PART I
In this Annual Report on Form 10-K ("Form 10-K"), the following terms have the meanings indicated below:
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Unless
the context otherwise requires, the terms "we," "us," "our," and "registrant," as well as the term "Superior Essex," refer to Superior Essex Inc. and its
subsidiaries on and after November 10, 2003, the effective date of the plan of reorganization of Superior TeleCom Inc. and its subsidiaries.
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"COMEX"
refers to Commodity Exchange Inc., a subsidiary of the New York Mercantile Exchange, Inc. that operates the principal U.S. copper futures and options
trading market.
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"Essex
Group" refers to Essex Group, Inc., a wholly-owned subsidiary of Essex International.
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"Essex
International" refers to Essex International Inc., a wholly-owned subsidiary of Superior Essex Holding
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"Essex
Europe" refers to Essex Europe S.A.S., a wholly-owned French holding company (formerly known as Essex Nexans Europe S.A.S.) which owns our consolidated
operations in Europe.
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"LME"
refers to the London Metal Exchange, which operates the principal European copper futures and options trading market.
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"SHME"
refers to the Shanghai Metal Exchange, which operates the principal Asian copper futures and options trading market.
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"Superior
Essex Communications" refers to Superior Essex Communications LP, a limited partnership with Superior Essex Holding as the sole limited partner and SE
Communications GP, a wholly-owned subsidiary of Superior Essex Holding, as the sole general partner.
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"Superior
Essex Holding" refers to Superior Essex Holding Corp., a wholly-owned subsidiary of Superior Essex, and the sole limited partner of Superior Essex Communications.
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"Superior
TeleCom," unless the context otherwise requires, refers to Superior TeleCom Inc. and its subsidiaries and the business carried on by them prior to
November 10, 2003.
Industry and market data
Unless otherwise indicated, information contained in this Form 10-K concerning the wire and cable industry, our general expectations concerning
the industry and its segments and our market position and market share within the industry and its segments are principally derived from management estimates. Such estimates are derived from third
party sources as well as data from our internal research and assumptions made by us, based on such data and our knowledge of the industry which we believe to be reasonable. Our internal research has
not been verified by any independent source. In addition, some similar information in this Form 10-K is based on data from various third party sources, including industry
publications, government publications, reports by market research firms or other published independent sources. We have not independently verified any of such information and cannot assure you of its
accuracy or completeness. While we are not aware of any misstatements regarding any industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based
on various factors, including those discussed under the caption "Risk Factors" in this Form 10-K.
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ITEM 1. BUSINESS
General
We are one of the largest wire and cable manufacturers in the world. We manufacture and supply a broad portfolio of wire and cable products for the
communications, energy, automotive, industrial, and commercial / residential end-markets. We are a leading manufacturer of magnet wire, fabricated insulation products, and copper and fiber
optic communications wire and cable products. We are also a leading distributor of magnet wire, insulation, and related products sold to smaller original equipment manufacturers, or OEMs, and motor
repair facilities. We convert copper cathode to copper rod for internal consumption and for sale to other wire and cable manufacturers and OEMs. We currently operate 25 manufacturing facilities in
North America, Europe and China and employ approximately 4,500 people.
Financial
information about our business segments and foreign operations is included in note 17 to the accompanying audited consolidated financial statements for the years ended
December 31, 2007, 2006 and 2005.
Organizational History
We were incorporated under Delaware law in 2003 to acquire and conduct the business formerly conducted by Superior TeleCom, pursuant to Superior TeleCom's plan of
reorganization. On March 3, 2003, Superior TeleCom and certain of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Superior TeleCom continued to manage its properties and operate its businesses as a
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In accordance with a plan of
reorganization confirmed by the Bankruptcy Court, on November 10, 2003, the effective date of the plan, we acquired the business formerly conducted by Superior TeleCom and its subsidiaries. The
plan of reorganization provided for, among other things, the cancellation of all pre-bankruptcy senior debt, subordinated debt and outstanding shares of common stock of Superior TeleCom
and the distribution to Superior TeleCom's senior secured debt holders of (1) 16,500,000 shares of our common stock, representing 100% of our initial outstanding common stock,
(2) 5,000,000 shares of preferred stock of Superior Essex Holding, and (3) $145 million
principal amount of 9
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2
% senior secured notes issued jointly by Superior Essex Communications and Essex Group.
Acquisitions and Dispositions
Since acquiring Superior TeleCom's business in November 2003, we have completed a series of acquisitions in North America, Europe and China. With respect to our
communications cable business, on June 1, 2004, Superior Essex Communications acquired certain assets from operating subsidiaries of Belden Inc. related to Belden's North American copper
outside plant, or OSP, communications wire and cable business. Under the terms of the asset purchase agreement, Superior Essex Communications acquired certain inventories, selected machinery and
equipment and certain customer contracts related to a portion of Belden's communications business for total consideration of $83.1 million.
In
our North American magnet wire and distribution business, on September 7, 2004, Essex Group acquired substantially all inventory associated with Nexans' U.S. magnet wire
operations and assumed certain U.S. customer contractual arrangements. The total purchase price for the acquisition was $11.6 million.
On
October 21, 2005, we expanded our European magnet wire operations by acquiring Nexans' magnet wire operations in Europe through formation of a joint venture, Essex Europe,
combining our U.K. magnet wire business and Nexans' European magnet wire and enamel businesses. We initially
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owned
60% of the joint venture and Nexans had a 40% minority ownership. We refer to this acquisition as the Essex Europe transaction. On June 27, 2007, pursuant to the call provision provided
for in the joint venture shareholders agreement, we acquired Nexans' 40% minority interest in Essex Europe for a cash purchase price of $29.6 million.
We
completed three additional acquisitions in 2007. In April 2007, Essex Group, through its newly formed Canadian subsidiary, Essex Group Canada Inc., acquired certain assets
related to Nexans remaining North American magnet wire business in Simcoe, Canada for a cash purchase price of $12.7 million, which we refer to as the Simcoe acquisition. In July 2007, we
acquired Nexans' 80% ownership interest in Essex Magnet Wire (Tianjin) Ltd. (f/k/a Nexans Tianjin Magnet Wires and Cables Co., Ltd.), a Chinese company operating a magnet wire
facility located in Tianjin, China, for a cash purchase price of $9.3 million. We refer to this transaction as the Tianjin acquisition. These transactions provide us with an increased market
presence in the North American and Chinese markets for magnet wire products used in the transformer and power generation end markets. On July 31, 2007, Essex Europe acquired all of the
outstanding common stock of Invex S.p.A. ("Invex"), a leading European magnet wire producer based in Italy for a cash purchase price of $41.1 million. We refer to this transaction as the
Invex acquisition.
See
footnote 5 to the accompanying audited consolidated financial statements for more information regarding the completed acquisitions.
Business Segments
We divide our business operations into five business segments: communications cable, North American magnet wire and distribution, European magnet wire and
distribution, Asia/Pacific magnet wire and copper rod.
Communications Cable
The communications cable segment of our business develops, manufactures and markets the following communications wire and cable products to telephone companies
(both the regional Bell operating companies, or RBOCs, and independent telephone companies), cable television, or CATV, companies, distributors and system integrators:
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Outside
plant, or OSP, products including copper cable, fiber optic cable and composite cable used outdoors for voice and data transmission to carry telephone, internet,
video on demand and other communication services to homes and offices; and
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premises
wire and cable products, including copper and fiber optic cables used within homes and buildings to provide connectivity for telecommunications networks, local area
networks, or LANs, wide area networks, or WANs, and switching structures to connect various electronic switching and testing components.
OSP product net sales were $677.4 million, $666.9 million and $573.4 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The majority of our OSP product sales relate to copper OSP products. We are the largest manufacturer of copper OSP communications wire and cable in
North America, based on sales. At the end of 2007, we believe we had an approximate 68% share of the total North American copper OSP market. Copper wire and cable are the most widely used media for
voice and data transmission in the local loop portion of the traditional telecommunications infrastructure operated by local exchange carriers, or LECs. The local loop is the segment of the
telecommunications network that connects the customer's premises to the nearest telephone company switching center or central office.
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Demand
for copper OSP wire and cable is dependent on several factors, including the rate at which new access lines are installed in homes and businesses, the level of infrastructure
spending for items such as road-widening and bridges, which generally necessitate replacement of existing utilities including telephone cable, and the level of general maintenance and
repair spending by the LECs, including repairs resulting from weather related damage. The installation of new access lines is, in turn, partially dependent on the level of new home construction and
expansion of business. The major telephone operating companies have experienced an annual decrease in access lines in the local loop of approximately 7% for the past several years, including 2007, and
this trend is expected to continue. Competitive alternatives to traditional telephone service, such as wireless and cable telephony, have had a negative impact on the demand for copper OSP wire and
cable, and use of these alternatives is expected to increase. Additionally, the demand for copper OSP products is impacted by the extent to which the RBOCs and other telephone companies deploy fiber
optic cable in their networks. Certain RBOCs have begun to significantly increase the use of fiber optic cable further downstream in their networks, in some cases all the way to the premises. See
"Risk FactorsOther Risks Related to Our Business."
Although
other media, such as fiber optic cable, are used for trunk lines between central offices and for feeder lines connecting central offices to the local loop, a significant portion
of all local loop lines and systems continues to be copper based. Copper usage in the local loop continues to be supported by technological advances that expand the use and bandwidth of the installed
local loop copper network. High-speed and bandwidth intensive telecommunications services, such as integrated voice and data, digital subscriber lines, or DSL, broadcast and conference
quality video, Internet, high-speed LAN-to-LAN connectivity, "Voice over Internet Protocol" or VoIP, and other specialized bandwidth intensive applications, can now
be provided over the copper based local loop network.
Our
copper OSP products include distribution cable and service wire products, ranging in size from a single twisted pair to a 4,200-pair cable. The basic unit of virtually
all copper OSP wire and cable is the "twisted pair," a pair of insulated conductors twisted around each other. Twisted pairs are bundled together to form communications wire and cable. Our copper OSP
wire and cable products are differentiated by a multitude of design variations, depending on where the cable is to be installed. Copper OSP products normally have metallic shields for mechanical
protection and electromagnetic shielding, as well as an outer polyethylene or polyvinyl chloride ("PVC") jacket.
The
fiber optic OSP cables we manufacture can be used in a variety of installations, such as aerial, buried and underground conduit, and can be configured with one to 1,008 fibers. These
cables are sold to our traditional customers, such as distributors and LECs (including the RBOCs), as well as CATV companies and campus network installers and operators.
We
are a key supplier of copper OSP wire and cable to two of the three RBOCs and Embarq Corporation (formerly Sprint Corporation). It is estimated that the RBOCs and Embarq comprise
approximately 70% of the North American copper OSP market. The remaining North American market is comprised of more than 1,200 smaller independent telephone companies. For the years ended
December 31, 2007, 2006 and 2005, a total of 65%, 65% and 67%, respectively, of our OSP product net sales were to the RBOCs and Embarq. We sell to the RBOCs and major independent telephone
companies through a direct sales force.
The
terms of our sales to the RBOCs and the independent telephone operating companies are generally established pursuant to multi-year supply arrangements. Typically,
customers are not required to purchase any minimum quantities of product under these arrangements. At December 31, 2007, we had arrangements with two of the three RBOCs, AT&T and Verizon. Our
sales to AT&T were approximately 10% of our consolidated total sales in 2007. Our agreement with AT&T is subject to automatic annual renewals upon approval from both parties. See "Summary of Certain
Customer Agreements."
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Premises product net sales were $177.5 million, $151.0 million and $105.3 million for the years ended December 31, 2007, 2006 and
2005, respectively. Premises wire and cable is used within buildings to provide connectivity for telecommunications networks and LANs and within switching structures to connect various electronic
switching and testing components. Rapid technological advances in communications and computer system capabilities have created increasing demand for greater bandwidth capabilities in wire and cable
products. Demand for premises wire and cable products is dependent upon new office building and retail construction, technological upgrades of existing office building networks, building remodeling
and residential construction.
There
are two primary applications for communications wiring systems within buildings: data applications and voice applications. The primary voice application consists of networking
telephone stations. The primary data application is LANs, which generally require the wired interconnection of
workstations and peripherals, such as printer and file servers, to form a network. Data applications constitute the majority of new wiring system investment. Video applications are increasingly
being deployed over premises wiring products.
Four
major types of cables are currently deployed in premises applications: (i) LAN copper twisted pair (unshielded twisted pair, or UTP, and shielded twisted pair, or STP),
(ii) LAN fiber optic cable, (iii) LAN coaxial cable and (iv) voice grade twisted copper pair.
Our
current copper premises wire and cable product offerings include voice-grade cables and high performance data transmission cables (Category 6A, Category 6 and
Category 5e) ranging in size from 2-pair to 2,100-pair. These cables are designed and manufactured for use in both plenum (horizontal) and riser (vertical) environments.
Our fiber optic premises cables contain from one to 144 fibers and are used principally for data network backbone applications.
Our
premises wire and cable products are sold primarily through major national distributors, international distributors, and smaller regional distributors who in turn resell to
contractors, international and domestic telephone companies and private overseas contractors for installation in industrial, commercial and residential markets. The North American premises wire and
cable market is fragmented, with more than 20 premises wire and cable manufacturers.
Magnet Wire and Distribution
Our magnet wire and distribution business currently consists of three geographic operating segments: North America, Europe, and Asia/Pacific. We have a leading
position in terms of revenues and volume of magnet wire sold within North America and Europe. Overall, we are the largest magnet wire producer in the world.
Magnet
wire (also known as winding wire) is insulated copper or aluminum wire wound into coils and used in electrical motors, transformers, controls, switches and other electronic
devices. Magnet wire is sold mainly to large OEMs through annual or multi-year supply agreements with a percentage of each customer's total requirements awarded. See "Summary
of Certain Customer Agreements." We also distribute magnet wire and fabricated insulation products manufactured by us and related accessory products purchased from third parties to small OEMs and
motor/transformer repair facilities. In our North American and European segments, we formulate and produce our own magnet wire enamels and in Europe, we sell a portion of our internally produced
enamels to third parties.
We
offer a comprehensive range of more than 2,000 magnet wire products ranging in diameter from less than 40 microns to more than 6 millimeters (3 to 48 gauge). These include standard
round and flat
wire products (which are insulated with an enamel coating), along with specialty products such as continuous transposed cable, or CTC, and paper-wrapped, glass-sealed, self-bonding and
self-lubricating wires.
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The
principal end-market applications for magnet wire are energy, automotive, industrial, and commercial / residential. Energy applications for magnet wire include power
transformers, distribution transformers and power generators used in power grids and in private industrial, commercial and residential energy systems. Automotive applications include motors,
electronics and electrical devices used in cars and other transport vehicles. Industrial magnet wire applications include a broad range of products used by OEMs such as machine tools, HVAC
compressors, hydraulic pumps, conveyors and traction motors. Magnet wire is used in commercial and residential applications in products such as heating pumps, hermetic motors for HVAC and
refrigeration, electronics, household appliances and lighting.
In
2007 we completed the Invex, Simcoe and Tianjin acquisitions which significantly increased our position in the energy end-markets in North America, Europe and China.
The North American magnet wire and distribution segment currently operates five magnet wire manufacturing plants and two electrical insulation fabricating plants
in the U.S., one magnet wire manufacturing plant in Canada (acquired in 2007) and one manufacturing and distribution facility in Torreon, Mexico.
The
North American magnet wire and distribution segment's largest OEM customers include A.O. Smith, Cooper Industries, Emerson Electric, Howard Industries, Regal-Beloit, Tecumseh and
Visteon. In 2007, one customer accounted for 14% of our total North American magnet wire and distribution segment sales. In 2006 two customers accounted for 16% and 10% of our total North American
magnet wire and distribution segment sales. In 2005 two customers accounted for 10% and 9% of our total North American distribution segment sales.
The North American magnet wire market has experienced a consolidation of suppliers over the last four years and is now comprised of several key established
competitors. Longer-term demand for commercial and residential end-use products has been negatively impacted by the migration of end-product manufacturing to
off-shore locations. More recently, demand has been negatively impacted by weakness in the U.S. residential construction and housing markets. The reduced demand in the
commercial/residential markets has been partially offset, however, by growth in the North American energy and industrial end-use markets.
The
North American magnet wire and distribution segment's sales of magnet wire were $955.5 million, $875.2 million and $574.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively. For the years ended December 31, 2007, 2006 and 2005, approximately 82%, 79% and 78%, respectively, of magnet wire volume shipped was sold
direct to OEM customers pursuant to annual or multi-year supply arrangements. In North America we are one of the leading suppliers of magnet wire as measured by revenues and pounds sold.
We believe our manufacturing facilities in the U.S., Canada and Mexico give us flexibility in serving our customer's needs. Our manufacturing facility in Torreon, Mexico is strategically located to
service major OEM customers with Mexican manufacturing locations as well as to allow us to pursue new market opportunities in Mexico, Central America and South America. We also distribute fabricated
insulation and other accessory products to customers in Mexico from this location.
We
believe we have a competitive cost and quality advantage through the internal supply of a portion of our copper rod requirements and through the formulation and production our own
enamel coatings.
In
January 2008, we announced a consolidation and restructuring of our North American magnet wire manufacturing facilities. The changes are expected to more efficiently match our
production
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capabilities
to industry demand levels and to customer requirements. The restructuring involves a phased closure of our Vincennes, Indiana magnet wire manufacturing facility, which is expected to be
completed by the fourth quarter of 2008. See note 20 to the accompanying consolidated financial statements.
Within our North American magnet wire and distribution segment, we operate Essex Brownell, one of the largest national distributors for magnet wire and related
products. Our Essex Brownell distribution operation provides a single source for motor/transformer repair businesses and OEMs to purchase all of their magnet wire, insulation and related accessory
product needs. We manufacture many of the fabricated insulation products marketed and distributed by Essex Brownell.
The
Essex Brownell distribution operation includes a sales force that covers North America, supported by strategically located distribution centers and warehouse locations. In addition
to internally produced magnet wire and insulation products, Essex Brownell distributes products from more than 100 third-party suppliers. We believe Essex Brownell provides us with a distinct
competitive advantage, as we are the only major North American magnet wire producer that also distributes a full line of complementary electrical accessory products.
Our European magnet wire and distribution segment consists of Essex Europe and its operating subsidiaries, and for periods prior to the Essex Europe transaction
on October 21, 2005, consisted solely of our U.K. magnet wire and distribution business. The European magnet wire and distribution segment produces magnet wire in eight facilities in France,
Germany, Italy (two facilities acquired in 2007), Portugal and the U.K., and produces enamels in one production facility in France.
Net
sales for the European magnet wire and distribution segment totaled $758.4 million in 2007, $647.0 million in 2006 and $105.8 million in 2005. On a pro forma
basis, assuming the Essex Europe transaction had occurred on January 1, 2005, net sales for the European magnet wire and distribution segment would have totaled $413.0 million for 2005.
The
European magnet wire and distribution segment's largest magnet wire customers include Danfoss, Emerson Electric, Grundfos, Siemens, Valeo and Wilo. In 2007, two customers with sales
in excess of 10% of the segment's sales accounted for 24% of the total sales of the European magnet wire and distribution segment. Two customers accounted for 27% of the segment's net sales for the
year ended December 31, 2006. During 2005, no customer accounted for more than 10% of sales for the European magnet wire and distribution segment.
The European magnet wire market is fragmented with more than 20 competitors. Due in part to industry overcapacity, product pricing is a key competitive factor.
Demand for commercial and residential products has been somewhat negatively impacted by customer migration to lower-cost markets, though much of this shift has been from Western to Eastern
Europe. Demand in Europe in the energy and automotive end-use segments, however, has been relatively strong in recent years.
We
are the largest producer in the European magnet wire market in terms of both sales and volume. We believe our product breadth, scale and geographic reach provide us an ability to
offer our customers better flexibility and service than many of our competitors. We also believe we have a cost and quality advantage arising from the internal supply of enamels from our facility in
Meyzieu, France.
Essex
Europe has entered into agreements with Nexans regarding the supply of copper rod and pre-drawn copper wire. Under the agreements, Nexans is the exclusive supplier of
copper rod in France and is the supplier for a substantial majority of Essex Europe's copper rod needs in Germany and
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Portugal.
Nexans is also the exclusive supplier of pre-drawn copper wire in France and Germany and for a minimum of 30% of Essex Europe's pre-drawn copper wire requirements in
Portugal. See "Raw Materials and ManufacturingCopper" below. We also have agreements with all the other major copper rod suppliers in Europe.
In the U.K. and France, we distribute magnet wire to smaller customers through our wholly-owned distribution businesses. These customers generally require smaller
quantities of wire than larger OEMs, delivered immediately or on next day service. The customer base consists of small OEMs manufacturing small motors and generators, site and distribution
transformers and electro-mechanical devices, along with motor, generator and transformer repair shops, serving industrial, commercial and marine sectors of the market.
We produce enamels in our Meyzieu, France production facility and are the second largest magnet wire enamel producer in Europe in terms of sales and volume. The
European magnet wire and distribution segment markets its magnet wire enamel products world-wide through a sales network located close to magnet wire manufacturers.
Our Asia/Pacific magnet wire segment consists of our wholly-owned greenfield manufacturing facility in Suzhou and a manufacturing facility in Tianjin, China
acquired in July 2007. The Suzhou facility was completed in the fourth quarter of 2006 and started commercial production for external sales in February 2007. We currently own 80% of the Tianjin
business with a 20% minority partner.
China's
magnet wire market is the largest in the world, and has experienced a compounded annual growth rate in demand for magnet wire of approximately 10% over the last five years. The
market is also extremely fragmented with several hundred competitors that compete aggressively on price. Customers have developed rigorous vendor qualification processes because of the large number of
low quality producers. We believe that our ability to offer high quality products and customer service will allow us to grow our sales volumes in this market.
The
Asia/Pacific magnet wire segment's largest customers include Emerson, Toshiba and Areva. Five customers accounted for 67% of the Asia/Pacific magnet wire segment's sales for the year
ended December 31, 2007.
Copper Rod
Through our copper rod business segment we manufacture continuous-cast copper rod, which is the basic raw material used in the copper wire and cable
industry. We currently maintain two North American copper rod continuous casting units located in our Columbia City, Indiana facility to convert copper cathode into copper rod. In January 2008, we
announced the phased closure of our facility in Vincennes, Indiana, which housed a third continuous casting unit. Copper rod segment sales consist of external sales of processed copper rod that is not
used for internal production. Copper rod volumes fluctuate from period to period due to changes in internal consumption needs and external market conditions. Approximately 70% of our 2007 copper rod
production was used for internal
consumption, primarily by our North American magnet wire and distribution segment. We source our remaining internal need for copper rod from third party producers. Our current strategy is to increase
the percentage of copper rod production suitable for internal use in the manufacture of magnet wire. To the extent we are successful, our total copper rod production and our external sales of copper
rod will decrease.
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The
customer base for our copper rod segment is highly concentrated among a limited number of large customers. In particular, the largest copper rod segment customer accounted for 54%,
45% and 45% of the copper rod segment's net sales for the years ended December 31, 2007, 2006 and 2005, respectively. See "Risk FactorsOther Risks Related to Our Business."
The
market for copper rod is highly competitive with only a few major producers, including ourselves. Our ability to supply our own copper rod requirements allows us to control the
quality and consistency of a substantial portion of the primary raw material for our magnet wire business and also leads to cost savings versus buying all of our copper rod requirements from third
parties.
Summary of Certain Customer Agreements
A majority of sales of our products are pursuant to customer arrangements which generally provide for adjustments in pricing to take into account changes in the
price of copper and frequently, other raw materials.
In our communications cable business, we generally enter into two to five year supply agreements with the RBOCs and other large independent telephone companies.
Customarily, these agreements set forth the terms for purchases, if made, but do not require the customer to commit to a particular volume of purchases. The majority of our communications revenues are
derived from arrangements with the RBOCs and other large independent telephone companies. Under these arrangements, the price of the copper component of the products purchased during a calendar
quarter is established during a prior three-month period. The copper component of the purchase price during a calendar quarter is the average daily COMEX price for copper during the three-month period
ending one month before the end of the prior calendar quarter. Some contracts provide that the copper component of the purchase
price during one month will be based on the average daily COMEX price for copper for a portion of the prior month. As a result of these pricing arrangements, the price of the copper component of our
product billed to customers may be different than the current cost of copper at the time of sale. To minimize the impact of this difference, we forward price copper purchases with our suppliers based
on forecasted demand. See "Risk FactorsRisks to Our Business Related to Copper."
In
addition to these adjustments for copper, such communications cable agreements generally provide escalators for the cost of other key raw materials used in the manufacture of our
communications products, which may be in the form of an index or tied to specified raw material cost increases.
Pricing
for communications cable products sold to distributors and non-contract customers is generally established based on the price of the product on the date of order. In
the past, we have based the copper component of the sales price on the prior month's average daily COMEX price. However, circumstances such as the recent copper markets have warranted more timely
changes to the price of our communications products sold to distributors and non-contract customers. As a result, pricing for these products may be changed more frequently.
In our North American magnet wire and distribution business, we generally enter into multi-year agreements with large OEMs. These agreements
set forth the terms for purchase of magnet wire and, though they do not generally require the customer to purchase specific quantities, they may require the customer to purchase all or a specified
portion of their requirements from us. The price of copper magnet wire generally has two componentsa copper price component and a conversion component. The copper price is established as
described below. The conversion component is generally fixed for the term of the agreement. Under these agreements, qualified customers may fix the copper price component of future purchases of magnet
wire from us, in which case the commitments are generally
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non-cancelable.
We forward price copper purchases or utilize COMEX fixed price futures contracts to match the cost of copper purchased to the price of these forward purchase commitments.
See "Risk FactorsRisks to Our Business Related to Copper." If these customers do not elect to forward price the copper component, the copper price is either the COMEX copper spot price,
the current month's average COMEX copper price or the prior month's average COMEX copper price at the time of shipment. Similar agreements exist for sales of aluminum-based magnet wire. Many of these
agreements generally provide that prices are subject to review for adjustment in the event of abnormal and significant increases in non-metal material costs required to manufacture magnet
wire.
In
our distribution business in North America, the copper price of magnet wire is either the COMEX copper spot price at the time of shipment or the average COMEX copper price for the
month prior to shipment.
In
our European magnet wire business, our magnet wire pricing has two componentsa copper price component and a conversion component. There are several pricing options
available to qualified customers with respect to the copper price component. Customers may fix the copper price component of future purchases of magnet wire. In addition, customers may elect to have
the copper price component of future purchases of magnet wire based on the current, or the prior month's, average LME copper price at the time of shipment, or on the LME copper price on a particular
day during the shipment month. In order to use certain of these options, the customer must make an election prior to the first day of the month that determines the price and specify the volume of
magnet wire subject to such pricing election. These customer pricing elections are generally non-cancelable and we forward price copper purchases or utilize LME futures contracts to match
these elections. See "Risk FactorsRisks to Our Business Related to Copper." The copper price component of all other shipments is based upon the LME spot price on the date of shipment.
