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.
The accompanying 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.
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations
Superior Industries International, Inc. (referred to herein as the “Company” or “we,” “us” and “our”) designs and manufactures aluminum wheels for sale to original equipment manufacturers (“OEMs”) and aftermarket customers. We are one of the largest suppliers of cast aluminum wheels to the world’s leading automobile and light truck manufacturers, with manufacturing operations in the United States, Mexico, Germany and Poland. Our OEM aluminum wheels are sold primarily for factory installation, as either standard equipment or optional equipment on vehicle models manufactured by BMW-Mini, Daimler AG Company (Mercedes-Benz, AMG, Smart), FCA, Ford, GM, Honda, Jaguar-Land Rover, Mazda, Nissan, PSA, Renault, Subaru, Suzuki, Toyota, VW Group (Volkswagen, Audi, Skoda, Porsche, Bentley) and Volvo. We also sell aluminum wheels to the European aftermarket under the brands ATS, RIAL, ALUTEC and ANZIO. North America and Europe represent the principal markets for our products, but we have a global presence and influence with North American, European and Asian OEMs. We have determined that our North American and European operations should be treated as separate operating segments as further described in Note 5, “Business Segments.”
Presentation of Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the SEC’s requirements for quarterly reports on Form 10-Q and U.S. GAAP and, in our opinion, contain all adjustments, of a normal and recurring nature, which are necessary for fair presentation of (i) the condensed consolidated income (loss) statements for the three and nine month periods ended September 30, 2019 and September 30, 2018, (ii) the condensed consolidated statements of comprehensive income (loss) for the three and nine month periods ended September 30, 2019 and September 30, 2018, (iii) the condensed consolidated balance sheets at September 30, 2019 and December 31, 2018, (iv) the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2019 and September 30, 2018, and (v) the condensed consolidated statements of shareholders’ equity for the three and nine month periods ended September 30, 2019 and September 30, 2018. This Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes thereto filed with the Securities and Exchange Commission (“SEC”) in our 2018 Annual Report on Form 10-K.
Interim financial reporting standards require us to make estimates that are based on assumptions regarding the outcome of future events and circumstances not known at that time, including the use of estimated effective tax rates. Inevitably, some assumptions will not materialize, unanticipated events or circumstances may occur which vary from those estimates and such variations may significantly affect our future results. Additionally, interim results may not be indicative of our results for future interim periods or our annual results.
Cash Paid for Interest and Taxes and Non-Cash Investing Activities
Cash paid for interest was $28.2 million and $28.6 million for the nine months ended September 30, 2019, and 2018, respectively. Net cash income taxes paid was $6.5 million and $3.6 million for the nine months ended September 30, 2019, and 2018, respectively. As of September 30, 2019, and 2018, $15.8 million and $12.8 million, respectively, of equipment had been purchased but not yet paid for and is included in accounts payable and accrued expenses in our consolidated balance sheets.
New Accounting Standards
ASU 2016-02, Topic 842, “Leases.” Effective January 1, 2019, we adopted ASU 2016-02, ASC 842, “Leases,” the new lease accounting standard, using the optional transition approach. Adoption of the standard resulted in recognition of operating lease right-of-use (“ROU”) assets and lease liabilities of $18.2 million and $18.6 million, respectively, as well as a charge to eliminate previously deferred rent of $0.4 million, as of January 1, 2019. The ASU also requires lessees 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. Under the optional transition approach, financial statements for prior periods have not been restated and the disclosures applicable under the previous standard will be included for those periods. In adopting the standard, the Company has adopted the package of practical expedients. As a consequence, the Company has not reassessed (1) whether existing or expired contracts contain leases under the new definition of a lease, (2) lease classification for expired or existing leases (finance vs. operating) and (3) whether previously capitalized initial direct costs qualify for capitalization under the new standard. In addition, the Company has also adopted an accounting policy to exclude leases of less than one year from capitalization.
7
ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” In January 2018, the FASB issued ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Cut and Jobs Act (“the Act”) related to items in accumulated other comprehensive income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption. The Company adopted this guidance in the first quarter of 2019. The guidance requires new disclosures regarding a company’s accounting policy for releasing tax effects in AOCI. The Company has elected to not reclassify the income tax effects of the Tax Cut and Jobs Act from AOCI.
Accounting Standards Issued But Not Yet Adopted
ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350:) ASU 2017-04 amends the requirement that entities compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, entities should perform their annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and recognize an impairment if the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 with early adoption permitted. The new standard should be applied prospectively. We will consider the merits of early adoption of the new standard, if relevant, when performing our annual impairment test in the fourth quarter.
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” In June 2016 the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASU 2016-13), which requires entities to use a new impairment model based on Current Expected Credit Losses (CECL) rather than incurred losses. Under CECL, estimated credit losses would incorporate relevant information about past events, current conditions and reasonable and supportable forecasts and any expected credit losses would be recognized at the time of sale. We plan to adopt ASU 2016-13 on January 1, 2020. The Company does not expect that adoption will have any significant effect on our financial statements or disclosures because we generally do not incur any significant credit losses due to the financial strength and credit worthiness of our customers.
ASU 2018-13, “Fair Value Measurement.” In August 2018, the FASB issued an ASU entitled “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The ASU allows for early adoption in any interim period after issuance of the update. We are evaluating the impact this guidance will have on our financial statement disclosures.
ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans.” In August 2018, the FASB issued an ASU entitled “Compensation - Retirement Benefits - Defined Benefit Plans - General Subtopic 715-20 - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,” which is designed to improve the effectiveness of disclosures by removing and adding disclosures related to defined benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. The new standard allows for early adoption in any year end after issuance of the update. We are evaluating the impact this new standard will have on our financial statement disclosures.
8
Restatement for Reclassification of Certain Foreign Currency Translation Adjustments
Subsequent to the issuance of the September 30, 2018 interim financial statements, the Company identified an error related to the classification of foreign currency translation adjustments associated with the European non-controlling redeemable equity within the June 30, 2018 and September 30, 2018 condensed consolidated statements of shareholders’ equity, condensed consolidated balance sheets, condensed consolidated income statements and condensed consolidated statements of comprehensive income. As a result, the amounts previously reported have been corrected as the Company has reclassified $0.03 million and $2.9 million of European non-controlling redeemable equity translation adjustments from retained earnings to cumulative translation adjustment for the three and nine month periods ended September 30, 2018, respectively. In addition, the basic and diluted earnings (loss) per share amounts for the three and nine month periods ended September 30, 2018 have been corrected accordingly. The Company’s condensed consolidated statement of cash flows for the nine-month period ended September 30, 2018 was unaffected. Management evaluated the materiality of this misstatement from quantitative and qualitative perspectives and concluded it is not material to the prior periods.
