CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We may from time to time make written or oral statements in Management's Discussion and Analysis of Financial Condition and Results of Operations, Letter to Shareholders and elsewhere in this report which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and costs and potential liability for environmental-related matters. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expects,” “anticipates,” “believes,” “will,” “will likely result,” “will continue,” “plans to” and similar expressions.
Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the company, which could cause actual results to differ materially from such statements and from the company's historical results and experience. These risks, uncertainties and other factors include, but are not limited to those described in Item 1A - Risk Factors of this Annual Report on Form 10-K and elsewhere in the Annual Report and those described from time to time in our future reports filed with the Securities and Exchange Commission.
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the risks described herein should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ITEM 1 - BUSINESS
General Development and Description of Business
Headquartered in Van Nuys, California, the principal business of Superior Industries International, Inc. (referred to herein as the “company” or in the first person notation “we,” “us” and “our”) is the design and manufacture of aluminum road wheels for sale to original equipment manufacturers (OEMs). We are one of the largest suppliers of cast aluminum wheels to the world's leading automobile and light truck manufacturers, with wheel manufacturing operations in the United States and Mexico. Products made in our North American facilities are delivered primarily to automotive assembly operations in North America, both for domestic and internationally branded customers. Our OEM aluminum road wheels primarily are sold for factory installation, as either optional or standard equipment, on many vehicle models manufactured by Ford, General Motors (GM), Chrysler Group LLC (Chrysler), BMW, Mitsubishi, Nissan, Subaru, Toyota and Volkswagen.
The North American market for automobiles and light-duty trucks (including SUV's and crossover vehicles) has experienced rather pronounced cyclicality over recent years. We track annual production rates based on information from Ward's Automotive Group. For several years prior to 2008, annual North American vehicle production approached or exceeded 15 million units. Many factors, including general economic conditions and consumer access to credit, contributed to this trend of consistent and relatively strong market activity.
Beginning with the third quarter of 2008, the automotive industry was negatively impacted by several factors, including the continued dramatic shift away from full-size trucks and SUVs caused by continuing high fuel prices, rapidly rising commodity prices and the tightening of consumer credit due to the then deteriorating financial markets. These negative factors resulted in a dramatic cutback in vehicle production rates, reaching a the low level of 8.6 million units in 2009.
Accordingly, many vehicle manufacturers announced unprecedented restructuring actions, including assembly plant closures, significant reductions in production of light trucks and SUVs, delayed launches of key 2009 model-year light truck programs and movement toward more fuel-efficient passenger cars and cross-over type vehicles. These restructuring actions culminated in the bankruptcy reorganizations of Chrysler and GM in 2009.
Following the steep decline in 2009, North American automotive markets recovered substantially in 2010. Production of automobiles and light-duty trucks in North America reached 11.9 million units in 2010, an increase of 3.3 million, or 39 percent, from 8.6 million vehicles in 2009. An improved U.S. economy, low consumer interest rates and pent-up demand for vehicles following the recession all contributed to market demand recovery. Restructuring actions taken in many areas of the supply chain also contributed to general improvement in the overall financial health of the automotive sector.
The post-2009 North American market recovery continued on into 2011. Production in 2011 reached 13.1 million units, an increase of 10 percent over 2010. In addition to the economy, consumer credit and interest rates being generally supportive of market growth, the continuing increase in average age of automobiles on the road appeared to be contributing to higher rates of vehicle replacement. In 2011, the average age of an automobile in the U.S. reached 10.8 years, a new record according to Polk Automotive Research.
The 2011 rate of vehicle production increase was strong in both automobiles and light-duty trucks. The domestic brands gained market share, with international brands negatively impacted by lost production at Toyota and Honda due to effects of the earthquake and tsunami that occurred in March 2011. In contrast to the overall market, the company's unit sales to international brands grew more rapidly than to domestic brands.
