases, sales, issuances and settlements in the rollforward of
Level 3 activity. The adoption of this standard had no impact on our results of
operations or financial position. The additional Level 3 disclosures will
be effective for our first quarter of 2011 and we are currently evaluating the
impact of these new disclosure requirements on our consolidated financial
statements.
Note
7 – Business Segments
Our
Chairman and Chief Executive Officer is the chief operating decision maker
(CODM). The CODM evaluates both consolidated and disaggregated
financial information at each manufacturing facility in deciding how to allocate
resources and assess performance. Each manufacturing facility
functions as a separate cost center, manufactures the same products, ships
product to the same group of customers, utilizes the same cast manufacturing
process and as a result, production can be transferred among our
facilities. Accordingly, we operate as a single integrated business
and, as such, have only one operating segment - automotive
wheels. Net sales and net property, plant and equipment by
geographic area are summarized below.
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
Net
sales:
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
U.S.
|
|
$ |
69,483 |
|
|
$ |
35,716 |
|
|
$ |
115,938 |
|
|
$ |
68,490 |
|
Mexico
|
|
|
125,079 |
|
|
|
45,170 |
|
|
|
228,820 |
|
|
|
93,944 |
|
Consolidated
net sales
|
|
$ |
194,562 |
|
|
$ |
80,886 |
|
|
$ |
344,758 |
|
|
$ |
162,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
June
27, 2010
|
|
|
December
27, 2009
|
U.S.
|
|
|
|
|
|
|
|
|
|
$ |
44,821 |
|
|
$ |
48,311 |
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
127,165 |
|
|
|
131,810 |
|
Consolidated
property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
$ |
171,986 |
|
|
$ |
180,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
8 – Pre-Production Costs Related to Long-Term Supply Arrangements
We incur
pre-production engineering and tooling costs related to the products produced
for our customers under long-term supply arrangements. Customer-owned
tooling for which reimbursement is contractually guaranteed by the customer
included in our other assets as of June 27, 2010 was $13.6 million, net of
accumulated amortization of $19.6 million, and at December 27, 2009 was $11.8
million, which was net of $15.1 million of accumulated
amortization. Deferred tooling reimbursement revenues included as
part of accrued expenses and other non-current liabilities were $7.9 million and
$1.2 million, respectively, as of June 27, 2010 and $7.0 million and $4.8
million, respectively, as of December 27, 2009. Tooling
reimbursement revenues included in net
sales in the condensed consolidated statements of operations totaled $2.8
million and $2.3 million for the thirteen weeks ended June 27, 2010 and June 28,
2009, respectively, and $5.2 million and $4.5 million for the twenty-six weeks
ending June 27, 2010 and June 28, 2009, respectively.
Note
9 – Income (Loss) Per Share
In
accordance with U.S. GAAP, basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share includes
the dilutive effect of outstanding stock options and restricted share awards,
calculated using the treasury stock method.
For the
thirteen week period ended June 27, 2010, 3.3 million of the 4.0 million
outstanding stock options and restricted share awards had an exercise price
greater than the weighted-average market price of our common stock and,
therefore, were excluded from the calculation of diluted earnings per share for
the period. For the twenty-six week period ended June 27, 2010, 3.3
million of the 4.0 million outstanding stock options and restricted share awards
had an exercise price greater than the weighted-average market price of our
common stock and, therefore, were excluded from the calculation of diluted
earnings per share for the period.
Of the
3.2 million stock options outstanding at June 28, 2009, 3.1 million shares had
an exercise price greater than the weighted average market prices of our common
stock for the thirteen and twenty-six week periods ended June 28, 2009 and were,
therefore, excluded from the calculations of diluted earnings (loss) per share
for the respective periods. In addition, options to purchase the
remaining 0.1 million shares were excluded from the diluted loss per share
calculations for both periods ended June 28, 2009 because they were
anti-dilutive due to the net loss in each period.
Summarized
below are the calculations of basic and diluted loss per share for the
respective periods:
(In
thousands, except per share amounts)
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
net income (loss)
|
|
$ |
10,089 |
|
|
$ |
(20,969 |
) |
|
$ |
18,988 |
|
|
$ |
(77,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share
|
|
$ |
0.38 |
|
|
$ |
(0.79 |
) |
|
$ |
0.71 |
|
|
$ |
(2.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - Basic
|
|
|
26,690 |
|
|
|
26,668 |
|
|
|
26,679 |
|
|
|
26,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
net income (loss)
|
|
$ |
10,089 |
|
|
$ |
(20,969 |
) |
|
$ |
18,988 |
|
|
$ |
(77,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share
|
|
$ |
0.38 |
|
|
$ |
(0.79 |
) |
|
$ |
0.71 |
|
|
$ |
(2.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
26,690 |
|
|
|
26,668 |
|
|
|
26,679 |
|
|
|
26,668 |
|
Weighted
average dilutive stock options
|
|
|
73 |
|
|
|
- |
|
|
|
60 |
|
|
|
- |
|
Weighted
average shares outstanding - Diluted
|
|
|
26,763 |
|
|
|
26,668 |
|
|
|
26,739 |
|
|
|
26,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
10 – Income Taxes
Income
taxes are accounted for pursuant to U.S. GAAP which requires the 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 basis of assets and
liabilities. The effect on deferred taxes for a change in tax rates is
recognized in the provision for income taxes in the period of enactment. U.S.
income taxes on undistributed earnings of our international subsidiaries and our
50-percent owned joint ventures have not been provided as such 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.
When
determining whether a valuation allowance is required for our U.S. federal
deferred tax assets, we consider all positive and negative evidence available at
that time including the state of the automotive industry, historical operating
results and current projections of future operating results. In the first
quarter of 2009, due to our recent history of U.S. operating losses and the
continued uncertainty facing the automotive industry, we determined that a full
valuation allowance totaling $25.3 million was required at that time against our
U.S. federal deferred tax assets.
During
2010, we are continuing to evaluate all available positive and negative
evidence, and although the Company is once again profitable, we do not believe
it is appropriate to reverse the full valuation allowance, and further, we do
not expect to reverse the valuation allowance in 2010. However, during 2010 we
are releasing the portion of the valuation allowance to the extent that we
generate income that can be offset by net operating loss carryforwards
(NOL’s).
The
income tax provision on income before income taxes and equity earnings for the
twenty-six weeks ended June 27, 2010 was $0.5 million, which was an effective
income tax rate of 2.2 percent. During the first quarter of 2010, the income tax
provision was reduced by a net $10.4 million, as a result of the reversal of a
portion of our liability for unrecognized tax benefits as described below.
Without the reversal, the effective rate was approximately 48.7 percent. This
rate is substantially higher than the U.S. federal rate of 35 percent, even
though we expect that in the U.S. our NOL’s will be used to substantially offset
our federal taxable income. The increased rate is primarily the
result of two factors. First, we have an 84 percent effective rate in
Mexico. This was caused, in part, because we expect to be taxed under
the IETU tax regime in Mexico in 2010. We do not currently anticipate being
subject to the IETU tax regime in future years. Secondly, we
have not recorded any tax benefit related to the $4.1 million loss on the sale
of Suoftec.