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
Condensed Consolidated Income Statements
and Note 12 Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - Basic
|
$
|
(0.37
|
)
|
|
|
|
|
|
$
|
(0.37
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.32
|
)
|
Loss per share - Diluted
|
|
(0.37
|
)
|
|
|
|
|
|
|
(0.37
|
)
|
|
|
(0.21
|
)
|
|
|
(0.11
|
)
|
|
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss), net
of tax
|
$
|
4,282
|
|
|
$
|
31
|
|
|
$
|
4,313
|
|
|
$
|
(12,898
|
)
|
|
$
|
2,882
|
|
|
$
|
(10,016
|
)
|
Other comprehensive income (loss), net of tax
|
|
21,929
|
|
|
|
31
|
|
|
|
21,960
|
|
|
|
801
|
|
|
|
2,882
|
|
|
|
3,683
|
|
Comprehensive income (loss)
|
|
21,266
|
|
|
|
31
|
|
|
|
21,297
|
|
|
|
18,590
|
|
|
|
2,882
|
|
|
|
21,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Translation Adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency translation adjustment
|
$
|
(12,898
|
)
|
|
$
|
2,882
|
|
|
$
|
(10,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment balance
at September 30, 2018
|
|
(88,264
|
)
|
|
|
2,882
|
|
|
|
(85,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European non-controlling redeemable equity
translation adjustment
|
|
2,882
|
|
|
|
(2,882
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings balance at September 30, 2018
|
|
380,875
|
|
|
|
(2,882
|
)
|
|
|
377,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency translation adjustment
|
|
(12,898
|
)
|
|
|
2,882
|
|
|
|
(10,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
European non-controlling redeemable equity
translation adjustment
|
|
2,882
|
|
|
|
(2,882
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity balance at September 30, 2018
|
|
381,108
|
|
|
|
|
|
|
|
381,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE 2 – REVENUE
In accordance with ASC 606, “Revenue from Contracts with Customers,” the Company disaggregates revenue from contracts with customers into our operating segments, North America and Europe. Revenues by segment for the three and nine months ended September 30, 2019 are summarized in Note 5, “Business Segments.”
The Company’s customer receivables and current and long-term contract liabilities balances as of September 30, 2019 and December 31, 2018 are as follows (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Customer receivables
|
|
$
|
125,665
|
|
|
$
|
97,566
|
|
Contract liabilities—current
|
|
|
7,219
|
|
|
|
5,810
|
|
Contract liabilities—noncurrent
|
|
|
9,892
|
|
|
|
8,354
|
|
NOTE 3 – FAIR VALUE MEASUREMENTS
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis, while other assets and liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset impairment. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
The carrying amounts for cash and cash equivalents, investments in certificates of deposit, accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short period of time until maturity.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of deposit and fixed deposits and money market funds with original maturities of three months or less. Certificates of deposit and fixed deposits whose original maturity is greater than three months and is one year or less are classified as short-term investments.
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 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 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 stock embedded derivative are based upon Level 3 unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the liability – refer to Note 4, “Derivative Financial Instruments.”
Cash Surrender Value
We have an unfunded salary continuation plan, which was closed to new participants effective February 3, 2011. We purchased life insurance policies on certain participants to provide, in part, for future liabilities. In the second quarter of 2019, we terminated our life insurance policies in exchange for the cash surrender value of $7.6 million. We also received $0.6 million for death benefit claims.
10
The following tables categorize items measured at fair value at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
September 30, 2019
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
8,879
|
|
|
$
|
—
|
|
|
$
|
8,879
|
|
|
$
|
—
|
|
Total
|
|
|
8,879
|
|
|
|
—
|
|
|
|
8,879
|
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
14,856
|
|
|
|
—
|
|
|
|
14,856
|
|
|
|
—
|
|
Embedded derivative liability
|
|
|
3,457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,457
|
|
Total
|
|
$
|
18,313
|
|
|
$
|
—
|
|
|
$
|
14,856
|
|
|
$
|
3,457
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
December 31, 2018
|
|
|
|
|
|
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
|
|
|
8,057
|
|
|
|
—
|
|
|
|
8,057
|
|
|
|
—
|
|
Derivative contracts
|
|
|
4,218
|
|
|
|
—
|
|
|
|
4,218
|
|
|
|
—
|
|
Total
|
|
|
13,025
|
|
|
|
—
|
|
|
|
13,025
|
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
8,836
|
|
|
|
—
|
|
|
|
8,836
|
|
|
|
—
|
|
Embedded derivative liability
|
|
|
3,134
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,134
|
|
Total
|
|
$
|
11,970
|
|
|
$
|
—
|
|
|
$
|
8,836
|
|
|
$
|
3,134
|
|
The following table summarizes the changes during 2019 and 2018 in the Level 3 fair value measurement of the embedded derivative liability relating to the redeemable preferred stock issued May 22, 2017 in connection with the acquisition of our European operations:
January 1, 2018 – September 30, 2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Beginning fair value - January 1, 2018
|
|
$
|
4,685
|
|
Change in fair value of redeemable preferred stock
embedded derivative liability
|
|
|
(3,480
|
)
|
Effect of redeemable preferred stock modification
|
|
|
1,929
|
|
Ending fair value - December 31, 2018
|
|
|
3,134
|
|
Change in fair value of redeemable preferred stock
embedded derivative liability
|
|
|
323
|
|
Ending fair value - September 30, 2019
|
|
$
|
3,457
|
|
11
Debt Instruments
The carrying values of the Company’s 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 U.S. GAAP fair value hierarchy). The estimated fair value, as well as the carrying value, of the Company’s debt instruments are shown below:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Estimated aggregate fair value
|
|
$
|
601,714
|
|
|
$
|
624,943
|
|
Aggregate carrying value (1)
|
|
|
634,745
|
|
|
|
684,922
|
|
(1)
|
Long-term debt excluding the impact of unamortized debt issuance costs.
|
NOTE 4 - DERIVATIVE FINANCIAL INSTRUMENTS
Derivative Instruments and Hedging Activities
We use derivatives to partially offset our exposure to foreign currency, interest rate, aluminum and other commodity price 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, interest rates, and aluminum or other commodity prices.
To help protect gross margins from fluctuations in foreign currency exchange rates, certain of our subsidiaries, whose functional currency is the U.S. dollar or the Euro, hedge a portion of their forecasted foreign currency costs denominated in the Mexican Peso and Polish Zloty, respectively. We may hedge portions of our forecasted foreign currency exposure up to 48 months.
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. Gains or losses on cash flow hedges that are designated as hedging instruments are recorded in accumulated other comprehensive income (loss) (“AOCI”) until the hedged item is recognized in earnings, at which point accumulated gains or losses will be recognized in earnings and classified with the underlying hedged transaction. 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. The Company has derivatives that are designated as hedging instruments as well as derivatives that did not qualify for designation as hedging instruments.
Redeemable Preferred Stock Embedded Derivative
We have determined that the conversion option embedded in our 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. 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 holder’s option, the redemption value is significantly greater than the face amount, the shares carry a fixed mandatory dividend and the stock price necessary to make conversion more attractive than redemption ($56.32) is significantly greater than the price at the date of issuance ($19.05), all of which led to the conclusion that redemption is more likely than conversion.
We also have determined that the embedded 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, because the debt host contract involves a substantial discount (face of $150.0 million as compared to the redemption value of $300.0 million) and the redemption event would accelerate the holder’s option to redeem the shares (refer to Note 10, “Redeemable Preferred Stock”).
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 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 financial statement line item of the Company’s condensed consolidated income statements (refer to Note 3, “Fair Value Measurements”).
12
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 Company’s common stock price is estimated based on a volatility factor. The binomial option 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.
The expected volatility of the Company’s common stock is estimated based on historical volatility. The assumed base case term used in the valuation model is the period remaining until September 14, 2025 (the earliest date at which the holder may exercise its unconditional redemption option). A number of other scenarios incorporate 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 U.S. Treasury zero coupon yield with a remaining term equal to the expected term of the conversion and early redemption options. The significant assumptions utilized in the Company’s valuation of the embedded derivative at September 30, 2019 are as follows: valuation scenario terms between 2.25 and 5.96 years, volatility of 68.0 percent, risk-free rate of 1.6 percent related to the respective assumed terms, a risky bond rate of 20.0 percent and no dividend yield.
