SUPERIOR INDUSTRIES INTERNATIONAL, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report. This discussion contains forward-looking statements, which involve risks and uncertainties. Please refer to the section entitled "Forward-Looking Statements" at the beginning of this Annual Report immediately prior to Item 1. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in Item 1A, "Risk Factors" and elsewhere in this Annual Report.
Executive Overview
Our principal business is the design and manufacture of aluminum wheels for sale to OEMs inNorth America andEurope and to the aftermarket inEurope . We employ approximately 7,700 full-time employees, operating in eight manufacturing facilities inNorth America andEurope . We are one of the largest aluminum wheel suppliers to global OEMs and one of the leading European aluminum wheel aftermarket manufacturers and suppliers. Our OEM aluminum wheels accounted for approximately 94 percent of our sales in 2022 and are primarily sold for factory installation on vehicle models manufactured by BMW (including Mini), Ford,GM , Honda, Jaguar-Land Rover,Lucid Motors , Mazda, Mercedes-Benz Group, Nissan, PSA, Renault, Stellantis, Subaru,Suzuki , Toyota,VW Group (Volkswagen , Audi, SEAT,Skoda , Porsche, Bentley) and Volvo. We sell aluminum wheels to the European aftermarket under the brands ATS, RIAL, ALUTEC and ANZIO.North America andEurope represent the principal markets for our products, but we have a diversified global customer base consisting of North American, European and Asian OEMs.
Industry Overview
In 2020, the COVID-19 pandemic introduced significant volatility in the financial markets and had a widespread adverse effect on the automotive industry. In response to the then current industry production environment, we closed production at our European facilities in lateMarch 2020 . InNorth America , our manufacturing operations ceased production in earlyApril 2020 . The Company reopened all of its facilities byJune 1, 2020 , in line with industry demand and finished goods levels, and in accordance with local government requirements. As a result, COVID-19 had a significant adverse effect on our business, results of operations and financial condition in 2020, but this effect had largely subsided by the end of 2020 with the exception of supply chain disruptions which emerged late in 2020 and continued in 2021 and 2022. We are continuing to monitor the resurgence of the virus, including the emergence of new virus variants and the progress of the vaccination efforts. A broad range of factors impact automotive industry sales and production volumes, including consumer demand and preferences, dealer inventory levels, labor relations, trade agreements, cost and availability of raw materials and components, fuel prices, regulatory requirements, government initiatives, availability and cost of credit, changing consumer attitudes toward vehicle ownership and other factors. Our sales are driven generally by overall automotive industry production volumes and, more specifically, by the volumes of the vehicles for which we supply wheels. In addition, larger diameter wheels and premium finishes command higher unit prices. Larger cars and light trucks, as well as premium vehicle platforms, such as luxury, sport utility and crossover vehicles, typically employ larger diameter wheels and premium finishes. The automotive industry continues to be impacted by the supply chain disruption, which emerged as OEM vehicle production resumed and began to scale following the shutdown because of the COVID-19 pandemic. The supply chain disruption includes shortages of semiconductor chips, electric vehicle batteries, shipping containers, steel, resin and foam. In 2022, the semiconductor chip shortage continued to constrain OEM vehicle production. In addition, the Ukraine Conflict has resulted in temporary shutdowns at certain OEM production facilities, which began to affect our production volume inMarch 2022 . Cost inflation that we experienced in 2022 is expected to continue due to high energy rates, particularly inEurope , as well as the Ukraine Conflict. While the prices under our OEM contracts are adjusted for changes in the cost of aluminum, alloy premium and silicon, our aftermarket contracts do not provide such pass through of these costs. Additionally, future increases in raw material costs and OEM production volatility may cause our inventory levels to increase, negatively impacting our cash flows. Automotive industry production volumes in the North American and Western and Central European regions, our principal markets, are shown below for the year endedDecember 31, 2022 , as compared to the corresponding periods of 2021 and 2020: Automotive Industry Production (North America and Western and Central Europe) Twelve Months Ended December 31, 2022 vs 2021 2021 vs 2020 2022 2021 2020 % Change % Change (Units in thousands) North America 14,307 13,047 13,024 9.7 % 0.2 % Western and Central Europe 13,428 12,828 13,584 4.7 % (5.6 %) Total 27,735 25,875 26,608 7.2 % (2.8 %) 20
