UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
June 30, 2008
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-50514
SUPERIOR ESSEX INC.
(Exact name of registrant as specified in its
charter)
Delaware
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20-0282396
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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150 Interstate North Parkway Atlanta, Georgia
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30339
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(Address of principal executive offices)
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(Zip code)
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770-657-6000
Registrants telephone number, including area
code
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act:
Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes
x
No
o
As of July 30, 2008, the registrant had
19,901,782 shares of common stock, $0.01 par value, outstanding.
PART I. FINANCIAL
INFORMATION
In
this Quarterly Report on Form 10-Q, the following terms have the meanings
indicated below:
·
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.
·
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.
·
Essex Group refers to
Essex Group, Inc., a wholly-owned subsidiary of Essex International.
·
Essex Group Canada refers
to Essex Group Canada Inc., a wholly-owned Canadian subsidiary of Essex
Group.
·
Essex International refers
to Essex International Inc., a wholly- owned subsidiary of Superior Essex
Holding
·
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.
·
LME refers to the London
Metal Exchange, which operates the principal European copper futures and options
trading market.
·
SHME refers to the
Shanghai Metal Exchange, which operates the principal Asian copper futures and
options trading market.
·
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.
·
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.
·
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.
2
Forward-Looking Statements
Certain expectations and projections regarding our
future performance referenced in this Form 10-Q, in other materials we
file with the SEC or otherwise release to the public, and on our website are
forward-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 Managements 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 under the caption
Risk Factors in our Annual Report on Form 10-K for the year ended December 31,
2007 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-Q or in our Annual Report on Form 10-K
for the year ended December 31, 2007, 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.
3
ITEM 1. FINANCIAL STATEMENTS
SUPERIOR ESSEX INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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June 30,
2008
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December 31,
2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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79,462
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$
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102,677
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Accounts receivable (less
allowance for doubtful accounts of $6,467 and $6,503 at June 30, 2008
and December 31, 2007, respectively)
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498,581
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403,132
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Inventories, net
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320,830
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309,985
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Other current assets
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27,308
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32,102
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Total current assets
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926,181
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847,896
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Property, plant and
equipment, net
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334,895
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323,283
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Intangible and other
long-term assets, net
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48,611
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44,211
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Total assets
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$
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1,309,687
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$
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1,215,390
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LIABILITIES AND STOCKHOLDERS
EQUITY
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Current liabilities:
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Short-term borrowings
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$
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78,569
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$
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65,859
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Current portion of
long-term debt
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932
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1,097
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Accounts payable
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271,587
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245,042
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Accrued expenses
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121,177
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99,970
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Total current liabilities
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472,265
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411,968
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Long-term debt
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288,301
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286,229
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Other long-term
liabilities
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85,765
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83,934
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Total liabilities
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846,331
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782,131
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Minority interest in
consolidated subsidiary
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3,134
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2,706
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Commitments and
contingencies (note 11)
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Stockholders equity:
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Preferred stock, $.01 par
value; 7,000,000 shares authorized, none issued or outstanding
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Common stock, $.01 par
value; 33,000,000 shares authorized; 21,250,651 and 21,101,554 shares issued
at June 30, 2008 and December 31, 2007, respectively
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212
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209
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Capital in excess of par
value
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289,887
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286,242
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Accumulated other
comprehensive income
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23,868
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12,086
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Retained earnings
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181,529
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154,673
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Treasury stock, at cost
(1,349,108 shares and 791,865 shares at June 30, 2008 and December 31,
2007, respectively)
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(35,274
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(22,657
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Total stockholders equity
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460,222
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430,553
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Total liabilities and
stockholders equity
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$
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1,309,687
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$
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1,215,390
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The accompanying notes are an integral part
of these condensed consolidated financial statements
4
SUPERIOR ESSEX INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share
data)
(unaudited)
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Three Months Ended
June 30,
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2008
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2007
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Net sales
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$
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831,853
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$
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772,440
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Cost of goods
sold
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754,899
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697,989
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Gross profit
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76,954
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74,451
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Selling, general
and administrative expenses
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(40,452
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)
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(37,987
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Restructuring
and other charges
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(18,562
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)
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(413
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Income from
settlement of litigation (note 11)
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19,584
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Operating income
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37,524
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36,051