The following tables display the fair value of derivatives by balance sheet line item at September 30, 2019 and December 31, 2018:
|
|
September 30, 2019
|
|
|
|
Other
Current
Assets
|
|
|
Other
Non-current
Assets
|
|
|
Accrued
Liabilities
|
|
|
Other
Non-current
Liabilities
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts designated as
hedging instruments
|
|
$
|
3,537
|
|
|
$
|
4,205
|
|
|
$
|
1,557
|
|
|
$
|
3,695
|
|
Foreign exchange forward contracts not designated
as hedging instruments
|
|
|
1,130
|
|
|
|
—
|
|
|
|
454
|
|
|
|
—
|
|
Aluminum forward contracts designated as hedging
instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
563
|
|
|
|
—
|
|
Natural gas forward contracts designated as hedging
instruments
|
|
|
7
|
|
|
|
—
|
|
|
|
741
|
|
|
|
790
|
|
Interest rate swaps designated as hedging
instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
2,216
|
|
|
|
4,840
|
|
Embedded derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,457
|
|
Total derivative financial instruments
|
|
$
|
4,674
|
|
|
$
|
4,205
|
|
|
$
|
5,531
|
|
|
$
|
12,782
|
|
|
|
December 31, 2018
|
|
|
|
Other
Current
Assets
|
|
|
Other
Non-current
Assets
|
|
|
Accrued
Liabilities
|
|
|
Other
Non-current
Liabilities
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts designated as
hedging instruments
|
|
$
|
2,599
|
|
|
$
|
1,011
|
|
|
$
|
659
|
|
|
$
|
6,202
|
|
Foreign exchange forward contracts not designated
as hedging instruments
|
|
|
333
|
|
|
|
—
|
|
|
|
207
|
|
|
|
—
|
|
Aluminum forward contracts designated as hedging
instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
927
|
|
|
|
—
|
|
Cross currency swap not designated as a hedging
instrument
|
|
|
—
|
|
|
|
—
|
|
|
|
227
|
|
|
|
—
|
|
Natural gas forward contracts designated as hedging
instruments
|
|
|
275
|
|
|
|
—
|
|
|
|
355
|
|
|
|
—
|
|
Interest rate swaps designated as hedging
instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
131
|
|
|
|
128
|
|
Embedded derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,134
|
|
Total derivative financial instruments
|
|
$
|
3,207
|
|
|
$
|
1,011
|
|
|
$
|
2,506
|
|
|
$
|
9,464
|
|
13
The following table summarizes the notional amount and estimated fair value of our derivative financial instruments:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Notional
U.S. Dollar
Amount
|
|
|
Fair
Value
|
|
|
Notional
U.S. Dollar
Amount
|
|
|
Fair
Value
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts designated as
hedging instruments
|
|
$
|
474,672
|
|
|
$
|
2,490
|
|
|
$
|
467,253
|
|
|
$
|
(3,251
|
)
|
Foreign exchange forward contracts not designated
as hedging instruments
|
|
|
83,768
|
|
|
|
676
|
|
|
|
45,905
|
|
|
|
126
|
|
Aluminum forward contracts designated as hedging
instruments
|
|
|
11,905
|
|
|
|
(563
|
)
|
|
|
10,810
|
|
|
|
(927
|
)
|
Cross currency swap not designated as a hedging
instrument
|
|
|
—
|
|
|
|
—
|
|
|
|
12,151
|
|
|
|
(227
|
)
|
Natural gas forward contracts designated as hedging
instruments
|
|
|
5,758
|
|
|
|
(1,524
|
)
|
|
|
2,165
|
|
|
|
(80
|
)
|
Interest rate swaps designated as hedging
instruments
|
|
|
260,000
|
|
|
|
(7,056
|
)
|
|
|
90,000
|
|
|
|
(259
|
)
|
Total derivative financial instruments
|
|
$
|
836,103
|
|
|
$
|
(5,977
|
)
|
|
$
|
628,284
|
|
|
$
|
(4,618
|
)
|
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. 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 prices.
The following tables summarize the gain or loss recognized in AOCI as of September 30, 2019 and 2018, the amounts reclassified from AOCI into earnings and the amounts recognized directly into earnings for the three and nine months ended September 30, 2019 and 2018:
Three months ended September 30, 2019
|
|
Amount of Gain or
(Loss) Recognized in
AOCI on Derivatives, net of tax
|
|
|
Amount of Pre-tax
Gain or (Loss) Reclassified
from AOCI into Income
|
|
|
Amount of Pre-tax
Gain or (Loss)
Recognized in Income
on Derivatives
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
(8,302
|
)
|
|
$
|
703
|
|
|
$
|
1,817
|
|
Total
|
|
$
|
(8,302
|
)
|
|
$
|
703
|
|
|
$
|
1,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
|
Amount of Gain or
(Loss) Recognized in
AOCI on Derivatives, net of tax
|
|
|
Amount of Pre-tax
Gain or (Loss) Reclassified
from AOCI into Income
|
|
|
Amount of Pre-tax
Gain or (Loss)
Recognized in Income
on Derivatives
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
(1,520
|
)
|
|
$
|
2,417
|
|
|
$
|
3,557
|
|
Total
|
|
$
|
(1,520
|
)
|
|
$
|
2,417
|
|
|
$
|
3,557
|
|
14
Three months ended September 30, 2018
|
|
Amount of Gain or
(Loss) Recognized in
AOCI on Derivatives, net of tax
|
|
|
Amount of Pre-tax
Gain or (Loss) Reclassified
from AOCI into Income
|
|
|
Amount of Pre-tax
Gain or (Loss)
Recognized in Income
on Derivatives
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
17,523
|
|
|
$
|
233
|
|
|
$
|
(411
|
)
|
Total
|
|
$
|
17,523
|
|
|
$
|
233
|
|
|
$
|
(411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
Amount of Gain or
(Loss) Recognized in
AOCI on Derivatives, net of tax
|
|
|
Amount of Pre-tax
Gain or (Loss) Reclassified
from AOCI into Income
|
|
|
Amount of Pre-tax
Gain or (Loss)
Recognized in Income
on Derivatives
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
13,444
|
|
|
$
|
279
|
|
|
$
|
(720
|
)
|
Total
|
|
$
|
13,444
|
|
|
$
|
279
|
|
|
$
|
(720
|
)
|
NOTE 5 - BUSINESS SEGMENTS
The North American and European businesses represent separate operating segments in view of significantly different markets, customers and products in each of these regions. Within each of these regions, markets, customers, products and production processes are similar and production can be readily transferred between production facilities. Moreover, our business within each region leverages common systems, processes and infrastructure. Accordingly, North America and Europe comprise the Company’s reportable segments.