--------------------------------------------------------------------------------
Table of Contents
While automotive industry production volumes were initially forecast by IHS, an independent automotive industry analyst firm, inFebruary 2022 to increase nearly 19.1 percent in 2022 (16.6 percent inNorth America and 21.7 percent in Western andCentral Europe ), actual industry production volumes increased only 7.2 percent (9.7 percent inNorth America and 4.7 percent in Western andCentral Europe ). This was primarily due to continuing semiconductor chip shortages, weaker economies in our principal markets and the Ukraine Conflict. TheUkraine Conflict may continue to have an impact on future automotive production volumes and, therefore, Superior production volumes. The IHS forecast projects that production volumes inNorth America and Western andCentral Europe will increase 6.2 percent in 2023 (5.4 percent inNorth America and 7.1 percent in Western andCentral Europe ). While semiconductor manufacturers have announced plans to expand capacity over the next several years, it is unclear when automotive industry semiconductor chip shortages will subside. Business Overview
The following chart shows the comparison of our operational performance in 2022 and 2021 (in millions):
[[Image Removed: img248236764_0.jpg]]
21--------------------------------------------------------------------------------
Table of Contents
The following table is a summary of the Company's operating results for 2022 and 2021:
Results of Operations Fiscal Year EndedDecember 31, 2022
2021
(Dollars in thousands, except per share amounts) Net sales North America$ 943,713 $ 744,904 Europe 696,189 639,846 Net sales 1,639,902 1,384,750 Cost of sales (1,473,515 ) (1,270,035 ) Gross profit 166,387 114,715 Percentage of net sales 10.1 % 8.3 % Selling, general and administrative expenses 68,347 59,339 Income from operations 98,040 55,376 Percentage of net sales 6.0 % 4.0 % Interest expense, net (46,314 ) (41,879 ) Other expense, net (588 ) (2,306 ) Income tax provision (14,104 ) (7,437 ) Net income 37,034 3,754 Percentage of net sales 2.3 % 0.3 % Diluted earnings (loss) per share$ 0.02 $ (1.17 ) Value added sales (1)$ 770,649 $
753,669
Value added sales adjusted for foreign exchange (1)$ 816,514 $ 753,669 Adjusted EBITDA (2)$ 194,154 $ 166,713 Percentage of net sales 11.8 % 12.0 % Percentage of value added sales 25.2 % 22.1 % Unit shipments in thousands 15,592 16,123 (1) Value added sales and value added sales adjusted for foreign exchange are key measures that are not calculated according toU.S. GAAP. Refer to "Non-U.S. GAAP Financial Measures" for a definition of value added sales and value added sales adjusted for foreign exchange and a reconciliation of value added sales and value added sales adjusted for foreign exchange to net sales, the most comparableU.S. GAAP measure.
(2)
Adjusted EBITDA is a key measure that is not calculated according toU.S. GAAP. Refer to "Non-U.S. GAAP Financial Measures" for a definition of adjusted EBITDA and a reconciliation of our adjusted EBITDA to net income, the most comparableU.S. GAAP measure. 2022 versus 2021 Shipments
Wheel unit shipments were 15.6 million for 2022, compared to wheel unit
shipments of 16.1 million in the prior year, a decrease of 3.3 percent. The
decrease was driven by a 10.5 percent decrease in European unit shipment
volumes, partially offset by a 3.2 increase in shipment volumes in
Net sales for 2022 were$1,639.9 million compared to net sales of$1,384.8 million in the prior year, an increase of 18.4 percent. The increase in revenue was due to$325.1 million attributable to higher aluminum and other cost pass throughs to our OEM customers, as well as certain inflationary cost recoveries, offset by approximately$71.0 million of unfavorable Euro foreign exchange.
