Superior Industries International, Inc., a leading light vehicle aluminum wheel suppliers for OEMs and the European aftermarket, recently reported financial results for first quarter ended March 31, 2020.
“In the first quarter, we made progress on various key metrics of our value creation roadmap. Our efforts to enhance operating performance in North America by reducing structural costs, rationalizing our footprint, expanding our product portfolio, and correcting troubled product lines, among other activities, delivered significant improvement in the region. Overall, despite substantial declines in volume related to COVID-19, we delivered margin improvement year-over-year while leveraging the secular trends towards higher content wheels,” commented Majdi Abulaban, president and CEO of Superior.
“As the COVID-19 crisis took shape late in the quarter, we immediately took aggressive actions to ensure the health and safety of our employees, align costs to the substantial decline in OEM production, and enhance our cash and liquidity position. As production resumes, we are working closely with customers and suppliers to efficiently manage the restart and ramp-up to ensure successful execution of this process. Our focus has been and remains on the safety of our employees, delivering quality to our customers, and managing our cash flow and liquidity.”
Impacts of COVID-19
COVID-19 has had a widespread adverse effect on the automotive industry. While the full extent of the impact is difficult to predict, key customers temporarily closed production facilities in Europe and North America, which put significant downward pressure on Superior’s shipment volumes. As a result, Superior temporarily ceased production at all its facilities by early April. Superior has since instituted an Employee Health & Safety steering committee to drive consistent health and safety protocols across its global footprint. In addition, the company has taken multiple actions to reduce costs and bolster liquidity, including reductions in compensation and workforce, temporary furloughs, reduction in third-party spending, and drawdowns on revolving credit facilities. The company is leveraging government programs as applicable, such as participating in the German short-time work program and applying for a €30 million low-cost loan program in Germany, which is currently under review.
In addition, Superior has been in continuous contact with its OEM customers to understand their evolving facility-by-facility start-up, production ramp-up plans, and expected weekly vehicle platform volumes. As of May 8, 2020, most OEMs’ facilities in Europe have reopened and many of the facilities in North America are expected to open throughout May. Superior has reopened three of its four facilities in Europe and expects to reopen the fourth in June based on demand. In North America, the company anticipates reopening its facilities in the coming weeks in line with production demand and finished goods levels. In both regions, Superior is opening facilities with identified safety precautions and in accordance with local government requirements. Superior will continue to monitor production requirements and may consider future temporary facility closures as a tool to efficiently manage capacity.
Despite the above actions, COVID-19 factors had a negative financial impact on the results for the first quarter of 2020 by reducing:
• Unit shipments in March by approximately 530,000 or 11%;
• Net sales by approximately $40 million;
• Value-Added Sales, a non-GAAP financial measure, by approximately $22 million; and
• Adjusted EBITDA, a non-GAAP financial measure, by approximately $7 million.
Additionally, due to COVID-19, Superior was required to revisit as of March 31, 2020, the valuation of its goodwill and indefinite-lived intangible assets. Based on lower 2020 forecasted European automotive production volumes, higher discount rates, and lower market valuation multiples, the valuation analysis indicated that these assets were impaired, requiring a non-cash charge to earnings of $194 million during the first quarter.
Finally, increased volatility in foreign exchange rates and weakening of the Mexican Peso versus the U.S. dollar lowered the fair value of Superior’s hedging portfolio and translation of Superior’s Mexican subsidiaries’ financial statements into U.S. dollars. The combination of the net loss for the quarter and foreign exchange impacts reduced Superior’s shareholders’ equity to negative $28 million as of March 31, 2020.
First Quarter 2020 Results
Wheel unit shipments were 4.3 million in the first quarter of 2020, a decrease of 15%, compared to unit shipments of 5.0 million in the prior year period. The change in units was driven by production declines at our key customers related to COVID-19. During the quarter, wheels 19 inches and greater accounted for approximately 32% of Superior’s portfolio compared to just over 25% in the prior year period.