During
the twenty-six weeks ended June 28, 2009, our effective income tax rate differed
from the federal statutory rate primarily due to the full valuation allowance of
$25.3 million provided to offset our beginning U.S. federal deferred tax
assets. We also did not record any tax benefits related to U.S. losses
incurred during 2009.
We are a
multinational company subject to taxation in many jurisdictions. We
record liabilities dealing with uncertainty in the application of complex tax
laws and regulations in the various taxing jurisdictions in which we
operate. If we determine that payment of these liabilities will be
unnecessary, we reverse the liability and recognize the tax benefit during the
period in which we determine the liability no longer
applies. Conversely, we record additional tax liabilities or
valuation allowances in a period in which we determine that a recorded liability
is less than we expect the ultimate assessment to be or that a tax asset is
impaired. The effects of recording liability increases and decreases
are included in the effective income tax rate.
As a
result of the completion of certain examinations in the first two quarters of
2010, we recognized $17.4 million of previously unrecognized tax benefits, which
was offset by a reduction in deferred tax assets related to the unrecognized tax
benefits in the amount of $7.0 million. Within the next twelve month
period ending June 26, 2011, we do not anticipate recognizing any of the $29.3
million liability established for unrecognized tax benefits and related interest
and penalties, as there are no expected expirations of statutes of limitations
or terminations of examinations.
We
conduct business internationally and, as a result, one or more of our
subsidiaries files income tax returns in U.S. federal, U.S. state and certain
foreign jurisdictions. Accordingly, in the normal course of business,
we are subject to examination by taxing authorities throughout the world,
including taxing authorities in Mexico, the Netherlands and the United
States. We are no longer under examination of any U.S. federal, state
and local income tax returns for years before 2008. Our 2008 U.S.
federal income tax return is currently under examination.
On March
19, 2010, we received notification from Mexico’s Tax Administration Service
(Servicio de Administracion Tributaria) that the examination of the 2003 tax
year of Superior Industries de Mexico S.A. de C.V., our wholly-owned Mexican
subsidiary, had been completed. This subsidiary’s 2004 and 2007 tax
years are currently under examination by Mexico’s Tax Administration
Service. During the second quarter of 2010, we reorganized the legal
structure of our Mexico operation from a buy-sell manufacturer to a consignment
contract manufacturer.
Note
11 – Short-Term Investments
Due to
the tightened credit conditions and the turmoil in the automotive industry in
2008 and 2009, the financial institutions that we do business with required that
we maintain various deposits as compensating balances in the event of default on
certain obligations. In lieu of acquiring collateralized letters of
credit, we purchased certificates of deposit with maturity dates that expire
within twelve months that are used to secure our workers’ compensation
obligations and our natural gas contracts in Mexico. At June 27,
2010, certificates of deposit totaling $10.2 million, which are restricted in
use, are classified as short-term investments on our condensed consolidated
balance sheet. It is our intention to eliminate any restricted
deposits in the future when credit conditions return to normal and other forms
of securitization become more economically feasible.
Note
12 – Accounts Receivable
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
June
27, 2010
|
|
|
December
27, 2009
|
|
Trade
receivables
|
|
$ |
129,391 |
|
|
$ |
82,065 |
|
Receivable
from Otto Fuchs Kg
|
|
|
3,698 |
|
|
|
- |
|
Receivable
from joint venture
|
|
|
- |
|
|
|
2,764 |
|
Other
receivables
|
|
|
3,348 |
|
|
|
4,648 |
|
|
|
|
136,437 |
|
|
|
89,477 |
|
Allowance
for doubtful accounts
|
|
|
(718 |
) |
|
|
(486 |
) |
Accounts
receivable, net
|
|
$ |
135,719 |
|
|
$ |
88,991 |
|
|
|
|
|
|
|
|
|
|
Note
13 – Inventories
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
June
27, 2010
|
|
|
December
27, 2009
|
|
Raw
materials
|
|
$ |
10,097 |
|
|
$ |
7,281 |
|
Work
in process
|
|
|
28,123 |
|
|
|
19,230 |
|
Finished
goods
|
|
|
15,636 |
|
|
|
21,101 |
|
Inventories,
net
|
|
$ |
53,856 |
|
|
$ |
47,612 |
|
|
|
|
|
|
|
|
|
|
Note
14 – Property, Plant and Equipment
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
June
27, 2010
|
|
|
December
27, 2009
|
|
Land
and buildings
|
|
$ |
70,564 |
|
|
$ |
69,589 |
|
Machinery
and equipment
|
|
|
400,493 |
|
|
|
386,785 |
|
Leasehold
improvements and others
|
|
|
8,413 |
|
|
|
8,379 |
|
Construction
in progress
|
|
|
3,575 |
|
|
|
8,444 |
|
|
|
|
483,045 |
|
|
|
473,197 |
|
Accumulated
depreciation
|
|
|
(311,059 |
) |
|
|
(293,076 |
) |
Property,
plant and equipment, net
|
|
$ |
171,986 |
|
|
$ |
180,121 |
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $7.5 million for the thirteen weeks ended June 27, 2010, and $7.6
million for the comparable period ended June 28, 2009. Depreciation
expense was $15.1 million for the twenty-six weeks ended June 27, 2010, and
$15.5 million for the comparable period ended June 28,
2009. Impairment charges are recorded in the appropriate fixed assets
cost categories in the table above as discussed in Note 4 – Impairment of
Long-Lived Assets.
Note
15 – Retirement Plans
We have
an unfunded supplemental executive retirement plan covering our directors,
officers and other key members of management. Subject to certain
vesting requirements, the plan provides for a benefit based on the average of
the final 36 months of base salary, that is payable on the employee's death or
upon attaining age 65, if retired. The benefit is paid weekly and
continues for the retiree’s remaining life or for a minimum of ten
years.
For the
twenty-six weeks ended June 27, 2010, payments to retirees or their
beneficiaries totaled approximately $456,000. We presently anticipate
benefit payments in 2010 to total approximately $920,000. The
following table summarizes the components of net periodic pension cost for the
thirteen and twenty-six week periods of 2010 and 2009.
(Dollars
in thousands)
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
Service
cost
|
|
$ |
146 |
|
|
$ |
223 |
|
|
$ |
292 |
|
|
$ |
447 |
|
Interest
cost
|
|
|
317 |
|
|
|
301 |
|
|
|
633 |
|
|
|
603 |
|
Net
amortization
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
31 |
|
Net
periodic pension cost
|
|
$ |
463 |
|
|
$ |
540 |
|
|
$ |
925 |
|
|
$ |
1,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
16 – 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 17 –
Risk Management.
Note
17 – Risk Management
We are
subject to various risks and uncertainties in the ordinary course of business
due, in part, to the competitive global nature of the industry in which we
operate, changing commodity prices for the materials used in the manufacture of
our products and the development of new products.
The
functional currency of certain foreign operations in Mexico is the Mexican
peso. The settlement of accounts receivable and accounts payable for
these operations requires the transfer of funds denominated in the Mexican peso,
the value of which increased by 3 percent in relation to the U.S. dollar in the
first two quarters of 2010. Foreign currency transaction losses in
the second quarter of 2010 totaled $1.0 million compared to a loss of $1.5
million in the comparable period a year ago. For the first two
quarters of 2010, foreign currency transaction losses totaled $1.5 million
compared to a loss of $1.6 million in 2009. All transaction gains and
losses are included in other income (expense) in the condensed consolidated
statement of operations.