Cost of Sales
Cost of sales was$1,473.5 million for 2022, compared to$1,270.0 million in the prior year, an increase of 16.0 percent. The increase in cost of sales was primarily due to$218.8 million of higher aluminum costs and$36.3 million of higher conversion costs; partially offset by a reduction in cost of sales of$67.0 million due to foreign exchange primarily related to the Euro. 22
--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for 2022 were $68.3
million , or 4.2 percent of net sales, compared to $59.3 million , or 4.3 percent
of net sales in the prior year. The $9.0 million increase was primarily due to
the $4.4 million gain on the sale of our Fayetteville, Arkansas facility
recognized in 2021 and $3.1 million increase in costs associated with the
increase in gross profit and legal and consulting fees.
Net Interest Expense
Net interest expense for 2022 was$46.3 million compared to net interest expense of$41.9 million in 2021, a$4.4 million increase. The majority of the increase is due to the$3.7 million write off of unamortized debt issuance costs upon repayment of the previously outstanding term loan and termination of the revolving credit facilities. Refer to Note 10 "Debt," in the Notes to the Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data".
Other Expense
Other expense was$0.6 million in 2022 compared to other expense of$2.3 million in 2021, a decrease of$1.7 million . The higher expense in 2021 is primarily attributable to a net casualty loss of$1.5 million associated with a flood at ourWerdohl, Germany location.
Income Tax Provision
The income tax provision for 2022 was$14.1 million on pre-tax income of$51.1 million , representing an effective tax rate of 27.6 percent. The 2022 effective tax rate differs from the statutory rate primarily due to valuation allowances, tax credits, and the mix of earnings among tax jurisdictions. The income tax provision for 2021 was$7.4 million on pre-tax income of$11.2 million , representing an effective income tax rate of 66.5 percent. The 2021 effective tax rate differs from the statutory rate primarily due to the recognition of a valuation allowance on deferred tax assets, nondeductible charges andU.S. tax on foreign earnings, partially offset by a favorable split of pre-tax jurisdictional income.
Net Income (Loss)
Net income in 2022 was$37.0 million , or earnings per diluted share of$0.02 , compared to net income of$3.8 million , or a loss per diluted share of$1.17 in 2021.
Segment Sales and Income from Operations
Year Ended
December 31,
2022 2021 Change
(Dollars in thousands)
Selected data
Net sales
North America $ 943,713 $ 744,904 $ 198,809
Europe 696,189 639,846 56,343
Total net sales $ 1,639,902 $ 1,384,750 $ 255,152
Income from operations
North America $ 71,772 $ 50,798 $ 20,974
Europe 26,268 4,578 21,690
Total income from operations
In 2022, net sales of ourNorth America segment increased 26.7 percent while unit shipments increased 3.2 percent, as compared to the prior year. The$198.8 million increase in net sales was due to higher aluminum and other cost pass throughs to our OEM customers, as well as certain inflationary cost recoveries. North American segment income from operations for 2022 was$21.0 million higher than the prior year primarily due to the timing of inflationary cost recoveries and higher unit shipment volumes of$35.4 million , partially offset by higher selling, general and administrative expenses of$11.1 million , as well as inflationary cost increases in labor, utilities and other manufacturing costs. The increase in selling, general and administrative expenses was due to higher compensation, benefit, legal and other expenses of$6.7 million and the$4.4 million gain on the sale of ourFayetteville, Arkansas facility recognized in 2021. 23
--------------------------------------------------------------------------------
Table of Contents
In 2022, net sales of our European segment increased 8.8 percent despite an 10.5 percent decline in unit shipment volumes, compared to the prior year. The increase in net sales of$56.3 million was primarily due to$127.2 million in higher aluminum and other cost pass throughs, as well as certain inflationary cost recoveries, partially offset by unfavorable foreign exchange of$71.0 million and lower unit shipment volumes. European segment income from operations for 2022 was$21.7 million higher than the prior year primarily due to the timing of inflationary cost recoveries and product mix of$34.8 million , partially offset by inflationary cost increases in labor, utilities and other manufacturing costs and unabsorbed fixed costs due to lower production volumes.