In
our Asia/Pacific magnet wire business, we generally enter into single- or multi-year agreements with large customers. These agreements set forth the terms for purchase of
magnet wire and, though they do not generally require the customer to purchase specific quantities, they may require the customer to purchase all or a specified portion of their requirements from us.
The price of copper magnet wire generally has two componentsa copper price component and a conversion component. The copper price is established as described below. The conversion
component is generally fixed for the term of the agreement. Under these agreements, qualified customers may fix the copper price component of future purchases of magnet wire from us, in which case the
commitments are generally non-cancelable. We generally forward price copper purchases or utilize SHME fixed price futures contracts to match the cost of copper purchased to the price of
these forward purchase commitments. See "Risk FactorsRisks to Our Business Related to Copper." If these customers do not elect to forward price the copper component, the copper price is
either the SHME copper spot price or the current month's average SHME copper price at the time of shipment. Some of these agreements generally provide that prices are subject to review for adjustment
in the event of abnormal and significant increases in non-metal material costs required to manufacture magnet wire.
In our copper rod segment, customers generally enter into an annual agreement for expected delivered quantities at a selling price that includes the copper
component plus a premium for recovery of our costs to convert copper cathode to copper rod. The copper component is priced at the average COMEX spot price for the month of shipment or arrival.
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Raw Materials and Manufacturing
Copper rod is the most significant raw material used in our manufacturing process. Copper is a commodity and is therefore subject to price volatility. See "Risk
FactorsRisks to Our Business Related to Copper" below.
In
North America we purchase copper cathode and, to the extent not provided internally, copper rod from select copper producers. Generally, such copper cathode and rod purchases are
pursuant to supply agreements which extend for a one-year period and provide for the purchase of a fixed amount of copper cathode or rod during the year. The price of copper cathode and
copper rod generally has two componentsa copper price component and a premium to cover profit, freight and, in the case of copper rod, conversion. Under these agreements, the cost of the
copper component is based upon one of three pricing methods: 1) a forward fixed-price copper contract; 2) the average monthly COMEX copper price in the month of physical receipt by us;
or 3) the average monthly COMEX copper price at time of supplier shipment.
Essex
Europe has entered into an agreement with Nexans regarding the supply of copper rod. Under the terms of the agreement, Essex Europe agrees annually to purchase a specified monthly
volume of copper rod at fixed conversion costs, which are subject to annual adjustment, plus the cost of copper. Under the agreement, Nexans is the exclusive supplier of copper rod in France and is
the supplier for a substantial majority of Essex Europe's copper rod needs in Germany. The agreement expires on December 31, 2008 with automatic one year renewals unless cancelled by either
party upon six months prior notice.
The
manufacturing process for magnet wire involves several steps beginning with drawing down copper rod and bare wire into smaller diameters through various process steps until the
finished size and shape is achieved. The initial break down of copper rod into intermediate sized wire for the European magnet wire and distribution segment's facilities in France and in one of its
German facilities is provided through an agreement with Nexans for the purchase of pre-drawn copper wire. The purchased pre-drawn wire is then drawn down to its final shape or
size, and
insulating enamel or other material is applied to create the finished product. Under the terms of the agreement with Nexans, Essex Europe agrees to purchase a substantial portion of its
pre-drawn copper wire requirements from Nexans at fixed conversion costs, which may be adjusted annually for certain Nexans cost increases, plus the cost of copper. Under the agreement,
Nexans is the exclusive supplier for the European magnet wire and distribution segment's pre-drawn wire requirements in France and Germany and for 30% of its pre-drawn wire
requirements in Portugal. The agreement expires on December 31, 2008 with automatic one year renewals unless cancelled by either party upon twelve months prior notice. In December 2007, Nexans
provided notice that they did not intend to renew the pre-drawn agreement under the current terms and conditions. If we are unable to successfully negotiate a new agreement with Nexans, we
will have to obtain another source for our pre-drawn wire needs in Europe or acquire the necessary equipment to perform the initial draw down of copper rod and bare wire internally.
Historically,
we have had adequate supplies of copper available from producers and merchants, both foreign and domestic. We have historically purchased the majority of our copper
requirements from producers and have accessed COMEX warehouse supplies only on a limited basis. Although we have not experienced any material shortages during the current or recent years that have had
a material impact on our operations, no assurance can be given that we will be able to procure adequate supplies of copper cathode and copper rod to meet our future production needs. Furthermore,
supply shortages or disruptions may cause us to procure our copper rod from less cost effective sources and may have a negative impact on our margins.
12
Other raw materials that we use in the manufacture of our communications cable products include aluminum, bronze, steel, optical fibers and plastics, such as
polyethylene and PVC. Other raw materials used in our magnet wire and distribution segments consist primarily of aluminum, insulation papers, films and various chemical compounds used in the
production of enamels. Additionally, natural gas is a key energy source used in the manufacture of magnet wire and copper rod. The markets and availability of these raw materials are subject to
fluctuation and there can be no assurance that we will be able to procure adequate supplies of our essential raw materials to meet our future needs.
Seasonality
We have historically experienced seasonal fluctuations in our revenues, operating income and net income. Our sales volumes are generally lower in our fourth
quarter and, to a lesser extent, our first fiscal quarter, due primarily to cold weather related reduction in demand in our communications cable segment customers and the impact of year end holiday
related plant shutdowns of major OEM customers of our magnet wire and distribution segments. Additionally, sales volumes in Europe are generally lower in the third quarter reflecting the summer
holiday period. See "Risk FactorsOther Risks Related to Our Business."
Export Sales
Export sales from the U.S. during the years ended December 31, 2007, 2006 and 2005 were $351.2 million, $353.9 million and
$209.2 million, respectively. Our primary markets for export sales are Latin America and Canada.
Backlog and Returns
Backlog in the communications cable segment typically consists of two to three weeks of sales depending on seasonal and overall industry demand issues. Certain of
our magnet wire specialty products, such as CTC, have relatively high order backlogs due to the specialized nature of the product. Our backlog for CTC orders at December 31, 2007 was
approximately $80 million. Additionally, certain of our magnet wire customers may fix the price of the copper component of future unspecified magnet wire product purchases from us in which case
the commitment to purchase the copper is generally non-cancelable. See "Summary of Certain Customer Agreements." Our other product lines have no significant order backlog because we
follow the industry practice of stocking finished goods to meet customer demand on a just-in-time basis. We believe that the ability to fill orders in a timely fashion is a
competitive factor in the markets in which we operate. Historically, sales returns have not had a material adverse effect on results of operations.
Competition
The market for wire and cable products and copper rod is highly competitive. Each of our businesses competes with at least one major competitor. However, due to
the diversity of our product lines as a whole, no major single competitor competes with us across the entire spectrum of our product lines.
Many
of our products are made to industry specifications and, therefore, may be interchangeable with competitors' products. We are subject to competition in many markets on the basis of
price, delivery time, customer service and our ability to meet specialty needs. We believe we enjoy strong customer relations resulting from our long participation in the industry, emphasis on
customer service, commitment to quality control, reliability and substantial production resources.
13
Research and Development
In North America, we operate research and development facilities in Kennesaw, Georgia and Fort Wayne, Indiana. The Kennesaw facility's efforts primarily address
the needs of the communications cable segment's premises product lines and fiber optic cable development. At the Fort Wayne facility, our metallurgical and chemical labs are focused on the development
of magnet wire metal properties and processing qualities, as well as enhancement of enamels and their application in the magnet wire manufacturing process. Our European magnet wire and distribution
segment conducts research and development activities at its Chauny and Meyzieu facilities primarily related to the development and processing of enamels. Aggregate research and development expenses
during the years ended December 31, 2007, 2006 and 2005 amounted to $5.4 million, $5.5 million and $4.6 million, respectively.
Although
we hold certain trademarks, licenses and patents, none is considered to be material to our business.
Employees
As of December 31, 2007, we employed approximately 4,500 employees. Approximately 560 of our U.S. employees are represented by unions, all of which work in
our North American magnet wire and distribution and copper rod segments. U.S. collective bargaining agreements expire at various times in 2009 and 2010. We consider relations with our employees to be
satisfactory.
Environmental Matters
We are subject to federal, foreign, state and local environmental laws and regulations in each of the jurisdictions in which we own or operate facilities
governing, among other things, emissions into the air, discharges to water, the use, handling and disposal of hazardous substances and the investigation and remediation of soil and groundwater
contamination both on-site at past and current facilities and at off-site disposal locations. We do not believe that compliance with environmental laws and regulations will
have a material effect on our capital expenditures, net income or competitive position.
A
liability for environmental remediation and other environmental costs is accrued when it is considered probable and the costs can be reasonably estimated. We have accrued amounts with
respect to environmental matters that we believe were adequate at December 31, 2007. These accruals are not material to our operations or financial position and we do not currently anticipate
material capital expenditures for environmental control facilities.
Other
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports are available, without charge, on our website, www.superioressex.com under the "Investor RelationsFinancial Reports" caption, as soon as reasonably practicable
after they are filed electronically with the Securities and Exchange Commission ("SEC"). You may also request a copy of these filings, without charge, by writing Ms. Peggy Tharp, Director of
Investor Relations, at Superior Essex Inc., 150 Interstate North Parkway, Atlanta, GA, 30339.
In
Part III of this Form 10-K, we incorporate by reference certain information from our Proxy Statement for our 2008 Annual Meeting of Shareowners. We expect to
file that Proxy Statement with the SEC within 120 days of December 31, 2007, and we will promptly make it available on our website. Please refer to the Proxy Statement when it is
available.
ITEM 1A. RISK FACTORS
Certain expectations and projections regarding our future performance referenced in this Form 10-K, in other materials
we file with the SEC or otherwise release to the public, and on our website are forward-
14
looking statements. Senior officers also may make verbal statements to analysts, investors, regulators, the media and others that are forward-looking. Forward-looking statements involve matters that
are not historical facts, such as statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere regarding our future operations, prospects,
product demand, strategies, investments, financial condition (including liquidity and capital resources), economic performance (including growth and earnings), benefits expected as a result of our
projected growth, and industry conditions. We have tried, whenever possible, to identify these statements using words such as "anticipate," "assume," "believe," "can," "could," "estimate," "expect,"
"forecast," "future," "goal," "indicate," "intend," "may," "outlook," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," and similar
expressions.
You are cautioned not to place undue reliance on our forward-looking statements. Our forward-looking statements are not guarantees of future performance and are
based on currently available competitive, financial and economic data, our current expectations and assumptions, and our operating plans. While we believe that our expectations for the future are
reasonable in view of the currently available information, our expectations are subject to future events, risks and inherent uncertainties, as well as potentially inaccurate expectations and
assumptions, and there are numerous factorsmany beyond our controlthat could cause results to differ significantly from our expectations. Such events, risks and uncertainties
include, but are not limited to, those set forth below and in the other documents that we file with the SEC. We note these factors for investors as permitted by the Private Securities Litigation
Reform Act of 1995. There also may be other factors that we cannot anticipate or that are not described in this Form 10-K, generally because we do not perceive them to be material,
that could cause results to differ significantly from our expectations.
Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update these statements to reflect subsequent
circumstances or events except as required by federal securities laws. You are advised, however, to review any further disclosures we make on related subjects in our Form 10-Q and
Form 8-K reports to the SEC.
The
following risk factors should be considered carefully in addition to the other information contained in this Form 10-K. This Form 10-K contains
forward looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in the forward looking statements. Factors that may cause these
differences include those discussed below as well as those discussed elsewhere in this Form 10-K.
Risks to Our Business Related to Copper
Copper Supply
Shortages or disruptions in the availability of copper could have a material adverse effect on our business.
Copper is the primary raw material we use in the manufacture of our products. In 2007, we purchased almost 600 million pounds of copper. Foreign economies
have been consuming an increasing proportion of worldwide copper production. This and other macro-economic factors, together with labor and other business interruptions experienced by certain copper
suppliers, have contributed to periodic shortages of supply of copper, and such shortages may increase in the future. Furthermore, there are a limited number of copper suppliers. If we are unable to
maintain good relations with our copper suppliers or if there are any business interruptions at our copper suppliers, we may not have access to a sufficient supply of copper. Although we have not
experienced any shortages during recent years that have had a significant impact on our operations, no assurance can be given that we will be able to procure adequate supplies of copper and copper rod
to meet our future production needs and customer demand, which could result in a material loss of customers and revenues and adversely impact our results of operations. In addition, supply shortages
or disruptions or the loss of suppliers may cause us to procure our copper rod from less cost effective sources and may have a material adverse effect on our business, revenues and results of
operations.
15
A majority of our sales are pursuant to customer arrangements which provide for adjustments in pricing to take into account changes in the cost of copper. See
"BusinessSummary of Certain Customer Agreements." Over the past three years the spot price of copper has escalated rapidly and has been subject to significant volatility. The average
daily, high and low COMEX and LME spot prices per pound of copper for the periods indicated are summarized as follows:
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
COMEX:
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
3.23
|
|
$
|
3.10
|
|
$
|
1.68
|
|
High
|
|
|
3.75
|
|
|
4.08
|
|
|
2.28
|
|
Low
|
|
|
2.40
|
|
|
2.13
|
|
|
1.39
|
LME:
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
3.23
|
|
|
3.05
|
|
|
1.67
|
|
High
|
|
|
3.77
|
|
|
3.99
|
|
|
2.11
|
|
Low
|
|
|
2.37
|
|
|
2.06
|
|
|
1.39
|
Increases,
decreases and fluctuations in copper prices may have material adverse effects on our business, including those described below:
We may be unable to adequately hedge risks related to volatility, including declines, in copper pricing, which may have a material adverse effect on our business.
Approximately half of our 2007 communications cable segment sales were to telecommunications company customers pursuant to multi-year agreements under
which the price of the copper component of our communications cable products is fixed for each quarter based on a prior three-month average of copper prices, as described above under
"BusinessSummary of Certain Customer Agreements." As a result, the price of the copper component of our product billed to customers may be different than the current price of copper at
the time of sale and we may not be able to match the price billed with the copper cost component of the inventory shipped. To minimize this risk, we forward price copper purchases with our suppliers
based on forecasted demand. Volatility in the price of copper, among other factors, may adversely impact our ability to accurately forecast demand and may have a material adverse impact on our results
of operations. For example, if copper prices decline rapidly, actual demand may be less than forecasted demand as customers may reduce or delay purchases in anticipation of future contractual sales
price reductions. As a result, the cost of inventory, including the cost of copper acquired under forward purchase agreements, may exceed the current or expected selling price of the product and may
result in reduced profitability or even operating losses. In addition, rapid increases in copper prices can impact operating results in the short term if actual demand exceeds forecasted demand
because customers may accelerate orders in advance of expected future contractual sales price increases to take advantage of existing copper prices. In this case, we may have to utilize higher cost
inventory or purchase copper at current prices to fulfill orders priced at lower prior period copper prices which may result in reduced profitability or operating losses.
Certain
of our North American, European and Asia/Pacific magnet wire business customers frequently fix the copper cost component of future committed purchases. See
"BusinessSummary of Certain Customer Agreements." We forward price copper purchases or utilize COMEX, LME or SHME fixed price futures contracts to minimize the commodity price risk
associated with these sales. If copper prices decline rapidly, the risk that our customers may delay or default on their committed purchases may increase. As a result we may incur losses on our
futures contracts or be required to take delivery of copper inventory at prices in excess of then-current copper prices.
16
In
addition to the above, we maintain finished goods inventories, particularly with respect to our distribution customers, to meet near term expected demand. Pricing for the sale of
these inventories is generally based on current copper prices or the average COMEX or LME price for the prior month. Rapid declines in the price of copper may result in our inventories being carried
at costs in excess of net realizable value and may have an adverse effect on our results of operations.
Increases in copper prices may reduce customer demand for our products which may have a material adverse effect on our business.
As our product prices increase due to rises in copper prices, customers, particularly in our communications cable business, may more quickly exceed their capital
budgets for a particular period and reduce the funds available for the purchase of our products. We believe our communications cable segment sales were adversely impacted in the fourth quarter of 2006
due to budgetary constraints caused by high copper prices. Additionally, as pricing for our copper-based products increases, alternative products, such as fiber optic cable in our communications
business and aluminum in our magnet wire business, may become more price competitive with our copper-based products and demand for such products may be materially adversely affected as described below
under "Other Risks Relating to Our Business."
Increases in copper prices will increase our need for working capital.
As the price of copper increases, our working capital requirements increase. We estimate that each $1 change in the cost of copper has a $70 to $80 million
impact on our working capital. Increases in our working capital requirements can materially adversely impact our results of operations, our cash flow and our available liquidity to fund other business
needs. Furthermore, there is no assurance we would be able to finance additional working capital requirements or finance such working capital requirements on favorable terms. If we were unable to
obtain financing on favorable terms, our business and results of operations may be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources" below.
Increases in copper prices may increase credit and default risk with respect to our customers.
Increases in the price of our products as copper prices rise may place additional demands on the working capital and liquidity needs of our customers.
Accordingly, our customers' cash flow may be negatively impacted which may have an adverse effect on the timing and amount of payment of our accounts receivable.
Other Risks Related to Our Business
Our net sales, net income and growth depend largely on the strength of the economies in the geographic markets that we serve, and any significant weakening in one or more of
these markets could reduce the demand for our products.
Many of our customers use our products as components in their own products, systems or networks or in projects undertaken for their customers. Our ability to sell
our products is largely dependent on general business, economic and industry conditions, including how much our customers and end-users spend on new residential and commercial
construction, maintaining or reconfiguring their communications network, information technology, motors, automobiles and automotive components, appliances, heating, ventilation and cooling ("HVAC")
systems and power transmission and distribution infrastructures. Demand for our products was negatively impacted during 2007 due to weakness in the U.S. economy, particularly the residential
construction market, and to a lesser extent the European economy. If the U.S., European or other economies were to weaken further, demand for
17
our
products may continue to decline. This could cause a material adverse effect on our business, revenues and results of operations.
The increased use of fiber optic cable in the "local loop" may reduce the market for copper OSP products.
Through our communications cable segment, we are the largest supplier, based on sales, of copper OSP cables used by the RBOCs and other telephone companies in the
local loop portion of the
telecommunications infrastructure. Copper OSP is the communications cable segment's largest product group. However, fiber optic cable, which provides improved bandwidth and transmission speeds as
compared to copper cable, has been increasingly deployed in the local exchange network over the past several years. Certain RBOCs have and are continuing to significantly increase the use of fiber
optic cable further downstream in their networks, in some cases all the way to the premises, resulting in decreased demand for our copper OSP products. Further increases in the rate of use of fiber
optic products in these applications would further decrease the demand for our copper OSP cable and result in a continued decline in our sales of copper OSP cable, which would adversely impact our
business, revenues and results of operations.
Advancing technologies, such as fiber optic and wireless technologies, may make some of our products less competitive.
Technological developments could have a material adverse effect on our business. For example, a significant decrease in the cost and complexity of installation of
fiber optic systems or increase in the cost of copper-based systems could make fiber optic systems superior on a price performance basis to copper communications systems and may have a material
adverse effect on our business. The superior technological characteristics of fiber optic cable have caused companies increasingly to deploy it in the local loop. Also, competitive alternatives to
traditional telephone service, such as wireless and cable telephony and VoIP services, have had a negative impact on the demand for copper OSP wire and cable, and use of these alternatives is expected
to increase. Although we sell fiber optic cable and components and cable that is used in certain wireless applications, if fiber optic systems or wireless technology were to significantly erode the
markets for copper-based communications systems, our sales of fiber optic cable and products for wireless applications would likely not be sufficient to offset any decrease in sales or profitability
of other products that may occur.
Continued or accelerated declines in access lines and spending reductions by the telephone industry could adversely affect our business.
Our largest customers for the communications cable segment are the RBOCs and major independent telephone operating or holding companies. Approximately 66%, 67%
and 68%, respectively, of the 2007, 2006 and 2005 sales of our communications cable segment are attributable to these customers. Competitive alternatives, such as wireless and cable telephony, digital
subscriber lines or "DSL", VoIP services and cable modems have resulted in a loss of access lines and subscribers by the major telephone operating companies. Furthermore, the demand for
access lines is impacted by new housing starts. A continued or accelerated decline in access lines resulting from these factors could result in reductions in capital spending by the telephone industry
and in the demand for our communications cable products which would adversely impact our business, revenues and results of operations.
Our inability to compete with other manufacturers in the wire and cable industry could harm our business.
The market for wire and cable products is highly competitive. Each of our businesses competes with at least one major competitor. Many of our products are made to
industry specifications and,
18
therefore,
may be interchangeable with competitors' products. We are subject to competition on the basis of price, delivery time, customer service and our ability to meet specialty needs. Some of our
competitors are larger and may have greater resources, financial and otherwise, than we do. There can be no assurance that we will be able to compete successfully with our existing competitors or with
new competitors. Failure to compete successfully could adversely affect our business, revenues and results of operations.
Our inability to maintain our relationships with key customers and distributors could have a material adverse effect on our business.
Our businesses are highly competitive. If we are unable to maintain our relationships with key customers and distributors, we may lose sales, particularly as
existing contracts expire or are re-bid. Losses of sales under existing customer contracts, if not replaced by expanding other existing relationships or new relationships, could have a
material adverse effect on our business.
Our customer base in our communications cable and copper rod segments is highly concentrated, and a loss of a major customer could substantially impact the financial
performance of these segments.
Our customer base for our communications cable and copper rod segments is highly concentrated, and, therefore, a limited number of customers account for a
significant percentage of our net sales in any year in those segments. The loss of or reduced demand for products or related services from these customers could have a material adverse effect on our
business, revenues and results of operations.
Consolidation among our customers could result in our losing a customer or experiencing a slowdown as integration takes place.
Industries in which customers in certain of our product segments participate have experienced significant consolidation, in particular the telecommunications
industry. Consolidation may impact our business as our customers focus on integrating their operations. After a consolidation occurs, customers may scale back their purchases while the integration is
ongoing and they reevaluate their supply chain. Further, following consolidation, there can be no assurance that we will continue to supply products to the surviving company. Continued consolidation
can provide customers with greater purchasing power and negotiating leverage.
Fluctuations in the supply of certain non-copper raw materials and energy could harm our business.
In addition to copper, raw materials we use in the manufacture of our products include aluminum, steel, optical fibers, plastics, such as polyethylene and
polyvinyl chloride, and various chemicals and chemical compounds used in the production of enamels. Additionally, natural gas is a key energy source used in the manufacture of magnet wire and copper
rod. The markets and availability of these raw materials are subject to fluctuation and there can be no assurance that we will be able to procure adequate supplies of our essential raw materials to
meet our future needs or that we can increase prices for our products in amounts sufficient to offset any increases in the costs of these raw materials.
We
produce enamel formulated for our internal use in our Ft. Wayne, Indiana and Meyzieu, France facilities. If there is a disruption in the supply of internally produced enamels, we may
not be able to source our required enamel formulations from external suppliers on a timely basis sufficient to meet immediate customer orders.
Migration of magnet wire demand to China may adversely affect our business.
Our business may suffer due to the migration of magnet wire demand to China. Our magnet wire and distribution segments' principal product is magnet wire, which is
used primarily in motors for industrial, automotive, appliance and other applications. Several of our major magnet wire customers
19
have
shifted, or have plans to shift, certain levels of product manufacturing to China. While we recently completed construction of a magnet wire manufacturing facility in China and acquired an 80%
ownership in an existing Chinese magnet wire business, there can be no assurance that we will be able to successfully compete in China and /or offset any loss of business that may result from
declining demand for our products in North America and Europe due to this shift of customer requirements to China.
Our business is subject to the economic, political and other risks of maintaining facilities and selling products in foreign countries.
During the year ended December 31, 2007, a significant portion of our sales were in markets outside North America. Our financial results may be adversely
affected by significant fluctuations in the value of the U.S. dollar against foreign currencies, particularly the Euro, or by enactment of exchange controls or foreign government or regulatory
restrictions on the transfer of funds. In addition, our international manufacturing and sales are subject to other risks inherent in operating abroad, including,the difficulty in staffing and managing
widespread operations, increased costs and risks of doing business in a number of foreign jurisdictions, restrictive actions by foreign governments, the impact of the laws of the U.S. and other
countries in which we do business affecting trade, foreign investments and loans. Further, international operations and sales subject us to increased risks and increased costs related to compliance
with requirements of U.S. laws, including import and export laws and the anti-corruption laws. While we maintain a business conduct program to prevent, deter and detect violations of law
in the conduct of business throughout the world, a risk remains that employees will engage in activities that violate laws or our corporate policies, particularly in countries where employees were not
previously accustomed to operating under similar standards.
We are increasing our operations in China, which exposes us to risks inherent in doing business in China.
We recently completed initial construction and commenced operation of a wholly-owned "greenfield" magnet wire manufacturing facility in Suzhou, China and acquired
a magnet wire facility in Tianjin, China. Our business strategy may involve continued expansion in China. We face all the risks inherent in operating in an emerging market like China where we have not
previously operated a manufacturing
facility. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Despite this transition, the Chinese government continues to own significant production
assets and exercises significant control over economic growth. Our China-based activities are subject to greater political, legal and economic risks than those faced by other operations, including
such risks as those arising from:
-
-
unexpected
legal, regulatory or governmental requirements or approvals, such as those related to taxation, lending, import and tariffs, environmental regulations, land use
rights, intellectual property and other matters, which laws and regulations remain less developed than in other countries in which we operate;
-
-
unexpected
increases in taxes, tariffs and other assessments and changes that may adversely affect existing tax benefits;
-
-
uncertainty
regarding the enforcement of Chinese laws and regulations;
-
-
operating
in a market with a less developed supply chain, transportation and distribution infrastructure;
-
-
unfavorable
political or economic factors;
-
-
our
ability to effectively compete in an emerging market;
20
-
-
difficulties
in recruiting and retaining personnel; and
-
-
managing
international operations.
There
can be no assurance that we will be successful in operating or expanding our operations in China.
Our business strategy may include further acquisitions.
We have made a number of acquisitions over the past few years and our continued ability to implement our growth strategy depends in part on our ability to
identify, finance and complete further acquisitions. Market conditions and other factors may make attractive acquisitions unavailable or the cost of acquiring suitable businesses may become too
expensive. At the time an acquisition opportunity presents itself, internal and external conditions, such as our borrowing capacity or the availability of alternative financing, may cause us to be
unable to pursue or complete an acquisition. Our inability to identify and complete additional acquisitions could have an adverse affect on our future growth.