As it
relates to foreign currency translation gains and losses, however, since 1990,
the Mexican peso has experienced periods of relative stability followed by
periods of major declines in value. The impact of these changes in value
relative to our Mexico operations resulted in a cumulative unrealized
translation loss at June 27, 2010 of $58.3 million. Translation gains and losses
are included in other comprehensive income (loss) in the condensed consolidated
statements of shareholders’ equity and comprehensive income (loss).
When
market conditions warrant, we may also enter into contracts to purchase certain
commodities used in the manufacture of our products, such as aluminum, natural
gas and other raw materials in order to mitigate commodity price risk.
Typically, any such commodity commitments are expected to be purchased and used
over a reasonable period of time in the normal course of business. Accordingly,
such normal purchase/normal sale (NPNS) commitments are not subject to the
mark-to-market provisions of U.S. GAAP, unless there is a change in the facts or
circumstances in regard to the probability of taking full delivery of the
contracted quantities.
We
currently have several purchase agreements for the delivery of natural gas
through 2012. Due to the closures of our manufacturing facility in
Van Nuys, California in June 2009 and our manufacturing facility in Pittsburg,
Kansas in December 2008, we no longer qualify for the NPNS exemption provided
under U.S. GAAP for the remaining natural gas purchase commitments related to
those facilities. The natural gas purchase commitments covering these
facilities were settled in the first quarter of 2010. The cash paid
to settle these contracts was not material. In 2009, we concluded
that the natural gas purchase commitments for our manufacturing facility in
Arkansas and certain natural gas commitments for our facilities in Chihuahua,
Mexico no longer qualified for the NPNS exemption since we could no longer
assert that it was probable we would take full delivery of the contracted
quantities in light of the continued decline of our industry. These
natural gas purchase commitments are classified as being with “no hedging
designation” and, accordingly, we are required to record any gains and/or losses
associated with the changes in the estimated fair values of these commitments in
our current earnings. The contract and fair values of these purchase
commitments classified as “no hedging designation” at June 27, 2010 were $3.2
million and $1.8 million, respectively, which represents a gross liability of
$1.4 million which was included in accrued expenses in our June 27, 2010
condensed consolidated balance sheet. The gains and losses on these commitments
totaled a gain of $1.1 million in the second quarter of 2010 and a gain of $1.6
million for the first half of 2010. For the same periods of 2009, the
gains and losses on these commitments totaled a gain of $0.5 million in the
second quarter and a loss of $3.4 million in the first half of the
year. These gains and losses were included in cost of sales on our
condensed consolidated statements of operations for the respective periods in
2010 and 2009.
Based on
the quarterly analysis of our estimated future production levels, certain
natural gas purchase commitments with a contract value of $6.2 million and a
fair value of $4.5 million for our manufacturing facilities in Mexico continue
to qualify for the NPNS exemption provided under U.S. GAAP, since we can assert
that it is probable we will take full delivery of the contracted
quantities. The contract and fair values of all natural gas purchase
commitments were $9.4 million and $6.3 million, respectively, at June 27,
2010. As of December 27, 2009, the aggregate contract and fair values
of natural gas commitments were approximately $17.3 million and $12.4 million,
respectively. Percentage changes in the market prices of natural gas
will impact the fair values by a similar percentage.
The
recurring fair value measurement of the natural gas purchase commitments are
based on quoted market prices using the market approach and the fair value is
determined based on Level 1 inputs within the fair value hierarchy provided
under U.S. GAAP.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking
Statements
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. We may from
time to time make written or oral statements that are “forward-looking” within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, including
statements contained in this report and other filings with the SEC and other
reports and public statements. These statements may, for example,
express expectations or projections about future actions or results that we may
anticipate but, due to developments beyond our control, do not
materialize. Actual results could differ materially because of issues
and uncertainties such as those listed herein, which, among others, should be
considered in evaluating our financial outlook. The principal factors
that could cause our actual performance and future events and actions to differ
materially from such forward-looking statements include, but are not limited to,
changes in the automotive industry, including the financial distress of our OEM
customers and changes in consumer preferences for end products, fluctuations in
production schedules for vehicles for which we are a supplier, increased global
competitive pressures, our dependence on major customers and third party
suppliers and manufacturers, our ability to achieve cost savings from reductions
in manufacturing capacity, our exposure to foreign currency fluctuations,
increasing fuel prices and other factors or conditions described in Item 1A –
Risk Factors in Part II of this Quarterly Report on Form 10-Q and in Item 1A –
Risk Factors in Part I of our 2009 Annual Report on Form 10-K. We
assume no obligation to update publicly any forward-looking
statements.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the accompanying unaudited Condensed Consolidated
Financial Statements and notes thereto and with the audited Condensed
Consolidated Financial Statements, notes thereto, and management’s Discussion
and Analysis of Financial Condition and Results of Operations included in our
2009 Annual Report on Form 10-K, as amended.
Executive
Overview
Comparisons
to the second quarter and year-to-date periods a year ago are affected by the
extremely difficult market conditions in the U.S. automobile industry that
existed during those periods in 2009, which included:
|
·
|
Bankruptcy
filings by two of our major customers – GM and
Chrysler
|
|
·
|
Extended
plant shutdowns of our customers light truck and SUV plants in the first
half of 2009.
|
|
·
|
Announcements
by customers of plans to discontinue certain product
lines
|
|
·
|
Uncertainty
of customers’ other restructuring
plans
|
|
·
|
Customer
demand for our wheels declining over 50 percent in 2009 when compared to
the same periods in 2008
|
|
·
|
Impairment
charges totaling $11.8 million recorded in the first half of
2009
|
Accordingly,
the comparisons of 2010 to these 2009 periods are very favorable.
Overall
North American production of passenger cars and light trucks in the second
quarter of 2010 was reported by industry publications as being up by
approximately 74 percent versus the comparable period a year ago, with
production of passenger cars increasing 54 percent and production of light
trucks and SUVs increasing 95 percent. While production levels of the
U.S. automotive industry are markedly better than the second quarter of 2009,
which was severely impacted by the deterioration of the U.S. financial markets
and overall recessionary economic conditions in the U.S, they are still below
what would be considered normal production levels.
Consolidated
revenues in the second quarter of 2010 increased $113.7 million, or 141 percent,
to $194.6 million from $80.9 million in the comparable period a year
ago. Wheel sales increased $113.0 million, or 143.8 percent, to
$191.6 million from $78.6 million in the second quarter a year ago, as our wheel
shipments increased 113.5 percent to 2.9 million from 1.4 million a year
ago. Gross profit in the second quarter of 2010 was $27.9 million, or
14.3 percent of net sales, compared to a loss of $(12.0) million, or (14.9)
percent of net sales, in the comparable period a year ago. Net income
for the second quarter of 2010 was $10.1 million, or $0.38 per diluted share,
compared to a net loss in the second quarter of 2009 of $(21.0) million, or
$(0.79) per diluted share, which included a charge against income tax expense of
$25.0 million for a valuation allowance recorded against our U.S. deferred tax
assets.
