The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
October 1, 2017
(Unaudited)
Note 1 Nature of Operations
Headquartered in
Southfield, Michigan, the principal business of Superior Industries International, Inc. (referred to herein as the company or we, us and our) is the design and manufacture of aluminum wheels for sale
to original equipment manufacturers (OEMs). We are one of the largest suppliers of cast aluminum wheels to the worlds leading automobile and light truck manufacturers, with manufacturing operations in North America and
Europe. Customers in North America and Europe represent the principal market for our products.
Our largest customers, Ford Motor Company
(Ford), General Motors Company (GM) and Toyota Motor Company (Toyota) each accounted for more than 10 percent of our consolidated sales in the first nine months of 2017 and together represented approximately
56 percent of our trade sales during the first nine months of 2017. Additionally, Nissan Motor Co., Ltd. (Nissan) and Fiat Chrysler Automotive N.V. (FCA) individually accounted for 6 percent and 4 percent,
respectively, of our consolidated sales during the first nine months of 2017 and together with Ford, GM and Toyota represented approximately 66 percent of our trade sales during the first nine months of 2017. We also manufacture aluminum wheels
for BMW, Mazda, Subaru, Tesla and Volkswagen. Additionally, the acquisition of Uniwheels AG (Uniwheels) on May 30, 2017 diversifies our OEM customer base to include Audi AG (Audi),
Mercedes-Benz,
and other European customers and also provides a diversified base of new aftermarket customers. The loss of all or a substantial portion of our sales to Ford, GM or Toyota would have a
significant adverse impact on our operating results and financial condition. This risk is partially mitigated by our long-term relationships with these OEM customers and our supply arrangements, which are generally for multi-year periods.
Demand for automobiles and light trucks (including SUVs and crossover vehicles) in the North American and European markets is subject to many unpredictable
factors such as changes in the general economy, gasoline prices, consumer credit availability and interest rates. Demand for aluminum wheels can be further affected by other factors, including pricing and performance compared to competitive
materials such as steel. Additionally, the demand for our products is influenced by shifts of market share between vehicle manufacturers and the specific market penetration of individual vehicle platforms being sold by our customers.
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 25, 2016 (the 2016 Annual Report on Form
10-K)
and apply appropriate interim financial reporting standards for a fair statement of our operating results and financial
position in conformity with accounting principles generally accepted in the United States of America, as codified by the Financial Accounting Standards Board (FASB) in the Accounting Standards Codification (ASC) (referred to
herein as U.S. GAAP), as indicated below. For convenience of presentation, the 2016 fiscal year is referred to as December 31, but actually reflects our financial position and results of operations for the period described
below. Users of financial information produced for interim periods in 2017 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 2016 Annual Report on Form
10-K.
In
the past, Superior has used a
4-4-5
convention for our fiscal quarters, which are thirteen week periods (referred to as quarters) ending on the last Sunday of each
calendar quarter. Each fiscal year for the last three years has had 52 weeks. Fiscal 2017 is a 53 week fiscal year and as a consequence one quarter, typically the fourth quarter, has fourteen weeks. Uniwheels, our European operations, is based
on a calendar year end. Consequently, to more closely align our third quarter end dates, we have adjusted the
quarter-end
date of our North American operations to October 1, 2017 from September 24,
2017, resulting in
6
a fiscal quarter consisting of fourteen weeks (referred to either as the quarter or three months ended October 1, 2017). This modification to the third quarter timing
aligns the close of the third quarter of the North American Operations within one day of the close of the third quarter of the European operations, which ended on September 30, 2017. Therefore, in the third quarter there is a slight difference
in timing of the quarter close of our two operations that is deemed to be insignificant. The year ends of our North America and European operations will align in the fourth quarter ending on December 31, 2017. Starting in 2018 both our North
American and European operations will be on a calendar year end with each month ending on the last day of the month.
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with the SECs requirements for quarterly reports on Form
10-Q
and U.S. GAAP and, in our opinion, contain all adjustments, of a normal
and recurring nature, which are necessary for a fair statement of (i) the condensed consolidated statements of operations for the three and nine month periods ended October 1, 2017, (ii) the condensed consolidated statements of
comprehensive income for the three and nine month periods ended October 1, 2017, (iii) the condensed consolidated balance sheets at October 1, 2017 and December 31, 2016, (iv) the condensed consolidated statements of cash flows for
the nine month periods ended October 1, 2017 and September 25, 2016, and (v) the condensed consolidated statement of shareholders equity for the nine month period ended October 1, 2017. 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 31, 2016, included in this report, was derived from our 2016 audited financial
statements, but does not include all disclosures required by U.S. GAAP.
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.
New Accounting Pronouncements
In May 2014, the FASB
issued Accounting Standards Update (ASU) Revenue from Contracts with Customers. This update outlines a single, comprehensive model for accounting for revenue from contracts with customers. We plan to adopt this update on
January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at
the date of initial application (modified retrospective method). We anticipate adopting the standard using the modified retrospective method. There may be differences in timing of revenue recognition under the new standard compared to recognition
under ASC 605 - Revenue Recognition. We have completed an initial assessment of our North America operations and are currently reviewing our Europe operations that we acquired in the second quarter.
In February of 2016, the FASB issued ASU
2016-02,
Leases (Topic 842) (ASU
2016-02).
ASU
2016-02
requires an entity to recognize
right-of-use
assets and lease
liabilities on its balance sheet and disclose key information about leasing arrangements. ASU
2016-02
offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and
lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies,
ASU
2016-02
is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires modified retrospective adoption, with early
adoption permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In August 2016, the FASB
issued an ASU entitled Statement of Cash Flows (Topic 740): Classification of Certain Cash Receipts and Cash Payments. The objective of the ASU is to address the diversity in practice in the presentation of certain cash receipts and cash
payments in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will
have on our statement of cash flows.
7
In October 2016, the FASB issued an ASU entitled Income Taxes (Topic 230): Intra-Entity Transfers of Assets
Other than Inventory. The objective of the ASU is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In November 2016, the FASB issued an ASU entitled Statement of Cash Flows (Topic 230): Restricted Cash. The objective of the ASU is to address the
diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will have on our statement of cash flows.
In January 2017,
the FASB issued an ASU entitled Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of the ASU is to simplify how an entity is required to test goodwill for impairment by eliminating
Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting units goodwill with the carrying amount of that goodwill. This ASU is effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In January 2017, the FASB issued an ASU entitled Business Combinations (Topic 805): Clarifying the Definition of a Business. The objective of the
ASU is to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In March 2017, the FASB issued an ASU entitled Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost. The objective of the ASU is to improve the reporting of net benefit cost in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption is permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In July 2017, the FASB issued an ASU entitled (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of
the Indefinite Deferral for Mandatorily Redeemable Financial instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The objective of this ASU is to reduce the complexity in
accounting for certain financial instruments with down round features. When determining whether certain financial instruments should be classified as debt or equity instruments, a down round feature would no longer preclude equity classification
when assessing whether the instrument is indexed to an entitys own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value
as a result of the existence of a down round feature. Early adoption is permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In August 2017, the FASB issued an ASU entitled Derivatives and Hedging (Topic 815). The objective of this standard is to better align financial
reporting with risk management activities, provide a more faithful representation of hedging activities and reduce complexity and costs associated with hedging. This ASU removes the requirement to recognize hedge ineffectiveness in income prior to
settlement, allows documentation of hedge effectiveness at inception to be completed by
quarter-end,
allows qualitative rather than quantitative assessment of effectiveness (subsequent to initial quantitative
assessment), allows critical terms match for cash flow hedges of a group of forecasted transactions if derivatives mature within the same month as transactions, permits use of the back up long haul method for hedges initially designated
using the short cut method and permits cash flow hedging of a component of purchases and sales of
non-financial
assets (i.e., commodity price excluding transportation) resulting in higher hedge effectiveness.
The ASU also permits fair value hedging of the benchmark interest rate
8
component of interest rate risk as well as partial term hedging, allows partial term fair value hedges of interest rate risk, permits cash flow hedging of interest rate risk for a contractually
specified rate rather than a benchmark rate and permits exclusion of cross currency basis spread in determining effectiveness. This ASU is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We are
evaluating the impact this guidance will have on our financial position and statement of operations.