(Dollars in thousands)
|
|
Net Sales
|
|
|
Income from Operations
|
|
Three months ended
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
North America
|
|
$
|
188,089
|
|
|
$
|
197,776
|
|
|
$
|
(4,440
|
)
|
|
$
|
2,901
|
|
Europe
|
|
|
163,925
|
|
|
|
149,836
|
|
|
|
4,197
|
|
|
|
4,787
|
|
|
|
$
|
352,014
|
|
|
$
|
347,612
|
|
|
$
|
(243
|
)
|
|
$
|
7,688
|
|
(Dollars in thousands)
|
|
Depreciation and Amortization
|
|
|
Capital Expenditures
|
|
Three months ended
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
North America
|
|
$
|
15,432
|
|
|
$
|
8,300
|
|
|
$
|
5,425
|
|
|
$
|
11,197
|
|
Europe
|
|
|
15,396
|
|
|
|
15,292
|
|
|
|
13,494
|
|
|
|
6,249
|
|
|
|
$
|
30,828
|
|
|
$
|
23,592
|
|
|
$
|
18,919
|
|
|
$
|
17,446
|
|
(Dollars in thousands)
|
|
Net Sales
|
|
|
Income from Operations
|
|
Nine months ended
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
North America
|
|
$
|
553,607
|
|
|
$
|
606,684
|
|
|
$
|
13,586
|
|
|
$
|
26,362
|
|
Europe
|
|
|
508,599
|
|
|
|
516,320
|
|
|
|
28,841
|
|
|
|
40,230
|
|
|
|
$
|
1,062,206
|
|
|
$
|
1,123,004
|
|
|
$
|
42,427
|
|
|
$
|
66,592
|
|
(Dollars in thousands)
|
|
Depreciation and Amortization
|
|
|
Capital Expenditures
|
|
Nine months ended
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
North America
|
|
$
|
31,248
|
|
|
$
|
25,701
|
|
|
$
|
15,988
|
|
|
$
|
29,790
|
|
Europe
|
|
|
46,252
|
|
|
|
46,231
|
|
|
|
31,596
|
|
|
|
25,676
|
|
|
|
$
|
77,500
|
|
|
$
|
71,932
|
|
|
$
|
47,584
|
|
|
$
|
55,466
|
|
15
(Dollars in thousands)
|
|
Property, Plant and Equipment, net
|
|
|
Goodwill and Intangible Assets
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
North America
|
|
$
|
235,115
|
|
|
$
|
249,791
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Europe
|
|
|
281,777
|
|
|
|
282,976
|
|
|
|
421,232
|
|
|
|
459,803
|
|
|
|
$
|
516,892
|
|
|
$
|
532,767
|
|
|
$
|
421,232
|
|
|
$
|
459,803
|
|
(Dollars in thousands)
|
|
Total Assets
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
North America
|
|
$
|
461,584
|
|
|
$
|
484,682
|
|
Europe
|
|
|
941,778
|
|
|
|
966,934
|
|
|
|
$
|
1,403,362
|
|
|
$
|
1,451,616
|
|
Geographic information
Net sales by geographic location are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
26,916
|
|
|
$
|
27,653
|
|
|
$
|
81,638
|
|
|
$
|
88,663
|
|
Mexico
|
|
|
161,173
|
|
|
|
170,123
|
|
|
|
471,969
|
|
|
|
518,021
|
|
Germany
|
|
|
59,548
|
|
|
|
57,205
|
|
|
|
180,785
|
|
|
|
199,398
|
|
Poland
|
|
|
104,377
|
|
|
|
92,631
|
|
|
|
327,814
|
|
|
|
316,922
|
|
Consolidated net sales
|
|
$
|
352,014
|
|
|
$
|
347,612
|
|
|
$
|
1,062,206
|
|
|
$
|
1,123,004
|
|
NOTE 6 - INVENTORIES
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
43,104
|
|
|
$
|
49,571
|
|
Work in process
|
|
|
49,951
|
|
|
|
42,886
|
|
Finished goods
|
|
|
69,024
|
|
|
|
83,121
|
|
Inventories, net
|
|
$
|
162,079
|
|
|
$
|
175,578
|
|
Service wheel and supplies inventory included in other non-current assets in the condensed consolidated balance sheets totaled $7.9 million and $8.9 million at September 30, 2019 and December 31, 2018, respectively.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
$
|
142,542
|
|
|
$
|
140,471
|
|
Machinery and equipment
|
|
|
793,325
|
|
|
|
769,451
|
|
Leasehold improvements and other
|
|
|
11,486
|
|
|
|
12,883
|
|
Construction in progress
|
|
|
76,395
|
|
|
|
67,559
|
|
|
|
|
1,023,748
|
|
|
|
990,364
|
|
Accumulated depreciation
|
|
|
(506,856
|
)
|
|
|
(457,597
|
)
|
Property, plant and equipment, net
|
|
$
|
516,892
|
|
|
$
|
532,767
|
|
16
Depreciation expense for the three and nine months ended September 30, 2019 was $24.2 million and $57.4 million, respectively. Depreciation expense for the three months ended September 30, 2019 included accelerated depreciation of $7.6 million related to excess equipment arising from the plan to reduce production at our Fayetteville, Arkansas manufacturing facility (refer to Note 20, “Restructuring”). Depreciation expense for the three and nine months ended September 30, 2018 was $17.1 million and $52.0 million, respectively.
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
Following is a summary of the Company’s finite-lived and indefinite-lived intangible assets and goodwill as of September 30, 2019 and December 31, 2018.
Nine Months Ended September 30, 2019
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Currency
Translation
|
|
|
Net Carrying Amount
|
|
|
Remaining
Weighted
Average
Amortization
Period
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand name
|
|
$
|
9,000
|
|
|
$
|
(4,333
|
)
|
|
$
|
2
|
|
|
$
|
4,669
|
|
|
3-4
|
Technology
|
|
|
15,000
|
|
|
|
(7,221
|
)
|
|
|
3
|
|
|
|
7,782
|
|
|
2-4
|
Customer relationships
|
|
|
167,000
|
|
|
|
(48,681
|
)
|
|
|
(1,646
|
)
|
|
|
116,673
|
|
|
4-9
|
Total finite
|
|
|
191,000
|
|
|
|
(60,235
|
)
|
|
|
(1,641
|
)
|
|
|
129,124
|
|
|
|
Trade names
|
|
|
14,000
|
|
|
|
—
|
|
|
|
(435
|
)
|
|
|
13,565
|
|
|
Indefinite
|
Total intangibles
|
|
$
|
205,000
|
|
|
$
|
(60,235
|
)
|
|
$
|
(2,076
|
)
|
|
$
|
142,689
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Beginning Balance
|
|
|
Currency
Translation
|
|
|
Ending
Balance
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
291,434
|
|
|
$
|
(12,891
|
)
|
|
$
|
278,543
|
|
Year Ended December 31, 2018
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Currency
Translation
|
|
|
Net Carrying Amount
|
|
|
Remaining
Weighted
Average
Amortization
Period
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand name
|
|
$
|
9,000
|
|
|
$
|
(2,979
|
)
|
|
$
|
237
|
|
|
$
|
6,258
|
|
|
4-5
|
Technology
|
|
|
15,000
|
|
|
|
(4,964
|
)
|
|
|
394
|
|
|
|
10,430
|
|
|
3-5
|
Customer relationships
|
|
|
167,000
|
|
|
|
(33,468
|
)
|
|
|
3,823
|
|
|
|
137,355
|
|
|
5-10
|
Total finite
|
|
|
191,000
|
|
|
|
(41,411
|
)
|
|
|
4,454
|
|
|
|
154,043
|
|
|
|
Trade names
|
|
|
14,000
|
|
|
|
—
|
|
|
|
326
|
|
|
|
14,326
|
|
|
Indefinite
|
Total intangibles
|
|
$
|
205,000
|
|
|
$
|
(41,411
|
)
|
|
$
|
4,780
|
|
|
$
|
168,369
|
|
|
|
|
|
Beginning Balance
|
|
|
Currency
Translation
|
|
|
Ending
Balance
|
|
Year Ended December 31, 2018
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
304,805
|
|
|
$
|
(13,371
|
)
|
|
$
|
291,434
|
|
Amortization expense for these intangible assets was $6.6 million and $6.5 million for the quarters ended September 30, 2019 and 2018, respectively. Amortization for the first nine months of the year was $20.1 million and $19.9 million for September 30, 2019 and 2018, respectively. The anticipated annual amortization expense for these intangible assets is $25.0 million for 2019 to 2021, $22.2 million for 2022 and $20.2 million for 2023.