Financial Condition, Liquidity and Capital Resources
As ofDecember 31, 2022 , our cash and cash equivalents totaled$213.0 million compared to$113.5 million atDecember 31, 2021 . Our sources of liquidity primarily include cash and cash equivalents, cash provided by operating activities, borrowings under available debt facilities, factoring arrangements for trade receivables and, from time to time, other external sources of funds. Working capital (current assets minus current liabilities) and our current ratio (current assets divided by current liabilities) were$257.6 million and 2.0:1, respectively, atDecember 31, 2022 , versus$172.4 million and 1.7:1 atDecember 31, 2021 . The increase in our working capital of$85.2 million is due to a$99.5 million increase in our cash and cash equivalents from the effective management of working capital during an inflationary cost environment throughout 2022, as well as the$24.9 million of residual proceeds from theDecember 2022 refinancing of a portion of our debt obligations. Our working capital requirements, investing activities and cash dividend payments have historically been funded from internally generated funds, debt facilities, cash and cash equivalents, and we believe these sources will continue to meet our future requirements. Capital expenditures relate to improving production quality and efficiency and extending the useful lives of existing property and expenditures for new product offerings, as well as expanded capacity for existing products. During 2023, we expect that capital expenditures will be approximately$70.0 million ,$16.7 million of which has been committed under outstanding purchase orders atDecember 31, 2022 . In connection with the acquisition of our European operations, we entered into several debt and equity financing arrangements during 2017. OnMarch 22, 2017 , we entered into a senior secured credit facility consisting of a$400.0 million term loan facility ("Acquisition Term Loan Facility") and a$160.0 million revolving credit facility (the "US Revolving Credit Facility"), subsequently reduced to$107.5 million byMay 2022 . OnMay 22, 2017 , we issued 150,000 shares of redeemable preferred stock for an aggregate purchase price of$150.0 million . OnJune 15, 2017 , we issued €250.0 million aggregate principal amount of 6.00% Senior Notes dueJune 15, 2025 (the "Notes"). Finally, as part of the European business acquisition, we also assumed$70.7 million of outstanding debt, including a €30.0 million European revolving credit facility (the "European Revolving Credit Facility") which was subsequently increased to €60.0 million. In addition, the European business entered into equipment loan agreements totaling$13.4 million (€12.0 million) in the fourth quarter of 2019. The Company drew down €10.6 million on these equipment loans in the first quarter of 2020 and drew the remaining €1.4 million in the first quarter of 2021. OnDecember 15, 2022 , the Company entered into a$400.0 million term loan facility (the "Term Loan Facility") withOaktree Fund Administration L.L.C. , in its capacity as the administrative agent,JPMorgan Chase Bank, N.A ., in its capacity as collateral agent, and other lenders party thereto. The Term Loan Facility requires quarterly principal payments of$1.0 million . Additional principal payments may be due with respect to asset sales, debt issuances and as a percentage of cash flow in excess of a specified threshold. Concurrent with the issuance of the Term Loan Facility, the Company entered into a$60.0 million revolving credit facility (the "Revolving Credit Facility") and terminated the previously outstanding$107.5 million US Revolving Credit Facility and €60.0 million European Revolving Credit Facility. The$388.0 million proceeds of the borrowings under the Term Loan Facility (consisting of the$400.0 million aggregate principal less the original issuance discount of$12.0 million ) were used to repay the$349.2 million balance outstanding under the Acquisition Term Loan Facility and to pay debt issuance costs and expenses incurred in connection with the Term Loan Facility and Revolving Credit Facility. As a result of the refinancing, our annual interest expense on the Term Loan Facility is expected to increase by more than$20.0 million in 2023. Balances outstanding under the Term Loan Facility, Notes, and equipment loans as ofDecember 31, 2022 were$400.0 million ,$232.4 million , and$12.4 million , respectively. The balance of the redeemable preferred stock was$222.8 million as ofDecember 31, 2022 . The Revolving Credit Facility and the Term Loan Facility are scheduled to mature onDecember 15, 2027 andDecember 15, 2028 , respectively. However, in the event the Company has not repaid, refinanced or otherwise extended the maturity of the Notes beyond the maturity date of the Term Loan Facility by the date 91 days prior toJune 15, 2025 , the Term Loan Facility and Revolving Credit Facility would mature 91 days prior toJune 15, 2025 . Similarly, in the event the Company has not redeemed, refinanced or otherwise extended the unconditional redemption date of the redeemable preferred stock beyond the maturity date of the Term Loan Facility by the date 91 days prior toSeptember 14, 2025 , the Term Loan Facility and Revolving Credit Facility would mature 91 days prior toSeptember 14, 2025 . 24