Note 3 Acquisition
On March 23, 2017, Superior announced that it had entered into various agreements to commence a tender offer to acquire 100 percent of the
outstanding equity interests of Uniwheels (the Acquisition) through a newly-formed, wholly-owned subsidiary (the Acquisition Sub). The Acquisition will be effected through a multi-step process as more fully described below.
In the first step of the Acquisition, on March 23, 2017, Superior obtained a commitment from the owner of approximately 61 percent of the
outstanding stock of Uniwheels, Uniwheels Holding (Malta) Ltd. (the Significant Holder), evidenced by an irrevocable undertaking agreement (the Undertaking Agreement) to tender such stock in the second step of the
Acquisition. In connection with the Undertaking Agreement, on March 23, 2017: (i) Superior entered into a business combination agreement with Uniwheels pursuant to which, subject to the provisions of the German Stock Corporation Act, Uniwheels
and its subsidiaries undertook to, among other things, cooperate with the financing of the Acquisition; and (ii) Superior and the Significant Holder entered into a guarantee and indemnification agreement pursuant to which Superior will hold the
Significant Holder harmless for claims that may arise relating to its involvement with Uniwheels. As Uniwheels is a company listed on the Warsaw Stock Exchange, the Acquisition was required to be carried out in accordance with the Polish Act of
29 July 2005 on Public Offerings and the Conditions for Introducing Financial Instruments to Organized Trading and Public Companies (the Public Offering Act).
Following the publication of a formal tender offer document by Superior, as required by the Public Offering Act, Superior commenced the acceptance period for
the tender offer (the Tender Offer) on April 12, 2017, pursuant to which, Superior offered to purchase all (but not less than 75 percent) of the outstanding stock of Uniwheels and, upon the consummation of the Tender Offer, agreed
to purchase the stock of the Significant Holder along with all other stock of Uniwheels tendered pursuant to the Tender Offer. On May 30, 2017, Superior acquired 92.3 percent of the outstanding stock of Uniwheels for approximately
$703.0 million (based on an exchange rate of 1.00 Dollar = 3.74193 Polish Zloty). We refer to this acquisition as the First Step Acquisition.
Under the terms of the Tender Offer:
|
|
|
the Significant Holder received cash consideration of Polish Zloty 226.5 per share; and
|
|
|
|
Uniwheels other shareholders received cash consideration of Polish Zloty 247.87 per share, equivalent to the volume weighted-average-price of Uniwheels shares for the three months prior to commencement of
the Tender Offer, plus 5.0 percent.
|
On June 30, 2017, the company announced that it had commenced the delisting and associated
tender process for the remaining outstanding shares of Uniwheels. As of July 31, 2017, 153,251 additional shares (representing 1.2 percent of Uniwheels shares) were tendered at Polish Zloty 247.87 per share. We refer to this acquisition as
the Second Step Acquisition. The aggregate equity purchase price of the Acquisition (assuming the remaining 6.5 percent of Uniwheels stock is acquired for cash consideration of Polish Zloty 247.87 per share, the price paid to
Uniwheels shareholders in the Tender Offer, and an exchange rate of 1.00 Dollar = 3.74193 Polish Zloty) will be approximately $778.0 million. We entered into foreign currency hedges prior to the closing of the First Step Acquisition
intended to reduce currency risk associated with the settlement of the Tender Offer (the Hedging Transactions). The net benefit of such Hedging Transactions to Superior reduced the total anticipated purchase price of the Acquisition to
$766.2 million.
9
The companys condensed consolidated financial statements for the three and nine month periods ended
October 1, 2017 and September 25, 2016 include Uniwheels results of operations subsequent to May 30, 2017 (please see Note 7, Business Segments for the segment results included within the condensed consolidated
financial statements for the three and nine month periods ended October 1, 2017 and September 25, 2016, which include Uniwheels results of operations subsequent to May 30, 2017). The companys condensed consolidated financial
statements reflect the purchase accounting adjustments in accordance with ASC 805 Business Combinations, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on
the acquisition date.
During the second quarter of 2017, the company determined a preliminary valuation of the identifiable assets acquired and the
liabilities assumed. The following is the allocation of the purchase price:
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Estimated purchase price
|
|
|
|
|
Cash consideration
|
|
$
|
703,000
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
63,200
|
|
|
|
|
|
|
Preliminary purchase price allocation
|
|
|
|
|
Cash and cash equivalents
|
|
|
12,296
|
|
Accounts receivable
|
|
|
60,580
|
|
Inventories
|
|
|
82,402
|
|
Prepaid expenses and other current assets
|
|
|
11,479
|
|
|
|
|
|
|
Total current assets
|
|
|
166,757
|
|
Property and equipment
|
|
|
250,000
|
|
Intangible assets
(1)
|
|
|
212,000
|
|
Goodwill
|
|
|
306,154
|
|
Other assets
|
|
|
20,937
|
|
|
|
|
|
|
Total assets acquired
|
|
|
955,848
|
|
|
|
|
|
|
Accounts payable
|
|
|
61,883
|
|
Other current liabilities
|
|
|
40,361
|
|
|
|
|
|
|
Total current liabilities
|
|
|
102,244
|
|
Other long-term liabilities
|
|
|
87,404
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
189,648
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
766,200
|
|
|
|
|
|
|
(1)
|
Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a preliminary valuation prepared by an independent third party. The fair values assigned
to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty and multi-period excess earnings methods. The major assumptions used in arriving at the estimated identifiable intangible
asset values included managements estimates of future cash flows, discounted at an appropriate rate of return which are based on the weighted average cost of capital for both the company and other market participants. The useful lives for
intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. The estimated fair value of intangible assets and related useful
lives as included in the preliminary purchase price allocation include:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
Value
|
|
|
Estimated
Useful Life
(in Years)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Brand name
|
|
$
|
9,000
|
|
|
|
5-6
|
|
Technology
|
|
|
16,000
|
|
|
|
4-6
|
|
Customer relationships
|
|
|
167,000
|
|
|
|
6-11
|
|
Trade names
|
|
|
20,000
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
212,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The above goodwill represents future economic benefits expected to be recognized from the companys
expansion into the European wheel market, as well as expected future synergies and operating efficiencies from combining operations with Uniwheels. Acquisition goodwill of $321.7 million (initial balance of $306.2 million, increased for
post-acquisition translation adjustments) has been allocated to the European segment.
The following unaudited combined pro forma information is for
informational purposes only. The pro forma information is not necessarily indicative of what the combined companys results actually would have been had the Acquisition been completed as of the beginning of the periods as indicated. In
addition, the unaudited pro forma information does not purport to project the future results of the combined company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
|
|
Proforma
|
|
|
Proforma
|
|
|
Proforma
|
|
|
Proforma
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales as reported
|
|
$
|
331,404
|
|
|
$
|
175,580
|
|
|
$
|
746,252
|
|
|
$
|
544,354
|
|
Uniwheels sales, prior to the Acquisition
|
|
|
|
|
|
|
124,813
|
|
|
|
243,744
|
|
|
|
373,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma combined sales
|
|
$
|
331,404
|
|
|
$
|
300,393
|
|
|
$
|
989,996
|
|
|
$
|
917,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income as reported
|
|
$
|
2,615
|
|
|
$
|
5,974
|
|
|
$
|
(1,554
|
)
|
|
$
|
33,602
|
|
Uniwheels net income before income taxes, prior to the Acquisition
|
|
|
|
|
|
|
15,282
|
|
|
|
25,394
|
|
|
|
47,749
|
|
Incremental interest expense on the debt
|
|
|
|
|
|
|
(10,630
|
)
|
|
|
(17,716
|
)
|
|
|
(31,889
|
)
|
Incremental amortization on the identifiable intangible assets
|
|
|
|
|
|
|
(6,187
|
)
|
|
|
(10,312
|
)
|
|
|
(18,562
|
)
|
Transaction expenses incurred by both the company and Uniwheels
|
|
|
10,079
|
|
|
|
|
|
|
|
27,572
|
|
|
|
|
|
Income tax expense related to the proforma adjustments
|
|
|
(3,528
|
)
|
|
|
1,653
|
|
|
|
(6,877
|
)
|
|
|
4,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net income (loss)
|
|
$
|
9,166
|
|
|
$
|
6,092
|
|
|
$
|
16,507
|
|
|
$
|
35,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Note 4 Restructuring
During 2014, we completed a review of initiatives to reduce costs and enhance our competitive position. Based on this review, we committed to a plan to close
operations at our Rogers, Arkansas facility, which was completed during the fourth quarter of 2014. The action was undertaken in order to reduce costs and enhance our global competitive position. During the fourth quarter of 2016, we sold the Rogers
facility for total proceeds of $4.3 million, resulting in a $1.4 million gain on sale, which is recorded as a reduction to selling, general and administrative expense in the consolidated income statements.