The identification of potential impairment involves comparing our Europe reporting unit’s estimated fair value to its carrying value, including goodwill. In performing our valuation, we utilize both an income approach and a market approach to determine fair value. The income approach is based on projected debt-free cash flow, which is discounted to the present value using discount factors that consider the timing and risk of cash flows. The discount rate used is the weighted average of an estimated cost of equity and of debt (“weighted average cost of capital”). The weighted average cost of capital is adjusted as necessary to reflect risk associated with the
17
business of the Europe reporting unit. Financial projections are based on estimated production volumes, product prices and expenses, including raw material cost, wages, energy and other expenses. Other significant assumptions include terminal value cash flow and growth rates, future capital expenditures and changes in future working capital requirements. The market approach is based on the observed ratios of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) of comparable, publicly traded companies. The market approach fair value is determined by multiplying historical and anticipated financial metrics of the European reporting unit by the EBITDA pricing multiples derived from the comparable, publicly traded companies. Our 2018 assessment of European goodwill indicated that the fair value of the European reporting unit exceeded its respective carrying value by approximately $12.2 million, or approximately 2%. A considerable amount of management judgment and assumptions are required in performing the quantitative impairment test, principally related to determining the fair value of the reporting unit. While the Company believes its judgments and assumptions are reasonable, different assumptions could change the estimated fair value.
The identification and evaluation of potential triggering events in interim periods between annual impairment assessments also involves considerable judgment. Recent analyst forecasts of automotive passenger car and light truck sales in Europe for 2020 to 2023 are lower than previously issued forecasts. In addition, the Company’s closing stock price (which fluctuated higher and lower than the December 31, 2018 stock price during the first two quarters) has ranged between a low of $2.41 and high of $3.74 during the third quarter with a price of $2.89 as of September 30, 2019, representing a 40 percent decline in market capitalization since December 31, 2018. While these factors may indicate a potential decline in the fair value of the European reporting unit, we do not have sufficient evidence to conclude that it is more likely than not that the carrying value of the European reporting unit exceeds its fair value. The Company plans to complete its long-term business planning in the fourth quarter of 2019. These financial projections are a key input into the quantitative impairment test of goodwill and indefinite-lived intangibles, which we plan to perform in the fourth quarter.
NOTE 9 – DEBT
A summary of long-term debt and the related weighted average interest rates is shown below:
|
|
September 30, 2019
(Dollars in Thousands)
|
|
Debt Instrument
|
|
Total
Debt
|
|
|
Debt
Issuance
Costs (1)
|
|
|
Total
Debt, Net
|
|
|
Weighted
Average
Interest
Rate
|
|
Term Loan Facility
|
|
$
|
375,800
|
|
|
$
|
(10,953
|
)
|
|
$
|
364,847
|
|
|
6.1%
|
|
6.00% Senior Notes due 2025
|
|
|
243,962
|
|
|
|
(5,810
|
)
|
|
|
238,152
|
|
|
6.0%
|
|
Other
|
|
|
13,183
|
|
|
|
—
|
|
|
|
13,183
|
|
|
2.2%
|
|
Capital Leases
|
|
|
1,800
|
|
|
|
—
|
|
|
|
1,800
|
|
|
2.9%
|
|
|
|
$
|
634,745
|
|
|
$
|
(16,763
|
)
|
|
|
617,982
|
|
|
|
|
|
Less: Current portion
|
|
|
|
|
|
|
|
|
|
|
(3,300
|
)
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
614,682
|
|
|
|
|
|
|
|
December 31, 2018
(Dollars in Thousands)
|
|
Debt Instrument
|
|
Total
Debt
|
|
|
Debt
Issuance
Costs (1)
|
|
|
Total
Debt, Net
|
|
|
Weighted
Average
Interest
Rate
|
|
Term Loan Facility
|
|
$
|
382,800
|
|
|
$
|
(13,078
|
)
|
|
$
|
369,722
|
|
|
6.3%
|
|
6.00% Senior Notes due 2025
|
|
|
286,100
|
|
|
|
(7,366
|
)
|
|
|
278,734
|
|
|
6.0%
|
|
Other
|
|
|
16,022
|
|
|
|
—
|
|
|
|
16,022
|
|
|
2.2%
|
|
|
|
$
|
684,922
|
|
|
$
|
(20,444
|
)
|
|
|
664,478
|
|
|
|
|
|
Less: Current portion
|
|
|
|
|
|
|
|
|
|
|
(3,052
|
)
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
661,426
|
|
|
|
|
|
Senior Notes
On June 15, 2017, the Company issued 250.0 million Euro aggregate principal amount of 6.00% Senior Notes (the “Notes”) due June 15, 2025. Interest on the Notes is payable semiannually, on June 15 and December 15. The Company may redeem the Notes, in
18
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, up 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 Company, including the Senior Secured Credit Facilities (as defined below), to the extent of the assets securing such indebtedness.
During the second and third quarters of 2019, the Company opportunistically purchased Notes on the open market with face values of $22.4 million (20.0 million Euro) and $7.8 million (7.0 million Euro) for $19.4 million and $6.6 million, respectively. The associated carrying values of the Notes, net of allocable debt issuance costs, were $21.8 million and $7.6 million, respectively, resulting in net gains of $2.4 million and $1.0 million for the second and third quarters, respectively, which are included in other income.
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 the Company 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 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 several 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 Bank of New York Mellon, London Branch (“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 several important qualifications, limitations and exceptions that are described in the indenture. As of September 30, 2019, the Company was in compliance with all covenants under the indenture governing the Notes.
Senior Secured Credit Facilities
On March 22, 2017, the Company entered into a senior secured credit agreement (the “Credit Agreement”) with Citibank, N.A, as Administrative Agent, Collateral Agent and Issuing Bank, JP Morgan Chase N.A., Royal Bank of Canada and Deutsche Bank A.G. New York Branch as Joint Lead Arrangers and Joint Book Runners, and the other lenders party thereto (collectively, the “Lenders”). The Credit Agreement consisted of a $400.0 million senior secured term loan facility (the “Term Loan Facility”), which matures on May 23, 2024, and a $160.0 million revolving credit facility maturing on May 23, 2022 (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facilities”).
On June 29, 2018, the Company entered into an amendment to the Credit Agreement pursuant to which the interest rate under the Term Loan Facility was reduced to LIBOR plus 4.00 percent (from LIBOR plus 4.50 percent), subject to a LIBOR floor of 0.00 percent (in place of the previous LIBOR floor of 1.00 percent). Substantially all of the original loans under the Term Loan Facility were replaced with loans from existing lenders under terms that were not substantially different than those of the original loans. As a result, this transaction did not result in any debt extinguishment and the unamortized debt issuance costs associated with the original loans will continue to be amortized over the remaining term of the replacement loans (which is unchanged from the original term).
Borrowings under the Term Loan Facility will bear interest at a rate equal to, at the Company’s option, either (a) LIBOR for the relevant interest period, with a floor of zero, plus an applicable rate of 4.00 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,
19
(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 3.00 percent.
Borrowings under the Revolving Credit Facility initially bear interest at a rate equal to, at the Company’s option, either (a) LIBOR for the relevant interest period, with a floor of 1.00 percent per annum, plus an applicable rate of 3.50 percent or (b) a base rate, 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 2.50 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. 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 consolidated financial statements line, interest expense.