--------------------------------------------------------------------------------
Table of Contents
The redeemable preferred stock may be unconditionally redeemed at the holder's election on or afterSeptember 14, 2025 at the redemption amount, currently$300 million , provided the Company has sufficient available funds. UnderDelaware law, any redemption payment would be limited to the "surplus" that our Board determines is available to fund a full or partial redemption without rendering us insolvent. The shares of preferred stock that have not been redeemed would continue to receive an annual dividend of 9 percent on the$150.0 million original stated value, plus any accrued and unpaid dividends, which would be paid quarterly. The Board would have to evaluate on an ongoing basis the ability of the Company to make any further redemption payments until the full redemption amount has been paid. The Company intends to repay, refinance or otherwise extend the Notes prior to their maturity and to redeem, refinance or otherwise extend the unconditional redemption date of the redeemable preferred stock. As ofDecember 31, 2022 , the Company had no outstanding borrowings under the Revolving Credit Facility, outstanding letters of credit of$4.8 million and available unused commitments under the Revolving Credit Facility of$55.2 million . As a result, our liquidity totaled$230.7 million atDecember 31, 2022 , consisting of cash and cash equivalents of$175.5 million ($213.0 million less$37.5 million related to the contractual liquidity required pursuant to the Term Loan Facility and Revolving Credit Facility) and available and unused commitments under the Revolving Credit Facility of$55.2 million . As part of our ongoing efforts to improve our cash flow and related liquidity, we negotiate with suppliers to optimize our terms and conditions, including extended payment terms. Beginning in 2021, the Company receives extended payment terms for a portion of our purchases with one of our principal aluminum suppliers in exchange for a nominal adjustment to the product pricing. The payment terms provided to us are consistent with aluminum industry norms, as well as those offered to the supplier's other customers. The supplier intends to finance these extended terms by factoring receivables due from us with a financial institution. We are not a party to the supplier's factoring agreement with the financial institution. We remit payments directly to our supplier, except with respect to product purchased under extended terms which have been factored by the supplier. These payments are remitted directly to the financial institution in accordance with the payment terms originally negotiated with our supplier. As ofDecember 31, 2022 , the Company owed$14.4 million to the financial institution which is included in accounts payable in the consolidated balance sheets. The Company made$141.5 million in payments to the financial institution pursuant to the supplier's factoring arrangement for the year endedDecember 31, 2022 . These payments are included in cash flows from operations within the consolidated statements of cash flows.
As of
The following table summarizes the cash flows from operating, investing, and financing activities as reflected in the consolidated statements of cash flows.
Fiscal Year Ended December 31, 2022 2021 (Dollars in thousands) Net cash provided by operating activities 152,570
44,885
Net cash used in investing activities (57,007 ) (57,524 ) Net cash provided by financing activities 4,505 (24,025 ) Effect of exchange rate changes on cash (519 )
(2,286 )
Net increase (decrease) in cash and cash equivalents
2022 versus 2021 Operating Activities
Net cash provided by operating activities was
Investing Activities
Net cash used in investing activities was$57.0 million in 2022, relatively flat as compared to$57.5 million in 2021 because of a$7.0 million reduction in capital expenditures which was largely offset by proceeds of$6.6 million from the sale of ourFayetteville, Arkansas facility recognized in 2021. 25
--------------------------------------------------------------------------------
Table of Contents
Financing Activities
Net cash provided by financing activities was$4.5 million in 2022, as compared to net cash used of$24.0 million in 2021. The$28.5 million increase in cash flow provided by financing activities was primarily due to Term Loan Facility proceeds of$388.0 million , less$349.2 million used to repay the previously outstanding term loan and$12.6 million of debt issuance costs related to the Term Loan Facility and Revolving Credit Facility.