The total cost incurred as a result of the Rogers facility closure was $16.0 million, of which $0.1 million and $0.2 million was recognized for
the nine month periods ended October 1, 2017 and September 25, 2016, respectively. The following table summarizes the Rogers, Arkansas plant closure costs and classification in the consolidated income statement for the period ended
October 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Costs Incurred
Through
December 31,
2016
|
|
|
Costs Incurred
During the Nine
Months Ended
October 1, 2017
|
|
|
Total Costs
|
|
|
Classification
|
|
Accelerated and other depreciation of assets idled
|
|
$
|
7,254
|
|
|
$
|
13
|
|
|
$
|
7,267
|
|
|
|
Cost of sales,
Restructuring costs
|
|
Severance costs
|
|
|
2,011
|
|
|
|
|
|
|
|
2,011
|
|
|
|
Cost of sales,
Restructuring costs
|
|
Equipment removal and impairment, inventory written-down, lease termination and other
costs
|
|
|
6,634
|
|
|
|
117
|
|
|
|
6,751
|
|
|
|
Cost of sales,
Restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,899
|
|
|
|
130
|
|
|
|
16,029
|
|
|
|
|
|
Gain on sale of the facility
|
|
|
(1,436
|
)
|
|
|
|
|
|
|
(1,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,463
|
|
|
$
|
130
|
|
|
$
|
14,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Fair Value Measurements
The company applies fair value accounting for all financial assets and liabilities and
non-financial
assets and
liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis, while other assets and liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset impairment. Fair value
is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the
fair value measurement:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for
identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs that are generally unobservable and typically reflect managements estimate of assumptions that market
participants would use in pricing the asset or liability.
The carrying amounts for cash and cash equivalents, investments in certificates of deposit,
accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short period of time until maturity.
12
Cash and Cash Equivalents
Included in cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an
insignificant risk of change in value due to interest rates, quoted price or penalty on withdrawal. A debt security is classified as a cash equivalent if it meets these criteria and if it has a remaining time to maturity of three months or less from
the date of acquisition. Amounts on deposit and available upon demand, or negotiated to provide for daily liquidity without penalty, are classified as cash and cash equivalents. Time deposits, certificates of deposit and money market accounts that
meet the above criteria are reported at par value on our balance sheet and are excluded from the table below.
Derivative Financial Instruments
Our derivatives are
over-the-counter
customized derivative
transactions and are not exchange traded. We estimate the fair value of these instruments using industry-standard valuation models such as a discounted cash flow. These models project future cash flows and discount the future amounts to a present
value using market-based expectations for interest rates, foreign exchange rates, commodity prices and the contractual terms of the derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g., LIBOR) plus an
adjustment for
non-performance
risk. In certain cases, market data may not be available, and we may use broker quotes and models (e.g., Black-Scholes) to determine fair value. This includes situations where
there is lack of liquidity for a particular currency or commodity or when the instrument is longer dated. The fair value measurements of the redeemable preferred shares embedded derivatives are based upon Level 3 unobservable inputs reflecting
managements own assumptions about the inputs used in pricing the liability refer to Note 6, Financial Instruments.
Cash
Surrender Value
The cash surrender value of the life insurance policies is the sum of money the insurance company will pay to the company in the event
the policy is voluntarily terminated before its maturity or the insured event occurs. Over the term of the life insurance contracts, the cash surrender value changes as a result of premium payments and investment income offset by investment losses,
charges and miscellaneous fees. The amount of the asset recorded for the investment in the life insurance contracts is equal to the cash surrender value which is the amount that will be realized under the contract as of the balance sheet date if the
insured event occurs.
The following table categorizes items measured at fair value at October 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
in Active Markets
for Identical Assets
|
|
|
Significant Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
October 1, 2017
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
750
|
|
|
$
|
|
|
|
$
|
750
|
|
|
$
|
|
|
Cash surrender value
|
|
|
7,944
|
|
|
|
|
|
|
|
7,944
|
|
|
|
|
|
Derivative contracts
|
|
|
8,248
|
|
|
|
|
|
|
|
8,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,942
|
|
|
$
|
|
|
|
$
|
16,942
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
7,750
|
|
|
$
|
|
|
|
$
|
7,750
|
|
|
$
|
|
|
Embedded derivative liability
|
|
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,518
|
|
|
$
|
|
|
|
$
|
7,750
|
|
|
$
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table categorizes items measured at fair value at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
December 31, 2016
|
|
Total
|
|
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
750
|
|
|
$
|
|
|
|
$
|
750
|
|
|
$
|
|
|
Cash surrender value
|
|
|
7,480
|
|
|
|
|
|
|
|
7,480
|
|
|
|
|
|
Derivative contracts
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,243
|
|
|
$
|
|
|
|
$
|
8,243
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
24,773
|
|
|
$
|
|
|
|
$
|
24,773
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,773
|
|
|
$
|
|
|
|
$
|
24,773
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Financial Instruments
Debt Instruments
The carrying values of the
companys debt instruments vary from their fair values. The fair values were determined by reference to transacted prices of these securities (Level 2 input based on the GAAP fair value hierarchy). The estimated fair value, as well as the
carrying value, of the companys debt instruments are shown below (in thousands):
|
|
|
|
|
|
|
October 1, 2017
|
|
(Dollars in thousands)
|
|
|
|
Estimated aggregate fair value
|
|
$
|
688,174
|
|
Aggregate carrying value
(1)
|
|
|
705,096
|
|
(1)
|
Long-term debt excluding the impact of unamortized debt issuance costs.
|
Derivative Instruments and Hedging Activities
We use
derivatives to partially offset our business exposure to foreign currency risk. We may enter into forward contracts, option contracts, swaps, collars or other derivative instruments to offset some of the risk on expected future cash flows and on
certain existing assets and liabilities. However, we may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There
can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
To
help protect gross margins from fluctuations in foreign currency exchange rates, certain of our subsidiaries whose functional currency is the U.S. dollar hedge a portion of forecasted foreign currency costs. Generally, we may hedge portions of our
forecasted foreign currency exposure associated with costs, typically for up to 48 months.
14
We record all derivatives in the condensed consolidated balance sheets at fair value. Our accounting treatment
for these instruments is based on the hedge designation. The effective portions of cash flow hedges are recorded in Accumulated Other Comprehensive Income (AOCI) until the hedged item is recognized in earnings. The ineffective portions
of cash flow hedges are recorded in cost of sales. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates. All derivatives were
designated as hedging instruments at December 31, 2016. At October 1, 2017, the company held derivatives that were designated as hedging instruments as well as derivatives that did not qualify for designation as hedging instruments as
discussed below.
Deferred gains and losses associated with cash flow hedges of foreign currency costs are recognized as a component of cost of sales in
the same period as the related cost is recognized. Our foreign currency transactions hedged with cash flow hedges as of October 1, 2017, are expected to occur within 1 month to 48 months.
Derivative instruments designated as cash flow hedges must be
de-designated
as hedges when it is probable the
forecasted hedged transaction will not occur in the initially identified time period or within a subsequent
two-month
time period. Deferred gains and losses in AOCI associated with such derivative instruments
are reclassified immediately into other expense. Any subsequent changes in fair value of such derivative instruments are reflected in other expense unless they are
re-designated
as hedges of other
transactions.
Currency option derivative contracts not designated as hedging instruments consist principally of certain option contracts to purchase
Polish Zloty and the Euro related to the acquisition of Uniwheels and a cross currency swap. See Note 3, Acquisition.
Redeemable Preferred
Stock Embedded Derivative
We have determined that the conversion option embedded in Series A redeemable preferred stock is required to be accounted
for separately from the Series A redeemable preferred stock as a derivative liability. Separation of the conversion option as a derivative liability is required because its economic characteristics are considered more akin to an equity instrument
and therefore the conversion option is not considered to be clearly and closely related to the economic characteristics of the redeemable preferred stock. This is because the economic characteristics of the redeemable preferred stock are considered
more akin to a debt instrument due to the fact that the shares are redeemable at the holders option, the redemption value is significantly greater than the face amount, the shares carry a fixed mandatory dividend, the stock price necessary to
make conversion more attractive than redemption ($56.324) is significantly greater than the price at the date of issuance ($19.05), all of which lead to the conclusion that redemption is more likely than conversion. For additional information on the
redeemable preferred stock, see Note 13, Redeemable Preferred Shares in Notes to Condensed Consolidated Financial Statements.