We are
continuing to implement and monitor action plans to improve our operational
performance and mitigate the impact of the changes in U.S. auto industry
production and the continuing pricing environment in which we now operate on our
operating results and financial condition. While we continue to
reduce costs through process automation and identification of industry best
practices, the pace of changes in auto production and global pricing pressures
may continue at a rate faster than our progress on achieving cost reductions for
an indefinite period of time. This is due to the inherently
time-consuming nature of developing and implementing these cost reduction
programs. In addition, although we have a portion of our natural gas
requirements covered by fixed-price contracts expiring through 2012, costs may
increase to a level that cannot be immediately recouped in selling
prices. The impact of these factors on our future operating results
and financial condition and cash flows may be negative to an extent that cannot
be predicted, and we may not be able to implement sufficient cost-saving
strategies to mitigate any future impact.
Results
of Operations
(Dollars
in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
Selected
data
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
|
June
27, 2010
|
|
|
June
28, 2009
|
|
Net
sales
|
|
$ |
194,562 |
|
|
$ |
80,886 |
|
|
$ |
344,758 |
|
|
$ |
162,434 |
|
Gross
profit (loss)
|
|
$ |
27,892 |
|
|
$ |
(12,056 |
) |
|
$ |
40,520 |
|
|
$ |
(26,569 |
) |
Percentage
of net sales
|
|
|
14.3 |
% |
|
|
-14.9 |
% |
|
|
11.8 |
% |
|
|
-16.4 |
% |
Income
(loss) from operations
|
|
$ |
20,569 |
|
|
$ |
(20,788 |
) |
|
$ |
26,971 |
|
|
$ |
(48,986 |
) |
Percentage
of net sales
|
|
|
10.6 |
% |
|
|
-25.7 |
% |
|
|
7.8 |
% |
|
|
-30.2 |
% |
Net
income (loss)
|
|
$ |
10,089 |
|
|
$ |
(20,969 |
) |
|
$ |
18,988 |
|
|
$ |
(77,470 |
) |
Percentage
of net sales
|
|
|
5.2 |
% |
|
|
-25.9 |
% |
|
|
5.5 |
% |
|
|
-47.7 |
% |
Diluted
income (loss) per share
|
|
$ |
0.38 |
|
|
$ |
(0.79 |
) |
|
$ |
0.71 |
|
|
$ |
(2.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Consolidated
revenues in the second quarter of 2010 increased $113.7 million, or 140.5
percent, to $194.6 million from $80.9 million in the same period a year
ago. Wheel sales increased $113.0 million, or 143.8 percent, to
$191.6 million from $78.6 million in the second quarter a year ago, as our wheel
shipments increased by 113.5 percent. The average selling price of
our wheels increased approximately 14 percent in the current quarter due to an
increase in the pass-through price of aluminum. Tooling reimbursement
revenues totaled $2.9 million in the second quarter of 2010 and $2.3 million in
the second quarter of 2009. The increase in tooling reimbursement
revenues in the current quarter was due to a higher volume of new wheel
development programs during 2010.
Consolidated
revenues in the first two quarters of 2010 increased $182.3 million, or 112.2
percent, to $344.7 million from $162.4 million in the same period a year
ago. Wheel sales increased $181.5 million, or 114.9 percent, to
$339.4 million from $157.9 million in the first two quarters a year ago, as our
wheel shipments increased by 90.8 percent. The average selling price
of our wheels during the first six months of 2010 increased approximately 13
percent due to a 10 percent increase in the pass-through price of aluminum and a
3 percent increase in the average selling price due to a shift in sales
mix. Wheel program development revenues totaled $5.4 million in the
first two quarters of 2010 and $4.5 million in the same period of
2009. This increase was due to higher volume of new wheel development
programs during 2010.
U.S.
Operations
Consolidated
revenues of our U.S. wheel plants in the second quarter of 2010 increased $33.0
million, or 98 percent, to $66.7 million from $33.7 million in the comparable
period a year ago. The increase in revenues in 2010 is
primarily attributable to an 85 percent increase in unit shipments and a 7
percent increase in the average selling price due principally to the increase in
the pass-through price of aluminum. During the first two quarters of
2010, consolidated revenues of our U.S. wheel plants increased $45.5 million, or
70 percent, to $110.1 million from $64.6 million in the comparable period a year
ago. The increase in revenues in the 2010 periods is primarily
attributable to increased consumer demand for automobiles and light trucks,
which increased our unit shipments 62 percent, and to a 6 percent increase in
the average selling price due principally to the increase in the pass-through
price of aluminum.
Mexico
Operations
Consolidated
revenues of our Mexico wheel plants in the second quarter of 2010 increased
$80.3 million, or 180 percent, to $124.9 million from $44.6 million in the
comparable period a year ago. The increase in revenues in 2010
is primarily attributable to a 135 percent increase in unit shipments and a 19
percent increase in the average selling price due principally to the increase in
the pass-through price of aluminum. During the first two quarters of
2010, consolidated revenues of our Mexico wheel plants increased $135.0 million,
or 145 percent, to $228.4 million from $93.3 million in the comparable period a
year ago. The increase in revenues in the 2010 periods is
primarily attributable to increased consumer demand for automobiles and light
trucks, which increased our unit shipments 111 percent, and to a 16 percent
increase in the average selling price due principally to the increase in the
pass-through price of aluminum.
Customer
Comparisons
As
reported by industry publications, North American production of passenger cars
and light trucks in the second quarter was up approximately 74.0 percent
compared to the same quarter in the previous year, while our wheel
shipments increased 113.5 percent for the same period. The increase of
North American production included an increase of 54.0 percent for passenger
cars and an increase of 94.8 percent for light trucks and SUVs. During the same
period, our shipments of passenger car wheels increased by 92.6 percent while
light truck wheel shipments increased by 131.7 percent.
The
comparisons to the 2009 periods are impacted by the GM and Chrysler bankruptcy
filings and resulting assembly plant shutdowns during the first and second
quarters of that year. Wheel shipments in the second quarter of 2010 to GM were
33 percent of total shipments compared to 29 percent a year ago, and wheel
shipments to Chrysler were 13 percent of total shipments compared to 8 percent
in 2009. Wheel shipments to Ford were 33 percent of total shipments
compared to 42 percent a year ago. Wheel shipments to our
international customers were 21 percent of total sales the second quarter of
2010 and 2009.
Our
shipments to GM increased 139 percent compared to the second quarter of 2009, as
light truck and SUV wheel shipments increased 211 percent and shipments of
passenger car wheels increased 35 percent. The major unit shipment
increases were for the GMT800/900 platform, the Cadillac SRX and Chevrolet’s
Malibu. Shipments to Chrysler increased 264 percent versus the prior
year, as shipments of light truck and SUV wheels increased 195 percent and
passenger car wheels increased 397 percent. The major increases in
unit shipments to Chrysler were for Dodge’s Magnum/Charger, Journey and
Caravan.
Shipments
to Ford increased 68 percent compared to the same period a year go, as light
truck and SUV wheel shipments increased 64 percent and shipments of passenger
car wheels increased 72 percent. The major unit shipment increases
were for the F Series trucks, Focus, Fusion and Fiesta. Shipments to
international customers increased 115 percent compared to a year ago, as
shipments of light truck and SUV wheels increased 119 percent and shipments of
passenger car wheels increased 113 percent. The principal unit
shipment increases to international customers in the current period compared to
a year ago were for Nissan’s Altima, the Subaru-Isuzu Legacy/Outback and the
Toyota Avalon.