If
we are able to identify and consummate acquisitions, there are significant challenges to integrating an acquired operation, which requires substantial management, financial and other
resources and may pose risks to production, customer service and market share of existing operations. There can be no assurance that the expected benefits of acquisitions will be realized.
Our indebtedness may limit cash flow available to invest in the ongoing needs of our business to generate future cash flow.
Our outstanding debt as of December 31, 2007 was $353.2 million. We may also incur additional debt from time to time to finance working capital,
acquisitions, capital expenditures and other general corporate purposes. Our indebtedness could have important consequences to holders of our common stock. For example, it could:
-
-
require
us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the availability of our cash flow to fund working
capital, acquisitions, capital expenditures, research and development efforts and other general corporate purposes;
-
-
increase
the amount of interest expense that we have to pay, because we increase the principal amount or because some of our borrowings (approximately $73.5 million
outstanding as of December 31, 2007) are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;
-
-
increase
our vulnerability to adverse general economic or industry conditions;
-
-
limit
our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate; or
-
-
place
us at a competitive disadvantage compared to competitors that have less debt.
We may be unable to meet our covenant obligations under our senior secured revolving credit facility which could adversely affect our business.
Our operations depend on the availability and cost of working capital financing and may be adversely affected by any shortage or increased cost of such financing.
Our senior secured revolving credit facility contains covenants that we may not be able to meet. If we cannot meet these covenants, events of default would arise, which could result in payment of the
applicable indebtedness being accelerated and a cross default to our other indebtedness. In addition, if we require working capital greater than that provided by our senior secured revolving credit
facility, we may be required either to (1) seek to increase the availability under the senior secured revolving credit facility, (2) obtain other
21
sources
of financing or (3) reduce our operations. There can be no assurance that any amendment of our senior secured revolving credit facility or replacement financing would be available on
terms that are favorable or acceptable to us. Moreover, there can be no assurance that we will be able to obtain a new credit facility with acceptable terms upon expiration of our senior secured
revolving credit facility.
We may be unable to raise additional capital to meet capital expenditure needs if our operations do not generate sufficient funds to do so.
Our business is expected to have continuing capital expenditure needs. While we anticipate that our operations will generate sufficient funds to meet our capital
expenditure needs for the foreseeable future, our ability to gain access to additional capital, if needed, cannot be assured. If we are unable to obtain additional capital on acceptable terms, our
business, revenues and results of operations could be adversely affected.
Declining returns in the investment portfolio of our defined benefit plans may require us to increase cash contributions to the plans.
Funding for the defined benefit pension plans we sponsor is based upon the funded status of the plans and a number of actuarial assumptions, including an expected
long-term rate of return on assets and discount rate. Benefit accruals under all of our U.S. defined benefit pension plans are frozen. Due to declining returns in the investment portfolio
of our U.S. defined benefit pension plans in recent years, our funded U.S. defined benefit plans were underfunded as of December 31, 2007 by approximately $13.5 million, based on the
actuarial methods and assumptions utilized for purposes of Statement of Financial Accounting Standards ("SFAS") No. 87. Our required cash contributions for 2008 for our U.S. defined benefit
plans are expected to be approximately $3.7 million. In the event that actual returns differ negatively from the actuarial assumptions, the funded status of our defined benefit plans may change
and any such deficiency could result in additional charges to equity and against earnings and increase our required cash contributions.
If we are unable to retain senior management, our business operations could be adversely affected.
Our success and future prospects depend on the continued contributions of our senior management. There can be no assurances that we would be able to find
qualified replacements for these individuals if their services were no longer available. The loss of services of one or more members of our senior management team, and the process of integrating their
replacements, could severely disrupt our operations.
Failure to negotiate extensions of our labor agreements as they expire may result in a disruption of our operations.
Substantially all of the hourly employees in our U.S., Canadian, and Mexican magnet wire facilities are represented by labor unions and are covered by collective
bargaining agreements, which usually have a multi-year duration and are separate by location. We cannot predict what issues may be raised by the collective bargaining units representing
our employees and, if raised, whether negotiations concerning such issues will be successfully concluded. A protracted work stoppage could result in a disruption of our operations which could
adversely affect our ability to deliver certain products and our results of operations.
22
The designation of our non-U.S. subsidiaries as unrestricted subsidiaries under our 9% note indenture and their exclusion as subsidiaries under our credit agreement may have an
adverse impact on our operations.
In order to assure continued compliance with the indenture governing our 9% senior notes, we have designated substantially all of our non-U.S. subsidiaries as
"unrestricted subsidiaries" under that indenture, meaning that these subsidiaries are not subject to many of the covenants under that indenture. In addition, these entities are not considered
"subsidiaries" subject to the restrictions under our credit facility. As a result, we and our non-U.S. subsidiaries must operate as separate business entities, which can have a number of implications,
including the following:
-
-
If
these subsidiaries were to require additional capital, we can contribute capital only if we could meet the tests for restricted payments or permitted investments under
our indenture and our senior secured revolving credit facility. Thus, these entities may be entirely reliant on their own sources of working capital to fund their operations, which may limit their
ability to pursue strategic growth opportunities, including acquisitions.
-
-
Our
non-U.S. subsidiaries may have to rely on their own credit, which could increase our consolidated borrowing costs and could otherwise adversely affect our business and
results of operations.
-
-
In
the event contributions are needed to fund losses at our non-U.S. subsidiaries, any payments we make could deplete our restricted payments and permitted investment
capacity under our indenture and senior secured revolving credit facility, limiting availability for other uses.
Essex Europe's dependence on its continuing relationship with Nexans may expose Essex Europe to additional risks to its operations.
Essex Europe has a number of continuing relationships with Nexans, including exclusive arrangements for the purchase of Essex Europe's pre-drawn wire
needs through 2008, exclusive arrangements for the purchase of copper rod in France and a significant majority of its copper rod needs in Germany and Portugal through 2008 and leases of certain
manufacturing facilities in shared locations with Nexans at Chauny and Bramsche. If Nexans does not provide these goods and services, Essex Europe may be required to obtain these goods and services
from other sources or internally develop the capability to provide these goods and services. We may be unable to obtain or provide such goods and services at the same or similar costs and terms as
those provided by Nexans, and the Essex Europe business, revenues and results of operations could be adversely affected. In December 2007, Nexans provided notice that they did not intend to renew the
agreement to provide pre-drawn copper wire to Essex Europe under the current terms and conditions. If we are unable to successfully negotiate a new agreement with Nexans, we will have to
obtain another source for our pre-drawn wire needs in Europe or acquire the necessary equipment to perform the initial draw down of copper rod and bare wire internally.
Our revenues, operating income and net income are subject to quarterly and seasonal fluctuations due to the seasonal nature of our business, which makes it more difficult for
investors and analysts to make meaningful comparisons of our interim quarterly results.
We experience seasonal fluctuations in our net sales, operating income and net income during the year due to the following factors:
-
-
seasonal
reductions in demand by our communications cable segment customers during the first and fourth quarters due to the cold weather seasons in North America;
-
-
fourth
quarter holiday related plant shutdowns of major OEM customers of our magnet wire and distribution segments; and
23
-
-
seasonal
decreases in sales volumes in Europe during the third quarter summer holiday season, which impacts our European magnet wire and distribution segment.
Due
to the seasonal nature of our business, our interim financial results are typically not indicative of results for the entire fiscal year.
We may incur costs and may not be successful in protecting our intellectual property and in defending claims that we are infringing on the intellectual property of others.
We may encounter difficulties, costs or risks in protecting our intellectual property rights or obtaining rights to intellectual property to permit us to continue
or expand our business. Other companies, including some of our largest competitors, hold intellectual rights in our industries, and intellectual property held by others could inhibit our ability to
introduce new products or require use of more expensive manufacturing processes unless we secure licenses on commercially reasonable terms if necessary. The unfavorable resolution of an intellectual
property dispute could preclude us from manufacturing and selling certain products, require us to pay a royalty on the sale of certain products or could impair competitive advantages if a competitor
wins the right to use processes or sell products we believed we had the right to.
We might be unable to achieve planned cost savings or incur additional charges to income.
We have undertaken a number of cost savings initiatives, including lean manufacturing initiatives and actions related to the restructuring of our North American
manufacturing facilities and the related closure of our Vincennes magnet wire facility. We continually consider other cost-savings initiatives and monitor the cost effectiveness of our
manufacturing network. Some of these activities, including restructuring programs, may require significant capital expenditures and result in charges against income as equipment is decommissioned or
facilities are closed. These actions, including restructuring programs, are expected to reduce overall manufacturing costs. If we do not achieve all of the planned savings of these activities, we
might not achieve expected levels of profitability.
Risks Relating to Our Common Stock
We cannot assure you as to the market price for our common stock.
Our common stock is listed on the Nasdaq Global Market under the trading symbol SPSX. The market price of our common stock will be subject to significant
fluctuation in response to numerous factors, including variations in our annual or quarterly financial results or those of our competitors, changes by financial analysts in their estimates of our
future earnings, conditions in the economy in general or in the wire and cable industry in particular, copper commodity prices and other factors beyond our control. No assurance can be given as to the
market price for our common stock.
Our operating results can fluctuate significantly from period to period. If we miss market expectations, our stock price could decline.
Our operating results are difficult to predict and may fluctuate significantly from quarter to quarter. Our operating results in some periods may be below
investor expectations. If this happens, the market price of our common stock is likely to decline. Fluctuations in our future quarterly earnings may be caused by many factors, including without
limitation:
-
-
the
volume and timing of orders from and shipments to our customers;
-
-
customer
inventories;
-
-
work
stoppages, raw material shortages and other developments affecting the operations of our customers;
24
-
-
market
acceptance of new and enhanced versions of our products and services;
-
-
variations
in the mix of products and services we sell; and
-
-
the
location and utilization of our production capacity and employees.
Our dividend policies and other restrictions on the payment of dividends may prevent the payment of dividends for the foreseeable future.
We do not anticipate paying any dividends on our common stock for the foreseeable future. In addition, covenants in our debt instruments limit our ability to pay
cash dividends and may prohibit the payment of non-cash dividends and certain other payments.
Provisions of our certificate of incorporation and bylaws could discourage potential acquisition proposals and could deter or prevent a change in control.
Some provisions of our certificate of incorporation and bylaws, as well as Delaware statutes, may have the effect of delaying, deferring or preventing a change in
control. These provisions, including those providing for the possible issuance of preferred stock and limiting the ability of stockholders to nominate directors, may make it more difficult for other
persons, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a stockholder
might consider to be in such stockholder's best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
25
ITEM 2. PROPERTIES
We conduct our principal operations at the facilities set forth below:
Operation
|
|
Location
|
|
Square
Footage
|
|
Leased/Owned
|
Communications Cable
|
|
|
|
|
|
|
|
OSP/Premises
|
|
Brownwood, Texas
|
|
415,000
|
|
Leased (expires 2018)
|
|
|
Chester, South Carolina
|
|
223,000
|
|
Owned
|
|
|
Hoisington, Kansas
|
|
276,000
|
|
Owned
|
|
|
Tarboro, North Carolina
|
|
284,000
|
|
Owned
|
Magnet Wire and Distribution:
|
|
|
|
|
|
|
North America:
|
|
|
|
|
|
|
|
Magnet Wire
|
|
Fort Wayne, Indiana
|
|
181,000
|
|
Owned
|
|
|
Franklin, Indiana(a)
|
|
35,000
|
|
Owned
|
|
|
Franklin, Tennessee
|
|
289,000
|
|
Leased (expires 2013)
|
|
|
Kendallville, Indiana
|
|
88,000
|
|
Owned
|
|
|
Torreon, Mexico
|
|
317,000
|
|
Owned
|
|
|
Vincennes, Indiana(e)
|
|
242,000
|
|
Owned
|
|
|
Simcoe, Canada
|
|
230,000
|
|
Owned
|
|
Fabricated Insulation
|
|
Clifton Park, New York
|
|
22,000
|
|
Leased (expires 2008)
|
|
|
Willowbrook, Illinois
|
|
60,000
|
|
Leased (expires 2016)
|
Europe:
|
|
|
|
|
|
|
|
Magnet Wire
|
|
Chauny, France(c)
|
|
342,000
|
|
Leased (expires 2009)
|
|
|
Macon, France
|
|
458,000
|
|
Owned
|
|
|
Arolsen, Germany
|
|
211,000
|
|
Owned
|
|
|
Bramsche, Germany(d)
|
|
199,000
|
|
Owned
|
|
|
Viana de Castelo, Portugal
|
|
375,000
|
|
Owned
|
|
|
Huyton Quarry, U.K.
|
|
318,000
|
|
Owned
|
|
|
Quattordio, Italy
|
|
374,000
|
|
Owned
|
|
|
Quattordio, Italy
|
|
188,000
|
|
Owned
|
|
Enamels
|
|
Meyzieu, France
|
|
307,000
|
|
Owned
|
Asia/Pacific:
|
|
|
|
|
|
|
|
Magnet Wire
|
|
Suzhou, China(b)
|
|
235,000
|
|
Owned
|
|
|
Tianjin, China(b)
|
|
68,000
|
|
Owned
|
Copper Rod
|
|
Columbia City, Indiana
|
|
75,000
|
|
Owned
|
-
(a)
-
The
Franklin, Indiana facility is approximately 70,000 square feet, of which 35,000 square feet is leased to Femco Magnet Wire Corporation, a joint venture with the Furukawa
Electric Co., Ltd., Tokyo, Japan. Femco markets magnet wire with special emphasis on products required by Japanese manufacturers with production facilities in the United States.
-
(b)
-
Land
for the Suzhou, China and Tianjin, China facilities is leased under 50-year land use rights agreements with Chinese development authorities.
-
(c)
-
The
Chauny, France facility is owned by Nexans and leased to Essex Europe. We have an option to purchase the property at the conclusion of the lease for a price of approximately
€1.0 million.
-
(d)
-
Land
for the Bramsche facility is leased under several long-term lease agreements which expire in 2047 through 2054.
26
-
(e)
-
In
January 2008, the Company announced a phased closure of its Vincennes, Indiana, facility, which is expected to be completed by the fourth quarter of 2008. See note 20 to the
consolidated financial statements.
In
addition to the facilities described in the table above, we currently lease over 20 warehousing and distribution facilities throughout the United States, Canada, France and the United
Kingdom to facilitate the sale and distribution of our products.
We
believe that our facilities are generally suitable and adequate for the business being conducted and to service the requirements of our customers.
ITEM 3. LEGAL PROCEEDINGS
We are involved in lawsuits, claims, investigations and proceedings, including those described below, consisting of commercial, employment, employee benefits,
environmental and other matters which arise in the ordinary course of business. In accordance with SFAS No. 5, "Accounting for Contingencies," we record a liability when management believes it
is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management believes it has adequate provisions for any such matters. We review these provisions
at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter.
Litigation is inherently unpredictable. However, management believes it has valid defenses with respect to all legal matters against the Company and its subsidiaries and we do not believe any such
matters, either individually or in the aggregate, will have a material adverse effect on its business, financial condition, liquidity or results of operations.
In
2003, Superior TeleCom, our predecessor, and Essex Electric Inc. ("Essex Electric") each filed lawsuits under Section 1 of the Sherman Act against certain defendants
based on an alleged conspiracy to elevate the prices of certain copper products during certain periods from 1993 to 1996. On June 4, 2007, the parties to the 2003 Copper Action (including all
plaintiffs and defendants) entered into a settlement pursuant to which the 2003 Copper Action was dismissed with prejudice. The terms of the settlement are confidential. A portion of the settlement
proceeds (approximately $27,000,000) are being held in escrow by plaintiffs' counsel (the "Escrowed Settlement Proceeds"). We and Essex Electric, now known as Exeon Inc. ("Exeon"), each claim
to be entitled to the Escrowed Settlement Proceeds. On June 18, 2007, Exeon filed an action for declaratory judgment and related relief against the Company and certain of its subsidiaries in
the Supreme Court of the State of New York, New York County (the "2007 NY Action").
Exeon Inc. v. Superior Essex Inc., Superior Telecommunications Inc.,
Essex International Inc., and Essex Group, Inc.
, Supreme Court of the State of New York, County of New York, Index No. 108413/07. In the 2007 NY Action,
Exeon seeks a declaration that the claims giving rise to
the Escrowed Settlement Proceeds were transferred to Exeon in connection with the sale of a portion of the electrical wire business of our subsidiary, Essex Group, to Exeon in 2002 and that Exeon is
entitled to all of the Escrowed Settlement Proceeds. The 2007 NY Action also alleges that we, by claiming the Escrowed Settlement Proceeds attributable to the electrical wire business, are in breach
of the purchase agreement related to the sale of a portion of the Essex Group electrical wire business to Exeon and seeks damages in excess of $40 million resulting from the alleged breach.
On
June 20, 2007, we and Essex Group filed suit in the Superior Court of Cobb County, Georgia against Essex Electric and the other defendants named therein (the "2007 Cobb
Action").
Superior Essex Inc., et al. v. Exeon Inc., et al.
, Civil Action File
No. 07-1-5146-28, Superior Court of Cobb County, Georgia. The 2007 Cobb Action sought a declaratory judgment that we are entitled to all of the Escrowed
Settlement Proceeds. In addition, the 2007 Cobb Action sought damages as a result of a breach of the purchase agreement and breaches of fiduciary duty. In connection with the 2007 Cobb Action, we
filed a motion to dismiss or stay the 2007 NY Action pending the outcome of the 2007 Cobb Action.
27
Our
motion to dismiss or stay the 2007 NY Action pending resolution of the 2007 Cobb Action was denied, and the 2007 Cobb Action has been dismissed on the sole ground that New York is
the most appropriate forum for resolution of these disputes. We have now asserted in the 2007 NY Action those claims that we had asserted in the 2007 Cobb Action. Discovery is underway in the 2007 NY
Action.
On
January 29, 2008, Belden Technologies, Inc. and Belden CDT (Canada) Inc. ("Belden") filed a Complaint against us and Superior Essex Communications in the United
States District Court for the District of Delaware, alleging that we infringed U.S. Patent Nos. 5,424,491; 6,074,503; 6,570,095; 6,596,944; 6,998,537; and 7,179,999. The six
patents-in-suit are directed to communication cables and related manufacturing processes in the premises products field. Belden has not completed formal service of the
Complaint and summons upon us. We have not responded to the Complaint by filing an answer or a motion with the district court in view of the preliminary nature of the lawsuit. Nevertheless, we will
vigorously defend against the suit if served.
We
operate in nine countries in Europe, North America and Asia-Pacific and our international operations have grown significantly over the past two years, primarily through
our joint venture with Nexans in Europe and through acquisitions. We are implementing our code of ethics and procedures to assure compliance with laws throughout our operations. Through our processes
to ensure compliance with laws, we recently identified certain U.S trade control compliance issues.
These
issues include isolated sales of products by a foreign subsidiary which were not in compliance with U.S. trade control laws related to Cuba. We have voluntarily reported these
transactions related to Cuba to the U.S. Department of Treasury, Office of Foreign Asset Control. Upon discovery of transactions related to Cuba, we undertook a comprehensive review of transactions
that may involve embargoed countries. We have completed that review and have identified no further transactions that were not in compliance with U.S. laws related to embargoed countries.
In
addition, through this review, we have learned that we shipped a coating for our magnet wire products to our manufacturing operations in Mexico and China and such shipments were
misclassified under the U.S. export laws. Such shipments occurred on a regular basis without required export authorization. We have voluntarily reported such violations to the U.S. Department of
Commerce, Bureau of Industry and Security ("BIS"). On January 26, 2008, BIS granted licenses for shipments of the coating to our facilities in Mexico and China.
To
the extent we violated U.S. export regulations, fines and other penalties may be imposed. Because these matters are now pending before the indicated agencies, there can be no
assurance that any actual fines or penalties imposed will not have a material adverse affect on our business, financial condition, liquidity or results of operations.
Since
approximately 1990, Essex International and certain subsidiaries have been named as defendants in a number of product liability lawsuits brought by electricians, other skilled
tradesmen and others claiming injury, in a substantial majority of cases, from exposure to asbestos found in electrical wire products produced many years ago. Litigation against various past insurers
of Essex International who had previously refused to defend and indemnify Essex International against these lawsuits was settled during 1999. Under the settlement, Essex International was reimbursed
for substantially all of its costs and expenses incurred in the defense of these lawsuits, and the insurers have undertaken to defend, are currently directly defending and, if it should become
necessary, will indemnify Essex International against those asbestos lawsuits, subject to the terms and limits of the respective policies. Under the plan of reorganization, certain of the claimants in
these actions will only be able to assert claims against the insurers under applicable insurance coverage and related arrangements. Management believes that Essex International's exposure, if any, in
these matters will not have a material adverse effect either individually, or in the aggregate, upon our business, financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Description of business and basis of presentation
The Company is a manufacturer and supplier of wire and cable products for the communications, energy, automotive, industrial, and commercial/residential
end-markets. The Company manufactures magnet wire, fabricated insulation products, and copper and fiber optic communications wire and cable products. The Company is also a distributor of
magnet wire, insulation, and related products sold to smaller original equipment manufacturers, or OEMs, and motor repair facilities. The Company converts copper cathode to copper rod for internal
consumption and for sale to other wire and cable manufacturers and OEMs. The Company currently operates manufacturing facilities in the United States, Canada, the United Kingdom, France, Germany,
Portugal, Italy, Mexico and China.
Principles of consolidation
The consolidated financial statements represent the consolidation of all majority owned companies. Investments in affiliated companies representing 20% to 50%
ownership are accounted for using the equity method of accounting. Other investments representing ownership of less than 20% are recorded at cost. Intercompany accounts and transactions have been
eliminated.
Cash and cash equivalents
All highly liquid investments purchased with a maturity at acquisition of 90 days or less are considered to be cash equivalents.
Inventories
Inventories of communications products are stated at the lower of cost or market, using the first-in, first-out ("FIFO") cost method.
Inventories of magnet wire and copper rod are primarily stated at the lower of cost or market, using the last-in, first-out ("LIFO") cost method. Inventories include costs of
materials, labor and manufacturing overhead. The Company establishes allowances for surplus and obsolete inventory based on a comparison of inventories on hand against estimated future sales, which is
a function of historical sales and anticipated future selling prices. Actual results could differ from assumptions used to value obsolete or excessive inventory and additional reserves may be
required.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Leasehold improvements are amortized over the lesser of the
estimated useful lives of the assets or the lease term. Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method. The
estimated lives are as follows:
Land improvements
|
|
10 to 20 years
|
Buildings and improvements
|
|
10 to 40 years
|
Machinery and equipment
|
|
3 to 15 years
|
Maintenance
and repairs are charged to expense as incurred. Long-term improvements are capitalized as additions to property, plant and equipment. Upon retirement or other
disposal, the asset cost and related accumulated depreciation are removed from the accounts and the net amount, less any
F-9
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
proceeds,
is charged or credited to income. Interest is capitalized during the active construction period of major capital projects. Interest capitalized in 2007 and 2006 amounted to
$0.4 million and $1.3 million, respectively, and insignificant amounts were capitalized in 2005.
Intangible Assets
Intangible assets consist primarily of acquired customer base intangibles and are being amortized on a straight-line basis over their estimated useful
lives.
Deferred financing costs
Origination costs incurred in connection with outstanding debt financings are included in the balance sheet in other assets. These deferred financing costs are
being amortized over the lives of the applicable debt instruments on an effective interest rate basis and are charged to operations as additional interest expense.
Customer sales incentives
The Company pays a sales incentive to certain customers who meet specified contractual sales volume criteria. Such amounts are recorded as a reduction of sales
and are paid periodically to those qualifying customers.
Income taxes
Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future
tax impact of temporary differences arising from assets and liabilities whose tax bases are different from financial statement amounts. A valuation allowance is established if it is more likely than
not that all or a portion of deferred tax assets will not be realized. Realization of the future tax benefits of deferred tax assets is dependent on the Company's ability to generate taxable income
within the carryforward period and the periods in which net temporary differences reverse.
The
Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
("FIN 48"), on
January 1, 2007. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as establishes criteria for subsequently recognizing, derecognizing and measuring
uncertain tax positions for financial statement purposes. As a result of the implementation of FIN 48, the Company recognized a net increase of $6.6 million in the liability for
unrecognized tax benefits, which was accounted for as a decrease to the January 1, 2007 balance of retained earnings of $6.3 million and a decrease in minority interest in consolidated
subsidiaries of $0.3 million.
The
Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. To the extent interest and penalties are not assessed
with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. During the years ended December 31, 2007, 2006 and
2005 the Company recognized interest and penalties of $0.8 million, $0.2 million and $0.2 million, respectively. Accrued
interest and penalties amounted to $1.9 million and $0.6 million at December 31, 2007 and 2006, respectively.
F-10
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
Derivative financial instruments
All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered, the derivative is designated as either
(i) a fair value hedge of a recognized asset or liability, (ii) a cash flow hedge of a forecasted transaction, (iii) a hedge of a net investment in a foreign operation, or
(iv) a non-designated derivative instrument. The Company currently engages in certain derivatives that are classified as cash flow hedges and non-designated derivative
instruments. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in other comprehensive income with any ineffective portion of a financial instrument hedge
immediately recognized in earnings. Changes in the fair value of non-designated derivative contracts are reported in current earnings. Cash flows from derivatives are classified in the
same category as cash flows from the item being hedged.
The
Company formally documents all relationships between designated hedging instruments and hedged items, as well as the risk management objectives and strategy for undertaking various
hedge transactions. The Company formally assesses, both at the hedge's inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective
in offsetting changes in cash flow of hedged items. When it is determined that a derivative is no longer highly effective as a hedge, hedge accounting is discontinued on a prospective basis.
Derivative
financial instruments and derivative transactions reflected in the consolidated financial statements are discussed in note 14.
Revenue recognition
Revenue is recognized when pervasive evidence of an agreement exists, delivery has occurred, the price to the buyer is fixed and determinable and collectability
is reasonably assured.
Cost of goods sold
Cost of goods sold includes the cost of raw materials and all product manufacturing costs, purchasing and receiving costs, inspection costs, inbound freight
charges, and shipping and handling costs.
Selling, general and administrative expense
Selling, general and administrative expense includes corporate and divisional headquarters costs, non-production related legal, accounting and human
resource costs, research and development costs, product management and engineering costs, treasury and risk-management costs, and sales and marketing expenses. Selling, general and
administrative expense also includes warehousing costs associated with the Company's distribution networks.
Foreign currency translation
The financial position and results of operations of the Company's foreign subsidiaries, other than its Mexican subsidiaries, are measured using local currency as
the functional currency. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at end-of-period exchange rates. Revenues and expenses are
translated at average exchange rates prevailing during the year. The resulting translation gains and losses are charged directly to accumulated other comprehensive income,
F-11
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
a
component of stockholders' equity, and are not included in net income until realized through sale or liquidation of the investment. Foreign currency exchange gains and losses incurred on foreign
currency transactions are included in income as they occur. Net gains on foreign exchange transactions were $2.7 in 2007. Net losses on foreign exchange transactions were $0.5 million in 2006 and
insignificant in 2005. The Company enters into derivative transactions to economically hedge certain of these transactions. See note 14.