We have also
determined that the early redemption option upon the occurrence of a redemption event (e.g. change of control, etc.) must also be bifurcated and accounted for separately from the redeemable preferred stock at fair value, because the debt host
contract involves a substantial discount (face of $150.0 million as compared to the redemption value of $300 million) and exercise of the early redemption option would accelerate the holders option to redeem the shares.
Accordingly, we have recorded an embedded derivative liability representing the combined fair value of the right of holders to receive common stock upon
conversion of Series A redeemable preferred stock at any time (the conversion option) and the right of the holders to exercise their early redemption option upon the occurrence of a redemption event (the early redemption
option). The embedded derivative liability is adjusted to reflect fair value at each period end with changes in fair value recorded in the Change in fair value of redeemable preferred stock embedded derivative liability financial
statement line item of the companys consolidated statements of operations (refer to Note 13, Redeemable Preferred Shares).
A binomial
option pricing model is used to estimate the fair value of the conversion and early redemption options embedded in the redeemable preferred stock. The binomial model utilizes a decision tree whereby future movement in the companys
common stock price is estimated based on the volatility factor. The binomial options pricing model requires the development and use of assumptions. These assumptions include estimated volatility of the value of our common stock, assumed possible
conversion or early redemption dates, an appropriate risk-free interest rate, risky bond rate and dividend yield.
15
The expected volatility of the companys equity is estimated based on the historical volatility of our
common stock. The assumed base case term used in the valuation model is the period remaining until May 22, 2024 (the earliest date at which the holder may exercise its unconditional redemption option). A number of other scenarios incorporated
earlier redemption dates to address the possibility of early redemption upon the occurrence of a redemption event. The risk-free interest rate is based on the yield on the U.S. Treasury zero coupon yield curve with a remaining term equal to the
expected term of the conversion and early redemption options. The significant assumptions utilized in the companys valuation of the embedded derivatives at October 1, 2017 are as follows: valuation scenario terms between 4.25 and 6.64
years, volatility of 32.0%, risk-free rate of
1.81%-2.12%
related to the respective assumed terms, a risky bond rate of 19.1% and a dividend yield of 2.2%.
Based on the foregoing assumptions the fair value of the redeemable preferred stock embedded derivative liability at October 1, 2017 is $6.7 million
and the change in fair value of redeemable preferred stock embedded derivative liability during the quarter was $4.1 million mainly due to the decline in our stock price from $19.05 (at date of issuance) to $16.65 (at October 1, 2017) and
the reduction in the remaining term of the options used in the valuation scenarios due to the months elapsed since issuance.
The following tables display
the fair value of derivatives by balance sheet line item at October 1, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
|
Other Current
Assets
|
|
|
Other Non-current
Assets
|
|
|
Accrued
Liabilities
|
|
|
Other Non-current
Liabilities
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts and collars designated as hedging instruments
|
|
$
|
2,856
|
|
|
$
|
4,410
|
|
|
$
|
3,053
|
|
|
$
|
2,700
|
|
Aluminum forward contracts not designated as hedges
|
|
|
982
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
Cross currency swap not designated as hedging instrument
|
|
|
|
|
|
|
|
|
|
|
654
|
|
|
|
1,308
|
|
Embedded derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial instruments
|
|
$
|
3,838
|
|
|
$
|
4,410
|
|
|
$
|
3,742
|
|
|
$
|
10,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Other Current
Assets
|
|
|
Other
Non-current
Assets
|
|
|
Accrued
Liabilities
|
|
|
Other
Non-current
Liabilities
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts and collars designated as hedging instruments
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
10,076
|
|
|
$
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial instruments
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
10,076
|
|
|
$
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following table summarizes the notional amount and estimated fair value of our derivative financial
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
December 31, 2016
|
|
|
|
Notional
U.S. Dollar
Amount
|
|
|
Fair Value
|
|
|
Notional
U.S. Dollar
Amount
|
|
|
Fair Value
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts and collars designated as hedging instruments
|
|
$
|
287,255
|
|
|
$
|
1,513
|
|
|
$
|
160,461
|
|
|
$
|
(24,760
|
)
|
Aluminum forward contracts not designated as hedges
|
|
|
13,588
|
|
|
|
947
|
|
|
|
|
|
|
|
|
|
Cross currency swap not designated as hedging instrument
|
|
|
36,453
|
|
|
|
(1,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial instruments
|
|
$
|
337,296
|
|
|
$
|
498
|
|
|
$
|
160,461
|
|
|
$
|
(24,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts are presented on a gross basis. The notional amounts of the derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such
as interest rates, foreign currency exchange rates or commodity volumes and prices.
The following table provides the impact of derivative instruments
designated as cash flow hedges on our statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended October 1, 2017
|
|
Amount of Gain or (Loss)
Recognized in AOCI on
Derivatives (Effective
Portion)
|
|
|
Amount of Pre-tax
Gain or
(Loss) Reclassified from
AOCI into Income (Effective
Portion)
|
|
|
Amount of Pre-tax Gain or
(Loss) Recognized in Income
on
Derivatives (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts and collars
|
|
$
|
25,438
|
|
|
$
|
(3,630
|
)
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,438
|
|
|
$
|
(3,630
|
)
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 25,
2016
|
|
Amount of Gain or (Loss)
Recognized in AOCI on
Derivatives (Effective
Portion)
|
|
|
Amount of Pre-tax
Gain or
(Loss) Reclassified from
AOCI into Income (Effective
Portion)
|
|
|
Amount of Pre-tax Gain or
(Loss) Recognized in Income
on
Derivatives (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts and collars
|
|
$
|
8,227
|
|
|
$
|
9,777
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,227
|
|
|
$
|
9,777
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Business Segments
Superior groups its operating segments into reportable segments in which sales and manufacturing efforts are focused. The products, manufacturing, and
procurement are similar throughout the companys operations. Each operating segment has discrete financial information evaluated regularly by the companys Chief Operating Decision Maker (CODM) in determining resource
allocation and assessing performance. As a result of the Uniwheels acquisition, the company realigned its executive management structure which changed the information used by our CODM to assess performance and allocate resources. Due to different
economic circumstances and customer base in the companys operations and in conformity with ASC Topic 280, Segment Reporting, the company reports the results of its business in two reportable segments: North America and Europe.
17
Net Sales and Results of Operations by Reportable Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
180,100
|
|
|
$
|
175,580
|
|
|
$
|
541,218
|
|
|
$
|
544,354
|
|
Europe
|
|
|
151,304
|
|
|
|
|
|
|
|
205,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
331,404
|
|
|
$
|
175,580
|
|
|
$
|
746,252
|
|
|
$
|
544,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,413
|
|
|
$
|
5,250
|
|
|
$
|
4,260
|
|
|
$
|
43,512
|
|
Europe
|
|
|
4,345
|
|
|
|
|
|
|
|
3,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from operations
|
|
$
|
5,758
|
|
|
$
|
5,250
|
|
|
$
|
7,704
|
|
|
$
|
43,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets by Reportable Segment
|
|
|
|
|
|
|
|
|
|
|
October 1,
2017
|
|
|
December 31,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
North America
|
|
$
|
554,408
|
|
|
$
|
542,756
|
|
Europe
|
|
|
1,008,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,563,355
|
|
|
$
|
542,756
|
|
|
|
|
|
|
|
|
|
|
Note 8 Short-Term Investments
Certificates of deposit and fixed deposits whose original maturity is greater than three months and is one year or less are classified as short-term
investments and certificates of deposit and fixed deposits whose maturity is greater than one year at the balance sheet date are classified as
non-current
assets in our condensed consolidated balance sheets.
The purchase of any certificates of deposit or fixed deposits that are classified as short-term investments or
non-current
assets appear in the investing section of our condensed consolidated statements of
cash flows.
Restricted Deposits
We purchase
certificates of deposit that mature within twelve months and are used to secure or collateralize letters of credit securing our workers compensation obligations. At each of October 1, 2017 and December 31, 2016, certificates of
deposit totaling $0.8 million were restricted in use and were classified as short-term investments on our condensed consolidated balance sheets.