NON-GAAP FINANCIAL MEASURES
In this Annual Report, we discuss three important measures that are not
calculated according to
Value added sales represents net sales less the value of aluminum and other
costs, as well as outsourced service provider ("OSPs") costs that are included
in net sales. Contractual arrangements with our customers allow us to pass on
changes in aluminum and certain other costs. Value added sales adjusted for
foreign exchange represents value added sales on a constant currency basis. For
entities reporting in currencies other than the U.S. dollar, the current period
amounts are translated using the prior year comparative period exchange rates,
rather than the actual exchange rates in effect during the current period. Value
added sales adjusted for foreign exchange allows users of the financial
statements to consider our net sales information both with and without the
aluminum, other costs and OSP costs and fluctuations in foreign exchange rates.
Management utilizes value added sales adjusted for foreign exchange as a key
metric in measuring and evaluating the growth of the Company because it
eliminates the volatility of the cost of aluminum and changes in foreign
exchange rates. Management utilizes value added sales in calculating adjusted
EBITDA margin to eliminate volatility of the cost of aluminum in evaluating
year-over-year margin growth.
Adjusted EBITDA is defined as earnings before interest income and expense,
income taxes, depreciation, amortization, restructuring charges and other
closure costs and impairments of long-lived assets and investments, changes in
fair value of the redeemable preferred stock embedded derivative, acquisition
and integration, certain hiring and separation related costs, proxy contest
fees, gains associated with early debt extinguishment and accounts receivable
factoring fees. We use adjusted EBITDA as an important indicator of the
operating performance of our business. Adjusted EBITDA is used in our internal
forecasts and models when establishing internal operating budgets, supplementing
the financial results and forecasts reported to our Board of Directors and
evaluating short-term and long-term operating trends in our operations. We
believe the adjusted EBITDA financial measure assists in providing a more
complete understanding of our underlying operational measures to manage our
business, to evaluate our performance compared to prior periods and the
marketplace and to establish operational goals. Adjusted EBITDA is a non-GAAP
financial measure and should not be considered in isolation or as a substitute
for financial information provided in accordance with U.S. GAAP. This non-GAAP
financial measure may not be computed in the same manner as similarly titled
measures used by other companies.
The following table reconciles our net sales, the most directly comparable U.S.
GAAP financial measure, to our value added sales and value added sales adjusted
for foreign exchange:
Fiscal Year Ended December 31, 2022 2021
(Dollars in thousands) Net sales$ 1,639,902 $
1,384,750
Less: aluminum, other costs, and outside service provider costs (869,253 ) (631,081 ) Value added sales$ 770,649 $
753,669
Currency impact on current period value added sales 45,865
-
Value added sales adjusted for foreign exchange
753,669
26--------------------------------------------------------------------------------
Table of Contents
The following table reconciles our net income, the most directly comparable
Fiscal Year Ended December 31, 2022 2021 (Dollars in thousands) Net income$ 37,034 $ 3,754 Interest expense, net 46,314 41,879 Income tax provision 14,104 7,437 Depreciation 70,244 73,343 Amortization 20,928 26,292 Restructuring, factoring fees and other (1) (2) 5,530
14,033
Change in fair value of redeemable preferred stock
embedded derivative liability (3) - (25 ) Adjusted EBITDA$ 194,154 $
166,713
Adjusted EBITDA as a percentage of net sales 11.8 %
12.0 % Adjusted EBITDA as a percentage of value added sales 25.2 % 22.1 %
(1)
In 2022, we incurred$3.6 million of accounts receivable factoring fees,$1.1 million of hiring and other costs and$0.8 million of restructuring costs. (2) In 2021, we incurred$5.3 million of restructuring costs comprised of ongoing fixed costs associated with ourFayetteville, Arkansas facility, relocation and installation costs of repurposed machinery and costs of site preparation activities which occurred as part of the sale of the facility. Additionally, we recognized a gain on sale of$4.4 million related to the sale of theFayetteville, Arkansas facility. We also incurred$1.5 million of costs from a flood at ourWerdohl, Germany facility,$4.5 million related to theWerdohl restructuring,$4.3 million of certain hiring and separation costs,$2.1 million of accounts receivable factoring fees, and$0.7 million of other costs. (3) The change in the fair value is mainly driven by the change in our stock price during the respective periods.