The
U.S. dollar is the functional currency of the Company's Mexican subsidiaries. All Mexican currency asset and liability amounts are remeasured into U.S. dollars at
end-of-period exchange rates, except for inventories, prepaid expenses and property, plant, and equipment, which are remeasured at historical rates. Mexican currency income and
expenses are remeasured at average exchange rates in effect during the year, except for expenses related to balance sheet amounts remeasured at historical exchange rates. Exchange gains and losses
arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in income in the period in which they occur.
Stock Based Compensation Plans
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R),
Share-Based
Payment.
SFAS No. 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (e.g. stock options
and unvested stock awards) granted to employees. SFAS No. 123(R) also requires recognition of compensation expense based on the grant date fair value for the unvested portion of outstanding
options and equity awards granted prior to the adoption date. Prior to the adoption of SFAS No. 123(R), the Company applied the intrinsic-value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees
, and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion
No. 25
, to account for stock-based compensation plans. Under this method, compensation expense was recorded only if the market price of the underlying stock on the date
of grant exceeded the exercise price. The Company adopted SFAS No. 123(R) using the modified prospective method and accordingly, results for periods prior to adoption were not restated. The
adoption of SFAS 123(R) resulted in a decrease in income before income taxes, minority interest and extraordinary gain, net income and net income per diluted common share of
$1.0 million, $0.6 million and $0.03, respectively, for the year ended December 31, 2006. Additionally, as a result of the initial adoption of SFAS 123(R), contra-equity
balances for unearned stock-based compensation of $4.9 million at December 31, 2005 were reclassified to capital in excess of par value and accrued liabilities of $1.3 million at
December 31, 2005 related to unexercised stock options were credited to capital in excess of par value. Compensation expense attributable to all stock-based compensation plans is recognized on
a straight-line basis over the related vesting period. The Company's policy is to issue authorized but unissued shares to satisfy stock option exercises.
SFAS
No. 123,
Accounting for Stock-Based Compensation
, established accounting and disclosure requirements using a
fair-value based method of accounting for stock-based employee compensation plans for periods prior to the adoption of SFAS 123(R). As allowed by SFAS No. 123, prior to 2006
the Company elected to continue to apply the intrinsic-value based method of accounting described above, and adopted only the disclosure requirements of SFAS No. 123. The following table
illustrates the
F-12
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
effect
on net income if the fair-value based method had been applied to all outstanding awards for the year ended December 31, 2005 (in thousands, except for per share amounts):
Net income, as reported
|
|
$
|
31,912
|
|
Add stock-based employee compensation expense included in reported net income, net of tax
|
|
|
2,127
|
|
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of tax
|
|
|
(2,675
|
)
|
|
|
|
|
Pro forma net income
|
|
$
|
31,364
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
Basicas reported
|
|
$
|
1.92
|
|
|
Basicpro forma
|
|
|
1.88
|
|
|
Dilutedas reported
|
|
|
1.88
|
|
|
Dilutedpro forma
|
|
|
1.85
|
|
The
weighted average per share fair value of options granted at an exercise price equal to the fair market value (using the Black Scholes option pricing model) for the years ended
December 31, 2007, 2006 and 2005 was $16.54, $12.26 and $8.60, respectively.
The
fair value for options granted during the following periods was estimated at the date of grant using the Black Scholes option pricing model with the following weighted average
assumptions:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Volatility
|
|
40
|
%
|
40
|
%
|
43
|
%
|
Dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Risk-free interest rate
|
|
4.7
|
%
|
4.9
|
%
|
4.1
|
%
|
Expected life (years)
|
|
6.2
|
|
6.2
|
|
6.2
|
|
The
expected volatility is estimated using the historical daily volatility of the Company's stock as well as the historical volatilities of publicly-traded stock of certain of the
Company's competitors. The Company has not made any dividend payments on its common stock and does not intend to declare cash dividends on its stock in the foreseeable future. The
risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the stock options. The expected term was determined using the "simplified"
method, as prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 107.
Research and development costs
Research and development costs are expensed as incurred. Research and development costs for the years ended December 31, 2007, 2006 and 2005 were
$5.4 million, $5.5 million and $4.6 million, respectively.
F-13
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
Advertising costs
Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2007, 2006 and 2005 were $1.2 million,
$1.0 million and $1.5 million, respectively.
Insurance reserves
The Company is self-insured up to certain limits (on an individual and aggregate basis) for certain insurable risks related primarily to U.S. workers'
compensation and health insurance. Under current policy arrangements, the Company has a self-insured retention of $250,000 per claim with an annual aggregate self-insured
retention of $4.6 million for workers compensation coverage. The annual self-insured retention for U.S. employee health insurance is $200,000 per employee, spouse or dependent.
Provisions for losses expected under these programs are recorded based on estimates of the aggregate liabilities for the claims incurred. Total reserves relating to self-insured programs
amounted to $3.2 million and $4.2 million at December 31, 2007 and 2006, respectively.
Income per share
Basic income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. The
computation of diluted income per share does not assume conversion or exercise of securities that would have an antidilutive effect on income per share. Diluted income per common share is determined
assuming the inclusion of outstanding stock options, warrants and grants under the treasury stock method.
Comprehensive income
Comprehensive income includes all changes in equity from non-owner sources such as net income, foreign currency translation adjustments, changes in
the fair value of certain derivatives and actuarial gains and losses and prior service costs related to defined benefit pension plans.
F-14
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
The
components of comprehensive income included in the accompanying consolidated statements of stockholders' equity reflect the following reclassification adjustments:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Unrealized holding gains on derivatives during the period, net of tax of $2,457, $9,063 and $3,298 in 2007, 2006 and 2005, respectively
|
|
$
|
3,843
|
|
$
|
14,172
|
|
$
|
5,165
|
|
Less reclassification adjustments for gains included in net income, net of tax of $2,286, $11,495 and $2,477 in 2007, 2006 and 2005, respectively
|
|
|
(3,579
|
)
|
|
(17,965
|
)
|
|
(3,875
|
)
|
|
|
|
|
|
|
|
|
Net unrealized net gains (losses) on derivatives
|
|
$
|
264
|
|
$
|
(3,793
|
)
|
$
|
1,290
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment arising during the period, net of tax of $544 in 2007
|
|
$
|
11,188
|
|
$
|
4,387
|
|
$
|
(1,497
|
)
|
Less reclassification adjustment for amounts included in net income
|
|
|
|
|
|
|
|
|
(461
|
)
|
|
|
|
|
|
|
|
|
Net foreign currency translation adjustment
|
|
$
|
11,188
|
|
$
|
4,387
|
|
$
|
(1,958
|
)
|
|
|
|
|
|
|
|
|
The
components of accumulated other comprehensive income (loss) at December 31, 2007 and 2006 were as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Foreign currency translation adjustment net of tax of $544 at December 31, 2007
|
|
$
|
15,945
|
|
$
|
4,757
|
|
Actuarial losses of defined benefit pension plans, net of tax of $2,405 and $3,546 at December 31, 2007 and 2006, respectively
|
|
|
(3,110
|
)
|
|
(4,654
|
)
|
Prior service costs of defined benefit pension plans, net of tax of $255 and $286 at December 31, 2007 and 2006, respectively
|
|
|
(451
|
)
|
|
(502
|
)
|
Unrealized loss on derivatives, net of tax of $197 and $367 at December 31, 2007 and 2006, respectively
|
|
|
(298
|
)
|
|
(562
|
)
|
|
|
|
|
|
|
|
|
$
|
12,086
|
|
$
|
(961
|
)
|
|
|
|
|
|
|
Concentrations of risk
At December 31, 2007 and 2006, accounts receivable from the regional Bell operating companies ("RBOCs") and major independent telephone companies amounted
to $32.8 million and $36.0 million, respectively. Additionally, accounts receivable from one North American magnet wire and distribution segment customer amounted to $30.7 million
at December 31, 2007 and accounts receivable from two customers totaled $46.2 million at December 31, 2006. Accounts receivable from one customer of Essex Europe amounted to
$36.9 million and $35.5 million at December 31, 2007 and 2006, respectively. See note 17 for concentrations of risk within the Company's business segments.
F-15
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
Cash
and cash equivalents at December 31, 2007 include $67 million of overnight investments with a major U.S. bank.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash
flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The assets and liabilities of a disposal group
classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet and are no longer depreciated.
Use of estimates
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the allocation of the purchase price to the assets acquired and
liabilities assumed in business acquisitions (see note 5); the carrying amount of property, plant and equipment and intangible assets; valuation allowances for receivables, inventories and
deferred income tax assets; self-insurance reserves; obligations related to employee benefits and liabilities for unrecognized income tax benefits. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards ("FAS") No. 141 (revised 2007),
Business
Combinations
("FAS 141(R)") which replaces FAS No. 141,
Business Combinations
. FAS 141(R) retains the
underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but FAS 141(R) changed
the method of applying the acquisition method in a number of significant aspects. Changes prescribed by FAS 141(R) include, but are not limited to, requirements to expense transaction costs and
costs to restructure acquired entities; record earn-outs and other forms of contingent consideration at fair value on the acquisition date; record 100% of the net assets acquired even if
less than a 100% controlling interest is acquired; and to recognize any excess of the fair value of net assets acquired over the purchase consideration as a gain to the acquirer. FAS 141(R) is
effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the
exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). Early
adoption is not allowed. The Company is
F-16
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
currently
evaluating the effects, if any, that FAS 141(R) may have on its consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial
Statements
("FAS 160"). FAS 160 amends Accounting Research Bulletin 51,
Consolidated Financial
Statements,
to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling interest. FAS 160 also clarifies that all of those transactions resulting in a change in ownership of a
subsidiary are equity transactions if the parent retains its controlling financial interest in the subsidiary. FAS 160 requires expanded disclosures in the consolidated financial statements
that clearly identify and distinguish between the interests of the parent's owners and the interests of the noncontrolling owners of a subsidiary. FAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. FAS 160 shall be applied prospectively as of the beginning of the
fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all
periods presented. The Company is currently evaluating the effects, if any, that FAS 160 may have on its consolidated financial statements, however adoption of FAS 160 will result in the
reclassification of the Company's minority interest in subsidiaries to equity.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 establishes a common definition for fair value to be
applied to guidance regarding U.S.
generally accepted accounting principles, requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact, if any, the adoption of SFAS No. 157 will have on its 2008 consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS No. 159"). SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial statements to
understand more easily the effect on earnings of a company's choice to use fair value. It also requires companies to display the fair value of those assets and liabilities for which the company has
chosen to use fair value on the face of the balance sheet. The Company is required to adopt SFAS No. 159 on January 1, 2008 and is currently evaluating the impact, if any, of SFAS
No. 159 on its consolidated financial statements.
In
September 2006, the FASB issued Statement No. 158,
Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R).
Statement 158 requires an employer to recognize a net liability or asset and an offsetting adjustment to accumulated
other comprehensive income for the underfunded or overfunded status of defined benefit pension and other postretirement benefit plans. Statement 158 requires prospective application, and the
recognition and disclosure requirements are effective for years ending after December 15, 2006. The
F-17
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (Continued)
Company
implemented Statement 158 as of December 31, 2006. The impact of Statement 158 on individual line items of the consolidated balance sheet as of December 31, 2006 is
as follows:
|
|
Before
Application of
Statement 158
|
|
Adjustments
|
|
After
Application of
Statement 158
|
|
|
|
(in thousands)
|
|
Accrued expenses
|
|
$
|
102,756
|
|
$
|
(8,136
|
)
|
$
|
94,620
|
|
Other long-term liabilities
|
|
|
52,805
|
|
|
6,591
|
|
|
59,396
|
|
Total liabilities
|
|
|
640,710
|
|
|
(1,545
|
)
|
|
639,165
|
|
Minority interest in consolidated subsidiaries
|
|
|
27,919
|
|
|
747
|
|
|
28,666
|
|
Accumulated other comprehensive loss
|
|
|
(1,759
|
)
|
|
798
|
|
|
(961
|
)
|
Total stockholders' equity
|
|
|
358,190
|
|
|
798
|
|
|
358,988
|
|
2. Inventories
At December 31, 2007 and 2006, the components of inventories are summarized as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
48,102
|
|
$
|
41,786
|
|
Work in process
|
|
|
78,792
|
|
|
75,647
|
|
Finished goods
|
|
|
289,413
|
|
|
289,839
|
|
|
|
|
|
|
|
|
|
|
416,307
|
|
|
407,272
|
|
LIFO reserve
|
|
|
(106,322
|
)
|
|
(117,938
|
)
|
|
|
|
|
|
|
|
|
$
|
309,985
|
|
$
|
289,334
|
|
|
|
|
|
|
|
Inventories
valued using the LIFO method amounted to $177.7 million and $125.5 million at December 31, 2007 and 2006, respectively.
During
2007, 2006 and 2005 certain inventory quantities were reduced, resulting in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect
was to increase net income by $3.0 million, $3.6 million and $0.3 million in 2007, 2006 and 2005, respectively.
3. Property, plant and equipment
At December 31, 2007 and 2006, property, plant and equipment are summarized as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Land and land improvements
|
|
$
|
16,340
|
|
$
|
12,813
|
Buildings and improvements
|
|
|
76,544
|
|
|
59,195
|
Machinery and equipment
|
|
|
328,094
|
|
|
258,423
|
|
|
|
|
|
|
|
|
420,978
|
|
|
330,431
|
Less accumulated depreciation
|
|
|
97,695
|
|
|
71,951
|
|
|
|
|
|
|
|
$
|
323,283
|
|
$
|
258,480
|
|
|
|
|
|
F-18
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Property, plant and equipment (Continued)
Depreciation
and amortization expense for the years ended December 31, 2007, 2006 and 2005 was $29.5 million, $25.8 million and $21.8 million, respectively.
4. Intangible and other long-term assets
At December 31, 2007 and 2006 intangible and other long-term assets are summarized as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Amortizing intangible assets, net
|
|
$
|
24,958
|
|
$
|
26,188
|
Deferred financing costs
|
|
|
5,196
|
|
|
6,494
|
Deferred income taxes
|
|
|
8,708
|
|
|
6,567
|
Other
|
|
|
5,349
|
|
|
3,765
|
|
|
|
|
|
|
|
$
|
44,211
|
|
$
|
43,014
|
|
|
|
|
|
Acquired
amortizing intangible assets at December 31, 2007 and 2006 are summarized as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer base
|
|
$
|
27,924
|
|
$
|
5,595
|
|
$
|
27,924
|
|
$
|
4,000
|
Other
|
|
|
4,069
|
|
|
1,440
|
|
|
3,473
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,993
|
|
$
|
7,035
|
|
$
|
31,397
|
|
$
|
5,209
|
|
|
|
|
|
|
|
|
|
Aggregate
amortization expense for amortizing intangible assets for the years ended December 31, 2007, 2006 and 2005 was $2.1 million, $2.2 million and
$2.1 million, respectively. Estimated amortization expense for the next five years is: $2.1 million in 2008, $2.0 million in 2009, $1.7 million in 2010, $1.6 million
in 2011, and $1.6 million in 2012.
5. Acquisitions and dispositions
Invex acquisition
On July 31, 2007, Essex Europe acquired all of the outstanding common stock of Invex S.p.A. ("Invex"), a leading European magnet wire producer based
in Italy for a cash purchase price of $41.1 million. The Company believes the acquisition will complement its existing European operations and should provide near- and
long-term synergy opportunities in the areas of sales and administration, internal enamel usage, and other logistical, procurement and manufacturing arrangements. The purchase was financed
with cash on hand. The acquisition was accounted for using the purchase method of accounting and the results of the acquired operations have been included in the consolidated results of operations of
the Company from the date of acquisition. Invex is included in the Company's European magnet wire and distribution segment. The Company is in the process of finalizing certain asset and liability
valuations and therefore the allocation of the purchase price is
F-19
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisitions and dispositions (Continued)
subject
to refinement and adjustment. The preliminary allocation of the Invex purchase price is summarized as follows (in thousands):
Cash purchase price
|
|
$
|
41,108
|
|
Acquisition costs
|
|
|
1,288
|
|
|
|
|
|
|
|
$
|
42,396
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
|
Inventory, accounts receivable and other current assets
|
|
|
111,387
|
|
|
Property, plant and equipment
|
|
|
42,145
|
|
|
Current liabilities
|
|
|
(88,216
|
)
|
|
Long-term debt
|
|
|
(7,810
|
)
|
|
Other long-term liabilities
|
|
|
(15,110
|
)
|
|
|
|
|
|
|
$
|
42,396
|
|
|
|
|
|
Tianjin acquisition
On July 26, 2007, the Company acquired Nexans' 80% ownership interest in Essex Magnet Wire (Tianjin) Ltd. (formerly known as Nexans Tianjin Magnet
Wires and Cables Co., Ltd.) which owns and operates a magnet wire facility located in Tianjin, China, for a cash purchase price of $9.3 million. In addition to complementing its
existing magnet wire manufacturing facility in Suzhou, China, the Company believes this acquisition provides a significant market presence in the Chinese market for rectangular wires and related
products used primarily by large transformer manufacturers in high-performance power generators and transformers. The acquisition was accounted for using the purchase method of accounting
and the results of the acquired operations have been included in the consolidated results of operations of the Company from the date of acquisition. The operations of Essex Magnet Wire
(Tianjin) Ltd. are included in the Company's Asia/Pacific magnet wire segment. The Company is in the process of finalizing certain asset and liability valuations and therefore the allocation of
the purchase price is subject to refinement and adjustment. The preliminary allocation of the Tianjin purchase price is summarized as follows (in thousands):
Cash purchase price
|
|
$
|
9,320
|
|
Acquisition costs
|
|
|
725
|
|
|
|
|
|
|
|
$
|
10,045
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
|
Inventory, accounts receivable and other current assets
|
|
|
24,531
|
|
|
Property, plant and equipment
|
|
|
6,065
|
|
|
Other long-term assets
|
|
|
887
|
|
|
Short-term borrowings
|
|
|
(12,534
|
)
|
|
Current liabilities
|
|
|
(6,390
|
)
|
|
Minority interest
|
|
|
(2,514
|
)
|
|
|
|
|
|
|
$
|
10,045
|
|
|
|
|
|
F-20
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisitions and dispositions (Continued)
Simcoe acquisition
On April 27, 2007, the Company acquired certain assets and assumed certain liabilities related to Nexans' remaining North American magnet wire business in
Simcoe, Canada. This acquisition provides the Company with an increased market presence in the North American market for magnet wire products used in the transformer and power generation end markets.
The Simcoe acquisition was completed for a cash purchase price, after adjustment, of $12.7 million. The acquisition was accounted for using the purchase method of accounting and the results of
the acquired operations have been included in the consolidated results of operations of the Company from the date of acquisition. The Simcoe operations are included in the North American magnet wire
and distribution segment. The Company is in the process of finalizing certain asset and liability valuations and therefore the allocation of the purchase price is subject to refinement and adjustment.
The preliminary allocation of the Simcoe purchase price is summarized as follows (in thousands):
Cash purchase price
|
|
$
|
12,742
|
|
Acquisition costs
|
|
|
863
|
|
|
|
|
|
|
|
$
|
13,605
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
|
Inventory and other current assets
|
|
|
12,063
|
|
|
Property, plant and equipment
|
|
|
3,576
|
|
|
Other long-term assets
|
|
|
60
|
|
|
Current liabilities
|
|
|
(829
|
)
|
|
Long-term pension and post-retirement benefit liabilities
|
|
|
(1,265
|
)
|
|
|
|
|
|
|
$
|
13,605
|
|
|
|
|
|
SDS acquisition
On January 4, 2006, Essex Europe (as defined below) acquired all of the outstanding capital stock of Societe de Distribution et de Services ("SDS") from
Nexans for a cash payment of $1.2 million. SDS is engaged in the business of distributing magnet wire and related products in France. In connection with the acquisition, Essex Europe recorded a
restructuring reserve of $0.6 million related primarily to workforce reductions and the closure of certain of SDS's leased warehouse locations. Nexans reduced the purchase price by
€0.7 million for certain restructuring costs incurred by Essex Europe. The acquisition of SDS was accounted for as a purchase and the results of operations of SDS have been
included in the Company's results of operations from the date of acquisition. The allocation of the purchase price resulted in unallocated negative goodwill of $1.5 million which has been
reflected as an extraordinary gain (net of minority interest of $0.6 million) in the statement of operations for the year ended December 31, 2006.
Essex Europe
On October 21, 2005, the Company acquired Nexans' magnet wire operations in Europe through formation of a joint venture, Essex Nexans Europe S.A.S.
("Essex Nexans"), a French holding company, combining the Company's U.K. magnet wire business and Nexans' European magnet wire and enamel businesses (the "Essex Europe Transaction"). The Company
initially owned 60% of the
F-21
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisitions and dispositions (Continued)
joint
venture and Nexans had a 40% minority ownership. The Company believes the acquisition enhanced its ability to serve its global customer base, provided synergies with respect to its U.K. magnet
wire business and increased its geographic diversification.
The
aggregate cost of the acquisition was approximately $29.0 million. The following summarizes the fair value of the assets acquired and liabilities assumed at the date of
acquisition.
Current assets
|
|
$
|
148,105
|
|
Property, plant and equipment
|
|
|
5,329
|
|
Intangible and other long-term assets
|
|
|
4,903
|
|
|
|
|
|
|
Total assets acquired
|
|
|
158,337
|
|
|
|
|
|
Current liabilities
|
|
|
(89,796
|
)
|
Long-term debt
|
|
|
(15,032
|
)
|
Other long-term liabilities
|
|
|
(7,714
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(112,542
|
)
|
Minority interest
|
|
|
(16,803
|
)
|
|
|
|
|
Net assets acquired
|
|
$
|
28,992
|
|
|
|
|
|
The
transaction was accounted for as a purchase of the Nexans magnet wire and enamel businesses and a partial sale of the Company's U.K. subsidiary. The Company recognized a net
pre-tax loss of $0.5 million in the fourth quarter of 2005 related to the partial sale. The operations of Essex Nexans have been included in the consolidated results of operations
of the Company from the date of acquisition.
In
April 2007, the Company paid $4.1 million of additional contingent consideration to Nexans based on the achievement of specified levels of profitability by Essex Nexans in 2006
as provided for in the Contribution and Formation Agreement governing the initial transaction. The fair value of the net assets acquired exceeded the initial purchase price and therefore the full
amount of this contingent payment was accrued by the Company on the October 21, 2005 acquisition.
On
June 27, 2007, as provided for in the Essex Nexans shareholders agreement, the Company exercised its option to purchase Nexans' 40% minority interest in Essex Nexans for a cash
payment of $29.6 million, including acquisition costs of $0.2 million. In connection with the acquisition, the name of the French holding company was changed to Essex
Europe S.A.S. ("Essex Europe"). The acquisition of the minority interest has been accounted for using the purchase method of accounting. The purchase price allocation resulted in an adjustment
to the carrying value of recorded assets and liabilities based on their relative fair values as of the acquisition date. The allocation of the purchase price resulted in unallocated negative goodwill,
after elimination of the acquired portion of property, plant and equipment and certain other long-term assets, of $3.2 million, or $0.16 per diluted share of common stock,
which has been reflected as an extraordinary gain in the statement of operations for the year
F-22
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisitions and dispositions (Continued)
ended
December 31, 2007. The application of the purchase price and the adjustments to the carrying value of the assets and liabilities are summarized as follows:
|
|
(in thousands)
|
|
Current assets
|
|
$
|
9,770
|
|
Property, plant and equipment
|
|
|
(7,505
|
)
|
Intangible assets
|
|
|
(74
|
)
|
Deferred tax assets
|
|
|
2,496
|
|
Current liabilities
|
|
|
(3,406
|
)
|
Minority interest
|
|
|
31,519
|
|
|
|
|
|
|
|
|
32,800
|
|
Purchase price
|
|
|
29,570
|
|
|
|
|
|
Extraordinary gain
|
|
$
|
3,230
|
|
|
|
|
|
Pro forma data (unaudited)
The following unaudited pro forma consolidated results of operations have been prepared as if the Invex acquisition and the acquisition of the Essex Europe
minority interest had occurred at the beginning of the periods presented. The pro forma effects of the Simcoe and Tianjin acquisitions are not significant. The extraordinary gain directly attributable
to the Essex Europe minority interest acquisition is included in the pro forma consolidated results of operations for each period presented.
|
|
Year Ended December 31,
(unaudited)
|
|
|
2007
|
|
2006
|
|
|
(in thousands, except per share amounts)
|
Net sales
|
|
$
|
3,173,531
|
|
$
|
3,205,856
|
Income before extraordinary gain
|
|
|
64,931
|
|
|
61,153
|
Net income
|
|
|
68,161
|
|
|
65,835
|
Income before extraordinary gain per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
3.20
|
|
|
3.30
|
|
Diluted
|
|
|
3.16
|
|
|
3.21
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
3.36
|
|
|
3.55
|
|
Diluted
|
|
|
3.31
|
|
|
3.46
|
Essex Electric disposition
In January 2006, the Company sold its investment in the common stock of Essex Electric Inc. together with its warrant to purchase additional shares of
Essex Electric Inc. to The Alpine Group, Inc. for a cash payment of $8.5 million (see note 16). As a result of the transaction, the Company recognized a pre-tax
gain of $5.8 million. Following the sale, the Company no longer has any equity interest in Essex Electric Inc.
F-23
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisitions and dispositions (Continued)
US Seal disposition
On March 4, 2005, the Company sold accounts receivable and inventory totaling approximately $1.2 million together with related trademarks and
service names constituting the business conducted by the Company under the US Seal trade name for a net total purchase price of $11.6 million. A gain of $10.4 million was recognized on
the sale. In connection with the sale, the Company also signed a non-exclusive distribution agreement to act as a distributor for certain of the US Seal products for a period of five
years. The Company believes the expected revenues under the distribution agreement represent a significant continuation of the direct cash flows of the disposed US Seal product line and accordingly,
the disposition is not reported as a discontinued operation in accordance with SFAS No. 144,
Accounting for the Impairment and Disposal of Long-Lived
Assets
and EITF Issue No. 03-13. The US Seal product line is included in the North American magnet wire and distribution segment.