18
Note 9 Inventories
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Raw materials
|
|
$
|
59,744
|
|
|
$
|
40,255
|
|
Work in process
|
|
|
53,711
|
|
|
|
21,447
|
|
Finished goods
|
|
|
64,642
|
|
|
|
21,135
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
178,097
|
|
|
$
|
82,837
|
|
|
|
|
|
|
|
|
|
|
Service wheel and supplies inventory included in other
non-current
assets in the
condensed consolidated balance sheets totaled $8.5 million and $6.5 million at October 1, 2017 and December 31, 2016, respectively. Included in raw materials were operating supplies and spare parts totaling $13.6 million and
$10.3 million on October 1, 2017 and December 31, 2016, respectively. The significant increase in the current year inventory is attributable to the acquired European operations.
Note 10 Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Land and buildings
|
|
$
|
138,570
|
|
|
$
|
67,915
|
|
Machinery and equipment
|
|
|
699,817
|
|
|
|
485,185
|
|
Leasehold improvements and others
|
|
|
11,141
|
|
|
|
4,868
|
|
Construction in progress
|
|
|
53,686
|
|
|
|
26,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903,214
|
|
|
|
584,269
|
|
Accumulated depreciation
|
|
|
(384,956
|
)
|
|
|
(356,866
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
518,258
|
|
|
$
|
227,403
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $36.7 million and $25.9 million for the nine months ended October 1, 2017 and
September 25, 2016, respectively. The significant increase in balances is attributable to property, plant, and equipment related to our acquired European operations.
Note 11 Preproduction Costs Related to Long-Term Supply Arrangements
We incur preproduction engineering and tooling costs related to the products produced for our customers under long-term supply agreements. We expense all
preproduction engineering costs for which reimbursement is not contractually guaranteed by the customer or which are in excess of the contractually guaranteed reimbursement amount. We amortize the cost of the customer-owned tooling over the expected
life of the wheel program on a straight-line basis. Also, we defer any reimbursements made to us by our customers and recognize the tooling reimbursement revenue over the same period in which the tooling is in use. Changes in the facts and
circumstances of individual wheel programs may accelerate the amortization of both the cost of customer-owned tooling and the deferred tooling reimbursement revenues. Recognized tooling reimbursement revenues, which totaled $5.7 million and
$6.2 million for the nine months ended October 1, 2017 and September 25, 2016, respectively, are included in net sales in the condensed consolidated statements of operations. The following tables summarize the unamortized
customer-owned tooling costs included in our
non-current
assets, and the deferred tooling revenues included in accrued expenses and other
non-current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Customer-Owned Tooling Costs
|
|
|
|
|
|
|
|
|
Preproduction costs
|
|
$
|
82,751
|
|
|
$
|
78,299
|
|
Accumulated amortization
|
|
|
(69,954
|
)
|
|
|
(65,100
|
)
|
|
|
|
|
|
|
|
|
|
Net preproduction costs
|
|
$
|
12,797
|
|
|
$
|
13,199
|
|
|
|
|
|
|
|
|
|
|
Deferred Tooling Revenues
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
5,436
|
|
|
$
|
5,419
|
|
Other
non-current
liabilities
|
|
|
2,439
|
|
|
|
2,593
|
|
|
|
|
|
|
|
|
|
|
Total deferred tooling revenues
|
|
$
|
7,875
|
|
|
$
|
8,012
|
|
|
|
|
|
|
|
|
|
|
19
Note 12 Goodwill and Other Intangible Assets
Goodwill and indefinite-lived assets, such as certain trade names acquired in connection with the acquisition of Uniwheels on May 30, 2017, are not
amortized, but are instead evaluated for impairment on an annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that impairment may be more likely. During the three months ended October 1, 2017, no
impairment charges have been taken against the companys goodwill or indefinite-lived intangible assets. At October 1, 2017, the goodwill is $321.7 million, consisting of the initial balance of $306.2 million, increased for
post-acquisition translation adjustments. The carrying amount of goodwill arose from the Acquisition described in Note 3, Acquisition.
The
companys other intangible assets primarily consist of assets with finite lives. These assets are amortized on a straight-line basis over their estimated useful lives. Following is a summary of the companys finite-lived and
indefinite-lived intangible assets as of October 1, 2017. There were no such intangible assets at December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Currency
Translation
|
|
|
Net
|
|
|
Remaining
Weighted Average
Amortization
Period
|
|
(Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand name
|
|
$
|
9,000
|
|
|
$
|
(516
|
)
|
|
$
|
447
|
|
|
$
|
8,931
|
|
|
|
5-6
|
|
Technology
|
|
|
16,000
|
|
|
|
(1,102
|
)
|
|
|
792
|
|
|
|
15,690
|
|
|
|
4-6
|
|
Customer relationships
|
|
|
167,000
|
|
|
|
(7,446
|
)
|
|
|
8,335
|
|
|
|
167,889
|
|
|
|
6-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite
|
|
|
192,000
|
|
|
|
(9,064
|
)
|
|
|
9,574
|
|
|
|
192,510
|
|
|
|
|
|
Trade names
|
|
|
20,000
|
|
|
|
|
|
|
|
1,014
|
|
|
|
21,014
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
212,000
|
|
|
$
|
(9,064
|
)
|
|
$
|
10,588
|
|
|
$
|
213,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for these intangible assets was $6.9 million for the three month period ended October 1, 2017.
The anticipated annual amortization expense for these intangible assets is $27.2 million for 2018 to 2021 and $25.3 million for 2022.
Note
13 Redeemable Preferred Shares
On March 22, 2017, Superior and TPG Growth III Sidewall, L.P. (TPG) entered into an Investment
Agreement pursuant to which Superior agreed to issue a number of shares of Series A Perpetual Convertible Preferred Stock (the Series A redeemable preferred stock) and Series B Perpetual Preferred Stock (the Series B redeemable
preferred stock), par value $0.01 per share (the Series A redeemable preferred stock and Series B redeemable preferred stock referred to collectively as the
20
redeemable preferred stock) to TPG for an aggregate purchase price of $150.0 million (the Investment). As of the closing of the Investment on May 22, 2017,
Superior issued 140,202 shares of Series A redeemable preferred stock, which was equal to 19.99 percent of Superiors common stock outstanding on such date, and 9,798 shares of Series B redeemable preferred stock to TPG.
On August 30, 2017, our stockholders approved the conversion of 9,798 shares of Series B redeemable preferred stock into Series A redeemable preferred
stock and all outstanding shares of Series B redeemable preferred stock were automatically converted into Series A redeemable preferred stock (the Conversion). Series A redeemable preferred stock has an initial stated value of $1,000 per
share, par value of $0.01 per share and liquidation preference over common stock. Series A redeemable preferred stock is convertible into shares of Superior common stock equal to the number of shares determined by dividing the sum of the stated
value and any accrued and unpaid dividends by the conversion price of $28.162. Series A redeemable preferred stock accrues dividends at a rate of 9 percent per annum, payable at Superiors election either
in-kind
or in cash. Series A redeemable preferred stock is also entitled to participate in dividends on common stock in an amount equal to that which would have been due had the shares been converted into
common stock.
We may mandate conversion of the Series A redeemable preferred stock if the price of the common stock exceeds $84.49. TPG may redeem the
shares upon the occurrence of any of the following events (referred to as a redemption event): a change in control, recapitalization, merger, sale of substantially all of the companys assets, liquidation or delisting of the
companys common stock. In addition, TPG may, at its option, unconditionally redeem the shares at any time after May 23, 2024. Superior may, at its option, redeem in whole at any time all of the shares of Series A redeemable preferred
stock outstanding. If redeemed by either party on or before October 22, 2018, the redemption value (the redemption value) would be $262.5 million (1.75 times stated value). If redeemed after October 22, 2018, the
redemption value would be the greater of $300 million (2.0 times stated value) or the product of the number of common shares into which the Series A redeemable preferred stock could be converted (5.3 million shares currently) and the then
current market price of the common stock.
We have determined that the conversion option embedded in the redeemable preferred stock is required to be
accounted for separately from the redeemable preferred stock as a derivative liability. Separation of the conversion option as a derivative liability is required because its economic characteristics are considered more akin to an equity instrument
and therefore the conversion option is not considered to be clearly and closely related to the economic characteristics of the redeemable preferred stock. This is because the economic characteristics of the redeemable preferred stock are considered
more akin to a debt instrument due to the fact that the shares are redeemable at the holders option, the redemption value is significantly greater than the face amount, the shares carry a fixed mandatory dividend, the stock price necessary to
make conversion more attractive than redemption ($56.324) is significantly greater than the price at the date of issuance ($19.05), all of which lead to the conclusion that redemption is more likely than conversion.