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Interest expense
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(8,552
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(7,472
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Interest income
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316
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869
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Other income
(expense), net
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(16
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103
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Income before income taxes, minority interest and
extraordinary gain
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29,272
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29,551
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Income tax
expense
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(9,854
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(11,885
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Income before minority interest and extraordinary
gain
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19,418
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17,666
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Minority
interest in earnings of subsidiaries
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(3
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(1,307
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Income before extraordinary gain
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19,415
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16,359
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Extraordinary
gain (note 5)
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3,539
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Net income
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$
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19,415
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$
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19,898
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Net income per
share of common stock:
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Basic:
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Income before extraordinary gain
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$
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0.99
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$
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0.81
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Extraordinary gain (note 5)
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0.17
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Net income
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$
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0.99
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$
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0.98
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Diluted:
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Income before extraordinary gain
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$
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0.98
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$
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0.80
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Extraordinary gain (note 5)
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0.17
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Net income
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$
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0.98
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$
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0.97
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Weighted average
shares outstanding:
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Basic
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19,696
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20,253
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Diluted
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19,909
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20,527
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The accompanying notes are an integral part
of these condensed consolidated financial statements
5
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Six Months Ended
June 30,
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2008
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2007
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Net sales
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$
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1,589,013
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$
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1,468,068
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Cost of goods
sold
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1,446,013
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1,332,372
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Gross profit
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143,000
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135,696
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Selling, general
and administrative expenses
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(84,100
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)
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(73,586
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)
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Restructuring
and other charges
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(20,683
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)
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(1,287
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)
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Income from
settlement of litigation (note 11)
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19,584
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Operating income
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57,801
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60,823
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Interest expense
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(16,870
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)
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(15,122
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)
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Interest income
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910
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1,615
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Other expense,
net
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(1,168
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)
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(648
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)
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Income before income taxes, minority interest and
extraordinary gain
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40,673
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46,668
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Income tax
expense
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(13,571
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)
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(18,794
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)
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Income before minority interest and extraordinary
gain
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27,102
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27,874
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Minority
interest in earnings of subsidiaries
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(246
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)
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(2,357
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)
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Income before extraordinary gain
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26,856
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25,517
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Extraordinary
gain - (note 5)
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3,539
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Net income
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$
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26,856
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$
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29,056
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Net income per
share of common stock:
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Basic:
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Income before extraordinary gain
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$
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1.36
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$
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1.26
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Extraordinary gain (note 5)
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0.18
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Net income
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$
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1.36
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$
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1.44
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Diluted:
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Income before extraordinary gain
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$
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1.35
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$
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1.25
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Extraordinary gain (note 5)
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0.17
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Net income
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$
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1.35
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$
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1.42
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Weighted average
shares outstanding:
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Basic
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19,729
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20,203
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Diluted
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19,921