Gross
Profit (Loss)
Consolidated
gross profit (loss) increased $39.9 million for the second quarter of 2010 to a
gross profit of $27.9 million, or 14.3 percent of net sales, compared to a loss
of $(12.0) million, or (14.9) percent of net sales, for the same period a year
ago. As indicated above, unit shipments in the second quarter of 2010
increased 113.7 percent compared to the same period a year ago. The
sharp increase in customer requirements resulted in wheel production also
increasing 116.9 percent compared to the same period a year ago, significantly
increasing absorption of plant fixed costs. This, along with the
additional margin on the increased unit shipments contributed to the
significantly higher gross margin in the second quarter of
2010. Additionally, gross profit in the second quarter of 2009
included one-time termination benefits costs and other non-impairment costs
related to plant closures totaling approximately $ 6.5 million and $0.5 million
of gains on the mark-to-market of the natural gas contracts.
Consolidated
gross profit (loss) for the first two quarters of 2010 increased $67.1 million
to a gross profit of $40.5 million, or 11.8 percent of net sales, compared to a
loss of $(26.6) million, or (16.4) percent of net sales, for the same six month
period a year ago. As indicated above, unit shipments in the first
six months of 2010 increased 90.8 percent compared to the same period a year
ago. The sharp increase in customer requirements resulted in wheel
production also increasing 100.5 percent compared to the same period a year ago,
significantly impacting absorption of plant fixed
costs. Additionally, gross profit in the first two quarters of 2009
included one-time termination benefits costs and other non-impairment costs
related to plant closures totaling approximately $9.7 million and $3.4 million
of losses on the mark-to-market adjustment of the natural gas
contracts.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the second quarter of 2010 increased
$1.5 million to $7.3 million, or 3.8 percent of net sales, from $5.8 million, or
7.2 percent of net sales, in the same period in 2009. The principal
increases in the second quarter of 2010 were $0.8 million in additional costs,
including depreciation expense, associated with our new enterprise resource
planning (ERP) system, $0.7 million in incentive compensation, which is based on
a percentage of income, and $0.4 million in legal and consulting
fees. For the first two quarters of 2010, selling, general and
administrative expenses were $13.5 million, or 3.9 percent of net sales,
compared to $10.6 million, or 6.5 percent of net sales, for the same period in
2009. The principal increases in the year-to-date period were $1.2
million in ERP costs, including depreciation expense, $0.9 million in the
provision for doubtful accounts and $0.8 million in incentive compensation,
which is based on a percentage of income.
Impairment
of Long-Lived Assets
Due to
the financial condition of our major customers and others in the automotive
industry, we tested our long-lived assets for impairment during each quarter of
2009. During the first two quarters of 2010, we closely monitored our
long-lived assets for indicators of impairment in accordance with U.S. GAAP and
did not identify any indicators of impairment that triggered the need for
impairment testing during the first two quarters of 2010.
The
long-lived asset impairment test performed during the first quarter of 2009
demonstrated that the estimated future undiscounted cash flows of our
Fayetteville, Arkansas manufacturing facility would not be sufficient to recover
the carrying value of our long-lived assets attributable to that
facility. As a result, we recorded a pretax asset impairment charge
against earnings totaling $8.9 million during that quarter, reducing the $18.2
million carrying value of certain assets at this facility to their respective
estimated fair values. We have classified the inputs to the
nonrecurring fair value measurement of these assets as being Level 2 within the
fair value hierarchy in accordance with U.S. GAAP. The estimated fair
values of the long-lived assets at our Fayetteville, Arkansas manufacturing
facility were determined with the assistance of estimated fair values of
comparable properties and independent third party appraisals of the machinery
and equipment. During the second quarter of 2009, we also recorded
additional impairment charges totaling $2.9 million to reduce the carrying value
of certain assets held for sale to their estimated market values. We
have also classified the inputs to the nonrecurring fair value measurement of
these assets as being Level 2 within the fair value hierarchy in accordance with
U.S. GAAP.
Income
(Loss) from Operations
Aluminum,
natural gas and other direct material costs are a significant component of the
direct costs to manufacture wheels. These costs are substantially the
same for all of our plants since the same suppliers service both our U.S. and
Mexico operations. In addition, our operations in the U.S. and Mexico sell to
the same customers, utilize the same marketing and engineering resources, have
the same material inputs, have interchangeable manufacturing processes and
provide the same basic end product. However, profitability between
our U.S. and Mexico operations can vary as a result of differing labor and
benefit costs, the mix of wheels manufactured and sold by each plant, as well as
differing plant utilization levels resulting from our internal allocation of
wheel programs to our plants.
Consolidated
income (loss) from operations includes our U.S. operations and our international
operations, which are principally our wheel manufacturing operations in Mexico,
and certain costs that are not allocated to a specific
operation. These expenses include corporate services that are
primarily incurred in the U.S. but are not charged directly to our world-wide
operations, such as selling, general and administrative expenses, engineering
services for wheel program development and manufacturing support, environmental
and other governmental compliance services, etc.
Consolidated
income (loss) from operations increased $41.4 million in the second quarter of
2010 to income of $20.6 million, or 10.6 percent of net sales, from the loss of
$(20.8) million, or (25.7) percent of net sales, in 2009. Income from
operations of our U.S. operations increased $17.9 million, while income from our
Mexican operations increased $27.5 million when comparing 2010 to
2009. Corporate costs incurred during the second quarter of 2010 were
$4.0 million higher than the second quarter of 2009
For the
first half of 2010, consolidated income (loss) from operations increased $76.0
million to income of $27.0 million, or 7.8 percent of net sales, from the loss
of $(49.0) million, or (30.2) percent of net sales, in 2009. Income
from operations of our U.S. operations increased $45.4 million, while income
from our Mexico operations increased $32.7 million when comparing 2010 to
2009. Corporate costs incurred during the first half of 2010 were
$2.1 million higher than the same period in 2009. Included
below are the major items that impacted income (loss) from operations for our
U.S. and Mexico operations during the second quarter and year-to-date period of
2010.
U.S.
Operations
Income
(loss) from operations for our U.S. operations in the second quarter of 2010
increased by $17.9 million to income from a loss in the second quarter of
2009. Our U.S. operations during the 2010 periods consisted of two
wheel plants for both periods, whereas the 2009 periods also included our
California wheel manufacturing facility, which ceased operations at the end of
the second quarter of 2009. Approximately $10.5 million of the
improvement in the second quarter income from our U.S. operations was
attributable primarily to the increases in unit shipments in their respective
periods and to an increase in plant utilization in 2010. Plant
closure costs, mark-to-market adjustments for our natural gas contracts and
other non-impairment charges contributed $4.5 million to the improvement, while
impairment charges totaling $2.9 million recorded in the second quarter of 2009
to reduce the carrying value of certain assets held for sale to their estimated
market values did not occur in the second quarter of 2010.