We have also determined that the early redemption option exercisable upon the occurrence of a redemption event must also be bifurcated and accounted for
separately from the redeemable preferred stock at fair value, because the debt host contract involves a substantial discount (face of $150 million as compared to the redemption value of $300 million) and the exercise of the early redemption
option upon the occurrence of a redemption event would accelerate the holders option to redeem the shares.
Accordingly, we have recorded an
embedded derivative liability representing the estimated combined fair value of the right of holders to receive common stock upon conversion (the conversion option) and the right of the holders to exercise their early redemption option
upon the occurrence of a redemption event (the early redemption option). The embedded derivative liability is adjusted to reflect fair value at each period end with changes in fair value recorded in the Change in fair value of
redeemable preferred stock embedded derivative liability financial statement line item of the companys condensed consolidated statements of operations. Refer to Note 6, Financial Instruments for further information regarding
the valuation of the embedded derivative.
21
Since the redeemable preferred stock may be redeemed at the option of the holder, but is not mandatorily
redeemable, the redeemable preferred stock has been classified as mezzanine equity and initially recognized at fair value of $150 million (the proceeds on the date of issuance) less issuance costs of $3.7 million, resulting in an initial
value of $146.3 million. This amount has been further reduced by $10.9 million assigned to the embedded derivative liability at date of issuance, resulting in an adjusted initial value of $135.4 million. We are accreting the
difference between the adjusted initial value of $135.4 million and the redemption value of $300 million over the seven-year period from date of issuance through May 23, 2024 (the date at which the holder has the unconditional right
to redeem the shares, deemed to be the earliest likely redemption date) using the effective interest method. The accretion to the carrying value of the redeemable preferred stock is treated as a deemed dividend, recorded as a charge to retained
earnings and deducted in computing earnings per share (analogous to the treatment for stated and participating dividends paid on the redeemable preferred shares). We have accreted $5.2 million through October 1, 2017 resulting in a balance
of $140.6 million.
Note 14 Earnings Per Share
In accordance with U.S. GAAP, basic earnings per share is computed by dividing net income (loss), less preferred dividends, by the weighted average number of
common shares outstanding. For purposes of calculating diluted earnings per share, net income is divided by the total of the weighted average shares outstanding plus the dilutive effect of our redeemable preferred stock, outstanding stock
options and time and performance based restricted stock units under the treasury stock method, which includes consideration of stock-based compensation required by U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars and shares in thousands, except per share amounts)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
Basic Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income (loss)
|
|
$
|
2,615
|
|
|
$
|
5,974
|
|
|
$
|
(1,554
|
)
|
|
$
|
33,602
|
|
Less: Redeemable preferred stock dividends
|
|
|
(8,147
|
)
|
|
|
|
|
|
|
(11,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic numerator
|
|
$
|
(5,532
|
)
|
|
$
|
5,974
|
|
|
$
|
(12,583
|
)
|
|
$
|
33,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share
|
|
$
|
(0.22
|
)
|
|
$
|
0.24
|
|
|
$
|
(0.50
|
)
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-Basic
|
|
|
24,905
|
|
|
|
25,424
|
|
|
|
24,941
|
|
|
|
25,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income (loss)
|
|
$
|
2,615
|
|
|
$
|
5,974
|
|
|
$
|
(1,554
|
)
|
|
$
|
33,602
|
|
Less: Redeemable preferred stock dividends
|
|
|
(8,147
|
)
|
|
|
|
|
|
|
(11,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted numerator
|
|
$
|
(5,532
|
)
|
|
$
|
5,974
|
|
|
$
|
(12,583
|
)
|
|
$
|
33,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
$
|
(0.22
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.50
|
)
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-Basic
|
|
|
24,905
|
|
|
|
25,424
|
|
|
|
24,941
|
|
|
|
25,482
|
|
Weighted average dilutive stock options and restricted stock units
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-Diluted
|
|
|
24,905
|
|
|
|
25,570
|
|
|
|
24,941
|
|
|
|
25,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the first nine months of 2017, no options were included in the diluted earnings per share calculation because to do so
would have been anti-dilutive. The performance shares discussed in Note 19, Stock-Based Compensation are not included in the diluted earnings per share because the performance metrics had not been met as of the period ended
October 1, 2017. The redeemable preferred shares discussed in Note 13, Redeemable Preferred Shares are not included in the diluted earnings per share because the conversion would be anti-dilutive as of the period ended
October 1, 2017.
22
Note 15 Income Taxes
The estimated annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates and applied to
year-to-date
ordinary income (loss). The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances, settlements with
taxing authorities and effects of changes in tax laws or rates, are reported in the interim period in which they occur.
The income tax benefit for the
nine months ended October 1, 2017, was $4.9 million on a
pre-tax
loss of $6.4 million, representing an effective income tax rate of 75.8 percent. The effective tax rate for the nine months
ended October 1, 2017 was driven by the blend of earnings and losses in various jurisdictions with varying tax rates and the treatment of certain costs related to the acquisition of Uniwheels. The income tax provision for the nine months ended
September 25, 2016, was $9.6 million on
pre-tax
income of $43.2 million, representing an effective income tax rate of 22.2 percent. The effective tax rate for the nine months ended
September 25, 2016 was lower than the statutory rate due to earnings in countries with tax rates lower than the U.S. statutory rate.
Note 16
Retirement Plans
We have an unfunded salary continuation plan covering certain directors, officers and other key members of management. We
purchase life insurance policies on certain participants to provide, in part, for future liabilities. Cash surrender value of these policies, totaling $7.9 million and $7.5 million at October 1, 2017 and December 31, 2016,
respectively, are included in other
non-current
assets in the companys condensed consolidated balance sheets. Subject to certain vesting requirements, the plan provides for a benefit based on final
average compensation, which becomes payable on the employees death or upon attaining age 65, if retired. The plan was closed to new participants effective February 3, 2011. We have measured the plan assets and obligations of our
salary continuation plan for all periods presented.
For the nine months ended October 1, 2017, payments to retirees or their beneficiaries totaled
approximately $1.1 million. We presently anticipate benefit payments in 2017 to total approximately $1.5 million. The following table summarizes the components of net periodic pension cost for the first nine months of 2017 and
2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
298
|
|
|
|
304
|
|
|
|
894
|
|
|
|
912
|
|
Net amortization
|
|
|
67
|
|
|
|
84
|
|
|
|
201
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
365
|
|
|
$
|
388
|
|
|
$
|
1,095
|
|
|
$
|
1,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Note 17 Debt
A summary of long-term debt and the related weighted average interest rates is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
Debt Instrument
|
|
Long-Term
Debt
|
|
|
Debt
Issuance
Costs
(1)
|
|
|
Long-Term
Debt, Net
|
|
|
Weighted
Average
Interest
Rate
|
|
Term loan facility
|
|
$
|
387,800
|
|
|
$
|
(12,957
|
)
|
|
$
|
374,843
|
|
|
|
5.5
|
%
|
6.00% Senior Notes due 2025
|
|
|
294,166
|
|
|
|
(7,919
|
)
|
|
|
286,247
|
|
|
|
6.0
|
%
|
Other
|
|
|
23,130
|
|
|
|
(3,316
|
)
|
|
|
19,814
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
705,096
|
|
|
$
|
(24,192
|
)
|
|
|
680,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
|
|
|
|
|
|
|
|
(5,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
675,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Unamortized portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes
On
June 15, 2017, Superior issued 250.0 million aggregate principal amount of 6.0% Senior Notes (the Notes) due June 15, 2025. Interest on the Notes is payable semiannually, June 15 and December 25. Superior may
redeem the Notes, in whole or in part, on or after June 15, 2020 at redemption prices of 103.000% and 101.500% of the principal amount thereof if the redemption occurs during the
12-month
period beginning
June 15, 2020 or 2021, respectively, and a redemption price of 100% of the principal amount thereof on or after June 15, 2022, in each case plus accrued and unpaid interest to, but not including, the applicable redemption date. In
addition, the company may redeem some or all of the Notes prior to June 15, 2020 at a price equal to 100.0% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any, to, but not including,
the redemption date. Prior to June 15, 2020, the company may redeem up to 40% of the aggregate principal amount of the Notes using the proceeds of certain equity offerings at a certain redemption price. If we experience a change of control or
sell certain assets, the company may be required to offer to purchase the Notes from the holders.