As of September 30, 2019, the Company had repaid $24.2 million under the Term Loan Facility resulting in a balance of $375.8 million. As of September 30, 2019, the Company had no outstanding borrowings under the Revolving Credit Facility and had outstanding letters of credit of $3.6 million and available unused commitments under this facility of $156.4 million.
Guarantees and Collateral Security
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 Company’s 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).
Covenants
The Senior Secured Credit Facilities contain a number of restrictive 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 other 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 September 30, 2019, the Company was in compliance with all covenants under the Credit Agreement.
Acquisition Debt and European Credit Facility
In connection with the acquisition of Uniwheels, AG, the Company assumed $70.7 million of outstanding debt. At September 30, 2019, $13.2 million of debt remained outstanding, of which $3.0 million was classified as current. The outstanding debt is related to equipment and bears interest at 2.2 percent.
During the second quarter of 2019, the Company amended its European revolving credit facility (the “European Credit Facility”), increasing the available borrowing limit from 30.0 million Euro to 45.0 million Euro and extending the term to May 22, 2022. At September 30, 2019, there was 44.6 million Euro of available funds under the European Credit Facility. The credit facility bears interest at Euribor (with a floor of zero) plus a margin (ranging from 1.55 percent to 3.0 percent based on the net debt leverage ratio of Superior Industries Europe AG and its wholly owned subsidiaries, collectively “Superior Europe AG”), currently 1.55 percent. The annual commitment fee for unused commitments (ranging from 0.50 percent to 1.05 percent based on the net debt leverage ratio of Superior Europe AG), is currently 0.50 percent per annum. In addition, a management fee is assessed equal to 0.07 percent of borrowings outstanding at each month end. The commitment and management fees are both included in interest expense. Superior
20
Europe AG has pledged substantially all of its assets, including land and buildings, receivables, inventory, and other moveable assets (other than collateral associated with the equipment loan) as collateral under the European Credit Facility.
The European Credit Facility is subject to a number of restrictive covenants that, among other things, restrict, subject to certain exceptions, the ability of Superior Europe AG 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 or distributions, or repurchase our capital stock, prepay, redeem, or repurchase any subordinated indebtedness, and enter into agreements which limit our ability to incur liens on our assets. At September 30, 2019, Superior Europe AG was in compliance with all covenants under the European Credit Facility.
NOTE 10 - REDEEMABLE PREFERRED STOCK
During 2017, we issued 150,000 shares of Series A (140,202 shares) and Series B (9,798 shares) Perpetual Convertible Preferred Stock, par value $0.01 per share to TPG Growth III Sidewall, L.P. (“TPG”) for an aggregate purchase price of $150.0 million. On August 30, 2017, the Series B shares were converted into Series A redeemable preferred stock, the “redeemable preferred stock,” after approval by our shareholders. The 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.
The redeemable preferred stock is convertible into shares of our 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. The redeemable preferred stock accrues dividends at a rate of 9 percent per annum, payable at our election either in-kind or in cash and 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 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 Company’s assets, liquidation or delisting of the Company’s common stock. In addition, as originally issued, TPG has the right, at its option, to unconditionally redeem the shares at any time after May 23, 2024, subsequently extended to September 14, 2025 (the “redemption date”). We may, at our option, redeem in whole at any time all of the shares of redeemable preferred stock outstanding. At redemption by either party, the redemption value will be the greater of two times the initial face value ($150.0 million) and any accrued unpaid dividends or dividends paid-in-kind, currently $300.0 million, or the product of the number of common shares into which the 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 and the redemption option exercisable upon occurrence of a “redemption event” which are embedded in the redeemable preferred stock must be accounted for separately from the redeemable preferred stock as a derivative liability (as more fully described under Note 4, “Derivative Financial Instruments”).
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 $150.0 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 $135.5 million. The difference between the adjusted initial value of $135.5 million and the redemption value of $300 million was being accreted over the seven-year period from the date of issuance through May 23, 2024 (the original date at which the holder had 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 stock).
On November 7, 2018, the Company filed a Certificate of Correction to the Certificate of Designations for the preferred stock, which became effective upon filing and corrected the redemption date to September 14, 2025. This resulted in a modification of the redeemable preferred stock. As a result of the modification, the carrying value of the redeemable preferred stock decreased $17.2 million (which was credited to retained earnings, treated as a deemed dividend and is added back to compute earnings per share) and the period for accretion of the carrying value to the redemption value has been extended to September 14, 2025. The accretion has been adjusted to amortize the excess of the redemption value over the carrying value over the period through September 14, 2025. The accumulated accretion net of the modification adjustment as of September 30, 2019 is $21.3 million resulting in an adjusted redeemable preferred stock balance of $156.7 million.
21
NOTE 11 – EUROPEAN NON-CONTROLLING REDEEMABLE EQUITY
On May 30, 2017, the Company acquired 92.3 percent of the outstanding shares of Uniwheels, Inc. Subsequently, the Company commenced a delisting and associated tender offer for the remaining shares. On January 17, 2018, the Company entered into a Domination and Profit and Loss Transfer agreement (“DPLTA”) retroactively effective as of January 1, 2018 pursuant to which we offered to purchase the remaining outstanding shares at Euro 62.18. This price may be subject to change based on appraisal proceedings initiated by the minority shareholders which have not yet been concluded. The Company must also pay an annual dividend of Euro 3.23 as long as the DPLTA is in effect. For any shares tendered prior to the annual dividend payment, we must pay interest at a statutory rate, currently 4.12 percent, in place of the dividend. As a result, non-controlling interests with a carrying value of $51.9 million were reclassified from stockholders’ equity to mezzanine equity as of January 1, 2018 because non-controlling interests with redemption rights (not within the Company’s control) are considered redeemable and must be classified outside shareholders’ equity. As a result of purchases pursuant to the tender offer and the DPLTA, the Company has increased its ownership to 98.9 percent as of September 30, 2019. In addition, the carrying value of the non-controlling interests must be adjusted to redemption value since they are currently redeemable. The following table summarizes the European non-controlling redeemable equity activity for the twenty-one months ended September 30, 2019 (in thousands):
Balance at December 31, 2017
|
|
$
|
—
|
|
Reclassification of non-controlling interests
|
|
|
51,943
|
|
Redemption value adjustment
|
|
|
3,625
|
|
Dividends accrued
|
|
|
1,512
|
|
Dividends paid
|
|
|
(964
|
)
|
Translation adjustment
|
|
|
(3,219
|
)
|
Purchase of shares
|
|
|
(39,048
|
)
|
Balance at December 31, 2018
|
|
|
13,849
|
|
Dividends accrued
|
|
|
496
|
|
Dividends paid
|
|
|
(755
|
)
|
Translation adjustment
|
|
|
(566
|
)
|
Purchase of shares
|
|
|
(3,888
|
)
|
Balance at September 30, 2019
|
|
$
|
9,136
|
|
22