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20,491
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The accompanying notes are an integral part of these condensed
consolidated financial statements
6
SUPERIOR ESSEX INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(unaudited)
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Six Months Ended
June 30,
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2008
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2007
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Cash flows from operating
activities:
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Net income
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$
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26,856
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$
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29,056
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Adjustments to reconcile
net income to net cash provided by operating activities:
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Depreciation and
amortization (note 4)
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30,088
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15,030
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Amortization of deferred
financing costs and discount
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1,217
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1,061
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Minority interest in
earnings of subsidiaries
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246
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2,357
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Extraordinary gain
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(3,539
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)
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Settlement of derivatives
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1,948
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3,564
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Share-based compensation
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1,808
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4,016
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Change in assets and
liabilities:
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Accounts receivable, net
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(80,494
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)
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(58,638
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Inventories, net
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(2,441
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)
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28,169
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Other current and
non-current assets
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(2,366
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)
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16,350
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Accounts payable, accrued
expenses and other liabilities
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33,247
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38,619
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Other, net
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(306
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)
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795
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Cash flows provided by
operating activities
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9,803
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76,840
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Cash flows from investing
activities:
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Capital expenditures
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(30,050
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)
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(18,351
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)
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Acquisitions, net of cash
acquired (note 5)
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(2,965
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)
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(48,334
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)
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Other
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32
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|
26
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Cash flows used for
investing activities
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(32,983
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)
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(66,659
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)
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Cash flows from financing
activities:
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Short-term borrowings, net
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7,616
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6,551
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|
Repayments of long-term
debt
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|
(250
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)
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(15,021
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)
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Proceeds from exercise of
stock options and employee stock purchases
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|
1,278
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|
2,413
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|
Treasury stock purchases
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|
(10,869
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)
|
|
|
Excess tax benefits
resulting from stock options and awards
|
|
562
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|
1,737
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|
Cash flows used for
financing activities
|
|
(1,663
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)
|
(4,320
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)
|
Effect of exchange rate
changes on cash
|
|
1,628
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|
(611
|
)
|
Net increase (decrease) in
cash and cash equivalents
|
|
(23,215
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)
|
5,250
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|
Cash and cash equivalents
at beginning of period
|
|
102,677
|
|
53,493
|
|
Cash and cash equivalents
at end of period
|
|
$
|
79,462
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|
$
|
58,743
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements
7
SUPERIOR ESSEX INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
1.
General
Basis of presentation
The accompanying balance sheet as of December 31,
2007, which has been derived from audited financial statements, and the
unaudited consolidated financial statements as of June 30, 2008 and for
the three and six months ended June 30, 2008 and 2007, have been prepared
in accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, and, therefore, do not include all
disclosures required by accounting principles generally accepted in the United
States for complete financial statements. However, in the opinion of
management, these statements reflect all adjustments (which consist only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for the relevant periods. Results for the six months ended June 30,
2008 are not necessarily indicative of the results to be expected for the
entire fiscal year. These financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included
in Superior Essex Inc.s Annual Report on Form 10-K for the year
ended December 31, 2007.
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.
Tender offer and merger
On June 11, 2008, the Company entered into an
Agreement and Plan of Merger (the Agreement) with LS Cable Ltd. (LS Cable),
a Korean company. Under the terms of the agreement, Cyprus Acquisition Merger
Sub Inc. (Cyprus), an indirect wholly-owned subsidiary of LS Cable, made a
cash tender offer to purchase all of the outstanding shares of Superior Essex
common stock for $45.00 per share. On August 4, 2008, Cyprus completed the
tender offer and acquired approximately 92% of the outstanding common stock of
Superior Essex Inc. In accordance with the terms of the Agreement, LS Cable will
merge Cyprus with and into Superior Essex Inc. and all remaining Superior Essex
Inc. common shares will be cancelled in exchange for the right to receive a
cash payment of $45 per share. Upon completion of the merger Superior Essex
Inc. will be an indirect subsidiary of LS Cable.
Income taxes
Income tax expense for interim periods is provided
based on the Companys estimated effective tax rate for the full fiscal year.
The effective tax rate for the three and six months ended June 30, 2008 is
less than the U.S. statutory rate of 35% due to the favorable effect of lower
foreign effective tax rates and the discrete effects of favorable adjustments
to state effective tax rates
and research and development tax credits
which more than offset the
negative impact of state taxes, valuation allowances provided with respect to
operating losses incurred by one of the Companys Chinese subsidiaries and
liabilities for uncertain tax positions recorded in accordance with FASB
Interpretation No. 48 (FIN 48). The effective tax rate for the three and
six months ended June 30, 2007 exceeds the U.S. statutory rate of 35% due
to the effects of state and foreign taxes and liabilities for uncertain tax positions
recorded in accordance with FIN 48.
8
New accounting pronouncements
Effective January 1, 2008, the Company
adopted certain provisions of Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(FAS 157). FAS 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 assets and liabilities measured at
fair value on a recurring and non-recurring basis in periods subsequent to
initial recognition. FAS 157 establishes a hierarchy for fair value
measurements and related disclosures as follows: Level 1 - fair value
measurements based on quoted prices in active markets for identical assets or
liabilities; Level 2 fair value measurements based upon significant
observable market data other than quoted prices included within Level 1 or
significant unobservable inputs that are corroborated by observable market
data; and Level 3 fair value measurements based on significant unobservable
inputs that are not corroborated by observable market data.