The Notes are senior unsecured obligations ranking
equally in right of payment with all of its existing and future senior indebtedness and senior in right of payment to any subordinated indebtedness. The notes are effectively subordinated in right of payment to the existing and future secured
indebtedness of the Issuer, including the Senior Secured Credit Facilities (as defined below), to the extent of the assets securing such indebtedness.
Guarantee
The Notes are unconditionally guaranteed by
all material wholly-owned direct and indirect domestic restricted subsidiaries of the company (the Subsidiary Guarantors), with customary exceptions including, among other things, where providing such guarantees is not permitted by law,
regulation or contract or would result in adverse tax consequences.
Covenants
Subject to certain exceptions, the indenture governing the Notes contains restrictive covenants that, among other things, limit the ability of Superior and the
Subsidiary Guarantors to: (i) incur additional indebtedness or issue certain preferred stock; (ii) pay dividends on, or make distributions in respect of, their capital stock; (iii) make certain investments or other restricted
24
payments; (iv) sell certain assets or issue capital stock of restricted subsidiaries; (v) create liens; (vi) merge, consolidate, transfer or dispose of substantially all of their
assets; and (vii) engage in certain transactions with affiliates. These covenants are subject to a number of important limitations and exceptions that are described in the indenture.
The indenture provides for customary events of default that include, among other things (subject in certain cases to customary grace and cure periods): (i)
nonpayment of principal, premium, if any, and interest, when due; (ii) breach of covenants in the indenture; (iii) a failure to pay certain judgments; and (iv) certain events of bankruptcy and insolvency. If an event of default occurs
and is continuing, the Trustee or holders of at least 30% in principal amount of the then outstanding Notes may declare the principal, premium, if any, and accrued and unpaid interest on all the Notes to be due and payable. These events of default
are subject to a number of important qualifications, limitations and exceptions that are described in the indenture. As of October 1, 2017, the company was in compliance with all covenants under the indentures governing the Notes.
Senior Secured Credit Facilities
On March 22, 2017,
Superior entered into a senior secured credit agreement (the Credit Agreement) with Citibank, N.A, JP Morgan Chase N.A., Royal Bank of Canada and Deutsche Bank A.G. New York Branch (collectively, the Lenders). The Credit
Agreement consisted of a $400.0 million senior secured term loan facility (the Term Loan Facility) and a $160.0 million revolving credit facility (the Revolving Credit Facility and, together with the Term Loan
Facility, the Senior Secured Credit Facilities). Borrowings under the Term Loan Facility will bear interest at a rate equal to, at the companys option, either (a) LIBOR for the relevant interest period, adjusted for statutory
reserve requirements, subject to a floor of 1.00 percent per annum, plus an applicable rate of 4.50 percent or (b) a base rate, subject to a floor of 2.00 percent per annum, equal to the highest of (1) the rate of interest
in effect as publicly announced by the administrative agent as its prime rate, (2) the federal funds rate plus 0.50 percent and (3) LIBOR for an interest period of one month plus 1.00 percent, in each case, plus an applicable
rate of 3.50 percent. Borrowings under the Revolving Credit Facility initially bear interest at a rate equal to, at the companys option, either (a) LIBOR for the relevant interest period, adjusted for statutory reserve requirements,
subject to a floor of 1.00 percent per annum, plus an applicable rate of 3.50 percent or (b) a base rate, subject to a floor of 2.00 percent per annum, equal to the highest of (1) the rate of interest in effect as publicly
announced by the administrative agent as its prime rate, (2) the federal funds effective rate plus 0.50 percent and (3) LIBOR for an interest period of one month plus 1.00 percent, in each case, plus an applicable rate of
3.50 percent provided such rate may not be less than zero. The initial commitment fee for unused commitments under the Revolving Credit Facility shall be 0.50 percent. After September 30, 2017, the applicable rates for borrowings
under the Revolving Credit Facility and commitment fees for unused commitments under the Revolving Credit Facility are based upon the First Lien Net Leverage Ratio effective for the preceding quarter with LIBOR applicable rates between
3.50 percent and 3.00 percent, base rate applicable rates between 2.50 percent and 2.00 percent and commitment fees between 0.50 percent and 0.25 percent. Commitment fees are included in our condensed consolidated
financial statements line, interest (expense) income, net. As of October 1, 2017, the company repaid an additional $1.0 million under the term loan facility resulting in a balance of $387.8 million.
As of October 1, 2017, the company had no outstanding borrowings under the Revolving Credit Facility, had outstanding letters of credit of
$2.8 million and available unused commitments under the facility of $157.2 million.
Guarantees
Our obligations under the Credit Agreement are unconditionally guaranteed by all material wholly-owned direct and indirect domestic restricted subsidiaries of
the company, with customary exceptions including, among other things, where providing such guarantees is not permitted by law, regulation or contract or would result in adverse tax consequences. The guarantees of such obligations, will be secured,
subject to permitted liens and other exceptions, by substantially all of our assets and the Subsidiary Guarantors assets, including but not limited to: (i) a perfected pledge of all of the capital stock issued by each of the
companys direct wholly-owned domestic restricted subsidiaries or any guarantor (subject to certain exceptions) and up to 65 percent of the capital stock issued by each direct wholly-owned foreign restricted subsidiary of the company or
any guarantor (subject to certain exceptions) and (ii) perfected security interests in and mortgages on substantially all tangible and intangible personal property and material
fee-owned
real property of
the Company and the guarantors (subject to certain exceptions and exclusions).
25
Covenants
The Senior Secured Credit Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to incur
additional indebtedness and guarantee indebtedness, create or incur liens, engage in mergers or consolidations, sell, transfer or otherwise dispose of assets, make investments, acquisitions, loans or advances, pay dividends, distributions or other
restricted payments, or repurchase our capital stock, prepay, redeem, or repurchase any subordinated indebtedness, enter into agreements which limit our ability to incur liens on our assets or that restrict the ability of restricted subsidiaries to
pay dividends or make other restricted payments to us, and enter into certain transactions with our affiliates.
In addition,
the Credit Agreement contains customary default provisions, representations and warranties and restrictive covenants. The Credit Agreement also contains a provision permitting the
Lenders to accelerate the repayment of all loans outstanding under the Senior Secured Credit Facilities during an event of default. As of October 1, 2017, the company was in compliance with all covenants under the Credit Agreement.
Uniwheels Debt
In connection with the acquisition of
Uniwheels, the company assumed $70.7 million of outstanding debt. At October 1, 2017, $23.1 million of debt remained outstanding, including an equipment loan of $21.3 million and an outstanding balance of $1.8 million under
a Euro 30.0 million revolving line of credit which expires July 31, 2020. At October 1, 2017, $5.8 million of this debt was classified as current. The revolving credit facility bears interest at Euribor plus 1.0 percent (but
in any event not less than 0.96 percent) and the equipment loan bears interest at 1.00 percent.
Note 18 Commitments and Contingencies
Derivatives and Purchase Commitments
In
order to hedge exposure related to fluctuations in foreign currency rates and the cost of certain commodities used in the manufacture of our products, we periodically may purchase derivative financial instruments such as forward contracts, options
or collars to offset or mitigate the impact of such fluctuations. Programs to hedge currency rate exposure may address ongoing transactions including foreign-currency-denominated receivables and payables, as well as specific transactions related to
purchase obligations. Programs to hedge exposure to commodity cost fluctuations would be based on underlying physical consumption of such commodities.
In
accordance with our corporate risk management policies, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities,
certain firmly committed transactions and forecasted future cash flows. We have implemented a program to hedge a portion of our material foreign exchange exposures for up to approximately 48 months. For additional information on our derivatives, see
Note 6, Financial Instruments.
When market conditions warrant, we may also enter into purchase commitments to secure the supply of certain
commodities used in the manufacture of our products, such as aluminum, natural gas and other raw materials. At October 1, 2017, we did not have any purchase commitments in place for the delivery of aluminum, natural gas or other raw materials
in 2017.
Other
We are party to various legal
and environmental proceedings incidental to our business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against us. Based on facts now known, we believe all such matters are
adequately provided for, covered by insurance, are without merit and/or involve such amounts that would not materially adversely affect our consolidated results of operations, cash flows or financial position.