Income
(loss) from operations for the first half of 2010 increased by $45.4 million to
income from a loss in the first half of 2009. Approximately $25.2
million of the improvement in the first half of 2010 income from our U.S.
operations was attributable primarily to the increases in unit shipments in
their respective periods and to an increase in plant utilization in
2010. Plant closure costs, mark-to-market adjustments for our natural
gas contracts and other non-impairment charges contributed $8.4 million to the
improvement, while impairment charges totaling $11.8 million recorded in the
first half of 2009 to reduce the carrying value of certain assets held for sale
to their estimated market values did not occur in the first half of
2010.
Mexico
Operations
Income
(loss) from operations for our Mexico operations increased by $27.5 million in
the second quarter of 2010 to income from a loss in the second quarter of
2009. Income (loss) from operations for the first half of 2010
increased by $32.7 million from a loss in the first half of 2009. Mexico
operations during 2010 and 2009 consisted of three fully operational wheel
plants. The increase in income from operations of our Mexico
operations was due primarily to increases in unit shipments and an increase in
plant utilization in the second quarter of 2010.
U.S. versus Mexico
Production
During
the second quarter of 2010, wheels produced by our Mexico and U.S. operations
accounted for 60 percent and 40 percent, respectively, of our total production.
For the first half of 2010, the percentage of total production in Mexico was 63
percent and in the U.S was 37 percent. We anticipate that the
percentage of production in Mexico will remain between 60 percent and 65 percent
of our total production for the remainder of 2010.
Loss
on Sale of Joint Venture
On June
18, 2010, we sold our 50 percent ownership interest in Suoftec Light Metal
Products Production & Distribution Ltd. (Suoftec), the company’s joint
venture manufacturing facility in Hungary, to our partner in the joint venture,
Otto Fuchs Kg, based in Meinerzhagen, Germany. Suoftec manufactures
cast and forged aluminum wheels principally for the European automobile
industry. Being 50-percent owned and non-controlled, Suoftec was not
consolidated, but accounted for using the equity method of
accounting. During the second quarter of 2010, we made a strategic
decision to liquidate our investment in Suoftec. The total sales
price of our investment was 4 million euros or $4.9 million, in cash which was
received during the second quarter of 2010, and 3 million euros, $3.7 million,
worth of machinery and equipment. As of June 27, 2010, we have
recorded a receivable in the amount of $3.7 million which represents our
unconditional right to receive machinery and equipment from
Suoftec. This receivable has been included in other accounts
receivable in the condensed consolidated balance sheet as of June 27,
2010. The net investment including amounts included in other
comprehensive income in Suoftec as of the date of sale was approximately $12.8
million, resulting in a loss on the sale of our investment of $4.1
million. Legal and other costs related to the sale of our investment
in Suoftec were minimal.
Income
Tax (Provision) Benefit
The
income tax provision on income before income taxes and equity earnings for the
twenty-six weeks ended June 27, 2010 was $0.5 million, which was an effective
income tax rate of 2.2 percent. During the first quarter of 2010, the income tax
provision was reduced by a net $10.4 million, as a result of the reversal of a
portion of our liability for unrecognized tax benefits described below.
Without the reversal, the effective rate was approximately 48.7 percent. This
rate is substantially higher than the U.S. federal rate of 35 percent, even
though we expect that in the U.S. our NOL’s will be used to substantially offset
our federal taxable income. The increased rate is primarily the
result of two factors. The first, we have an 84 percent effective
rate in Mexico. The was caused, in part, because we expect to be
taxed under the IETU tax regime in Mexico in 2010. We do not currently
anticipate being subject to the IETU tax regime in future
years. Secondly, we have not recorded any tax benefit related to the
$4.1 million loss on the sale of Suoftec.
During
the twenty-six weeks ended June 28, 2009, our effective income tax rate differed
from the federal statutory rate primarily due to the full valuation allowance of
$25.3 million provided to offset our beginning U.S. federal deferred tax
assets. We also did not record any tax benefits related to U.S. losses
incurred during 2009.
We are a
multinational company subject to taxation in many jurisdictions. We
record liabilities dealing with uncertainty in the application of complex tax
laws and regulations in the various taxing jurisdictions in which we
operate. If we determine that payment of these liabilities will be
unnecessary, we reverse the liability and recognize the tax benefit during the
period in which we determine the liability no longer
applies. Conversely, we record additional tax liabilities or
valuation allowances in a period in which we determine that a recorded liability
is less than we expect the ultimate assessment to be or that a tax asset is
impaired. The effects of recording liability increases and decreases
are included in the effective income tax rate.
As a
result of the completion of certain examinations in the first two quarters of
2010, we recognized $17.4 million of previously unrecognized tax benefits, which
was offset by a reduction in deferred tax assets related to the unrecognized tax
benefits in the amount of $7.0 million. Within the next twelve month
period ending June 26, 2011, we do not anticipate recognizing any of the $29.3
million liability established for unrecognized tax benefits and related interest
and penalties, as there are no expected expirations of statutes of limitations
or terminations of examinations.
We
conduct business internationally and, as a result, one or more of our
subsidiaries files income tax returns in U.S. federal, U.S. state and certain
foreign jurisdictions. Accordingly, in the normal course of business,
we are subject to examination by taxing authorities throughout the world,
including taxing authorities in Mexico, the Netherlands and the United
States. We are no longer under examination of any U.S. federal, state
and local income tax returns for years before 2008. Our 2008 U.S.
federal income tax return is currently under examination.
On March
19, 2010, we received notification from Mexico’s Tax Administration Service
(Servicio de Administracion Tributaria) that the examination of the 2003 tax
year of Superior Industries de Mexico S.A. de C.V., our wholly-owned Mexican
subsidiary, had been completed. This subsidiary’s 2004 and 2007 tax
years are currently under examination by Mexico’s Tax Administration
Service. During the second quarter of 2010, we reorganized the legal
structure of our Mexico operation from a buy-sell manufacturer to a consignment
contract manufacturer.
Equity
Method Investment
Equity in
earnings (loss) of joint venture represents our share of the equity earnings of
our 50-percent owned joint venture in Hungary, Suoftec, through the date of sale
of our 50-percent ownership in June 2010. Our share of Suoftec’s net
loss in the second quarter of 2010 was $(1.4) million compared to a loss of
$(2.2) million for the same period in 2009. Including adjustments for
the elimination of intercompany profits in inventory, our adjusted equity
earnings of this joint venture was a loss of $(1.5) million in the second
quarter of 2010 and a loss of $(2.2) million in the second quarter of
2009. Our share of the joint venture’s net loss for the first two
quarters of 2010 including adjustments for the elimination of intercompany
profits was $(2.8) million compared to a loss of $(3.1) million in the same
period a year ago. As indicated above, due to the sale of our
50-percent ownership in the Suoftec joint venture in June 2010, we recorded a
loss on the sale of the investment totaling $4.1 million. During the
second quarter of 2010 we reorganized our Mexico operations by changing our
Mexico operation from a buy-sell manufacturing operation to a consignment
contract manufacturer. As a result of this change, we expect
that our taxable income in the United States will increase and our taxable
income in Mexico will decrease.