NOTE 12 – EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) attributable to Superior, after deducting preferred dividends and accretion and European non-controlling redeemable equity dividends, by the weighted average number of common shares outstanding. For purposes of calculating diluted earnings per share, the weighted average shares outstanding includes the dilutive effect of outstanding stock options and time and performance based restricted stock units under the treasury stock method. The redeemable preferred shares discussed in Note 10, “Redeemable Preferred Stock” are not included in the diluted earnings per share because the conversion would be anti-dilutive for the periods ended September 30, 2019 and September 30, 2018.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income
|
|
$
|
(6,631
|
)
|
|
$
|
(663
|
)
|
|
$
|
2,589
|
|
|
$
|
17,789
|
|
Less: Redeemable preferred stock dividends and accretion
|
|
|
(7,587
|
)
|
|
|
(8,295
|
)
|
|
|
(23,275
|
)
|
|
|
(24,499
|
)
|
Less: European non-controlling redeemable equity dividend
|
|
|
(113
|
)
|
|
|
(258
|
)
|
|
|
(496
|
)
|
|
|
(1,342
|
)
|
Basic numerator
|
|
$
|
(14,331
|
)
|
|
$
|
(9,216
|
)
|
|
$
|
(21,182
|
)
|
|
$
|
(8,052
|
)
|
Basic (loss) earnings per share
|
|
$
|
(0.57
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.32
|
)
|
Weighted average shares outstanding-Basic
|
|
|
25,127
|
|
|
|
25,017
|
|
|
|
25,089
|
|
|
|
24,985
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income
|
|
$
|
(6,631
|
)
|
|
$
|
(663
|
)
|
|
$
|
2,589
|
|
|
$
|
17,789
|
|
Less: Redeemable preferred stock dividends and accretion
|
|
|
(7,587
|
)
|
|
|
(8,295
|
)
|
|
|
(23,275
|
)
|
|
|
(24,499
|
)
|
Less: European non-controlling redeemable equity dividend
|
|
|
(113
|
)
|
|
|
(258
|
)
|
|
|
(496
|
)
|
|
|
(1,342
|
)
|
Diluted numerator
|
|
$
|
(14,331
|
)
|
|
$
|
(9,216
|
)
|
|
$
|
(21,182
|
)
|
|
$
|
(8,052
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(0.57
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.32
|
)
|
Weighted average shares outstanding-Basic
|
|
|
25,127
|
|
|
|
25,017
|
|
|
|
25,089
|
|
|
|
24,985
|
|
Dilutive effect of common share equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares outstanding-Diluted
|
|
|
25,127
|
|
|
|
25,017
|
|
|
|
25,089
|
|
|
|
24,985
|
|
NOTE 13 - 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. 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 three months ended September 30, 2019, was $4.8 million, resulting in an effective income tax rate of a 41.9 percent. The income tax provision for the nine months ended September 30, 2019 was $7.7 million, resulting in an effective income tax rate of and 75.0 percent for nine months. The effective tax rate was higher than the statutory rate primarily due to the United States (U.S.) taxation of foreign earnings under the Global Intangible Low-Tax Income (“GILTI”) provisions of the Act, and the recognition of a valuation allowance on forecasted non-deductible interest, offset with a benefit due to the mix of earnings among tax jurisdictions.
The income tax provision for the nine months ended September 30, 2018 was $1.1 million resulting in an effective income tax rate of 5.9 percent. The effective tax rate was lower than the statutory rate primarily due to earnings in countries with tax rates lower than the U.S. statutory rate, offset in part by U.S. taxation of foreign earnings under the GILTI provisions of the Act. The income tax benefit for the three months ended September 30, 2018 was $7.1 million resulting in an effective tax rate of 91.4 percent. The effective tax rate was a benefit primarily due to a revision to the estimated U.S. tax on foreign earnings under the GILTI provisions of the Act.
At September 30, 2019, the Company remains indefinitely reinvested with respect to its initial investment and any associated potential withholding tax on earnings of its non-U.S. subsidiaries subject to the transition tax, as well as with respect to future earnings that will primarily fund the operations of the subsidiaries.
23
NOTE 14 - LEASES
Effective January 1, 2019, we adopted ASU 2016-02, ASC 842, “Leases,” the new lease accounting standard, using the optional transition approach resulting in recognition of operating lease right-of-use (“ROU”) assets and lease liabilities of $18.2 million and $18.6 million, respectively, as well as a charge to eliminate previously deferred rent of $0.4 million.
The Company determines whether an arrangement is or contains a lease at the inception of the arrangement. Operating leases are included in other non-current assets, accrued expenses and other non-current liabilities in our condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, net, short-term debt and long-term debt (less current portion) in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. Since we generally do not have access to the interest rate implicit in the lease, the Company uses our incremental borrowing rate (for fully collateralized debt) at the inception of the lease in determining the present value of the lease payments. The implicit rate is, however, used where readily available. Lease expense under operating leases is recognized on a straight-line basis over the term of the lease. Certain of our leases contain both lease and non-lease components, which are accounted for separately.
The Company has operating and finance leases for office facilities, a data center and certain equipment. The remaining terms of our leases range from over one year to just under nine years. Certain leases include options to extend the lease term for up to ten years, as well as options to terminate which have been excluded from the term of the lease since exercise of these options is not reasonably certain.
24
Lease expense, cash flow, operating and finance lease assets and liabilities, average lease term and average discount rate are as follows:
|
|
September 30, 2019
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Lease Expense
|
|
|
|
|
|
|
|
|
Finance lease expense:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
548
|
|
|
$
|
1,551
|
|
Interest on lease liabilities
|
|
|
34
|
|
|
|
65
|
|
Operating lease expense
|
|
|
846
|
|
|
|
2,560
|
|
Total lease expense
|
|
$
|
1,428
|
|
|
$
|
4,176
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Components
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash outflows from finance leases
|
|
$
|
34
|
|
|
$
|
65
|
|
Operating cash outflows from operating leases
|
|
|
821
|
|
|
|
2,484
|
|
Financing cash outflows from finance leases
|
|
|
381
|
|
|
|
1,035
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities, net of terminations and disposals
|
|
|
1,292
|
|
|
|
1,803
|
|
Right-of-use assets obtained in exchange for operating lease liabilities (including adoption impact of $18.2 million) net of terminations and disposals
|
|
|
12
|
|
|
|
18,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
Balance Sheet Information
|
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Other non-current assets
|
|
$
|
15,079
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
(2,694
|
)
|
|
|
|
|
Other non-current liabilities
|
|
|
(13,508
|
)
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
(16,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
Property and equipment gross
|
|
$
|
4,109
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(1,677
|
)
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,432
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
(328
|
)
|
|
|
|
|
Long-term debt
|
|
|
(1,472
|
)
|
|
|
|
|
Total finance lease liabilities
|
|
$
|
(1,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rates
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term - finance leases (years)
|
|
4.4
|
|
|
|
|
|
Weighted-average remaining lease term - operating leases (years)
|
|
6.7
|
|
|
|
|
|
Weighted-average discount rate - finance leases
|
|
|
2.9
|
%
|
|
|
|
|
Weighted-average discount rate - operating leases
|
|
|
4.0
|
%
|
|
|
|
|
25
Summarized future minimum payments under our leases are as follows:
|
|
September 30,
|
|
|
|
2019
|
|
|
|
Finance Leases
|
|
|
Operating Leases
|
|
Lease Maturities (in thousands)
|
|
|
|
|
|
|
|
|
Three remaining months of 2019
|
|
$
|
247
|
|
|
$
|
835
|
|
2020
|
|
|
824
|
|
|
|
3,227
|
|
2021
|
|
|
560
|
|
|
|
2,823
|
|
2022
|
|
|
224
|
|
|
|
2,409
|
|
2023
|
|
|
5
|
|
|
|
2,140
|
|
Thereafter
|
|
|
—
|
|
|
|
6,859
|
|
Total
|
|
|
1,860
|
|
|
|
18,293
|
|
Less: Imputed Interest
|
|
|
(60
|
)
|
|
|
(2,091
|
)
|
Total lease liabilities, net of interest
|
|
$
|
1,800
|
|
|
$
|
16,202
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
Lease Maturities (in thousands)
|
|
|
|
|
|
|
|
|
2019
|
|
|
4,249
|
|
|
|
|
|
2020
|
|
|
3,232
|
|
|
|
|
|
2021
|
|
|
2,870
|
|
|
|
|
|
2022
|
|
|
2,635
|
|
|
|
|
|
2023
|
|
|
2,346
|
|
|
|
|
|
Thereafter
|
|
|
7,647
|
|
|
|
|
|
Total
|
|
$
|
22,979
|
|
|
|
|
|
The 2018 disclosure includes certain non-lease components that have been excluded from our ASC 842 accounting and disclosures for 2019.