Critical Accounting Estimates
Accounting estimates are an integral part of the consolidated financial statements. These estimates require the use of judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the periods presented. We believe the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in developing estimates actual results could differ from the original estimates, requiring adjustments to these balances in future periods (refer to Note 1, "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" in this Annual Report for our significant accounting policies related to our critical accounting estimates). Revenue Recognition - Revenue estimation uncertainty primarily relates to deferral and recognition of tooling revenue and recognition of certain price adjustments on sales to our OEM customers treated as variable consideration. Tooling revenues, related to the initial tooling reimbursed by our customers, are deferred and recognized over the average life of the vehicle wheel program on a straight-line basis. A portion of our selling prices to OEM customers is attributable to the aluminum content of our wheels. Our selling prices are adjusted for changes in the current aluminum market based upon specified aluminum price indices during specific pricing periods, as agreed with our customers. Selling prices for our OEM customers are also adjusted for changes in current market prices for alloy premium and silicon based on either price indices or other contractually defined terms. Our selling prices also incorporate a wheel weight price component which is based on customer product specifications. We estimate the variable consideration using the "most likely" amount estimation approach. Changes in the prices for aluminum, certain other raw materials and other costs are monitored and revenue is adjusted as changes in the respective indices occur, or as our contracts otherwise stipulate. Weights are monitored, and prices are adjusted as variations arise. Customer contract prices are generally adjusted quarterly to incorporate these price adjustments. InNorth America , OEM price adjustments due to manufacturing efficiencies are generally recognized as and when negotiated with customers. Contracts with European OEMs generally include annual price reductions based on expected manufacturing efficiencies over the life of the vehicle wheel program which are accrued as revenue is recognized. Adjustments to selling prices in 2022 and 2021 related to prior year revenues were$1.5 million and$2.6 million , respectively. Fair Value Measurements - The Company applies fair value accounting for all financial assets and liabilities and nonfinancial 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 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.
27--------------------------------------------------------------------------------
Table of Contents
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.
Our derivatives are over-the-counter customized derivative instruments and are not exchange traded. We estimate the fair value of these instruments using the income valuation approach. Under this approach, future cash flows are estimated and discounted 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 benchmark rate (e.g., SOFR) plus an adjustment for nonperformance risk. Impairment of Long-Lived Assets - Management evaluates the recoverability and estimated remaining lives of long-lived assets whenever facts and circumstances suggest that the carrying value of the assets may not be recoverable or the useful life has changed. Estimation uncertainty in evaluating recoverability of long-lived assets within a given asset group is primarily related to the assumptions used in estimating the cash flows associated with the respective asset group, as well as the discount rate used in determining fair value in the event of an impairment. The asset group is the unit of accounting for a long-lived asset or group of long-lived assets which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other asset groups. An impairment loss occurs when the carrying value of an asset group (including the carrying value of liabilities associated with the long-lived assets within the asset group) exceeds the undiscounted cash flows expected to be realized from the use and eventual disposition of the respective long-lived assets. Fair value is determined primarily by discounting the estimated expected cash flows. If the carrying amount of an asset group is impaired, a loss is recognized based on the amount by which the carrying value exceeds fair value. The Company's asset groups consist of the North American and European reportable segments. Retirement Plans - Subject to certain vesting requirements, our unfunded retirement plan generally 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 net periodic pension cost and related benefit obligations are primarily based on assumptions regarding the discount rate and the mortality of the participants, among other factors. The net periodic pension costs and related obligations are measured using actuarial techniques and assumptions (refer to Note 15, "Retirement Plans" in