Net
Income (Loss)
Net
income in the second quarter of 2010 was $10.1 million, or $0.38 per diluted
share, compared to net loss of $(21.0) million, or $(0.79) per diluted share, in
the second quarter of 2009. Net income in the first half of 2010 was
$19.0 million, or $0.71 per diluted share, compared to net loss of $(77.5)
million, or $(2.90) per diluted share, in the first half of 2009.
Financial
Condition, Liquidity and Capital Resources
Our
sources of liquidity include cash and cash equivalents, net cash provided by
operating activities and other external sources of funds. Working
capital and our current ratio were $274.7 million and 4.6:1, respectively, at
June 27, 2010, versus $241.4 million and 4.6:1 at December 27,
2009. We have no long-term debt. As of June 27, 2010, our
cash, cash equivalents and short-term investments totaled $143.4 million
compared to $140.5 million at December 27, 2009 and $169.3 million at June 28,
2009.
The
decrease in cash, cash equivalents and short-term investments since June 28,
2009 was due principally to an increase in accounts receivable and inventories,
due to the increased sales and production activities during the first two
quarters of 2010 compared to the depressed levels experienced in the comparable
period a year ago. For the foreseeable future, we expect all working
capital requirements, funds required for investing activities and cash dividend
payments to be funded from internally generated funds or existing cash, cash
equivalents and short-term investments. The decrease in cash provided
by operating activities and in cash, cash equivalents and short-term investments
experienced in the first half of 2010 may not necessarily be indicative of
future results.
Net cash
provided by operating activities decreased $31.7 million to $4.9 million for the
twenty-six weeks ended June 27, 2010, compared to $36.6 million provided during
the same period a year ago. The changes in net income and in non-cash
items included in net income increased net cash provided by operating activities
by $66.8 million. This $66.8 million increase was offset by the net
change in working capital components and other operating assets and liabilities,
totaling $98.5 million. The major changes in working capital
components were an increase in accounts receivable by $80.1 million, due to the
significant increase in sales compared to the comparable period in 2009; an
increase in inventories by $29.8 million, due to higher customer demand in the
2010 period; offset by an increase in accounts payable being higher by $16.0
million.
Our
principal investing activity during the twenty-six weeks ended June 27, 2010 was
funding $2.8 million of capital expenditures and $4.9 million in cash proceeds
received from the sale of Suoftec. Similar investing activities
during the same period a year ago included funding $5.7 million of capital
expenditures. The capital expenditures in both periods were for
ongoing improvements to our existing facilities, none of which were individually
significant.
Financing
activities during the twenty-six weeks ended June 27, 2010 and June 28, 2009
consisted of the payment of cash dividends on our common stock totaling $8.5
million in both periods.
Investment
in India
On June
28, 2010, subsequent to the close of the second quarter of 2010, we executed a
share subscription agreement (Agreement) with Synergies Casting Limited
(Synergies), and made a $2.5 million investment in
Synergies. Synergies is a private aluminum wheel manufacturer based
in Visakhapatnam, India. The Agreement allows us to make a series of
additional investments totaling $7.0 million through December 31, 2010, if
certain conditions are met by Synergies. If these conditions are met
and we make the additional investments in Synergies, we will own approximately
26 percent of Synergies on a fully diluted basis. We will be
accounting for our investment in Synergies under the equity method of
accounting.
Critical
Accounting Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to apply significant judgment in making estimates and
assumptions that affect amounts reported therein, as well as financial
information included in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations. These estimates and assumptions, which are
based upon historical experience, industry trends, terms of various past and
present agreements and contracts, and information available from other sources
that are believed to be reasonable under the circumstances, form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent through other sources. There can be no assurance that
actual results reported in the future will not differ from these estimates, or
that future changes in these estimates will not adversely impact our results of
operations or financial condition.
New
Accounting Standards
During
June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17,
Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 amended
the consolidation guidance applicable to variable interest entities (VIE), and
changed the approach for determining the primary beneficiary of a VIE. Among
other things, the new guidance requires a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a VIE; requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE;
enhances disclosures about an enterprise’s involvement with a VIE; and amends
certain guidance for determining whether an entity is a VIE. This accounting
guidance is effective for annual periods beginning after November 15, 2009
and was effective beginning in the first quarter of 2010. The
adoption of this standard had no impact on our operations or financial
position.
During
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 requires new disclosures around transfers into and
out of Levels 1 and 2 in the fair value hierarchy and separate disclosures about
purchases, sales, issuances and settlements related to Level 3 measurements. ASU
2010-06 was effective in the first quarter of 2010, except for disclosures
regarding purchases, sales, issuances and settlements in the rollforward of
Level 3 activity. The adoption of this standard during the first six months of
2010 had no impact on our results of operations or financial position. The
additional Level 3 disclosures will be effective for our first quarter of 2011
and we are currently evaluating the impact of these new disclosure requirements
on our consolidated financial statements.
Risk
Management
We are
subject to various risks and uncertainties in the ordinary course of business
due, in part, to the competitive global nature of the industry in which we
operate, changing commodity prices for the materials used in the manufacture of
our products and the development of new products.
The
functional currency of certain foreign operations in Mexico is the Mexican
peso. The settlement of accounts receivable and accounts payable of
these operations requires the transfer of funds denominated in the Mexican peso,
the value of which increased by 3 percent in relation to the U.S. dollar in the
first two quarters of 2010. Foreign currency transaction losses in
the second quarter of 2010 totaled $1.0 million compared to a loss of $1.5
million in the comparable period a year ago. For the first two
quarters of 2010, foreign currency transaction losses totaled $1.5 million
compared to a loss of $1.6 million in 2009. All transaction gains and
losses are included in other expense in the condensed consolidated statement of
operations.
As it
relates to foreign currency translation gains and losses, however, since 1990,
the Mexican peso has experienced periods of relative stability followed by
periods of major declines in value. The impact of these changes in value
relative to our Mexico operations resulted in a cumulative unrealized
translation loss at June 27, 2010 of $58.3 million. Translation gains and losses
are included in other comprehensive income (loss) in the condensed consolidated
statements of shareholders’ equity and comprehensive income (loss).
When
market conditions warrant, we may also enter into contracts to purchase certain
commodities used in the manufacture of our products, such as aluminum, natural
gas and other raw materials in order to mitigate commodity price risk.
Typically, any such commodity commitments are expected to be purchased and used
over a reasonable period of time in the normal course of business. Accordingly,
such normal purchase/normal sale (NPNS) commitments are not subject to the
mark-to-market provisions of U.S. GAAP, unless there is a change in the facts or
circumstances in regard to the probability of taking full delivery of the
contracted quantities.