We have taken significant steps in the past to reduce our overall costs, including rationalizing our production capacity in response to the late 2008 and 2009 industry recession and falloff in demand. In August 2008, we announced the planned closure of our wheel manufacturing facility located in Pittsburg, Kansas, and workforce reductions in our other North American plants, resulting in the layoff of approximately 665 employees and the elimination of 90 open positions. On January 13, 2009, we also announced the planned closure of our Van Nuys, California wheel manufacturing facility, thereby eliminating an additional 290 jobs. The Kansas and California facilities ceased operations in December 2008 and June 2009, respectively.
Raw Materials
The raw materials used in producing our products are readily available and are obtained through numerous suppliers with whom
we have established trade relations. We purchase aluminum for the manufacture of our aluminum road wheels, which accounted for the vast majority of our total raw material requirements during 2011. The majority of our aluminum requirements are met through purchase orders with certain major domestic and foreign producers. Generally, the orders are fixed as to minimum and maximum quantities of aluminum, which the producers must supply during the term of the orders. During 2011, we were able to successfully secure aluminum commitments from our primary suppliers to meet production requirements. In late December 2011, a significant supplier of aluminum informed us of a large decline in production rates of a smelter that has been our largest single source of purchased aluminum during both 2011 and 2010. The production decline has been caused by a labor issue that may continue unresolved for several months. While we anticipate being able to source aluminum requirements to meet our expected level of production in 2012, it currently is not clear whether we will incur any negative cost consequences resulting from our supplier's production cutbacks. We procure other raw materials through numerous suppliers with whom we have established trade relationships.
When market conditions warrant, we may also enter into purchase commitments to secure the supply of certain commodities used in the manufacture of our products, such as aluminum, natural gas and other raw materials. We currently have several purchase commitments in place for the delivery of natural gas through 2012. These natural gas contracts are considered to be derivatives under U.S. GAAP, and when entering into these contracts, it was expected that we would take full delivery of the contracted quantities of natural gas over the normal course of business. Accordingly, at inception, these contracts qualified for the normal purchase, normal sale (NPNS) exemption provided for under U.S. GAAP. As such, we do not account for these purchase commitments as derivatives unless there is a change in facts or circumstances in regard to the company's intent or ability to use the contracted quantities of natural gas over the normal course of business. See Note 11 - Commitments and Contingent Liabilities in Notes to Consolidated Financial Statements in Item 8 - Financial Statements and Supplementary Data of this Annual Report for further discussion of natural gas contracts.
Seasonal Variations
The automotive industry is cyclical and varies based on the timing of consumer purchases of vehicles, which in turn vary based on a variety of factors such as general economic conditions, availability of consumer credit, interest rates and fuel costs. While there have been no significant seasonal variations in the past few years, production schedules in our industry can vary significantly from quarter to quarter to meet the scheduling demands of our customers.
Customer Dependence
We have proven our ability to be a consistent producer of quality aluminum wheels with the capability to meet our customers' price, quality, delivery and service requirements. We strive to continually enhance our relationships with our customers through continuous improvement programs, not only through our manufacturing operations but in the engineering, wheel development and quality areas as well. These key business relationships have resulted in multiple vehicle supply contract awards with our key customers over the past year.
Ford, GM and Chrysler were our only customers accounting for more than 10 percent of our consolidated net sales in 2011. Net sales to these customers in 2011, 2010 and 2009 were as follows (dollars in millions):
2011
2010
2009
Percent of Net Sales
Dollars
Ford
35%
$286.5
33%
$239.6
$146.1
GM
30%
$245.7
$236.9
34%
$143.4
Chrysler
11%
$90.3
14%
$97.7
12%
$52.0
The loss of all or a substantial portion of our sales to Ford, GM or Chrysler would have a significant adverse effect on our financial results.
Foreign Operations
We manufacture and sell a significant portion of our products in Mexico. Net sales of our Mexico operations in 2011 totaled $520 million and represented 63% of our total net sales. Net property, plant and equipment of our operations in Mexico totaled $100