6. Short-term borrowings and financing arrangements
At December 31, 2007 and 2006, short-term borrowings consist of the following:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Essex Europe factoring agreement
|
|
$
|
46,103
|
|
$
|
27,185
|
Essex Magnet Wire (Tianjin) Ltd. credit facility
|
|
|
14,280
|
|
|
|
Essex Magnet Wire (Suzhou) Ltd. credit facilities
|
|
|
5,476
|
|
|
2,991
|
|
|
|
|
|
|
|
$
|
65,859
|
|
$
|
30,176
|
|
|
|
|
|
Essex Europe factoring agreement
In October 2005, Essex Europe entered into a factoring agreement with a third-party French financial institution (the "Factor") pursuant to which Essex Europe may
assign eligible accounts receivable to the Factor. Essex Europe can request advances in anticipation of customer collections on the assigned receivables. Interest was payable on the net outstanding
advances at the Euro Overnight Index Average rate plus .47% per annum. In July 2006, Essex Europe amended the agreement to increase the maximum available advances from
€35 million to €55 million. Interest on advances in excess of €35 million bore interest at the European Overnight Index Average
rate plus 0.67%. In July 2007, Essex Europe entered into a new factoring agreement to replace the existing factoring agreement. Under the new agreement, as subsequently amended, the amount of advances
available to Essex Europe is limited to 85% (80% if French social charges exceed 5% of sales) of assigned receivables up to a maximum of €90 million ($131 million at
December 31, 2007). Advances under the new agreement bear interest at the monthly average of the European Overnight Index Average (3.89% at December 31, 2007) rate plus 0.35%. The new
factoring agreement expires in July 2010. Accounts receivable at December 31, 2007 include $71.9 million of receivables which have been assigned to the Factor. Undrawn availability under
the agreement based on assigned accounts receivable at December 31, 2007 was $14.1 million. Neither the Company nor any of its domestic subsidiaries are guarantors under the factoring
agreement.
F-24
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Short-term borrowings and financing arrangements (Continued)
In connection with the Tianjin acquisition (see note 5), Essex Magnet Wire (Tianjin) Ltd. entered into a credit agreement to provide up to Chinese
Yuan Renminbi ("RMB") 170 million ($23.3 million at December 31, 2007) to refinance existing debt and provide working capital financing. Borrowings under the agreement primarily
bear interest at 90% of the basic RMB lending rate published by the Bank of China. The weighted average interest on borrowings outstanding at December 31, 2007 was 6.08%. The credit agreement
expires in July 2008. Borrowings under the agreement are guaranteed by Superior Essex Inc.
In the second quarter of 2007 Essex Magnet Wire (Suzhou) Ltd. borrowed RMB 40.0 million ($5.5 million at December 31, 2007) under a
short-term working capital loan agreement. The loan bears interest at the weighted average rate of 6.48% and is repayable in two equal installments in April 2008 and May 2008.
Essex
Magnet Wire (Suzhou) Ltd. borrowings at December 31, 2006 consist of amounts outstanding under a working capital loan providing up to RMB 23.4 million of
financing. The loan bore interest at a fixed rate of 5.51% and matured in November 2007.
Substantially all of the Company's non-U.S. subsidiaries, including Essex Europe, Essex Magnet Wire (Tianjin) Ltd. and Essex Magnet Wire
(Suzhou) Ltd., have been designated as unrestricted subsidiaries under the indenture governing the 9% senior notes (see note 8) and are not considered a subsidiaries for purposes of the
senior secured revolving credit facility. As a result, creditors of these companies may not have recourse to any assets of Superior Essex or its restricted subsidiaries, and these companies have no
responsibility for debts or obligations incurred by Superior Essex or its restricted
subsidiaries. Transactions with the Company's non-U.S. subsidiaries, including capital contributions, are generally subject to the same restrictions as transactions with unrelated third parties,
except that those transactions must also satisfy affiliate transaction tests. Further, operating profit from these companies is not generally included in determining whether financial tests for the 9%
senior note indenture and senior secured revolving credit facility purposes have been satisfied, such as debt incurrence or restricted investment tests, unless cash from those operating profits is
transferred to Superior Essex.
F-25
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Accrued Expenses
At December 31, 2007 and 2006, accrued expenses consists of the following:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Accrued compensation, pension obligations and other benefits
|
|
$
|
24,316
|
|
$
|
21,907
|
Accrued interest
|
|
|
5,076
|
|
|
5,040
|
Accrued income taxes
|
|
|
2,033
|
|
|
4,654
|
Accrued self insurance costs
|
|
|
3,231
|
|
|
4,176
|
Accrued purchase consideration (note 5)
|
|
|
|
|
|
4,927
|
Customer deposits on returnable containers
|
|
|
20,593
|
|
|
14,958
|
Customer deposits on purchase commitments
|
|
|
11,582
|
|
|
8,429
|
Deferred income taxes
|
|
|
13,218
|
|
|
6,213
|
Other
|
|
|
19,921
|
|
|
24,316
|
|
|
|
|
|
|
|
$
|
99,970
|
|
$
|
94,620
|
|
|
|
|
|
8. Long-term Debt
At December 31, 2007 and 2006, long-term debt consists of the following:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
9% senior notes, net of discount of $4,446 and $5,252 at December 31, 2007 and 2006, respectively
|
|
$
|
252,654
|
|
$
|
251,848
|
Series A redeemable preferred stock of Superior Essex Holding
|
|
|
5,000
|
|
|
5,000
|
8.975% subordinated note of Essex Europe
|
|
|
|
|
|
14,847
|
Term loan of Essex Magnet Wire (Suzhou) Ltd.
|
|
|
13,143
|
|
|
12,270
|
3% convertible bonds of Invex
|
|
|
8,432
|
|
|
|
Other
|
|
|
8,097
|
|
|
9,902
|
|
|
|
|
|
|
|
|
287,326
|
|
|
293,867
|
Less current portion of long-term debt
|
|
|
1,097
|
|
|
1,192
|
|
|
|
|
|
|
|
$
|
286,229
|
|
$
|
292,675
|
|
|
|
|
|
Senior secured revolving credit facility
Superior Essex Communications and Essex Group are borrowers under a $225 million senior secured credit facility. Interest on the senior secured credit
facility accrues on outstanding borrowings at an annual rate equal to, at the borrowers' option, LIBOR or a base rate, plus, in each case, an applicable margin, determined quarterly based on average
borrowing availability, ranging from 1.00% to 2.00% for LIBOR loans and from 0% to 0.75% for base rate loans. Obligations under the senior secured credit facility are secured by substantially all
domestic assets of the Company and 65% of the voting stock of certain of the Company's foreign subsidiaries. Availability under the senior secured credit facility is subject to a borrowing base equal
to the lesser of (1) $225 million less outstanding
F-26
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-term Debt (Continued)
letters
of credit and (2) a specified percentage of eligible accounts receivable and inventory less specified reserves. The specified percentages are (i) 85% of the value of the eligible
accounts receivable and with respect to inventory, the lesser of (a) $110 million or (b) the lesser of (x) 65% of the value of eligible inventory and (y) 85%
multiplied by the net orderly liquidation percentage then applicable multiplied by the value of the eligible inventory. Certain of the specified reserves that reduce availability are not fixed and may
be increased or imposed by the administrative agent for the senior secured credit facility at its reasonable credit judgment. The borrowers are obligated to pay an unused commitment fee of 0.25% per
annum on the unused amount of the maximum committed amounts and a fee of 0.125% per annum on the outstanding face amount of outstanding letters of credit. The senior secured credit facility matures in
April 2011. No borrowings were outstanding under the senior secured credit facility at December 31, 2007 and 2006 and undrawn availability was $224.5 million at December 31, 2007.
The
senior secured credit facility contains covenants which may limit Superior Essex Communications' and Essex Group's and their subsidiaries' ability to (i) pay dividends, redeem
capital stock or make other restricted payments, (ii) sell or dispose of assets, (iii) incur additional indebtedness or permit liens to exist on Company property, (iv) engage in
transactions with affiliates and (v) make additional investments or acquisitions. Capital expenditures, distributions, acquisitions and asset dispositions are not limited so long as no event of
default exists and the borrowers meet certain availability and liquidity conditions specified in the senior secured credit facility.
9% senior notes
The 9% senior notes were issued jointly by Superior Essex Communications and Essex Group in an aggregate principal amount of $257.1 million. The 9% senior
notes are due April 2012. Interest on the 9% senior notes is payable April 15 and October 15 of each year. The 9% senior notes were issued at an
original issue discount of $7.1 million resulting in an effective interest rate of 9
1
/
2
%. The 9% senior notes are fully and unconditionally guaranteed by the Company and each of
its existing and future domestic restricted subsidiaries.
The
Company may redeem some or all of the 9% senior notes at any time on or after April 15, 2008 at the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the twelve-month period commencing on April 15 of the year set forth below:
Year
|
|
Percentage
|
|
2008
|
|
104.50
|
%
|
2009
|
|
102.25
|
%
|
2010 and after
|
|
100.00
|
%
|
Upon
the occurrence of specific kinds of changes in control of the Company or certain of its subsidiaries, as specified in the indenture governing the 9% senior notes, holders of the 9%
senior notes will have the right to require the Company to purchase all or a portion of the outstanding 9% senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued
interest.
The
indenture governing the 9% senior notes contains covenants which restrict the Company's ability and the ability of certain of its subsidiaries to, among other things: incur
additional debt and issue preferred stock; make certain distributions, investments and other restricted payments; create
F-27
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-term Debt (Continued)
certain
liens; enter into transactions with affiliates; and merge, consolidate or sell substantially all of its assets. Restricted payments, including the payment of dividends, were limited to
approximately $40 million as of December 31, 2007 under the terms of the indenture. The indenture governing the 9% senior notes was amended in September 2005 to allow for the
transactions consummated in connection with the Essex Europe Transaction (see note 5). The Company paid $1.6 million to the noteholders in October 2005 in connection with the amendment
which is being amortized over the remaining term of the 9% senior notes.
Series A redeemable preferred stock of Superior Essex Holding
Holders of the series A preferred stock issued by Superior Essex Holding are entitled to receive cumulative cash dividends at a rate of
9
1
/
2
% per annum per share, payable semi-annually. The series A preferred stock ranks junior to all other classes of preferred stock of Superior Essex Holding. The
series A preferred stock is mandatorily redeemable on November 10, 2013 at $1 per share plus accrued and unpaid dividends. The series A preferred stock contains certain
other mandatory and optional redemption provisions. Each of the 5,000,000 shares of series A preferred stock shall have one vote with respect to all matters submitted to stockholders of
Superior Essex Holding for a vote, provided however, that holders of the series A preferred stock shall not be entitled to vote generally for directors. As a result of its mandatory redemption
provisions, the series A preferred stock has been classified as long-term debt and related dividends have been recorded as interest expense in accordance with Statement of Financial
Accountings Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
8.975% subordinated note of Essex Europe
The €11.3 million ($14.8 million) subordinated note of Essex Europe payable to Nexans was unsecured and bore interest at 8.975% per
annum payable quarterly. As a result of the acquisition of Nexans' 40% minority interest in Essex Europe (see note 5), the subordinated note was fully repaid in June 2007.
Term loan of Essex Magnet Wire (Suzhou) Ltd.
In July 2006, Essex Magnet Wire (Suzhou) Ltd. entered into a construction loan agreement with China Construction Bank to provide RMB 96 million
($12.3 million) of financing for construction of the Company's manufacturing facility in Suzhou, China. Interest on amounts drawn under the agreement is payable monthly at a floating rate,
adjusted annually, equal to 90% of the benchmark interest rate set by the People's Bank of China (5.51% at December 31, 2007). The loan is secured by a mortgage on the facility and equipment
and is repayable in two annual installments beginning July 2010. The loan is not guaranteed by the Company or any of its subsidiaries.
Convertible bonds of Invex
The €6.0 million face amount convertible bonds of Invex are unsecured and bear interest at the rate of 3% per annum. The bonds are payable
at maturity in January 2010. The bonds are convertible into 6,000,000 shares of Invex common stock at maturity provided the bondholders give notice of exercise during the period from October 1,
2009 to December 20, 2009. The bonds may be redeemed in whole, but not in part, at any time prior to September 30, 2009 at par value plus accrued and unpaid
F-28
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-term Debt (Continued)
interest.
The conversion right is terminated upon early redemption. The Company expects to redeem the bonds prior to September 30, 2009, thus eliminating the conversion right.
Other
Other long-term debt at December 31, 2007 and 2006 consists primarily of a $7 million sale/leaseback finance obligation with a
one-time purchase option with respect to one of the Company's manufacturing facilities. The purchase option is exercisable during the period December 13, 2008 to December 13,
2009 at a price equal to the greater of $5 million and the then fair value of the leased property.
The
fair value of the Company's long-term debt at December 31, 2007 and 2006 was approximately $283 million and $308.2 million, respectively, based
primarily on trading activity.
The
aggregate contractual principal maturities of long-term debt for the five years subsequent to December 31, 2007 are as follows:
Year
|
|
Amount
|
|
|
(in thousands)
|
2008
|
|
$
|
1,097
|
2009
|
|
|
15,762
|
2010
|
|
|
4,381
|
2011
|
|
|
8,762
|
2012
|
|
|
257,100
|
Thereafter
|
|
|
5,000
|
|
|
|
|
|
$
|
292,102
|
|
|
|
9. Income per share
The computation of basic and diluted income per share for the years ended December 31, 2007, 2006 and 2005 is as follows:
|
|
Year Ended December 31, 2007
|
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
|
(in thousands, except
per share amounts)
|
Basic income before extraordinary item per common share
|
|
$
|
60,447
|
|
20,304
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
96
|
|
|
|
|
Performance share awards
|
|
|
|
|
24
|
|
|
|
|
Stock options
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income before extraordinary item per common share
|
|
$
|
60,447
|
|
20,577
|
|
$
|
2.93
|
|
|
|
|
|
|
|
F-29
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income per share (Continued)
|
|
Year Ended December 31, 2006
|
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
|
(in thousands, except
per share amounts)
|
Basic income before extraordinary item per common share
|
|
$
|
56,478
|
|
18,524
|
|
$
|
3.05
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
222
|
|
|
|
|
Stock options
|
|
|
|
|
264
|
|
|
|
|
Warrants
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income before extraordinary item per common share
|
|
$
|
56,478
|
|
19,023
|
|
$
|
2.97
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
|
(in thousands, except
per share amounts)
|
Basic net income per common share
|
|
$
|
31,912
|
|
16,653
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
150
|
|
|
|
|
Stock options
|
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
31,912
|
|
16,973
|
|
$
|
1.88
|
|
|
|
|
|
|
|
The
basic and diluted income per share amounts for years ended December 31, 2007, 2006 and 2005 are computed by dividing the applicable statement of operations amount by the
weighted average shares outstanding. A total of 33,849, 399,828 and 924,411 anti-dilutive weighted average shares with respect to outstanding stock options, restricted stock awards and
Superior Essex's warrants have been excluded from the computation of diluted income per share for the years ended December 31, 2007, 2006 and 2005, respectively. Anti-dilutive
weighted average shares for the years ended December 31, 2006 and 2005 includes warrants issued in connection with Superior TeleCom's plan of reorganization to purchase 868,421 shares of the
Company's common stock. The warrants expired unexercised on May 10, 2006. Additionally, 122,797 and 145,215 weighted average shares contingently issuable pursuant to performance awards granted
in March 2006 (see note 10) have been excluded from the computation of diluted income per share for the years ended December 31, 2007 and 2006, respectively. A total of 169,241 weighted
average shares contingently issuable pursuant to performance awards granted primarily in April 2007 (see note 10) have been excluded from the computation of diluted earnings per share for the
year ended December 31, 2007. The potential dilutive effect of the $6 million Invex convertible bonds have not been included in the diluted income per share calculations for the year
ended December 31, 2007 as the Company intends to settle the debt in cash (see note 8).
F-30
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock based compensation plans
In November 2003, the Company adopted the Superior Essex Inc. 2003 Stock Incentive Plan (the "2003 Plan") pursuant to which a committee of the Company's
board of directors could grant stock options or restricted stock awards to employees, non-employee directors and certain service providers. The 2003 Plan authorized grants of awards or
options to purchase up to 1,833,333 shares of authorized but unissued common stock, stock held in treasury or both. Stock options under the 2003 Plan could be granted with an exercise price less than,
equal to or greater than the stock's fair market value at the date of grant. The term of stock options granted under the 2003 Plan could not exceed 10 years.
In
the first quarter of 2004, the Company made certain grants to its employees and directors of options to acquire common stock of the Company at an exercise price of $10.00 per share
(the "Original Options"). The 2003 Plan authorized the issuance of options granted prior to May 10, 2004 at an exercise price of $10.00 per share, the fair market value of the Company's common
stock at the time of emergence from reorganization. The fair market value of the Company's stock on the various grant dates of the Original Options was in each case higher than $10.00 (ranging from
$13.00 to $15.75). In 2005, Section 409A was added to the Internal Revenue Code to govern nonqualified deferred compensation plans, including nonqualified stock options that do not meet certain
criteria. Due to the lower-than-market-value exercise price, the Original Options vesting after December 31, 2004 were not exempted from the application of
Section 409A and unless amended to comply with Section 409A would have resulted in immediate taxation to the holder, plus substantial penalties and interest. Consequently, in order to
avoid these unforeseeable and unintended results, and in accordance with transition relief specified in IRS and Treasury Notice 2005-1 and proposed regulations under
Section 409A issued in September 2005, the Company's board of directors in November 2005 approved an amendment to 494,650 of the Original Options to increase the exercise price to the fair
market value of the Company's common stock on the grant dates of the Original Options (the "Amended Options"). In order to compensate the holders of the Amended Options for the increase in exercise
price, the board of directors also approved a grant of 118,365 shares of restricted stock of the Company having a value as of the close of business on November 1, 2005 approximately equal to
the amount by which the exercise price of the Amended Options was increased, rounding to the nearest whole number of shares. These shares of restricted stock vested prorata on or about the dates the
Amended Options vested. As a result of the modification to the Original Options
and the concurrent restricted stock award the Company recognized additional stock-based compensation expense of $0.8 million in the fourth quarter of 2005.
In
May 2005, the shareholders of the Company approved the Superior Essex Inc. 2005 Incentive Plan (the "2005 Plan") pursuant to which a committee of the Company's board of
directors may grant stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, performance awards, dividend and interest equivalents and
cash-based awards to eligible employees, officers, non-employee directors and consultants. Stock options can be granted under the 2005 Plan with an exercise price equal to or
greater than the stock's fair market value at the date of grant. The term of stock options granted may not exceed 10 years. As a result of adoption of the 2005 Plan, no further grants or awards
may be made pursuant to the 2003 Plan. In May 2007, the shareholders of the Company approved an amendment to the 2005 Plan to, among other things, increase the number of shares that may be issued
under the Plan by 500,000 shares and adjust the share reserve provisions. Immediately after the 2007 amendment, and subject to adjustment as provided in the 2005 Plan, the aggregate number of shares
of common stock available for issuance under the 2005 Plan was (i) 500,000, plus (ii) shares underlying awards outstanding under the 2005 Plan as of May 3, 2007, plus
F-31
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock based compensation plans (Continued)
(iii) shares
remaining available for issuance under the 2005 Plan as of May 2, 2007, plus (iv) a number of additional shares underlying awards outstanding under the 2003 Plan that
lapse for any reason, plus (v) a number of additional shares delivered or withheld on or after May 3, 2007 to cover the exercise price and/or satisfy tax withholding obligations with
respect to awards outstanding under the 2003 Plan. As of December 31, 2007 there were 567,208 shares remaining available for issuance under the 2005 Plan. During 2005 the Company's shareholders
also approved the 2005 Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to participate in the purchase of the Company's common stock. A total of 149,649 shares are available
for purchase by participants under the ESPP as of December 31, 2007. Shares of the Company's common stock may be purchased under the ESPP by participants at quarterly intervals at a price equal
to 95% of the closing price of the Company's stock on the last day of the quarterly purchase period.
Total
compensation cost related to all stock-based compensation plans was $7.5 million, $6.9 million and $3.5 million for the years ended December 31, 2007,
2006 and 2005, respectively. The actual income tax benefit realized for the tax deductions from option exercises and vesting of awards with respect to all stock-based compensation plans was
$3.4 million, $7.3 million and $1.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, there was
$6.5 million of unrecognized compensation cost related to the Company's stock-based compensation plans which is expected to be recognized over a weighted average period of 2 years.
The
following table summarizes stock option activity for the years ended December 31, 2007, 2006 and 2005. Amounts for stock options expected to vest are not materially different
from amounts for outstanding stock options included in the table below.
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
Outstanding at December 31, 2004
|
|
888,750
|
|
$
|
10.52
|
|
|
|
|
|
|
Granted
|
|
259,400
|
|
|
17.81
|
|
|
|
|
|
|
Exercised
|
|
(85,800
|
)
|
|
10.13
|
|
|
|
|
|
|
Original options subject to Section 409A
|
|
(494,650
|
)
|
|
10.00
|
|
|
|
|
|
|
Amended options subject to Section 409A
|
|
494,650
|
|
|
14.07
|
|
|
|
|
|
|
Forfeitures
|
|
(3,350
|
)
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
1,059,000
|
|
|
14.24
|
|
|
|
|
|
|
Granted
|
|
24,195
|
|
|
25.75
|
|
|
|
|
|
|
Exercised
|
|
(459,773
|
)
|
|
13.01
|
|
|
|
|
|
|
Forfeitures
|
|
(15,658
|
)
|
|
16.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
607,764
|
|
|
15.56
|
|
|
|
|
|
|
Granted
|
|
28,429
|
|
|
34.97
|
|
|
|
|
|
|
Exercised
|
|
(234,027
|
)
|
|
14.43
|
|
|
|
|
|
|
Forfeitures
|
|
(7,173
|
)
|
|
19.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
394,993
|
|
$
|
17.54
|
|
7.0
|
|
$
|
2,552
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
232,444
|
|
$
|
14.68
|
|
6.5
|
|
$
|
2,166
|
|
|
|
|
|
|
|
|
|
F-32
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock based compensation plans (Continued)
The
total intrinsic value (market value on the date of exercise less exercise price) of options exercised during the years ended December 31, 2007, 2006 and 2005 was
$5.0 million, $9.3 million and $0.7 million, respectively. The Company's policy is to issue authorized but unissued shares upon the exercise of options.
Pursuant
to an employment agreement, a total of 330,000 unvested shares of restricted stock valued at $10 per share were granted to the Company's Chief Executive Officer in November
2003. The restricted stock award vested at the rate of 12.5% of the shares granted at the end of each six-month period commencing on November 10, 2003. During the first quarter of
2004, the Company awarded 150,000 unvested shares of restricted stock with a weighted average per share value at the date of award of $13.25 to certain members of senior management. These restricted
stock awards provided for vesting after 7 years with earlier vesting after 3 years if the Company's stock price exceeded certain specified levels for a period of 20 consecutive trading
days. The stock price targets were met and all of these awards vested in November 2006. All other unvested share awards generally vest over periods of 3 to 5 years.
In
October 2005, the Company's Board of Directors approved the Amended and Restated Director Compensation Plan (the "Directors' Plan"), a subplan of the 2005 Plan. The Directors' Plan
provides for the payment of an annual cash retainer to the Company's directors. In addition to the cash compensation, the Directors' Plan provides for annual equity awards to non-employee
directors in the form of restricted stock units ("RSUs"). Each RSU represents the right to receive one share of Company common stock. The RSUs will vest on the earlier of (i) one year from the
date of grant, (ii) the director's death, disability or retirement, or (iii) the director leaving the Board within one year after a change in control. If the director leaves for any
other reason prior to the end of one year, a pro rata portion of the RSUs vest. The Directors' Plan provides that the directors may elect to receive all or a portion (in 25% increments) of their total
annual cash retainer in the form of stock
options or RSUs. Such elective stock options have a term of 10 years. The vesting provisions for such elective equity awards are the substantially the same as the comparable provisions for the
annual RSUs. A total of 17,475, 11,050 and 2,060 RSUs were granted under the Directors' Plan in 2007, 2006 and 2005, respectively. No stock options were granted under the Directors' Plan in 2007, 2006
or 2005.
In
March 2006 the Company's board of directors granted performance share awards to certain of the Company's executive officers under the 2005 Plan. Under the terms of the award, the
executives may vest in up to 193,620 shares of the Company's common stock on December 31, 2007 contingent upon meeting specified performance goals with respect to return on net assets and core
business revenues (as defined in the award) for the year ended December 31, 2007. A total of 157,128 of these shares were vested as of December 31, 2007 based on actual performance. In
April 2007, the Company's board of directors granted performance share awards to certain of the Company's officers and key employees under the 2005 Plan, as amended. Under the terms of the award the
executives may vest in up to 265,738 shares of the Company's common stock on December 31, 2009 contingent upon meeting specified performance goals during the three year period ended
December 31, 2009. Compensation expense related to the performance share awards is based on the grant date fair value of the award and the estimated number of shares that will ultimately vest.
Compensation expense is subject to future adjustment based upon changes in expected performance.
F-33
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock based compensation plans (Continued)
The
following table summarizes the status of the Company's unvested share awards, including the performance share awards and RSUs discussed above, for the years ended December 31,
2007, 2006 and 2005:
|
|
Shares
Outstanding
|
|
Weighted Average
Grant Date
Fair Value
|
Nonvested share awards outstanding at December 31, 2004
|
|
452,500
|
|
$
|
11.80
|
|
Granted
|
|
162,425
|
|
|
16.86
|
|
Vested
|
|
(116,175
|
)
|
|
12.07
|
|
|
|
|
|
|
Nonvested share awards outstanding at December 31, 2005
|
|
498,750
|
|
|
13.39
|
|
Granted
|
|
298,377
|
|
|
25.63
|
|
Vested
|
|
(323,246
|
)
|
|
13.50
|
|
Forfeited
|
|
(10,160
|
)
|
|
18.77
|
|
|
|
|
|
|
Nonvested share awards outstanding at December 31, 2006
|
|
463,721
|
|
|
21.07
|
|
Granted
|
|
311,274
|
|
|
34.94
|
|
Vested
|
|
(307,747
|
)
|
|
19.80
|
|
Forfeited
|
|
(44,693
|
)
|
|
26.27
|
|
|
|
|
|
|
Nonvested share awards outstanding at December 31, 2007
|
|
422,555
|
|
$
|
31.66
|
|
|
|
|
|
Nonvested share awards at December 31, 2007 expected to vest
|
|
272,602
|
|
$
|
29.89
|
|
|
|
|
|
The
total market value at the date of vesting of share awards vesting during the years ended December 31, 2007, 2006 and 2005 was $8.4 million, $11.0 million and
$2.0 million, respectively.