the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" in this Annual Report for a description of these assumptions). The following information illustrates the sensitivity to a change in certain assumptions of our unfunded retirement plan as ofDecember 31, 2022 . They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The effect of the indicated increase (decrease) in selected factors is shown below (in thousands): Increase (Decrease) in: Projected Benefit 2023 Net Percentage Obligation at Periodic Assumption Change December 31, 2022 Pension Cost Discount rate +1.0% $ (2,068 ) $ 92 Rate of compensation increase +1.0% $ 152 $ 8 Income Taxes - The Company operates in a number of geographic locations and is subject to foreign,U.S. federal, state and local taxes applicable in each of the respective jurisdictions. These tax laws are complex and involve uncertainties in the application to our facts and circumstances that may be subject to interpretation. We recognize benefits for uncertain tax positions based on a process that requires judgment in the technical application of laws, regulations and various related judicial opinions. If an uncertain tax position is more likely than not (probability of greater than 50 percent) to be sustained upon examination, we estimate the tax benefit as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. Evaluation of tax positions, their technical merits, and measurements using cumulative probability are inherently subjective estimates since they require our assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis, including consideration of changes in circumstances, such as new regulations, recent judicial opinions or the results of recent examinations by tax authorities. Any necessary changes to our estimates are recorded in the period in which the change occurs. 28
--------------------------------------------------------------------------------
Table of Contents
As a part of our income tax provision, we must also evaluate the likelihood that we will be able to realize our deferred tax assets which is dependent on our ability to generate sufficient taxable income in future years. A valuation allowance must be provided when, in our judgment, based on currently available information, it is more likely than not that all or a portion of such deferred tax assets will not be realized. The assessment regarding whether a valuation allowance is required or should be adjusted is based on an evaluation of possible sources of taxable income and considers all available positive and negative evidence, including the following:
•
Nature, frequency and severity of current and cumulative financial reporting losses: A pattern of recent losses is heavily weighted as a source of negative evidence. We generally consider cumulative pre-tax losses in the three-year period ending in the current quarter to be significant negative evidence of future profitability. We also consider the strength and trend of earnings.
•
Sources of future taxable income: Future reversals of existing temporary differences are heavily weighted sources of objectively verifiable evidence. Projections of future taxable income are a source of positive evidence only when the projections are combined with a history of recent profitability and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally will not be sufficient to overcome negative evidence that includes cumulative losses in recent years, particularly if the projected future profitability is dependent on a turnaround to profitability that has not yet been achieved.
•
Tax planning strategies: If necessary and available, tax planning strategies could be implemented to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavily weighted.
As ofDecember 31, 2022 , substantially all ourU.S. and certain German deferred tax assets, net of deferred tax liabilities, were subject to valuation allowances. If our financial results continue to improve, our assessment of the realization of our net deferred tax assets could result in the release of some or all the valuation allowances. Such a release would result in a material non-cash income tax benefit in the period of release and the recording of additional deferred tax assets. There is a reasonable possibility that within the next six to eighteen months, sufficient positive evidence becomes available to reach a conclusion that all or a significant portion of the valuation allowances against our US net deferred tax assets would no longer be required. Our accounting for the valuation of deferred tax assets represents our best estimate of future events. Changes in our current estimates, due to unanticipated market conditions, governmental legislative actions or events, could have a material effect on our ability to utilize our deferred tax assets. AtDecember 31, 2022 and 2021, deferred tax assets were$104.7 million and$102.1 million , respectively, and valuation allowances against those deferred tax assets were$67.6 million and$69.4 million (refer to Note 13, "Income Taxes" in the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" in this Annual Report for additional information).
© Edgar Online, source