We
currently have several purchase agreements for the delivery of natural gas
through 2012. Due to the closures of our manufacturing facility in
Van Nuys, California in June 2009 and our manufacturing facility in Pittsburg,
Kansas in December 2008, we no longer qualify for the NPNS exemption provided
under U.S. GAAP for the remaining natural gas purchase commitments related to
those facilities. The natural gas purchase commitments covering these
facilities were settled in the first quarter of 2010. The cash paid
to settle these contracts was not material. In 2009, we concluded
that the natural gas purchase commitments for our manufacturing facility in
Arkansas and certain natural gas commitments for our facilities in Chihuahua,
Mexico no longer qualified for the NPNS exemption since we could no longer
assert that it was probable we would take full delivery of the contracted
quantities in light of the continued decline of our industry. These
natural gas purchase commitments are classified as being with “no hedging
designation” and, accordingly, we are required to record any gains and/or losses
associated with the changes in the estimated fair values of these commitments in
our current earnings. The contract and fair values of these purchase
commitments classified as “no hedging designation” at June 27, 2010 were $3.2
million and $1.8 million, respectively, which represents a gross liability of
$1.4 million which was included in accrued expenses in our June 27, 2010
condensed consolidated balance sheet. The gains and losses on these commitments
totaled a gain of $1.1 million in the second quarter of 2010 and a gain of $1.6
million for the first half of 2010. For the same periods of 2009, the
gains and losses on these commitments totaled a gain of $0.5 million in the
second quarter and a loss of $3.4 million in the first half of the
year. These gains and losses were included in cost of sales on our
condensed consolidated statements of operations for the respective periods in
2010 and 2009.
Based on
the quarterly analysis of our estimated future production levels, certain
natural gas purchase commitments with a contract value of $6.2 million and a
fair value of $4.5 million for our manufacturing facilities in Mexico continue
to qualify for the NPNS exemption provided under U.S. GAAP, since we can assert
that it is probable we will take full delivery of the contracted
quantities. The contract and fair values of all natural gas purchase
commitments were $9.4 million and $6.3 million, respectively, at June 27,
2010. As of December 27, 2009, the aggregate contract and fair values
of natural gas commitments were approximately $17.3 million and $12.4 million,
respectively. Percentage changes in the market prices of natural gas
will impact the fair values by a similar percentage.
The
recurring fair value measurement of the natural gas purchase commitments are
based on quoted market prices using the market approach and the fair value is
determined based on Level 1 inputs within the fair value hierarchy provided
under U.S. GAAP.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
See Item
7A. Quantitative and Qualitative Disclosures About Market Risk in Part II of our
2009 Annual Report on Form 10-K and Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations – “Risk Management” in this
Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
Evaluation of Disclosure
Controls and Procedures
The
company's management, with the participation of the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of June 27, 2010. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decision regarding required disclosures.
The
evaluation of our disclosure controls and procedures included a review of their
objectives and design, our implementation of the controls and procedures and the
effect of the controls and procedures on the information generated for use in
this report. In the course of the evaluation, we sought to identify whether we
had any data errors, control problems or acts of fraud and to confirm that
appropriate corrective action, including process improvements, was being
undertaken if needed. This type of evaluation is performed on a quarterly basis
so that conclusions concerning the effectiveness of our disclosure controls and
procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual
Reports on Form 10-K. Many of the components of our disclosure controls and
procedures are also evaluated by our internal audit department, our legal
department and by personnel in our finance organization. The overall goals of
these various evaluation activities are to monitor our disclosure controls and
procedures on an ongoing basis, and to maintain them as dynamic systems that
change as conditions warrant.
Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of June 27, 2010, our disclosure controls and procedures were
not effective due to the material weakness discussed below.
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 weakness in
the company’s internal control over financial reporting as of June 27,
2010. At the beginning of the second quarter of 2010, we implemented
a new Enterprise Resource Planning (ERP) system, which included a reorganization
of the legal structure of our Mexico operation. The complexities of
the dual implementations caused numerous issues and delays that required
additional analytical reviews and reconciliations of various reports generated
from the new ERP system. The company did not maintain a sufficient
complement of personnel with the appropriate level of knowledge, experience and
training to perform the required analytical reviews and reconciliations in a
timely manner in order to file this Quarterly Report on Form 10-Q within the
time period specified by SEC rules and forms. We expect to have these
issues resolved prior to the end of the third quarter of 2010 and to complete
the documentation and testing of the corrective processes and remediation of
this material weakness by the end of 2010.
Inherent Limitations on
Effectiveness of Controls
There are
inherent limitations in the effectiveness of any control system, including the
potential for human error and the circumvention or overriding of the controls
and procedures. Additionally, judgments in decision-making can be faulty and
breakdowns can occur because of simple errors or mistakes. An effective control
system can provide only reasonable, not absolute, assurance that the control
objectives of the system are adequately met. Accordingly, our management,
including our Chief Executive Officer and Chief Financial Officer, does not
expect that our control system can prevent or detect all error or fraud.
Finally, projections of any evaluation or assessment of effectiveness of a
control system to future periods are subject to the risks that, over time,
controls may become inadequate because of changes in an entity’s operating
environment or deterioration in the degree of compliance with policies or
procedures.
Changes in Internal Control
Over Financial Reporting
We
implemented the new ERP system during the second quarter of 2010. The
implementation was completed and the system went “live” on March 29, 2010.
An ERP system is a fully-integrated set of programs and databases that
incorporate order processing, production planning and scheduling, purchasing,
accounts receivable, inventory management and accounting. This implementation
was subject to various testing and review procedures prior to execution.
In addition to ERP implementation, we reorganized the legal structure of
our Mexico operation from a buy-sell manufacturing operation to a consignment
contract manufacturer which resulted in changes to the accounting of various
transactions. In connection with this ERP system implementation, we
will update our internal controls over financial reporting, as necessary, to
accommodate modifications to our business processes and accounting procedures.
We do not believe that this ERP system implementation or the reorganization of
the legal structure of our Mexico operation will have an adverse impact on our
internal control over financial reporting once we have remediated the material
weakness identified above. Other than the items noted above, there
were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II
OTHER
INFORMATION
Item 1. Legal Proceedings
Information
regarding reportable legal proceedings is contained in Item 3 - Legal
Proceedings in Part I of our 2009 Annual Report on Form 10-K and in Note 16
– Commitments and Contingencies of this Quarterly Report on Form
10-Q. During the current quarter, there were no material developments
that require us to amend or update descriptions of legal proceedings previously
reported in our 2009 Annual Report on Form 10-K.
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Item 1A – Risk Factors in Part I of our 2009
Annual Report on Form 10-K, which could materially affect our business,
financial condition or future results. There have been no material
changes from the risk factors described in our 2009 Annual Report on Form
10-K.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
There
were no unregistered sales or repurchases of our common stock during the second
quarter of 2010.
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3.1
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Restated
Articles of Incorporation of the Registrant (Incorporated by reference to
Exhibit 3.1 to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 1994).
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3.2
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Amended
and Restated By-Laws of the Registrant (Incorporated by reference to
Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed May 25,
2010).
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31.1
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Certification
of Steven J. Borick, Chairman, Chief Executive Officer and President,
Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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31.2
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Certification
of Emil J. Fanelli, Chief Accounting Officer and acting Chief Financial
Officer, Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
(filed herewith).
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32.1
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Certification
of Steven J. Borick, Chairman, Chief Executive Officer and President, and
Emil J. Fanelli, Chief Accounting Officer and acting Chief Financial
Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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SUPERIOR INDUSTRIES INTERNATIONAL,
INC.
(Registrant)
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Date: August
13, 2010
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/s/
Steven J. Borick
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Steven
J. Borick
Chairman,
Chief Executive Officer and President
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Date: August
13, 2010
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/s/
Emil J. Fanelli
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Emil
J. Fanelli
Chief
Accounting Officer and acting Chief Financial Officer
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