11. Income taxes
The provision for income tax expense (benefit) for the years ended December 31, 2007, 2006 and 2005 is comprised of the following:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14,702
|
|
$
|
14,562
|
|
$
|
12,072
|
|
|
State
|
|
|
3,544
|
|
|
2,089
|
|
|
(1,913
|
)
|
|
Foreign
|
|
|
5,136
|
|
|
8,464
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
23,382
|
|
|
25,115
|
|
|
9,534
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10,568
|
|
|
10,875
|
|
|
757
|
|
|
State
|
|
|
417
|
|
|
877
|
|
|
267
|
|
|
Foreign
|
|
|
537
|
|
|
(1,232
|
)
|
|
(479
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
11,522
|
|
|
10,520
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
34,904
|
|
$
|
35,635
|
|
$
|
10,079
|
|
|
|
|
|
|
|
|
|
F-34
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income taxes (Continued)
Deferred
foreign tax expense for the year ended December 31, 2007 is net of $2.4 million of tax benefits resulting from the reduction of deferred tax liabilities due to
statutory tax rate changes enacted by certain foreign tax jurisdictions in 2007.
The
Company is routinely audited by federal, state and foreign taxing authorities. The outcome of these audits may result in the Company being assessed taxes in addition to amounts
previously paid. Historically, the Company recorded a liability for the expected outcome of such potential assessments and claims based upon the Company's best estimate of potential assessments or
claims by the Internal Revenue Service ("IRS") or other taxing authorities resulting from existing tax exposures and claims adjusted, from time to time, based upon changing facts and circumstances. On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
("FIN 48"), which prescribes a consistent recognition threshold and measurement attribute, as well as establishes criteria for subsequently recognizing, derecognizing and measuring uncertain
tax positions for financial statement purposes. As a result of the implementation of FIN 48 effective January 1, 2007, the Company recognized a net increase of $6.6 million in the
liability for unrecognized tax benefits. A summary of changes in the liability for unrecognized tax benefits for the year ended December 31, 2007 is as follows:
|
|
Year Ended
December 31,
2007
|
|
|
|
(in thousands)
|
|
Balance at implementation
|
|
$
|
9,320
|
|
Tax positions related to prior periods:
|
|
|
|
|
|
Gross increases
|
|
|
628
|
|
|
Gross reductions
|
|
|
(220
|
)
|
Tax positions related to current period:
|
|
|
|
|
|
Gross increases
|
|
|
4,498
|
|
|
Gross reductions
|
|
|
(502
|
)
|
Settlements
|
|
|
|
|
Lapse of statue of limitations
|
|
|
(2,876
|
)
|
Impact of foreign currency exchange
|
|
|
307
|
|
|
|
|
|
Balance December 31, 2007
|
|
$
|
11,155
|
|
|
|
|
|
If
recognized, approximately $9.1 million of unrecognized tax benefits at December 31, 2007 would reduce the Company's income tax expense and effective tax rate.
Recognition of these benefits would also result in deferred tax expense of $3.3 million due to the reversal of related deferred tax assets.
The
tax years 2004 to 2006 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company believes it is reasonably possible that approximately
$2.9 million in unrecognized tax benefits will be recognized during 2008 as a result of the recognition of certain federal tax benefits and closing of statues of limitations in certain tax
jurisdictions. Recognition of these benefits would also result in deferred tax expense of $2.4 million due to the reversal of related deferred tax assets.
During
the third quarter of 2005, the Company reorganized its U.K. subsidiary for U.S. income tax purposes. As a result, the Company recognized a loss related to its U.K. subsidiary on
its 2005 U.S.
F-35
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income taxes (Continued)
consolidated
income tax return. Accordingly, income tax expense for the year ended December 31, 2005 reflects a benefit of approximately $2.3 million attributable to this loss.
During
2005, the Company reached a settlement with state taxing authorities with respect to certain pre-petition claims primarily resulting from state income tax audits of
Superior TeleCom. As a result of the settlement, the Company recognized a non-cash net current tax benefit of $3.8 million (net of income tax of $2.4 million) in 2005. In
addition, during 2005, the Company settled certain pre-petition claims with Canadian taxing authorities resulting in a net tax benefit of $0.8 million and certain bankruptcy claims
with the IRS resulting in a tax benefit of $0.4 million in 2005.
Income
before income taxes, minority interest and extraordinary gain attributable to domestic and foreign operations was as follows:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
80,679
|
|
$
|
80,770
|
|
$
|
46,204
|
|
Foreign
|
|
|
17,134
|
|
|
15,080
|
|
|
(4,654
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and extraordinary gain
|
|
$
|
97,813
|
|
$
|
95,850
|
|
$
|
41,550
|
|
|
|
|
|
|
|
|
|
The
provision for income taxes differs from the amount computed by applying the U.S. federal income tax rate of 35% because of the effect of the following items:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Expected income tax expense at U.S. federal statutory tax rate
|
|
$
|
34,235
|
|
$
|
33,548
|
|
$
|
14,542
|
|
State income tax expense, net of U.S. federal income tax benefit
|
|
|
2,976
|
|
|
2,274
|
|
|
1,726
|
|
Taxes on foreign income at rates which differ from the U.S. federal statutory rate
|
|
|
1,707
|
|
|
921
|
|
|
98
|
|
Tax benefit due to enactment of statutory rate reductions
|
|
|
(2,366
|
)
|
|
|
|
|
|
|
Settlement of tax contingencies and claims
|
|
|
|
|
|
|
|
|
(4,993
|
)
|
Benefit of loss on reorganization of U.K. subsidiary
|
|
|
|
|
|
|
|
|
(2,251
|
)
|
Recognition of unrecognized tax benefits
|
|
|
(2,711
|
)
|
|
|
|
|
|
|
Unrecognized tax benefits
|
|
|
2,484
|
|
|
|
|
|
|
|
Extraterritorial income exemption and manufacturing deduction
|
|
|
(1,381
|
)
|
|
(1,055
|
)
|
|
(841
|
)
|
Change in valuation allowance, net
|
|
|
(293
|
)
|
|
958
|
|
|
1,677
|
|
Other, net
|
|
|
253
|
|
|
(1,011
|
)
|
|
121
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
34,904
|
|
$
|
35,635
|
|
$
|
10,079
|
|
|
|
|
|
|
|
|
|
F-36
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income taxes (Continued)
Items
that result in deferred tax assets and liabilities at December 31, 2007 and 2006 are as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Sale leaseback
|
|
$
|
2,665
|
|
$
|
2,605
|
|
|
Accruals not currently deductible for tax
|
|
|
8,674
|
|
|
7,971
|
|
|
Pension and post-retirement benefits
|
|
|
11,840
|
|
|
13,641
|
|
|
Net operating loss carryforwards (principally in foreign jurisdictions)
|
|
|
11,046
|
|
|
9,751
|
|
|
Alternative minimum tax credit carryforwards
|
|
|
|
|
|
4,356
|
|
|
Share-based compensation
|
|
|
3,065
|
|
|
1,571
|
|
|
Other
|
|
|
546
|
|
|
1,255
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
37,836
|
|
|
41,150
|
|
|
Valuation allowance
|
|
|
(13,519
|
)
|
|
(11,795
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
24,317
|
|
|
29,355
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
31,662
|
|
|
27,975
|
|
|
Inventories
|
|
|
10,923
|
|
|
3,012
|
|
|
Investments in and undistributed earnings of foreign subsidiaries
|
|
|
1,833
|
|
|
1,357
|
|
|
Other
|
|
|
2,515
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
46,933
|
|
|
33,727
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(22,616
|
)
|
$
|
(4,372
|
)
|
|
|
|
|
|
|
Net
deferred tax assets and liabilities are included in the consolidated balance sheets at December 31, 2007 and 2006 as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Other current assets
|
|
$
|
4,741
|
|
$
|
13,503
|
|
Intangible and other long-term assets
|
|
|
8,708
|
|
|
6,567
|
|
Accrued expenses
|
|
|
(13,218
|
)
|
|
(6,213
|
)
|
Other long-term liabilities
|
|
|
(22,847
|
)
|
|
(18,229
|
)
|
|
|
|
|
|
|
|
|
$
|
(22,616
|
)
|
$
|
(4,372
|
)
|
|
|
|
|
|
|
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon these considerations, management
believes it is more likely than
F-37
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income taxes (Continued)
not
the Company will realize the benefits of these deductible differences, net of valuation allowances, at December 31, 2007.
At
December 31, 2007, one of Essex Europe's United Kingdom subsidiaries had a net operating loss carryforward of $21.6 million, which is fully reserved, which is available
indefinitely to offset future taxable income of the U.K. business. A total of $3.5 million of the valuation allowance relating to the U.K. net operating loss carryforward was established prior
to the effective date of Superior TeleCom's
plan of reorganization. Accordingly, reductions in this portion of the valuation allowance, if any, will be recorded as additions to additional paid-in-capital. Essex Europe's
subsidiary in Portugal had a net operating loss carryforward of $8.6 million at December 31, 2007 expiring in 2008 to 2013.
One
of the Company's Chinese subsidiaries, Essex Magnet Wire (Suzhou) Ltd., has a net operating loss carryforward of approximately $4.4 million which expires in years
through 2012. In addition, Essex Magnet Wire (Suzhou) Ltd. is subject to a tax holiday for 2008 and 2009 and will be subject to tax at 50% of the enacted statutory income tax rate for 2010
through 2012. Essex Magnet Wire (Tianjin) Ltd., the Company's other Chinese subsidiary, was subject to a tax holiday which expired in 2007 and will be subject to tax at 50% of the enacted
statutory income tax rate for 2008 through 2010.
As
of December 31, 2007, the Company has not provided for withholding or U.S. income taxes on approximately $25 million of accumulated undistributed earnings of of certain
of the Company's foreign subsidiaries as they are considered by management to be permanently reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be
subject to U.S. income taxes and withholding taxes payable in various foreign tax jurisdictions. These taxes could potentially be offset by foreign tax credits. Determination of the amount of
unrecognized deferred U.S. deferred income tax liabilities is not considered practicable.
12. Asset impairments, restructuring and other charges
Essex Europe recorded a restructuring reserve of $0.2 million during 2006 with respect to planned workforce reductions at one of its manufacturing
facilities in Germany. The reserve was recorded as part of the continued refinement of the initial purchase price allocation to the assets and liabilities acquired in the Essex Europe acquisition (see
note 5) and did not impact operating results. Essex Europe also recorded a restructuring reserve of $0.7 million as part of the initial purchase price allocation in connection with the
acquisition of SDS (see note 5). During the year ended December 31, 2006, Essex Europe recorded a provision of $1.9 million which was charged to operations related to workforce
reductions and warehouse closures at the Company's U.K. magnet wire and distribution
F-38
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Asset impairments, restructuring and other charges (Continued)
operations
and $0.2 million related to warehouse closures at SDS. A summary of the changes in the restructuring reserves for the years ended December 31, 2007 and 2006 is as follows:
|
|
Germany
|
|
SDS
|
|
U.K.
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2005
|
|
$
|
|
|
$
|
|
|
$
|
134
|
|
$
|
134
|
|
|
Essex Europe transaction
|
|
|
243
|
|
|
|
|
|
|
|
|
243
|
|
|
SDS acquisition
|
|
|
|
|
|
695
|
|
|
|
|
|
695
|
|
|
Increases charged to operations
|
|
|
|
|
|
206
|
|
|
1,870
|
|
|
2,076
|
|
|
Payments
|
|
|
(255
|
)
|
|
(941
|
)
|
|
(1,612
|
)
|
|
(2,808
|
)
|
|
Foreign currency effects
|
|
|
12
|
|
|
40
|
|
|
(2
|
)
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
390
|
|
|
390
|
|
|
Increases charged to operations
|
|
|
|
|
|
|
|
|
12
|
|
|
12
|
|
|
Payments
|
|
|
|
|
|
|
|
|
(338
|
)
|
|
(338
|
)
|
|
Foreign currency effects
|
|
|
|
|
|
|
|
|
24
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
|
|
$
|
|
|
$
|
88
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
Essex
Europe recorded a restructuring provision of $0.3 million during 2007 related to a workforce reduction at its Viana de Castelo, Portugal manufacturing facility. The majority
of the costs were related to severance payments and related benefits. All amounts were paid during 2007. Restructuring and other charges for the year ended December 31, 2007 also include the
write-off of $0.4 million of deferred business acquisition costs, $0.4 million of facility exit costs related to former North American magnet wire and distribution segment
warehouses and $0.3 million of professional fees incurred in connection with the administration of Superior TeleCom's plan of reorganization. In addition to the amounts discussed above,
restructuring and other charges for the year ended December 31, 2006 included $0.2 million of facility exit costs primarily related to closure of a warehouse and the prior year closure
of an insulation manufacturing facility in our North American magnet wire and distribution segment and $0.3 million of professional fees incurred in connection with the administration of
Superior TeleCom's plan of reorganization. These charges were offset by a $0.4 million gain on the favorable settlement of an employee related dispute in our European magnet wire and
distribution segment. Restructuring and other charges for the year ended December 31, 2005 consisted of $0.7 million of facility exit costs primarily related to closure of an insulation
manufacturing facility in Athens, Georgia as well as several warehouses in the North American magnet wire and distribution segment, $0.1 million of facility exit costs related to the closure of
a warehouse in the European magnet wire and distribution segment and $0.3 million of professional fees related to the implementation and administration of the plan of reorganization. The
facility exit costs primarily consisted of future lease payments net of estimated sublease rentals.
During
2006 the Company recorded an impairment charge of $2.0 million related to an owned warehouse which was closed in 2006 and classified as held for sale. The impairment charge
was recorded as a result of ongoing evaluations of current market conditions in the area where the property is located. The warehouse was previously operated by the North American magnet wire and
distribution segment.
In
2005, the Company recorded an impairment charge of $2.3 million related to property, plant and equipment of the Company's U.K. subsidiary. The Company evaluated the
long-lived assets of its
F-39
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Asset impairments, restructuring and other charges (Continued)
U.K.
subsidiary for impairment as of March 31, 2005 after consideration of the continued deterioration in the European magnet wire market in the first quarter of 2005, the loss of a major
customer in 2005 and negotiated reductions in the value ascribed to the U.K. net assets in connection with the Essex Europe Transaction (see note 5). The impairment test was based on
probability weighted estimated cash flows associated with such assets. The fair value of the assets was based on appraised value determined primarily by comparison to prices for similar assets. The
U.K. operation is included in the European magnet wire and distribution segment.
13. Employee benefits
Pension and postretirement benefits
The Company and its subsidiaries sponsor several defined benefit pension plans. The defined benefit pension plans generally provide for payment of benefits,
commencing at retirement (between the ages of 50 and 65), based on the employee's length of service and earnings. Benefit accruals for U.S. salaried employees and non-union hourly
employees were frozen effective January 22, 2004 and benefit accruals for substantially all U.S. union employees were frozen during 2005, 2006 and 2007. The pension plan sponsored by the
Company's U.K. subsidiary was closed to new entrants in June 2004. In connection with the Simcoe acquisition (see note 5), the Company assumed the defined benefit pension plan covering hourly
union employees of the Company's manufacturing facility in Simcoe, Canada. Benefits under the Simcoe plan are based on negotiated benefit rates and the employee's length of service.
In
July 2004, the Company's board of directors approved the adoption of an unfunded supplemental executive retirement plan (the "SERP"). The SERP is designed to provide benefits to
certain specified
members of management commencing at retirement (between the ages of 55 and 65) based on the employee's length of service and compensation.
In
connection with the acquisition of Nexans' European magnet wire business, the Company assumed the defined benefit pension obligations for active employees of the joint venture's
French and German subsidiaries. These plans are unfunded and generally provide for benefits based on the employee's length of service and earnings.
The
Company provides for postretirement employee health care and life insurance benefits for a limited number of its U.S. employees and for Canadian employees at the Company's
manufacturing facility in Simcoe, Canada. The Company has established a specified amount it will pay per employee for such benefits; therefore, health care cost trends do not affect the calculation of
the postretirement benefit obligation or its net periodic benefit cost.
The
change in the projected benefit obligation, the change in plan assets and the funded status of the defined benefit pension plans and the post-retirement health care
benefits plans during the years
F-40
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee benefits (Continued)
ended
December 31, 2007 and 2006 are presented below, along with amounts recognized in the respective consolidated balance sheets:
|
|
Defined Benefit Pension Plans
|
|
|
|
|
|
|
|
Post-Retirement Health Care Benefits
|
|
|
|
U.S. Plans
|
|
Non U.S. Plans
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
127,205
|
|
$
|
123,944
|
|
$
|
23,381
|
|
$
|
23,872
|
|
$
|
3,147
|
|
$
|
3,119
|
|
|
Service cost
|
|
|
1,790
|
|
|
1,872
|
|
|
791
|
|
|
677
|
|
|
90
|
|
|
55
|
|
|
Interest cost
|
|
|
7,226
|
|
|
6,940
|
|
|
1,779
|
|
|
1,102
|
|
|
194
|
|
|
168
|
|
|
Actuarial loss (gain)
|
|
|
(6,761
|
)
|
|
(388
|
)
|
|
(20
|
)
|
|
(2,726
|
)
|
|
(655
|
)
|
|
(176
|
)
|
|
Employee contributions
|
|
|
|
|
|
|
|
|
68
|
|
|
129
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(5,186
|
)
|
|
(5,163
|
)
|
|
(2,055
|
)
|
|
(2,601
|
)
|
|
(32
|
)
|
|
(19
|
)
|
|
Acquisitions (note 5)
|
|
|
|
|
|
|
|
|
16,245
|
|
|
18
|
|
|
728
|
|
|
|
|
|
Impact of foreign currency exchange
|
|
|
|
|
|
|
|
|
3,039
|
|
|
2,910
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period
|
|
|
124,274
|
|
|
127,205
|
|
|
43,228
|
|
|
23,381
|
|
|
3,571
|
|
|
3,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
98,676
|
|
|
86,013
|
|
|
17,643
|
|
|
16,377
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
3,973
|
|
|
9,405
|
|
|
1,603
|
|
|
1,221
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
6,358
|
|
|
8,421
|
|
|
1,156
|
|
|
308
|
|
|
32
|
|
|
19
|
|
|
Employee contributions
|
|
|
|
|
|
|
|
|
68
|
|
|
129
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(5,186
|
)
|
|
(5,163
|
)
|
|
(2,055
|
)
|
|
(2,601
|
)
|
|
(32
|
)
|
|
(19
|
)
|
|
Acquisitions (note 5)
|
|
|
|
|
|
|
|
|
15,914
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign currency exchange
|
|
|
|
|
|
|
|
|
2,331
|
|
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
|
103,821
|
|
|
98,676
|
|
|
36,660
|
|
|
17,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status and recognized liability
|
|
$
|
(20,453
|
)
|
$
|
(28,529
|
)
|
$
|
(6,568
|
)
|
$
|
(5,738
|
)
|
$
|
(3,571
|
)
|
$
|
(3,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income not yet recognized as a component of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
640
|
|
$
|
715
|
|
$
|
|
|
$
|
|
|
$
|
66
|
|
$
|
73
|
|
Actuarial (gain) loss
|
|
|
7,201
|
|
|
9,895
|
|
|
(1,682
|
)
|
|
(2,115
|
)
|
|
(1,086
|
)
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,841
|
|
$
|
10,610
|
|
$
|
(1,682
|
)
|
$
|
(2,115
|
)
|
$
|
(1,020
|
)
|
$
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee benefits (Continued)
The
total accumulated benefit obligation for all defined benefit pension plans was $164.6 million and $147.2 million at December 31, 2007 and 2006, respectively. The
aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets as of
December 31, 2007 and 2006 were as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Projected benefit obligation
|
|
$
|
131,920
|
|
$
|
133,238
|
Accumulated benefit obligation
|
|
|
128,992
|
|
|
131,232
|
Fair value of plan assets
|
|
|
103,821
|
|
|
98,676
|
The
defined benefit pension plan weighted average asset allocations by asset category at December 31, 2007 and 2006 are as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Asset category:
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
U.S. plans
|
|
62
|
%
|
64
|
%
|
|
|
Non U.S. plans
|
|
54
|
|
75
|
|
|
Fixed income investments:
|
|
|
|
|
|
|
|
U.S. plans
|
|
33
|
|
31
|
|
|
|
Non U.S. plans
|
|
33
|
|
24
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
U.S. plans
|
|
5
|
|
5
|
|
|
|
Non U.S. plans
|
|
13
|
|
1
|
|
Pension
plan assets for the U.S. defined benefit plans are managed by an investment committee. The investment committee has engaged an investment consultant to provide advice on the
investment program and assist in developing investment policy and selecting outside investment managers. The Company has adopted two distinct investment strategies for its U.S. plans together seeking
long-term appreciation and consistency of total portfolio returns with a target average return of 6%-8% compounded annually over a five-year rolling time frame.
Approximately one-half of the plans' assets at December 31, 2007 are invested in a global securities collective fund which invests primarily in equity, debt and money market
instruments in global market sectors around the world. The targeted asset allocation of the collective fund is 65% equities (+/- 30%) and 35% bonds (+/- 30%). The remaining
plan assets at December 31, 2007 consist of investments in actively managed index and exchange traded funds that integrate asset allocation strategies across international and U.S. domestic
capital markets. The targeted asset allocation of this investment strategy is 60% equities (range of +/- 30%), 39% fixed income (range of 0% to +30%) and 1% cash equivalents (range
of 0% to 50%). Prior to December 2005, the investment policy was designed to seek long-term appreciation with a target average return of 8% compounded annually over a five-year
moving time frame and provided for the following targeted asset allocation ranges: equity investments of 40-60%; fixed income investments of 25-50%; cash equivalents of 3-10%; and
alternative investments (hedge funds) of 5%.
F-42
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee benefits (Continued)
Pension
assets for the Company's U.K. defined benefit plan are managed by the plan trustees in consultation with investment advisors. The investment policy seeks to outperform various
broad market indices by 1%. The investment policy provides for the following targeted asset allocation ranges: equity investments of 70-80% and fixed income investments of 20-30%. The pension assets
for the Simcoe pension are currently managed pursuant to the investment policy established by the prior plan sponsor. This policy seeks to provide a 4% real return on a long-term basis and
provides for the following targeted asset allocation ranges: equity investments of 45-65%; fixed income investments of 35-55%; and cash equivalents of 0-10%. The Company has established an investment
committee for the Simcoe plan and is currently in the process of reevaluating the current investment policy.
The
components of net periodic benefit cost of the defined benefit pension plans and the post-retirement health care benefit plans during the years ended December 31,
2007, 2006 and 2005 are presented below:
|
|
Defined Benefit Pension Plans
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,581
|
|
$
|
2,549
|
|
$
|
2,290
|
|
|
Interest cost
|
|
|
9,004
|
|
|
8,042
|
|
|
7,369
|
|
|
Expected return on plan assets
|
|
|
(10,160
|
)
|
|
(8,082
|
)
|
|
(7,721
|
)
|
|
Amortization of prior service cost
|
|
|
75
|
|
|
75
|
|
|
75
|
|
|
Amortization of actuarial (gain) loss
|
|
|
(21
|
)
|
|
462
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,479
|
|
$
|
3,046
|
|
$
|
2,018
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement
Health Care Benefits
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
90
|
|
$
|
55
|
|
$
|
58
|
|
Interest cost
|
|
|
195
|
|
|
168
|
|
|
162
|
|
Amortization of prior service cost
|
|
|
7
|
|
|
7
|
|
|
7
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
292
|
|
$
|
230
|
|
$
|
227
|
|
|
|
|
|
|
|
Past
service costs of $0.1 million and actuarial gains of $0.1 million included in other comprehensive income at December 31, 2007 are expected to be recognized as a
component of net periodic benefit cost in 2008.
F-43
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee benefits (Continued)
The
actuarial present value of the projected pension benefit obligation and the postretirement health care benefits obligation at December 31, 2007, 2006 and 2005 were determined
based upon the following weighted average assumptions:
|
|
Defined Benefit
Pension Plans
|
|
Post-Retirement
Health Care Benefits
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.2
|
%
|
5.8
|
%
|
5.5
|
%
|
6.2
|
%
|
5.8
|
%
|
5.5
|
%
|
|
Increase in future compensation
|
|
5.0
|
|
5.0
|
|
5.0
|
|
3.0
|
|
3.0
|
|
3.0
|
|
Non U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.4
|
|
5.1
|
|
4.6
|
|
5.2
|
|
N/A
|
|
N/A
|
|
|
Increase in future compensation
|
|
3.3
|
|
2.9
|
|
2.9
|
|
N/A
|
|
N/A
|
|
N/A
|
|
The
discount rate for defined benefit plans is determined by matching the projected plan benefit payments to a yield curve constructed using current market rates for a large portfolio of
high quality bonds. The assumption regarding increases in future compensation with respect to the U.S. plans relates to the SERP only.
The
net periodic benefit cost of the defined benefit pension plans was determined using the following weighted average assumptions:
|
|
Superior Essex Inc.
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.8
|
%
|
5.5
|
%
|
5.6
|
%
|
|
Expected return on plan assets
|
|
8.0
|
|
8.0
|
|
8.0
|
|
|
Increase in future compensation
|
|
5.0
|
|
5.0
|
|
5.0
|
|
Non U.S. Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.0
|
|
4.6
|
|
5.1
|
|
|
Expected return on plan assets
|
|
7.4
|
|
6.7
|
|
7.7
|
|
|
Increase in future compensation
|
|
2.9
|
|
2.9
|
|
2.9
|
|
To
determine the long-term rate of return on pension assets, the Company considers the current and expected plan asset allocation, as well as historical and expected returns
on various categories of plan assets.
F-44
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee benefits (Continued)
Benefit
payments under the Company's defined benefit pension plans and post-retirement health care benefit plan, which reflect expected future service, are expected to be
paid as follows:
Year
|
|
Defined Benefit
Pension Plans
|
|
Post-Retirement
Health Care
Benefits
|
|
|
(in thousands)
|
2008
|
|
$
|
7,098
|
|
$
|
71
|
2009
|
|
|
7,332
|
|
|
112
|
2010
|
|
|
7,555
|
|
|
136
|
2011
|
|
|
7,957
|
|
|
162
|
2012
|
|
|
8,205
|
|
|
188
|
2013 through 2017
|
|
|
53,051
|
|
|
1,248
|
The
Company expects to contribute $5.4 million to its defined benefit pension plans in 2008.
The
Company sponsors several defined contribution plans covering substantially all U.S. employees. The plans provide for limited company matching of participants' contributions. The
Company's contributions for the years ended December 31, 2007, 2006 and 2005 were $3.7 million, $3.4 million and $3.2 million, respectively.
14. Derivative financial instruments and fair value information
The Company uses or has used forward fixed price contracts and derivative financial instruments to manage commodity price, interest rate and foreign currency
exchange risks. The Company does not hold or issue financial instruments for investment or trading purposes. The Company is exposed to credit risk in the event of nonperformance by counter parties for
foreign exchange forward contracts, metal forward price contracts and metals futures contracts but the Company does not anticipate nonperformance by any of these counter parties. The amount of such
exposure is generally limited to any unrealized gains within the underlying contracts.