Net sales for the first quarter of 2020 were $301 million, compared to net sales of $358 million in the prior year period. The decrease in the quarter was driven primarily by lower volumes and lower aluminum prices, partially offset by the shift towards larger wheels with more premium content.
Value-Added Sales, a non-GAAP financial measure, defined as net sales less the value of aluminum and services provided by outsourced service providers that are included in net sales, were $170 million for the first quarter of 2020 compared to $193 million in the prior year period. The continued portfolio shift to larger diameter wheels with more premium content partially offset lower volume.
Gross profit for the first quarter of 2020 was $23 million, compared to $33 million in the prior year period. The decrease in gross profit for the quarter was due to lower sales, partially offset by lower manufacturing costs realized from the rationalization of the company’s manufacturing footprint, in addition to improved profitability from stronger product mix, lower energy costs and procurement savings.
Selling, general and administrative (SG&A) expenses for the first quarter of 2020 were $13 million compared to $14 million in the prior year period, primarily a result of lower compensation accruals compared to the prior year.
The operating loss for the first quarter of 2020 was $183 million, compared to income from operations of $19 million in the prior year period. The results were negatively impacted by the previously mentioned goodwill and indefinite-lived intangible assets impairments in the quarter of $194 million.
The income tax benefit for the first quarter of 2020 was $3 million on a pre-tax loss of $194 million. The tax benefit for the quarter was primarily due to Superior’s mix of earnings among tax jurisdictions, recognition of a valuation allowance on non-deductible interest, and impairment of goodwill, for which there is no corresponding tax benefit.
For the first quarter of 2020, the company reported a net loss of $190 million, or a loss per diluted share of $7.84, including the impact of $7.59 per share from goodwill and indefinite-lived intangible asset impairments, restructuring and net other items. This compares to net income of $2 million, or a loss per diluted share of $0.24, in the first quarter of 2019.
Adjusted EBITDA, a non-GAAP financial measure, was $40 million for the first quarter of 2020. This compares to $43 million for the first quarter of 2019. The decrease in Adjusted EBITDA was driven by lower volumes in North America and Europe, including production shutdowns related to COVID-19, partially offset by the shift to higher content wheels, lower manufacturing costs, and lower SG&A.
The company reported net cash provided by operating activities of $31 million in the first quarter of 2020, compared to $29 million in the prior year period. Operating cash flow improved through favorable working capital management partially offset by lower net income.
Net cash used for investing activities was $14 million in the first quarter of 2020 compared to $12 million in the prior year period. The prior year period benefited from the sale of other assets for $1 million.
During the first quarter of 2020, as part of Superior’s ongoing capital structure strategy, the company received proceeds from new European equipment loans totaling $12 million at an interest rate of 2.3% and used cash on hand to pay down its term loan by $23 million. Superior also paid dividends of $3 million and purchased $4 million of shares from minority equity holders of Superior Industries Europe AG during the quarter.
Capital Structure and Liquidity
Total funded debt and net debt as of March 31, 2020, were $824 million and $542 million, respectively, which compares to funded debt and net debt of $680 million and $626 million, respectively, in the prior year period. The increase in funded debt was a result of drawing $208 million net on the company’s U.S. and European revolving credit facilities as a precautionary measure considering the COVID-19 pandemic as previously disclosed.
Total liquidity, including cash and available amounts under revolving credit facilities, was $296 million as of March 31, 2020, which compares to $243 million in the prior year period. Total cash on hand as of March 31, 2020, was $282 million. As of April 30, 2020, total liquidity was $260 million. Going forward, total cash burn per month in a non-production scenario is expected to be less than $25 million.
The company remains in full compliance with all lending covenants, including leverage ratio limits on its lines of credit. Based on various forecast scenarios, Superior does not currently anticipate any issues meeting the covenant requirements under its credit facilities.