26
Note 19 Stock-Based Compensation
2008 Equity Incentive Plan
Our 2008 Equity Incentive
Plan, as amended (the Plan), authorizes us to issue up to 3.5 million shares of common stock, along with
non-qualified
stock options, stock appreciation rights, restricted stock and
performance units to our officers, key employees,
non-employee
directors and consultants. At October 1, 2017, there were 1.6 million shares available for future grants under this Plan. No more than
600,000 shares may be used under the Plan as full value awards, which include restricted stock and performance stock units. It is our policy to issue shares from authorized but not issued shares upon the exercise of stock
options.
During the first quarter of 2015, the company implemented a long term incentive program for the benefit of certain members of company management.
The program was designed to strengthen employee retention and to provide a more structured incentive program to stimulate improvement in future company results. Per the terms of the program, participants were granted, in 2015 to 2017, time value
restricted stock units (RSUs), vesting ratably over a three year time period, and performance restricted stock units (PSUs), with a three year cliff vesting. Upon vesting, each restricted stock award is exchangeable for one
share of the companys common stock, with accrued dividends. The PSUs are categorized further into three individual categories whose vesting is contingent upon the achievement of certain targets as follows:
|
|
|
40% of the PSUs vest upon certain Return on Invested Capital targets for 2015 to 2017 units
|
|
|
|
40% of the PSUs vest upon certain Cumulative EPS targets for 2016 to 2017 units
|
|
|
|
40% of the PSUs vest upon certain EBITDA margin targets for 2015 units
|
|
|
|
20% of the PSUs vest upon certain market based Shareholder Return targets for 2015 to 2017 units.
|
27
Options
Options are granted at not less than fair market value on the date of grant and expire no later than ten years after the date of grant. Options and
restricted shares granted under the Plan generally require no less than a three year ratable vesting period. Stock option activity in the first nine months of 2017 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2016
|
|
|
231,625
|
|
|
$
|
18.88
|
|
|
|
3.1
|
|
|
$
|
1,845,263
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,000
|
)
|
|
$
|
16.76
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(6,000
|
)
|
|
$
|
21.09
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2017
|
|
|
223,625
|
|
|
$
|
18.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest at October 1, 2017
|
|
|
223,625
|
|
|
$
|
18.84
|
|
|
|
1.6
|
|
|
$
|
51,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 1, 2017
|
|
|
223,625
|
|
|
$
|
18.84
|
|
|
|
1.6
|
|
|
$
|
51,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
Restricted stock awards, or full value awards, generally vest ratably over no less than a three year period. Shares of restricted stock granted
under the Plan are considered issued and outstanding at the date of grant, have the same dividend and voting rights as other outstanding common stock, are subject to forfeiture if employment terminates prior to vesting and are expensed ratably over
the vesting period. Dividends paid on the restricted shares granted under the Plan are
non-forfeitable
if the restricted shares do not ultimately vest. Restricted stock activity in the first nine months of
2017 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Awards
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
|
Weighted Average
Remaining
Amortization
Period (in Years)
|
|
Balance at December 31, 2016
|
|
|
144,295
|
|
|
$
|
19.43
|
|
|
|
0.5
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Vested
|
|
|
(137,823
|
)
|
|
$
|
19.43
|
|
|
|
|
|
Canceled
|
|
|
(3,667
|
)
|
|
$
|
19.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2017
|
|
|
2,805
|
|
|
$
|
19.72
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Restricted Stock Units
Restricted stock unit activity in the first nine months of 2017 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Awards
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
|
Weighted Average
Remaining
Amortization
Period (in Years)
|
|
Balance at December 31, 2016
|
|
|
127,567
|
|
|
$
|
22.03
|
|
|
|
1.7
|
|
Granted
|
|
|
131,656
|
|
|
$
|
22.24
|
|
|
|
|
|
Vested
|
|
|
(37,844
|
)
|
|
$
|
23.72
|
|
|
|
|
|
Canceled
|
|
|
(22,068
|
)
|
|
$
|
22.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2017
|
|
|
199,311
|
|
|
$
|
21.74
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Performance Stock Units
Restricted performance stock unit activity in the first nine months of 2017 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Awards
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
|
Weighted Average
Remaining
Amortization
Period (in Years)
|
|
Balance at December 31, 2016
|
|
|
227,193
|
|
|
$
|
21.72
|
|
|
|
1.6
|
|
Granted
|
|
|
164,566
|
|
|
$
|
22.39
|
|
|
|
|
|
Vested
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Canceled
|
|
|
(63,166
|
)
|
|
$
|
22.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2017
|
|
|
328,593
|
|
|
$
|
21.92
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
Stock-based compensation expense related to our equity incentive plans in accordance with U.S. GAAP was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
|
October 1,
2017
|
|
|
September 25,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
85
|
|
|
$
|
6
|
|
|
$
|
134
|
|
|
$
|
364
|
|
Selling, general and administrative expenses
|
|
|
(100
|
)
|
|
|
338
|
|
|
|
838
|
|
|
|
2,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income taxes
|
|
|
(15
|
)
|
|
|
344
|
|
|
|
972
|
|
|
|
2,658
|
|
Income tax benefit
|
|
|
6
|
|
|
|
(123
|
)
|
|
|
(358
|
)
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes
|
|
$
|
(9
|
)
|
|
$
|
221
|
|
|
$
|
614
|
|
|
$
|
1,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
As of October 1, 2017, a total of $3.5 million of unrecognized compensation cost related to
non-vested
awards is expected to be recognized over a weighted average period of approximately 1.8 years. There were no significant capitalized stock-based compensation costs at October 1, 2017 and
December 31, 2016.
Note 20 Common Stock Repurchase Programs
In October 2014, our Board of Directors approved a stock repurchase program (the 2014 Repurchase Program) which authorized the repurchase of up to
$30.0 million of our common stock. Under the 2014 Repurchase Program, we repurchased common stock from time to time on the open market or in private transactions. Shares repurchased under the 2014 Repurchase Program during 2015 totaled
1,056,954 shares at a cost of $19.6 million. The 2014 Repurchase Program was completed in the beginning of 2016, with purchases of 585,970 shares for a cost of $10.3 million. The repurchased shares described above were either canceled and
retired or added to treasury stock after the reincorporation in Delaware in 2015.
In January 2016, our Board of Directors approved a new stock repurchase
program (the 2016 Repurchase Program), authorizing the repurchase of up to $50.0 million of common stock. Under the 2016 Repurchase Program, we may repurchase common stock from time to time on the open market or in private
transactions. The timing and extent of the repurchases under the 2016 Repurchase Program will depend upon market conditions and other corporate considerations in our sole discretion. During 2016, we repurchased 454,718 shares of company stock at a
cost of $10.4 million under the 2016 Repurchase Program. In the first nine months of 2017, we repurchased an additional 215,841 shares of company stock at a cost of $5.0 million under the 2016 Repurchase Program. Superior does not
anticipate any repurchases under the 2016 Repurchase Program in the near term.
Note 21 - Subsequent Event
As of October 20, 2017, a Domination and Profit Loss Transfer Agreement (DPLTA) between Superior Industries International Germany AG
(Superior AG) and Uniwheels AG was proposed and will be submitted for approval to the Uniwheels shareholders on December 4
th
. Superior AG anticipates entering into the DPLTA, which
will become effective in January 2018. Superior decided to pursue a DPLTA without concurrently pursuing a
merger/squeeze-out.
This approach enables Superior to realize substantial synergies of a consolidated
entity without the distraction or expense associated with simultaneously pursuing a
merger/squeeze-out. According
to the terms of the DPLTA, Superior AG offer
s
to purchase any further
tendered shares for cash consideration of Euro 62.18, or approximately Polish Zloty 264 per share. This cash consideration may be subject to change based on appraisal proceedings that the minority shareholders of Uniwheels will be entitled to
initiate. The aggregate equity purchase price of the Acquisition (assuming an exchange rate of 1.00 Dollar = 3.74193 Polish Zloty) will be approximately $781 million, subject to the number of shares tendered and any change in share price
due to the appraisal proceedings. We will update the acquisition note in the fourth quarter to reflect the DPLTA purchase price. For each share that is not tendered, Superior will be obligated to pay a guaranteed annual dividend of Euro 3.23 as long
as the DPLTA is in effect.
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