Commodity price risk management
The cost of copper, the Company's most significant raw material, has historically been subject to considerable volatility. To manage the risk associated with such
volatility, the Company enters into futures purchase contracts to match the metal component of customer product pricing with the cost component of the inventory shipped. These futures contracts have
been designated as cash flow hedges with unrealized gains and losses recorded in other comprehensive income. Gains and losses are reclassified into earnings, as a component of cost of goods sold, when
the hedged sales transactions are reflected in the income statement. Hedge ineffectiveness, which is not significant, is immediately
F-45
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Derivative financial instruments and fair value information (Continued)
recognized
in earnings. The Company's commodities futures purchase contracts designated as cash flow hedges are summarized as follows at December 31, 2007 and 2006:
Type
|
|
Notional
Amount
|
|
Maturity Date
|
|
Weighted
Average
Contract Rate
|
|
Fair Value
Gain (Loss)
|
|
|
|
(in thousands
of pounds)
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
5,450
|
|
2008
|
|
$
|
3.14
|
|
$
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
16,300
|
|
2007
|
|
|
2.94
|
|
$
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Substantially
all of the unrealized loss on commodity futures outstanding at December 31, 2007 recognized as a component of accumulated other comprehensive income is expected to
be reclassified in earnings within the next twelve months to match the copper component of product pricing for outstanding customer orders.
Essex
Europe and Essex Magnet Wire (Tianjin) Ltd. enter into commodity futures contracts to match the copper component of customer product pricing with the cost component of the
inventory shipped. The futures contracts are intended to minimize the risks associated with forward product pricing for customers and changing copper prices. These contracts represent economic hedges
but have not been designated as hedges for accounting purposes. Accordingly, unrealized gains and losses on these contracts are recorded in income as a component of cost of goods sold. Net losses
recognized on these contracts were $5.5 million for the year ended December 31, 2007 and net gains recognized were $1.1 million and $0.6 million for the years ended
December 31, 2006 and 2005, respectively. There were no open positions as of December 31, 2006. Outstanding commodities futures purchase contracts held by Essex Europe and Essex Magnet
Wire (Tianjin) Ltd. at December 31, 2007 are summarized as follows:
Type
|
|
Notional
Amount
|
|
Maturity Date
|
|
Weighted
Average
Contract Rate
|
|
Fair Value
Gain (Loss)
|
|
|
|
(in thousands
of pounds)
|
|
|
|
|
|
(in thousands)
|
|
Copper
|
|
2,876
|
|
2008
|
|
$
|
3.07
|
|
$
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange risk management
The Company engages in the sale and purchase of products which result in accounts receivable and accounts payable denominated in foreign currencies. Additionally,
the Company enters into intercompany loans, some of which are not considered long-term investments, among subsidiaries with differing functional currencies. As a result, fluctuations in
the value of foreign currencies create exposures, which can adversely affect the Company's results of operations. The Company attempts to manage its transactional foreign currency exchange risk by
economically hedging foreign currency cash flow forecasts arising from the settlement of accounts receivable, accounts payable and intercompany accounts. Where naturally offsetting foreign currency
positions do not occur, the Company hedges
F-46
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Derivative financial instruments and fair value information (Continued)
certain,
but not all, of its foreign currency exposures through the use of foreign currency forward exchange contracts. These contracts generally have maturities of less than two months and represent
economic hedges but have not been designated as hedges for accounting purposes. Changes in the fair value of these contracts, together with gains and losses on foreign currency transactions, are
reflected in current earnings as a component of other income and expense..
The
Company is also exposed to foreign currency translation risk resulting from the translation of the financial statements of foreign subsidiaries with functional currencies other than
the U.S. dollar. The Company's most significant translation exposure is the Euro in relation to the U.S. dollar. During 2007 the Company entered into foreign currency put options to hedge against
adverse fluctuations in the results of operations of certain of its foreign subsidiaries resulting from foreign currency translation. The put options expired in 2007.
The
following table summarizes information about foreign currency related derivatives as of December 31, 2007:
Derivatives
|
|
Notional Amount
|
|
Weighted
Average
Contract Rate
|
|
Fair Value
Gain (Loss)
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
Forward exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
U.S. dollars (sell for Euros)
|
|
4,100
|
|
USD
|
|
0.68
|
|
$
|
|
|
U.S. dollars (buy with Canadian dollars)
|
|
4,000
|
|
USD
|
|
0.99
|
|
|
|
|
Canadian dollars (sell for U.S. dollars)
|
|
13,000
|
|
CAD
|
|
0.99
|
|
|
|
|
Euros (buy with British pounds)
|
|
7,000
|
|
EURO
|
|
0.74
|
|
|
|
|
Euros (sell for U.S. dollars)
|
|
1,980
|
|
EURO
|
|
1.46
|
|
|
|
|
British pounds (sell for Euros)
|
|
1,100
|
|
GBP
|
|
1.35
|
|
|
|
|
British pounds (buy with Euros)
|
|
600
|
|
GBP
|
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006, the Company had outstanding foreign currency forward exchange contracts to exchange 9.0 million Canadian dollars for $7.7 million in January
2007. The fair value of these forward exchange contracts was insignificant at December 31, 2006. Net gains (losses) recognized on foreign exchange derivative contracts were $(1.4) million,
$(0.1) million and $0.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.
15. Commitments and contingencies
Operating leases
The Company has various operating leases, primarily for warehouse space and certain manufacturing plants. These leases generally contain renewal options and
require the Company to pay all executory costs such as maintenance and insurance. Total rent expense under cancelable and noncancelable operating leases was $11.7 million, $10.1 million
and $8.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.
F-47
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Commitments and contingencies (Continued)
At
December 31, 2007, future minimum lease payments under noncancelable operating leases are as follows (in thousands):
Year
|
|
|
2008
|
|
$
|
10,557
|
2009
|
|
|
7,105
|
2010
|
|
|
5,228
|
2011
|
|
|
3,823
|
2012
|
|
|
2,758
|
Thereafter
|
|
|
4,874
|
|
|
|
|
|
$
|
34,345
|
|
|
|
Legal matters
The Company is involved in lawsuits, claims, investigations and proceedings, including those described below, consisting of commercial, employment, employee
benefits, environmental and other matters which arise in the ordinary course of business. In accordance with SFAS No. 5,
Accounting for
Contingencies
, the Company records a liability when management believes it is both probable that a liability has been incurred and the amount of loss can be reasonably
estimated. Management believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, management believes it
has valid defenses with respect to all legal matters against the Company and its subsidiaries and does not believe any such matters, either individually or
in the aggregate, will have a material adverse effect on its business, financial condition, liquidity or results of operations.
In
2003, Superior TeleCom and Essex Electric Inc. ("Essex Electric") each filed lawsuits under Section 1 of the Sherman Act against certain defendants based on an alleged
conspiracy to elevate the prices of certain copper products during certain periods from 1993 to 1996. On June 4, 2007, the parties to the 2003 Copper Action (including all plaintiffs and
defendants) entered into a settlement pursuant to which the 2003 Copper Action was dismissed with prejudice. The terms of the settlement are confidential. A portion of the settlement proceeds
(approximately $27,000,000) are being held in escrow by plaintiffs' counsel (the "Escrowed Settlement Proceeds"). The Company and Essex Electric, now known as Exeon Inc. ("Exeon"), each claim
to be entitled to the Escrowed Settlement Proceeds. On June 18, 2007, Exeon filed an action for declaratory judgment and related relief against the Company and certain of its subsidiaries in
the Supreme Court of the State of New York, New York County (the "2007 NY Action").
Exeon Inc. v. Superior Essex Inc., Superior
Telecommunications Inc., Essex International Inc., and Essex Group, Inc.
, Supreme Court of the State of New York, County of New York, Index
No. 108413/07. In the 2007 NY Action, Exeon seeks a declaration that the claims giving rise to the Escrowed Settlement Proceeds were transferred to Exeon in connection with the sale of a
portion of the electrical wire business of the Company's subsidiary, Essex Group, to Exeon in 2002 and that Exeon is entitled to all of the Escrowed Settlement Proceeds. The 2007 NY Action also
alleges that the Company, by claiming the Escrowed Settlement Proceeds attributable to the electrical wire business, is in breach of the purchase agreement related to the sale of a portion of the
Essex
F-48
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Commitments and contingencies (Continued)
Group
electrical wire business to Exeon and seeks damages in excess of $40 million resulting from the alleged breach.
On
June 20, 2007, the Company and Essex Group filed suit in the Superior Court of Cobb County, Georgia against Essex Electric and the other defendants named therein (the "2007
Cobb Action").
Superior Essex Inc., et al. v. Exeon Inc., et al.
, Civil Action File
No. 07-1-5146-28, Superior Court of Cobb County, Georgia. The 2007 Cobb Action sought a declaratory judgment that the Company is entitled to all of the
Escrowed Settlement Proceeds. In addition, the 2007 Cobb Action sought damages as a result of a breach of the purchase agreement and breaches of fiduciary duty. In connection with the 2007 Cobb
Action, the Company filed a motion to dismiss or stay the 2007 NY Action pending the outcome of the 2007 Cobb Action.
The
Company's motion to dismiss or stay the 2007 NY Action pending resolution of the 2007 Cobb Action was denied, and the 2007 Cobb Action has been dismissed on the sole ground that New
York is the most appropriate forum for resolution of these disputes. The Company has now asserted in the 2007 NY Action those claims that it had asserted in the 2007 Cobb Action. Discovery is underway
in the 2007 NY Action. Legal fees related to these actions are expensed as incurred.
On
January 29, 2008, Belden Technologies, Inc. and Belden CDT (Canada) Inc. ("Belden") filed a Complaint against the Company and Superior Essex Communications in the
United States District Court for the District of Delaware, alleging that the Company infringed U.S. Patent Nos. 5,424,491; 6,074,503; 6,570,095; 6,596,944; 6,998,537; and 7,179,999. The six
patents-in-suit are directed to communication cables and related manufacturing processes in the premises products field. Belden has not completed formal service of the
Complaint and summons upon the Company. The Company has not responded to the Complaint by filing an Answer or a motion with the district court in view of the preliminary nature of the lawsuit.
Nevertheless, the Company will vigorously defend against the suit if served.
The
Company operates in nine countries in Europe, North America and Asia-Pacific and its international operations have grown significantly over the past two years, primarily
through its joint venture with Nexans in Europe and through acquisitions. The Company is implementing its code of ethics and procedures to assure compliance with laws throughout its operations.
Through its processes to ensure compliance with laws, the Company recently identified certain U.S trade control compliance issues.
These
issues include isolated sales of products by a foreign subsidiary which were not in compliance with U.S. trade control laws related to Cuba. The Company has voluntarily reported
these transactions related to Cuba to the U.S. Department of Treasury, Office of Foreign Asset Control. Upon discovery of transactions related to Cuba, the Company undertook a comprehensive review of
transactions that may involve embargoed countries. The Company has completed that review and has identified no further transactions that were not in compliance with U.S. laws related to embargoed
countries.
In
addition, through this review, the Company has learned that it shipped a coating for its magnet wire products to its manufacturing operations in Mexico and China and such shipments
were misclassified under the U.S. export laws. Such shipments occurred on a regular basis without required export authorization. The Company has voluntarily reported such violations to the U.S.
Department of Commerce, Bureau of Industry and Security ("BIS"). On January 26, 2008, BIS granted licenses for shipments of the coating to the Company's facilities in Mexico and China.
F-49
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Commitments and contingencies (Continued)
To the extent the Company violated U.S. export regulations, fines and other penalties may be imposed. Because these matters are now pending before the indicated
agencies, there can be no assurance that any actual fines or penalties imposed will not have a material adverse affect on the Company's business, financial condition, liquidity or results of
operations.
Since
approximately 1990, Essex International and certain subsidiaries have been named as defendants in a number of product liability lawsuits brought by electricians, other skilled
tradesmen and others
claiming injury, in a substantial majority of cases, from exposure to asbestos found in electrical wire products produced many years ago. Litigation against various past insurers of Essex
International who had previously refused to defend and indemnify Essex International against these lawsuits was settled during 1999. Under the settlement, Essex International was reimbursed for
substantially all of its costs and expenses incurred in the defense of these lawsuits, and the insurers have undertaken to defend, are currently directly defending and, if it should become necessary,
will indemnify Essex International against those asbestos lawsuits, subject to the terms and limits of the respective policies. Under the plan of reorganization, certain of the claimants in these
actions will only be able to assert claims against the insurers under applicable insurance coverage and related arrangements. Management believes that Essex International's exposure, if any, in these
matters will not have a material adverse effect either individually, or in the aggregate, upon the Company's business, financial condition, liquidity or results of operations.
Environmental matters
The Company is subject to federal, foreign, state and local environmental laws and regulations in each of the jurisdictions in which it owns or operates
facilities governing, among other things, emissions into the air, discharges to water, the use, handling and disposal of hazardous substances and the investigation and remediation of soil and
groundwater contamination both on-site at past and current facilities and at off-site disposal locations. The Company does not believe that compliance with environmental laws
and regulations will have a material effect on its capital expenditures, net income or competitive position.
A
liability for environmental remediation and other environmental costs is accrued when it is considered probable and the costs can be reasonably estimated. The Company has accrued
amounts with respect to environmental matters that it believes were adequate at December 31, 2007. These accruals are not material to the Company's operations or financial position.
Purchase commitments
The Company accepts certain customer orders for future delivery at fixed prices. As copper is the most significant raw material used in the manufacturing process,
the Company enters into forward fixed-price purchase commitments with its suppliers for copper to match its cost to the value of the copper expected to be billed to customers. At December 31,
2007, the Company had forward fixed-price copper purchase commitments for delivery of 38.9 million pounds through June 2009 for $126.4 million. Additionally, at December 31, 2007,
the Company had forward purchase fixed-price commitments for 0.7 million pounds of aluminum through December 2008, 173,000 megawatts of electricity through 2010 and 270,000 MMBTUs of natural
gas through March 2008 amounting to $0.9 million, $13.4 million and $2.1 million, respectively.
F-50
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Commitments and contingencies (Continued)
Other
In 2006, the Company entered into indemnification agreements with its directors and certain members of management. The agreements provide that the Company will
indemnify the directors and specified officers to the full extent permitted by applicable law against expenses, judgments, fines and amounts paid in settlement by the directors or officers in
connection with legal proceedings in which the director or officer is involved by reason of their service to the Company as an officer or director. The agreements terminate upon the later of six years
after termination of service or final termination of any proceeding to which the agreements apply.
On
November 28, 2007, the Company announced a share repurchase program authorized by the Board of Directors to purchase up to $20 million of its outstanding common stock
through open market purchase at times and prices considered attractive. The Company had repurchased 366,118 shares for $9.1 million as of December 31, 2007. The share repurchases are
pursuant to a 10b5-1 trading plan. In January 2008, the Company completed it repurchases under the plan. The Company repurchased a total of 861,779 shares at an average price of $23.21 per
share.
16. Related party transactions
Essex Europe has entered into agreements to purchase a significant portion of its copper rod and pre-drawn copper wire requirements from Nexans. The
purchase agreements expire on December 31, 2008 with automatic one year renewals unless cancelled by either party upon six months prior notice in the case of copper rod and twelve months prior
notice in the case of pre-drawn copper wire. Total purchases pursuant to these agreements amounted to $298.4 million, $322.0 million and $36.4 million in 2007, 2006
and 2005, respectively.
Essex
Europe leases its manufacturing facility in Chauny, France from Nexans for an annual rental of €100 thousand. The lease expires in October 2009 at which time
Essex Europe has an option to purchase the facility from Nexans for €1.5 million less rent paid under the lease.
The
Company sells magnet wire to and provides certain tolling services for its 50% owned joint venture, Femco Magnet Wire Corporation ("Femco"). Net sales to Femco were
$25.5 million, $25.4 million and $14.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. Total net receivables from Femco were $2.3 million
at December 31, 2007. The operations of Femco and the Company's equity in the earnings of Femco are not significant.
In
December 2002, Superior TeleCom sold its electrical wire business to Essex Electric Inc. ("Essex Electric"), a subsidiary of Superior TeleCom's then parent company, The Alpine
Group Inc. In connection with the transaction Superior TeleCom received a warrant valued at $1.0 million to purchase 19.9% of the common stock of Essex Electric. The Company and Superior
TeleCom subsequently invested a total of $1.7 million representing their pro rata share of additional equity offerings made by Essex Electric. In January 2006, Alpine purchased all of the
Company's interest in Essex Electric, including the outstanding warrant, for a total cash price of $8.5 million.
In
connection with the sale of its electrical business, Superior TeleCom and Essex Electric entered into a Supply and Transitional Services Agreement (the "Supply Agreement"). Under the
Supply Agreement, Essex Electric, among other things, agreed to purchase from Superior TeleCom certain specified quantities of its overall requirements of copper rod. The purchase price for copper rod
specified in the Supply Agreement was based on the COMEX price plus an adder to reflect conversion
F-51
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Related party transactions (Continued)
to
copper rod. In November 2003, the Supply Agreement was replaced by a new agreement and the Company continued to sell copper rod to Essex Electric through January 2006. Total sales of copper rod by
the Company to Essex Electric were $7.1 million and $90.0 million, respectively, for the years ended December 31, 2006 and 2005.
17. Business segments and foreign operations
Reportable segments are strategic businesses that offer different products and services to different customers. These segments are communications cable, North
American magnet wire and distribution, European magnet wire and distribution, Asia/Pacific magnet wire and copper rod. The communications cable segment includes copper and fiber optic outside plant
wire and cable for voice and data transmission in telecommunications networks and copper and fiber optic datacom or premises wire and cable for use within homes and offices for local area networks,
Internet connectivity and other applications. The North American magnet wire and distribution segment manufactures and markets magnet wire and related products to major OEMs for use in motors,
transformers and electrical coils and controls primarily in North America. The North American magnet wire and distribution segment also distributes magnet wire and fabricated insulation products
manufactured by the Company and related accessory products purchased from third parties to small OEMs and motor repair facilities. The European magnet wire and distribution segment consists of
Essex Europe and manufactures and markets magnet wire used in motors, transformers and electrical coils and controls primarily in Europe. The European magnet wire and distribution segment also
produces enamels that are used both for internal consumption in the production of magnet wire and for sale to third parties. As a result of the Tianjin, China acquisition in July 2007 (see
note 5) and certain management reporting changes made during the third quarter of 2007, the Company began reporting a new segment, the Asia/Pacific magnet wire segment. The Asia/Pacific magnet
wire segment includes the Tianjin, China business and the Company's greenfield manufacturing operations in Suzhou, China. The operations of the Suzhou facility were previously included in the North
American magnet wire and distribution segment. All prior period segment information has been retrospectively adjusted to reflect the current segment reporting structure. The copper rod segment
includes sales of copper rod produced by the Company's North American continuous casting units to external customers. The copper rod segment also produces copper rod for internal processing which is
recorded by the consuming segment at cost as a component of cost of goods sold. Corporate and other charges consist primarily of parent company and corporate payroll costs, including stock-based
compensation charges, corporate headquarters costs and corporate legal, audit and accounting fees and compliance costs. The components of restructuring and other charges are discussed in
note 12.
The
Company's chief operating decision maker evaluates segment performance based on a number of factors with operating income, excluding corporate and other costs, restructuring and
other charges and asset impairments, being the most critical. Accordingly, corporate and other costs, restructuring and other charges, asset impairments and gain on sale of product line are not
allocated to the Company's reportable segments.
F-52
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Business segments and foreign operations (Continued)
Operating
results for each of the Company's reportable segments are presented below. Corporate and other items shown below are provided to reconcile to the Company's consolidated
statements of operations, cash flows and balance sheets.
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Net sales(a):
|
|
|
|
|
|
|
|
|
|
|
|
Communications cable(b)
|
|
$
|
854,900
|
|
$
|
817,886
|
|
$
|
678,669
|
|
|
North American magnet wire and distribution(c)
|
|
|
1,108,414
|
|
|
1,029,417
|
|
|
715,706
|
|
|
European magnet wire and distribution(d)
|
|
|
758,449
|
|
|
647,015
|
|
|
105,786
|
|
|
Asia/Pacific magnet wire(e)
|
|
|
31,477
|
|
|
|
|
|
|
|
|
Copper rod(f)
|
|
|
239,842
|
|
|
443,835
|
|
|
294,805
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,993,082
|
|
$
|
2,938,153
|
|
$
|
1,794,966
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
14,968
|
|
$
|
14,334
|
|
$
|
12,548
|
|
|
North American magnet wire and distribution
|
|
|
9,887
|
|
|
10,065
|
|
|
9,936
|
|
|
European magnet wire and distribution
|
|
|
4,123
|
|
|
2,196
|
|
|
755
|
|
|
Asia/Pacific magnet wire
|
|
|
1,693
|
|
|
56
|
|
|
|
|
|
Copper rod
|
|
|
737
|
|
|
1,068
|
|
|
605
|
|
|
Corporate and other
|
|
|
244
|
|
|
194
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,652
|
|
$
|
27,913
|
|
$
|
23,920
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
88,669
|
|
$
|
90,064
|
|
$
|
54,387
|
|
|
North American magnet wire and distribution
|
|
|
50,725
|
|
|
43,877
|
|
|
34,996
|
|
|
European magnet wire and distribution
|
|
|
22,592
|
|
|
19,341
|
|
|
(3,667
|
)
|
|
Asia/Pacific magnet wire
|
|
|
(2,890
|
)
|
|
(1,752
|
)
|
|
(157
|
)
|
|
Copper rod
|
|
|
57
|
|
|
(276
|
)
|
|
(681
|
)
|
|
Corporate and other
|
|
|
(29,866
|
)
|
|
(27,274
|
)
|
|
(21,089
|
)
|
|
Restructuring and other charges and asset impairments
|
|
|
(1,475
|
)
|
|
(4,243
|
)
|
|
(3,427
|
)
|
|
Gain on sale of product line
|
|
|
|
|
|
|
|
|
10,355
|
|
|
|
|
|
|
|
|
|
|
|
$
|
127,812
|
|
$
|
119,737
|
|
$
|
70,717
|
|
|
|
|
|
|
|
|
|
Capital and long-lived asset expenditures, including assets acquired in business acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
9,051
|
|
$
|
8,842
|
|
$
|
8,429
|
|
|
North American magnet wire and distribution(g)
|
|
|
10,984
|
|
|
5,252
|
|
|
7,361
|
|
|
European magnet wire and distribution(h)
|
|
|
61,585
|
|
|
6,197
|
|
|
1,182
|
|
|
Asia/Pacific magnet wire(i)
|
|
|
12,994
|
|
|
23,766
|
|
|
2,549
|
|
|
Copper rod
|
|
|
840
|
|
|
690
|
|
|
355
|
|
|
Corporate and other
|
|
|
648
|
|
|
78
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,102
|
|
$
|
44,825
|
|
$
|
20,327
|
|
|
|
|
|
|
|
|
|
F-53
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Business segments and foreign operations (Continued)
|
|
December 31,
|
|
|
2007
|
|
2006
|
Total assets:
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
377,895
|
|
$
|
388,892
|
|
North American magnet wire and distribution
|
|
|
336,231
|
|
|
303,069
|
|
European magnet wire and distribution
|
|
|
405,307
|
|
|
247,337
|
|
Asia/Pacific magnet wire
|
|
|
74,746
|
|
|
35,976
|
|
Copper rod
|
|
|
15,560
|
|
|
41,323
|
|
Corporate and other
|
|
|
5,651
|
|
|
10,222
|
|
|
|
|
|
|
|
$
|
1,215,390
|
|
$
|
1,026,819
|
|
|
|
|
|
-
(a)
-
One
customer accounted for 10% of consolidated net sales for the years ended December 31, 2007 and 2006. No customer accounted for more than 10% of consolidated net
sales for the year ended December 31, 2005.
-
(b)
-
Two
customers accounted for 36% and 10%, respectively, of the communications cable segment's net sales for the year ended December 31, 2007. Two customers accounted
for 36% and 11%, respectively, of the communications cable segment's net sales for the year ended December 31, 2006. Four customers accounted for 21%, 17%, 11% and 10%,
respectively, of the communications cable segment's net sales for the year ended December 31, 2005. Net sales to the RBOCs and major independent telephone companies accounted for 66%,
67% and 68% of the communications cable segment's sales for the years ended December 31, 2007, 2006 and 2005, respectively.
-
(c)
-
One
customer accounted for 14% of the North American magnet wire and distribution segment's sales for the year ended December 31, 2007. Two customers accounted for 16%
and 10%, respectively, of the North American magnet wire and distribution segment's sales for the year ended December 31, 2006. One customer accounted for 10% of the North American
magnet wire and distribution segment's sales for the years ended December 31, 2005.
-
(d)
-
Two
customers with sales in excess of 10% of segment sales accounted for 24% of the European magnet wire and distribution segment's net sales for the year ended December 31,
2007 and two customers with sales in excess of 10% of segment sales accounted for 27% of the European magnet wire and distribution segment's net sales for the year ended December 31, 2006.
-
(e)
-
Five
customers accounted for 67% of the Asia/Pacific magnet wire segment's sales for the year ended December 31, 2007.
-
(f)
-
Two
customers accounted for 54% and 29%, respectively, of the copper rod segment's net sales for the year ended December 31, 2007. Three customers accounted for 45%, 34%
and 13%, respectively, of the copper rod segment's net sales for the year ended December 31, 2006. Two customers accounted for 45% and 31%, respectively, of the copper rod segment's net
sales for the year ended December 31, 2005.
-
(g)
-
Includes
property, plant and equipment and other long-term assets of $3.6 million acquired in 2007 in connection with the Simcoe acquisition (see note 5).
F-54
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Business segments and foreign operations (Continued)
-
(h)
-
Includes
property, plant and equipment of $42.1 million acquired in 2007 in connection with the Invex acquisition (see note 5).
-
(i)
-
Includes
property, plant and equipment and intangible assets of $7.0 million acquired in 2007 in connection with the Tianjin acquisition (see note 5).
The
following provides information about domestic and foreign operations for the years ended December 31, 2007, 2006 and 2005. Net sales are attributed to the location in which
the sale was originated.