NOTE 15 – RETIREMENT PLANS
We have an unfunded salary continuation plan covering certain directors, officers and other key members of management. Subject to certain vesting requirements, the plan provides for a benefit based on final average compensation, which becomes payable on the employee’s death or upon attaining age 65, if retired. The plan was closed to new participants effective February 3, 2011. We purchased life insurance policies on certain participants to provide in part for future liabilities. Cash surrender value of these policies, totaling $8.1 million, are included in other non-current assets in the Company’s condensed consolidated balance sheets at December 31, 2018. In the second quarter of 2019, we terminated our life insurance policies in exchange for the cash surrender value of $7.6 million. We also received $0.6 million for death benefit claims.
For the nine months ended September 30, 2019, payments to retirees or their beneficiaries totaled approximately $1.0 million. We presently anticipate benefit payments in 2019 to total approximately $1.4 million. The following table summarizes the components of net periodic pension cost for the three and nine months ended September 30, 2019 and 2018.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
286
|
|
|
$
|
272
|
|
|
$
|
858
|
|
|
$
|
815
|
|
Net amortization
|
|
|
52
|
|
|
|
109
|
|
|
|
156
|
|
|
|
328
|
|
Net periodic pension cost
|
|
$
|
338
|
|
|
$
|
381
|
|
|
$
|
1,014
|
|
|
$
|
1,143
|
|
26
NOTE 16 - STOCK-BASED COMPENSATION
Equity Incentive Plan
Our 2018 Equity Incentive Plan (the “Plan”) was approved by stockholders in May 2018. The Plan authorizes us to issue up to 4.35 million shares of common stock, along with non-qualified stock options, stock appreciation rights, restricted stock and performance units to our officers, key employees, non-employee directors and consultants. At September 30, 2019, there were 1.6 million shares available for future grants under this Plan. No more than 1.2 million shares may be used under the 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.
Under the terms of the Plan, each year eligible participants are granted time value restricted stock units (“RSUs”), vesting ratably over a three-year period, and performance restricted stock units (“PSUs”), with three-year cliff vesting. Upon vesting, each restricted stock award is exchangeable for one share of the Company’s common stock, with accrued dividends.
Other Awards
On May 16, 2019 the Company granted the following equity awards to our new President and Chief Executive Officer in connection with the 2019 Inducement Grant Plan (the “Inducement Plan”): (i) an initial award consisting of (a) 666,667 PSUs at target, vesting in three approximately equal installments, to the extent the performance metrics are satisfied, during each of three performance periods and (b) 333,333 RSUs, vesting in approximately equal installments on February 28, 2020, 2021 and 2022; (ii) a 2019-2021 PSU grant, with the target number of 316,832 PSUs, which will vest to the extent the performance metrics are satisfied; and (iii) a 2019 RSU grant of 158,416 RSUs, vesting in approximately equal installments on February 28, 2020, 2021 and 2022. The PSU awards may be earned at up to 200% of target depending on the level of achievement of the performance metrics.
|
|
Equity Incentive Awards
|
|
|
|
Restricted Stock Units
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Performance Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
Balance at December 31, 2018
|
|
|
183,726
|
|
|
$
|
17.26
|
|
|
|
296,523
|
|
|
$
|
19.1
|
|
|
|
59,000
|
|
|
$
|
18.33
|
|
Granted
|
|
|
1,021,317
|
|
|
|
4.98
|
|
|
|
1,477,734
|
|
|
|
6.09
|
|
|
|
—
|
|
|
|
—
|
|
Settled
|
|
|
(103,681
|
)
|
|
|
17.12
|
|
|
|
(31,081
|
)
|
|
|
22.81
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(83,373
|
)
|
|
|
9.79
|
|
|
|
(204,438
|
)
|
|
|
12.36
|
|
|
|
(8,750
|
)
|
|
|
15.30
|
|
Balance at September 30, 2019
|
|
|
1,017,989
|
|
|
$
|
5.57
|
|
|
|
1,538,738
|
|
|
$
|
7.43
|
|
|
|
50,250
|
|
|
$
|
18.86
|
|
Vested or expected to vest at September 30, 2019
|
|
|
885,208
|
|
|
$
|
5.63
|
|
|
|
1,278,648
|
|
|
$
|
6.73
|
|
|
|
50,250
|
|
|
$
|
18.86
|
|
Stock-based compensation expense was $1.8 million and $1.2 million for the three-month period ended September 30, 2019 and 2018, respectively. Stock-based compensation expense was $3.7 million and $2.9 million for the nine-month period ended September 30, 2019 and 2018, respectively. Unrecognized stock-based compensation expense related to non-vested awards of $9.3 million is expected to be recognized over a weighted average period of approximately 1.9 years as of September 30, 2019.
NOTE 17 - COMMON STOCK REPURCHASE PROGRAMS
In January 2016, our Board of Directors approved a common stock repurchase program (the “Repurchase Program”), authorizing the repurchase of up to $50.0 million of our common stock. Under the Repurchase Program we have purchased $15.4 million, leaving a remaining authorization of $34.6 million, which we may repurchase from time to time on the open market or in private transactions. The timing and extent of the repurchases under the Repurchase Program will depend upon market conditions and other corporate considerations in our sole discretion. There were no repurchases under this program for the nine months ended September 30, 2019.
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Purchase Commitments
When market conditions warrant, we may 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. Prices under our aluminum contracts are based on a market index, the London Mercantile Exchange (LME), and regional premiums for processing, transportation and alloy components which are adjusted quarterly for purchases in the ensuing quarter. Changes in aluminum prices are generally passed through to our OEM customers and adjusted on a quarterly basis. Certain of our purchase agreements include volume commitments, however any excess commitments are generally negotiated with suppliers and those which have occurred in the past have been carried over to future periods.
27
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.
NOTE 19 – RECEIVABLES FACTORING
The Company sells certain customer trade receivables on a non-recourse basis under factoring arrangements with designated financial institutions. These transactions are accounted for as sales and cash proceeds are included in cash provided by operating activities. Factoring arrangements incorporate customary representations and warranties, including representations as to validity of amounts due, completeness of performance obligations and absence of commercial disputes. During the nine months ended September 30, 2019, the Company sold trade receivables totaling $272.4 million and incurred factoring fees of $0.8 million, which are included in other expense, net. During the third quarter of 2019, the Company sold trade receivables totaling $80.6 million and incurred factoring fees of $0.2 million. The collective limit under our factoring arrangements is $116.3 million at any point in time. As of September 30, 2019, $56.6 million of receivables had been factored under the arrangements.
NOTE 20 – RESTRUCTURING
During the third quarter, the Company initiated a plan to significantly reduce production and manufacturing operations at its Fayetteville, Arkansas location. As a result, the Company recognized a non-cash charge of $13.0 million in cost of sales, comprised of (1) $7.6 million of accelerated depreciation for excess equipment, (2) $3.2 million relating to the write-down of certain supplies inventory to net salvage value, (3) $1.6 million of employee severance and (4) $0.6 million of accelerated amortization of right of use assets under operating leases. Relocation costs for redeployment of machinery and equipment will be recognized in cost of sales as incurred over the next 12-18 months.
28