Superior Industries International Inc., one of the world’s leading light vehicle aluminum wheel suppliers for OEMs and the European aftermarket, has reported financial results for the second quarter ended June 30, 2020.
“During the second quarter of 2020, Superior executed significant actions to minimize the unprecedented impact of COVID-19 on automotive production. Our team responded decisively with safety, cost and cash flow initiatives to ensure the health and safety of our employees, manage our financial condition and conserve liquidity. After a complete shutdown of our facilities, our employees efficiently brought production back online during the quarter, while continuing to capture the previously executed structural cost improvements. I am very pleased by the response of the entire Superior team,” said Majdi Abulaban, president and CEO of Superior. “As we move through the second half of 2020, I remain confident that our team’s flexibility and the actions we have taken will allow us to navigate the evolving market conditions ahead and position us for growth as we emerge from the pandemic.”
Second quarter 2020 automotive production was severely impacted by the broad-based shutdown across the automotive industry in North America and Europe due to COVID-19. By June 1, 2020, Superior had resumed production at all its facilities following the temporary suspension of operations between late March and early April 2020. To ensure the health and safety of its employees, the company is executing its Safe Work Playbook across its footprint, which includes expanded cleaning, social distancing measures, distribution of personal protective equipment, and daily temperature checks, among other activities.
While Superior says it is experiencing stronger demand compared to April and May from its customers in North America, specifically on pickup/SUV platforms, as well as in Europe, the company continues to pursue cost reduction initiatives to align to the lower production environment. To date, Superior has executed temporary and permanent cost-savings including furloughs, compensation and benefit reductions, deferral of merit increases, reduced travel, personnel restructurings, and use of government subsidies where available. These cost initiatives are expected to benefit 2020 results by approximately $40 million. Further, Superior said it may utilize in the future selective, temporary facility closures to efficiently balance capacity with production costs and inventory levels. In addition to these cost reductions, the company is taking other measures to improve cash flow through targeted working capital initiatives and by reducing capital expenditures.
Despite the company’s cost saving actions, COVID-19 factors had a negative financial impact on the results for the second quarter of 2020, reducing net sales by approximately $200 million; Value-Added Sales, a non-GAAP financial measure, by approximately $110 million; and Adjusted EBITDA, a non-GAAP financial measure, by approximately $55 million. Most of the negative impact on revenue occurred in April and May, the company stated. In June, Superior’s Value-Added Sales rebounded from April and May, declining 14% compared to June of 2019, and free cash flow, defined as the sum of operating, investing, and financing activities before net debt repayments, was positive.
Second Quarter 2020 Results
Wheel unit shipments were 2.1 million in the second quarter of 2020, a decrease of 58%, compared to unit shipments of 4.9 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 35% of Superior’s portfolio compared to just over 28% in the prior year period.
Net sales for the second quarter of 2020 were $145 million, compared to net sales of $353 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 $84 million for the second quarter of 2020 compared to $194 million in the prior year period. The continued portfolio shift to larger diameter wheels with more premium content partially offset lower volume.
The gross loss for the second quarter of 2020 was $23 million, compared to gross profit of $40 million in the prior year period. The gross loss for the quarter was due to lower sales, partially offset by temporarily closing manufacturing facilities, reducing personnel and operating expenses, rationalizing the Company’s manufacturing footprint in the prior year, and realizing purchasing savings.
Selling, general, and administrative expenses for the second quarter of 2020 were $11 million compared to $16 million in the prior year period. The 29% decrease was primarily a result of furloughs, compensation and benefit reductions, reduced travel, and personnel restructurings.
The Company reported an operating loss of $34 million in the second quarter of 2020 compared to operating income of $24 million in the prior year period. The operating loss for the quarter was primarily driven by lower sales partially offset by the initiatives mentioned above, according to Superior.
The income tax benefit for the second quarter of 2020 was $4 million on a pre-tax loss of $47 million. The tax benefit for the quarter was primarily due to Superior’s mix of earnings among tax jurisdictions, partially offset by the recognition of a valuation allowance on non-deductible interest.
For the second quarter of 2020, the company reported a net loss of $43 million, or a loss per diluted share of $2.00, including the impact of $0.23 per share from restructuring and net other items. This compares to net income of $7 million, or a loss per diluted share of $0.04, in the second quarter of 2019. See attached pages for a reconciliation of net income to diluted earnings per share.
Adjusted EBITDA, a non-GAAP financial measure, amounted to a loss of $4 million for the second quarter of 2020. This compares to a profit of $49 million for the second 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 initiatives listed above.
During the second quarter of 2020, Superior repaid $101 million on its U.S. revolving credit facility. Superior also paid preferred dividends of $3 million and purchased $1 million of shares from minority equity holders of Superior Industries Europe AG during the quarter, leaving approximately $2 million worth of shares outstanding.
Capital Structure and Liquidity
Total funded debt and net debt as of June 30, 2020 were $727 million and $596 million, respectively, which compares to funded debt and net debt of $658 million and $601 million, respectively, in the prior year period. The increase in funded debt was due to the borrowings on the company’s revolving credit facilities.
Total liquidity, including cash and available amounts under revolving credit facilities, was $245 million as of June 30, 2020. Total cash on hand as of June 30, 2020 was $131 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. After repaying $101 million on its U.S. revolving credit facility during the second quarter of 2020, Superior was less than 35% drawn on the facility and therefore not required to test the net leverage covenant of 4.5x. If the Company had been required to test the covenant at the end of the second quarter, it would have been in compliance. Further, after the second quarter of 2020, the Company has made net repayments on the U.S. and European revolving credit facilities totaling an additional $69 million.
On March 23, 2020, the company withdrew its 2020 outlook given the unprecedented economic uncertainty resulting from COVID-19. The company continues to monitor the impact of COVID-19 and says it will revisit providing additional full-year 2020 outlook once conditions stabilize.
In the interim, based on the latest IHS industry production forecast, which indicates a decline in industry production in Superior’s key regions of approximately 24%, 23% in North America and 25% in Western and Central Europe, Superior anticipates free cash flow, defined as the sum of operating, investing, and financing activities before net debt repayment, to be neutral for full year 2020. Production schedules in North America remain strong due to inventory rebuild at Superior’s key customers while the ramp up in the European market has been slower. While the volume outlook continues to evolve rapidly, Superior anticipates its third quarter 2020 Value-Added Sales to decline in the low-teens percentage range compared to the prior year period.