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,107,929
|
|
$
|
2,289,067
|
|
$
|
1,687,770
|
|
Other North American countries
|
|
|
91,509
|
|
|
2,071
|
|
|
1,410
|
|
France
|
|
|
210,473
|
|
|
188,178
|
|
|
27,348
|
|
Germany
|
|
|
351,079
|
|
|
345,352
|
|
|
37,195
|
|
Other European countries
|
|
|
196,897
|
|
|
113,485
|
|
|
41,243
|
|
China
|
|
|
35,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,993,082
|
|
$
|
2,938,153
|
|
$
|
1,794,966
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Long-lived assets, net:
|
|
|
|
|
|
|
|
United States
|
|
$
|
219,996
|
|
$
|
228,546
|
|
Other North American countries
|
|
|
26,339
|
|
|
23,108
|
|
Europe
|
|
|
71,301
|
|
|
15,805
|
|
China
|
|
|
41,150
|
|
|
27,468
|
|
|
|
|
|
|
|
$
|
358,786
|
|
$
|
294,927
|
|
|
|
|
|
F-55
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Quarterly financial information (unaudited)
The unaudited quarterly results of operations of the Company for the years ended December 31, 2007 and 2006 are as follows:
|
|
2007
Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
(in thousands, except per share data)
|
|
Net sales
|
|
$
|
695,628
|
|
$
|
772,440
|
|
$
|
781,406
|
|
$
|
743,608
|
|
Gross profit
|
|
|
61,245
|
|
|
74,451
|
|
|
75,642
|
|
|
73,188
|
|
Restructuring and other charges
|
|
|
874
|
|
|
413
|
|
|
212
|
|
|
(24
|
)
|
Operating income
|
|
|
24,772
|
|
|
36,051
|
|
|
36,555
|
|
|
30,434
|
|
Income before extraordinary gain(a)
|
|
|
9,158
|
|
|
16,359
|
|
|
20,315
|
|
|
14,615
|
|
Net income(a)
|
|
$
|
9,158
|
|
$
|
19,898
|
|
$
|
20,315
|
|
$
|
14,306
|
|
|
|
|
|
|
|
|
|
|
|
Income per share of common stock(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
$
|
0.45
|
|
$
|
0.81
|
|
$
|
1.00
|
|
$
|
0.71
|
|
|
|
Net income
|
|
|
0.45
|
|
|
0.98
|
|
|
1.00
|
|
|
0.70
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
|
0.45
|
|
|
0.80
|
|
|
0.98
|
|
|
0.70
|
|
|
|
Net income
|
|
$
|
0.45
|
|
$
|
0.97
|
|
$
|
0.98
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Quarter Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(in thousands, except per share data)
|
Net sales
|
|
$
|
651,694
|
|
$
|
818,193
|
|
$
|
796,289
|
|
$
|
671,977
|
Gross profit
|
|
|
58,449
|
|
|
86,699
|
|
|
72,354
|
|
|
55,733
|
Restructuring and other charges and asset impairment charge
|
|
|
781
|
|
|
197
|
|
|
2,117
|
|
|
1,148
|
Operating income
|
|
|
22,056
|
|
|
48,264
|
|
|
32,712
|
|
|
16,705
|
Gain on sale of investment
|
|
|
5,788
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
|
12,228
|
|
|
22,819
|
|
|
14,707
|
|
|
6,724
|
Net income
|
|
$
|
13,099
|
|
$
|
22,819
|
|
$
|
14,707
|
|
$
|
6,724
|
|
|
|
|
|
|
|
|
|
Income per share of common stock(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
$
|
0.73
|
|
$
|
1.31
|
|
$
|
0.74
|
|
$
|
0.34
|
|
|
Net income
|
|
|
0.78
|
|
|
1.31
|
|
|
0.74
|
|
|
0.34
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
|
0.71
|
|
|
1.27
|
|
|
0.72
|
|
|
0.33
|
|
|
Net income
|
|
$
|
0.76
|
|
$
|
1.27
|
|
$
|
0.72
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
-
(a)
-
In
the fourth quarter of 2007 the Company recognized $1.7 million of tax benefits resulting from the reduction of deferred tax liabilities due to statutory tax rate changes
enacted by certain foreign tax jurisdictions.
F-56
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Quarterly financial information (unaudited) (Continued)
-
(b)
-
Net
income per share of common stock is determined by computing a year-to-date weighted average of the incremental shares included in each quarterly net income
per share calculation. As a result, the sum of the net income per share for the four quarterly periods may not equal the net income per share for the twelve month period.
19. Supplemental guarantor information
The 9% senior unsecured notes issued on April 14, 2004 were issued by Superior Essex Communications and Essex Group as joint and several obligors. The
notes are fully and unconditionally guaranteed by the Company and each of its existing and future domestic restricted subsidiaries (as defined in the indenture governing the notes). All of the
Company's current domestic subsidiaries, other than IP Licensing LLP, are restricted subsidiaries. The following consolidating information presents information about the Company (the "Parent"),
the issuers, guarantor subsidiaries and non-guarantor subsidiaries. Investments in subsidiaries are presented on the equity method. Intercompany transactions are eliminated in
consolidation. Intercompany investing cash flows for the
F-57
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
years
ended December 31, 2006 and 2005 that were previously presented as financing cash flows have been adjusted and properly presented as investing cash flows in the current year presentation.
|
|
Balance Sheet Information
December 31, 2007
|
|
|
Parent
|
|
Issuers
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Total
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
180
|
|
$
|
79,379
|
|
$
|
168
|
|
$
|
22,950
|
|
$
|
|
|
$
|
102,677
|
|
Accounts receivable, net
|
|
|
|
|
|
176,299
|
|
|
2,815
|
|
|
224,018
|
|
|
|
|
|
403,132
|
|
Inventories, net
|
|
|
|
|
|
164,834
|
|
|
12,075
|
|
|
133,076
|
|
|
|
|
|
309,985
|
|
Other current assets
|
|
|
1,808
|
|
|
8,195
|
|
|
589
|
|
|
18,022
|
|
|
3,488
|
|
|
32,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,988
|
|
|
428,707
|
|
|
15,647
|
|
|
398,066
|
|
|
3,488
|
|
|
847,896
|
Property, plant and equipment, net
|
|
|
901
|
|
|
188,571
|
|
|
13,509
|
|
|
120,302
|
|
|
|
|
|
323,283
|
Intangible and other long-term assets
|
|
|
9,150
|
|
|
30,350
|
|
|
11
|
|
|
14,016
|
|
|
(9,316
|
)
|
|
44,211
|
Investment in subsidiaries
|
|
|
298,323
|
|
|
155,612
|
|
|
242,711
|
|
|
|
|
|
(696,646
|
)
|
|
|
Intercompany accounts
|
|
|
142,360
|
|
|
|
|
|
40,355
|
|
|
|
|
|
(182,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
452,722
|
|
$
|
803,240
|
|
$
|
312,233
|
|
$
|
532,384
|
|
$
|
(885,189
|
)
|
$
|
1,215,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
65,859
|
|
$
|
|
|
$
|
65,859
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
1,097
|
|
|
|
|
|
1,097
|
|
Accounts payable
|
|
|
265
|
|
|
111,857
|
|
|
5,219
|
|
|
127,701
|
|
|
|
|
|
245,042
|
|
Accrued expenses
|
|
|
3,376
|
|
|
32,846
|
|
|
78
|
|
|
60,182
|
|
|
3,488
|
|
|
99,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,641
|
|
|
144,703
|
|
|
5,297
|
|
|
254,839
|
|
|
3,488
|
|
|
411,968
|
Long term-debt
|
|
|
|
|
|
259,654
|
|
|
5,000
|
|
|
21,575
|
|
|
|
|
|
286,229
|
Other long-term liabilities
|
|
|
18,528
|
|
|
39,681
|
|
|
3,613
|
|
|
31,428
|
|
|
(9,316
|
)
|
|
83,934
|
Intercompany accounts
|
|
|
|
|
|
56,552
|
|
|
|
|
|
126,163
|
|
|
(182,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,169
|
|
|
500,590
|
|
|
13,910
|
|
|
434,005
|
|
|
(188,543
|
)
|
|
782,131
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
2,706
|
|
|
|
|
|
2,706
|
Stockholders' equity
|
|
|
430,553
|
|
|
302,650
|
|
|
298,323
|
|
|
95,673
|
|
|
(696,646
|
)
|
|
430,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
452,722
|
|
$
|
803,240
|
|
$
|
312,233
|
|
$
|
532,384
|
|
$
|
(885,189
|
)
|
|
1,215,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
|
|
Balance Sheet Information
December 31, 2006
|
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94
|
|
$
|
44,071
|
|
$
|
2
|
|
$
|
9,326
|
|
$
|
|
|
$
|
53,493
|
|
Accounts receivable, net
|
|
|
|
|
|
192,648
|
|
|
3,979
|
|
|
138,993
|
|
|
|
|
|
335,620
|
|
Inventories, net
|
|
|
|
|
|
203,041
|
|
|
13,344
|
|
|
72,949
|
|
|
|
|
|
289,334
|
|
Other current assets
|
|
|
9,288
|
|
|
22,398
|
|
|
623
|
|
|
14,569
|
|
|
|
|
|
46,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,382
|
|
|
462,158
|
|
|
17,948
|
|
|
235,837
|
|
|
|
|
|
725,325
|
Property, plant and equipment, net
|
|
|
497
|
|
|
193,398
|
|
|
15,227
|
|
|
49,358
|
|
|
|
|
|
258,480
|
Intangible and other long-term assets
|
|
|
4,014
|
|
|
34,275
|
|
|
|
|
|
8,780
|
|
|
(4,055
|
)
|
|
43,014
|
Investment in subsidiaries
|
|
|
266,174
|
|
|
102,222
|
|
|
223,683
|
|
|
|
|
|
(592,079
|
)
|
|
|
Intercompany accounts
|
|
|
95,378
|
|
|
|
|
|
21,378
|
|
|
|
|
|
(116,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
375,445
|
|
$
|
792,053
|
|
$
|
278,236
|
|
$
|
293,975
|
|
$
|
(712,890
|
)
|
$
|
1,026,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
30,176
|
|
$
|
|
|
$
|
30,176
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
1,192
|
|
|
|
|
|
1,192
|
|
Accounts payable
|
|
|
4,537
|
|
|
82,611
|
|
|
3,392
|
|
|
70,566
|
|
|
|
|
|
161,106
|
|
Accrued expenses
|
|
|
6,862
|
|
|
32,127
|
|
|
220
|
|
|
55,411
|
|
|
|
|
|
94,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,399
|
|
|
114,738
|
|
|
3,612
|
|
|
157,345
|
|
|
|
|
|
287,094
|
Long term-debt
|
|
|
|
|
|
258,848
|
|
|
5,000
|
|
|
28,827
|
|
|
|
|
|
292,675
|
Other long-term liabilities
|
|
|
5,058
|
|
|
45,760
|
|
|
3,450
|
|
|
9,183
|
|
|
(4,055
|
)
|
|
59,396
|
Intercompany accounts
|
|
|
|
|
|
101,946
|
|
|
|
|
|
14,810
|
|
|
(116,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
16,457
|
|
|
521,292
|
|
|
12,062
|
|
|
210,165
|
|
|
(120,811
|
)
|
|
639,165
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
28,666
|
|
|
|
|
|
28,666
|
Stockholders' equity
|
|
|
358,988
|
|
|
270,761
|
|
|
266,174
|
|
|
55,144
|
|
|
(592,079
|
)
|
|
358,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
375,445
|
|
$
|
792,053
|
|
$
|
278,236
|
|
$
|
293,975
|
|
$
|
(712,890
|
)
|
$
|
1,026,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
|
|
Statement of Operations Information
Year Ended December 31, 2007
|
|
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
30,077
|
|
$
|
2,106,960
|
|
$
|
253,247
|
|
$
|
906,926
|
|
$
|
(304,128
|
)
|
$
|
2,993,082
|
|
Cost of goods sold
|
|
|
|
|
|
1,905,777
|
|
|
232,912
|
|
|
843,918
|
|
|
(274,051
|
)
|
|
2,708,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,077
|
|
|
201,183
|
|
|
20,335
|
|
|
63,008
|
|
|
(30,077
|
)
|
|
284,526
|
|
Selling, general and administrative expenses
|
|
|
(29,837
|
)
|
|
(109,336
|
)
|
|
(8,598
|
)
|
|
(37,545
|
)
|
|
30,077
|
|
|
(155,239
|
)
|
Restructuring and other charges
|
|
|
(289
|
)
|
|
(308
|
)
|
|
(112
|
)
|
|
(766
|
)
|
|
|
|
|
(1,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(49
|
)
|
|
91,539
|
|
|
11,625
|
|
|
24,697
|
|
|
|
|
|
127,812
|
|
Interest expense
|
|
|
(3
|
)
|
|
(31,202
|
)
|
|
(475
|
)
|
|
(9,341
|
)
|
|
9,313
|
|
|
(31,708
|
)
|
Interest income
|
|
|
7,019
|
|
|
3,302
|
|
|
1,227
|
|
|
159
|
|
|
(9,313
|
)
|
|
2,394
|
|
Other income (expense), net
|
|
|
52
|
|
|
(781
|
)
|
|
23
|
|
|
21
|
|
|
|
|
|
(685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, equity in earnings (loss) of subsidiaries, minority interest and extraordinary gain
|
|
|
7,019
|
|
|
62,858
|
|
|
12,400
|
|
|
15,536
|
|
|
|
|
|
97,813
|
|
Provision for income taxes
|
|
|
(3,196
|
)
|
|
(24,085
|
)
|
|
(2,509
|
)
|
|
(5,114
|
)
|
|
|
|
|
(34,904
|
)
|
Equity in earnings of subsidiaries
|
|
|
56,624
|
|
|
18,084
|
|
|
46,733
|
|
|
|
|
|
(121,441
|
)
|
|
|
|
Minority interest in earnings of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
(2,462
|
)
|
|
|
|
|
(2,462
|
)
|
Extraordinary gain
|
|
|
3,230
|
|
|
3,230
|
|
|
3,230
|
|
|
2,880
|
|
|
(9,340
|
)
|
|
3,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
63,677
|
|
$
|
60,087
|
|
$
|
59,854
|
|
$
|
10,840
|
|
$
|
(130,781
|
)
|
$
|
63,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
|
|
Statement of Operations Information
Year Ended December 31, 2006
|
|
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
27,607
|
|
$
|
2,272,818
|
|
$
|
237,612
|
|
$
|
668,629
|
|
$
|
(268,513
|
)
|
$
|
2,938,153
|
|
Cost of goods sold
|
|
|
|
|
|
2,070,003
|
|
|
217,318
|
|
|
618,503
|
|
|
(240,906
|
)
|
|
2,664,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
27,607
|
|
|
202,815
|
|
|
20,294
|
|
|
50,126
|
|
|
(27,607
|
)
|
|
273,235
|
|
Selling, general and administrative expenses
|
|
|
(27,228
|
)
|
|
(110,006
|
)
|
|
(8,793
|
)
|
|
(30,835
|
)
|
|
27,607
|
|
|
(149,255
|
)
|
Restructuring and other charges
|
|
|
(379
|
)
|
|
(199
|
)
|
|
|
|
|
(1,665
|
)
|
|
|
|
|
(2,243
|
)
|
Asset impairment charge
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
90,610
|
|
|
11,501
|
|
|
17,626
|
|
|
|
|
|
119,737
|
|
Interest expense
|
|
|
(1
|
)
|
|
(31,226
|
)
|
|
(475
|
)
|
|
(3,111
|
)
|
|
4,552
|
|
|
(30,261
|
)
|
Interest income
|
|
|
3,866
|
|
|
595
|
|
|
687
|
|
|
83
|
|
|
(4,552
|
)
|
|
679
|
|
Gain on sale of investment
|
|
|
5,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,788
|
|
Other income (expense), net
|
|
|
|
|
|
261
|
|
|
138
|
|
|
(492
|
)
|
|
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, equity in earnings (loss) of subsidiaries, minority interest and extraordinary gain
|
|
|
9,653
|
|
|
60,240
|
|
|
11,851
|
|
|
14,106
|
|
|
|
|
|
95,850
|
|
Provision for income taxes
|
|
|
(3,572
|
)
|
|
(20,775
|
)
|
|
(4,298
|
)
|
|
(6,990
|
)
|
|
|
|
|
(35,635
|
)
|
Equity in earnings of subsidiaries
|
|
|
51,268
|
|
|
12,123
|
|
|
43,715
|
|
|
|
|
|
(107,106
|
)
|
|
|
|
Minority interest in earnings of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
(3,737
|
)
|
|
|
|
|
(3,737
|
)
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
|
871
|
|
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,349
|
|
$
|
51,588
|
|
$
|
51,268
|
|
$
|
4,250
|
|
$
|
(107,106
|
)
|
$
|
57,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
|
|
Statement of Operations Information
Year Ended December 31, 2005
|
|
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
21,466
|
|
$
|
1,698,985
|
|
$
|
152,654
|
|
$
|
123,027
|
|
$
|
(201,166
|
)
|
$
|
1,794,966
|
|
Cost of goods sold
|
|
|
|
|
|
1,541,793
|
|
|
141,456
|
|
|
117,935
|
|
|
(179,700
|
)
|
|
1,621,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,466
|
|
|
157,192
|
|
|
11,198
|
|
|
5,092
|
|
|
(21,466
|
)
|
|
173,482
|
|
Selling, general and administrative expenses
|
|
|
(21,045
|
)
|
|
(95,038
|
)
|
|
(8,285
|
)
|
|
(6,791
|
)
|
|
21,466
|
|
|
(109,693
|
)
|
Restructuring and other charges
|
|
|
(324
|
)
|
|
(663
|
)
|
|
|
|
|
(134
|
)
|
|
|
|
|
(1,121
|
)
|
Asset impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
(2,306
|
)
|
|
|
|
|
(2,306
|
)
|
Gain on sale of product line
|
|
|
|
|
|
10,355
|
|
|
|
|
|
|
|
|
|
|
|
10,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
97
|
|
|
71,846
|
|
|
2,913
|
|
|
(4,139
|
)
|
|
|
|
|
70,717
|
|
Interest expense
|
|
|
|
|
|
(27,966
|
)
|
|
(397
|
)
|
|
(355
|
)
|
|
|
|
|
(28,718
|
)
|
Interest income
|
|
|
|
|
|
7
|
|
|
1
|
|
|
17
|
|
|
|
|
|
25
|
|
Other income (expense), net
|
|
|
(97
|
)
|
|
391
|
|
|
(145
|
)
|
|
(623
|
)
|
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, equity in earnings (loss) of subsidiaries and minority interest
|
|
|
|
|
|
44,278
|
|
|
2,372
|
|
|
(5,100
|
)
|
|
|
|
|
41,550
|
|
Provision for income taxes
|
|
|
|
|
|
(8,922
|
)
|
|
(909
|
)
|
|
(248
|
)
|
|
|
|
|
(10,079
|
)
|
Equity in earnings (loss) of subsidiaries
|
|
|
31,912
|
|
|
(3,393
|
)
|
|
30,449
|
|
|
|
|
|
(58,968
|
)
|
|
|
|
Minority interest in losses of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
441
|
|
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
31,912
|
|
$
|
31,963
|
|
$
|
31,912
|
|
$
|
(4,907
|
)
|
$
|
(58,968
|
)
|
$
|
31,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
|
|
Statement of Cash Flows Information
Year Ended December 31, 2007
|
|
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
11,446
|
|
$
|
158,730
|
|
$
|
15,985
|
|
$
|
(13,248
|
)
|
$
|
|
|
$
|
172,913
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(648
|
)
|
|
(16,197
|
)
|
|
(72
|
)
|
|
(23,815
|
)
|
|
|
|
|
(40,732
|
)
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
(81,486
|
)
|
|
|
|
|
(81,486
|
)
|
|
Proceeds from sale of investments and other assets
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
|
Intercompany accounts
|
|
|
(5,670
|
)
|
|
(86,706
|
)
|
|
(14,927
|
)
|
|
|
|
|
107,303
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
|
|
|
(21,941
|
)
|
|
|
|
|
|
|
|
21,941
|
|
|
|
|
|
Dividends received
|
|
|
|
|
|
1,295
|
|
|
475
|
|
|
|
|
|
(1,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for) investing activities
|
|
|
(6,318
|
)
|
|
(122,947
|
)
|
|
(14,524
|
)
|
|
(105,301
|
)
|
|
127,474
|
|
|
(121,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings, net
|
|
|
|
|
|
|
|
|
|
|
|
18,333
|
|
|
|
|
|
18,333
|
|
|
Proceeds from long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
163
|
|
|
|
|
|
163
|
|
|
Repayments of long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
(15,468
|
)
|
|
|
|
|
(15,468
|
)
|
|
Treasury stock purchases
|
|
|
(9,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,131
|
)
|
|
Intercompany accounts
|
|
|
|
|
|
|
|
|
|
|
|
111,353
|
|
|
(111,353
|
)
|
|
|
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
|
17,891
|
|
|
(17,891
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
(475
|
)
|
|
(1,295
|
)
|
|
|
|
|
1,770
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,763
|
|
|
Other
|
|
|
2,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for) financing activities
|
|
|
(5,042
|
)
|
|
(475
|
)
|
|
(1,295
|
)
|
|
132,272
|
|
|
(127,474
|
)
|
|
(2,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
86
|
|
|
35,308
|
|
|
166
|
|
|
13,624
|
|
|
|
|
|
49,184
|
|
Cash and cash equivalents at beginning of period
|
|
|
94
|
|
|
44,071
|
|
|
2
|
|
|
9,326
|
|
|
|
|
|
53,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
180
|
|
$
|
79,379
|
|
$
|
168
|
|
$
|
22,950
|
|
$
|
|
|
$
|
102,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-63
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
|
|
Statement of Cash Flows Information
Year Ended December 31, 2006
|
|
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
(13,819
|
)
|
$
|
(12,775
|
)
|
$
|
8,680
|
|
$
|
(3,355
|
)
|
$
|
|
|
$
|
(21,269
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(78
|
)
|
|
(12,833
|
)
|
|
(6
|
)
|
|
(24,602
|
)
|
|
|
|
|
(37,519
|
)
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
(1,189
|
)
|
|
|
|
|
(1,189
|
)
|
|
Proceeds from sale of investments and other assets
|
|
|
8,750
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
8,828
|
|
|
Intercompany accounts
|
|
|
(85,476
|
)
|
|
|
|
|
(9,273
|
)
|
|
|
|
|
94,749
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
|
|
|
(8,900
|
)
|
|
|
|
|
|
|
|
8,900
|
|
|
|
|
|
Dividends received
|
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for) investing activities
|
|
|
(76,804
|
)
|
|
(21,655
|
)
|
|
(8,803
|
)
|
|
(25,791
|
)
|
|
103,173
|
|
|
(29,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayments of) short-term borrowings, net
|
|
|
|
|
|
(13,049
|
)
|
|
|
|
|
6,516
|
|
|
|
|
|
(6,533
|
)
|
|
Proceeds from long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
12,026
|
|
|
|
|
|
12,026
|
|
|
Repayments of long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
|
|
|
|
(527
|
)
|
|
Proceeds from common stock offering
|
|
|
80,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,792
|
|
|
Intercompany accounts
|
|
|
|
|
|
91,631
|
|
|
|
|
|
9,793
|
|
|
(101,424
|
)
|
|
|
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
|
2,225
|
|
|
(2,225
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
3,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,995
|
|
|
Other
|
|
|
5,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for) financing activities
|
|
|
90,648
|
|
|
78,106
|
|
|
|
|
|
30,033
|
|
|
(103,173
|
)
|
|
95,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
25
|
|
|
43,676
|
|
|
(123
|
)
|
|
1,731
|
|
|
|
|
|
45,309
|
|
Cash and cash equivalents at beginning of period
|
|
|
69
|
|
|
395
|
|
|
125
|
|
|
7,595
|
|
|
|
|
|
8,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
94
|
|
$
|
44,071
|
|
$
|
2
|
|
$
|
9,326
|
|
$
|
|
|
$
|
53,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental guarantor information (Continued)
|
|
Statement of Cash Flows Information
Year Ended December 31, 2005
|
|
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash flows provided by operating activities
|
|
$
|
4,192
|
|
$
|
37,845
|
|
$
|
1,829
|
|
$
|
3,537
|
|
$
|
|
|
$
|
47,403
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Essex Europe acquisition, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
(17,196
|
)
|
|
|
|
|
(17,196
|
)
|
|
Belden and Nexans asset acquisitions
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
Capital expenditures
|
|
|
(451
|
)
|
|
(14,937
|
)
|
|
(916
|
)
|
|
(3,186
|
)
|
|
|
|
|
(19,490
|
)
|
|
Net proceeds from sale of assets and product line
|
|
|
11
|
|
|
11,599
|
|
|
|
|
|
|
|
|
|
|
|
11,610
|
|
|
Intercompany accounts
|
|
|
(4,658
|
)
|
|
(1,347
|
)
|
|
(1,306
|
)
|
|
|
|
|
7,311
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
|
|
|
(20,785
|
)
|
|
|
|
|
|
|
|
20,785
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
475
|
|
|
(832
|
)
|
|
(475
|
)
|
|
(832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for investing activities
|
|
|
(5,098
|
)
|
|
(35,470
|
)
|
|
(1,747
|
)
|
|
(21,214
|
)
|
|
27,621
|
|
|
(35,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term borrowings, net
|
|
|
|
|
|
(16,951
|
)
|
|
|
|
|
(3,419
|
)
|
|
|
|
|
(20,370
|
)
|
|
Debt issuance costs
|
|
|
|
|
|
(1,591
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,591
|
)
|
|
Repayments of long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
(57
|
)
|
|
Intercompany accounts
|
|
|
|
|
|
|
|
|
|
|
|
7,311
|
|
|
(7,311
|
)
|
|
|
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
|
20,785
|
|
|
(20,785
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
|
Other
|
|
|
|
|
|
(475
|
)
|
|
|
|
|
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for) financing activities
|
|
|
869
|
|
|
(19,017
|
)
|
|
|
|
|
24,620
|
|
|
(27,621
|
)
|
|
(21,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
(1,060
|
)
|
|
|
|
|
586
|
|
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(37
|
)
|
|
(17,702
|
)
|
|
82
|
|
|
7,529
|
|
|
|
|
|
(10,128
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
106
|
|
|
18,097
|
|
|
43
|
|
|
66
|
|
|
|
|
|
18,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
69
|
|
$
|
395
|
|
$
|
125
|
|
$
|
7,595
|
|
$
|
|
|
$
|
8,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-65
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Subsequent eventNorth American magnet wire and distribution restructuring
On January 23, 2008, the Company announced that it is consolidating and restructuring its North American magnet wire manufacturing facilities. The changes
are expected to more efficiently match the Company's production capabilities to industry demand levels and to customer requirements. The restructuring involves a phased closure of the Company's
Vincennes, Indiana, facility, which is expected to be completed by the fourth quarter of 2008. The Company's Board of Directors authorized the action on January 16, 2008 and the restructuring
was communicated to employees on January 23, 2008.
The
total restructuring charges are estimated at $22 million, consisting of non-cash charges of approximately $15 million, principally through accelerated
depreciation, and cash charges of approximately $7 million relating to employee severance and retention, equipment relocation and other costs associated with the restructuring. The Company
expects to incur these charges in 2008.
F-66