The following table summarizes information
about the Companys assets and liabilities measured at fair value on a
recurring basis as of June 30, 2008:
|
|
Fair Value Measurement Using
|
|
|
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Copper futures contracts
|
|
$
|
1,573
|
|
$
|
532
|
|
$
|
|
|
$
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 copper futures contracts consist of
Euro denominated contracts. The value of these contracts is derived from
converting U.S. dollar quoted LME futures contracts into Euro based equivalents
by applying the publicly traded U.S. dollar to Euro foreign exchange rate. The
Company also had non-deliverable forward foreign exchange contracts outstanding
at June 30, 2008 with insignificant fair value measurements using Level 2
inputs (see note 10). The fair value of the foreign currency forward exchange
contracts is based on dealer quotes of market forward rates and reflects the
amount the Company would receive or pay at their maturity dates for contracts
involving the same currencies and maturity dates.
Application of FAS 157 to nonfinancial
assets and liabilities measured at fair value on a nonrecurring basis is
effective for fiscal years beginning after November 15, 2008 with earlier
application permitted. Nonfinancial assets and liabilities measured at fair
value on a nonrecurring basis include intangible and long-lived assets measured
at fair value for impairment purposes, asset retirement obligations initially
measured at fair value, and those assets and liabilities initially measured at
fair value in a business combination. The Company has not implemented
FAS 157 for such assets and liabilities.
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 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 parents owners
and the interests of the noncontrolling owners of a subsidiary. FAS 160 is
effective for fiscal years, and interim
9
periods within those fiscal years, beginning
on or after December 15, 2008. Earlier adoption is prohibited.
FAS 160 will be applied prospectively as of the beginning of the fiscal
year in which the Statement is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure requirements will
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 Companys minority interest in subsidiary to equity.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161,
Disclosures about
Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133
(FAS 161)
.
FAS 161 requires enhanced disclosures
about an entitys derivative and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash
flows. FAS161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. FAS 161 encourages, but does not require, comparative disclosures
for earlier periods at initial adoption. The Company is currently evaluating
the effects that FAS 161 will have on its consolidated financial statements.
In April 2008 the FASB issued FASB Staff Position No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP
142-3). FSP 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142,
Goodwill and
Other Intangible Assets.
The intent of FSP 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under Statement
142 and the period of expected cash flows used to measure the fair value of the
asset under FASB Statement No. 141 (revised 2007),
Business
Combinations,
and other U.S. generally accepted accounting
principles. FSP 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early adoption is prohibited. The
Company is currently evaluating the effects, if any, that FSP 142-3 will have
on its consolidated financial statements.
2.
Inventories,
net
At June 30, 2008 and December 31,
2007, the components of inventories were as follows:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
41,111
|
|
$
|
48,102
|
|
Work in process
|
|
91,238
|
|
78,792
|
|
Finished goods
|
|
326,933
|
|
289,413
|
|
|
|
459,282
|
|
416,307
|
|
LIFO reserve
|
|
(138,452
|
)
|
(106,322
|
)
|
|
|
$
|
320,830
|
|
$
|
309,985
|
|
Inventories valued using the LIFO method
amounted to $176.9 million and $177.7 million at June 30, 2008 and December 31,
2007, respectively. During the three months ended June 30, 2008, certain
inventory quantities were reduced resulting in the liquidation of LIFO
inventory quantities carried at lower costs prevailing in prior years. The
effect was to increase net income by $3.2 million.
10
3.
Comprehensive
income
The components of comprehensive income for
the three and six months ended June 30, 2008 and 2007 were as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
19,415
|
|
$
|
19,898
|
|
Foreign currency translation adjustment,
net of income tax of $10 and $40 for the three months ended June 30,
2008 and 2007, respectively
|
|
680
|
|
1,037
|
|
Actuarial loss on defined benefit plans net
of income tax of $411 for the three months ended June 30, 2008
|
|
(732
|
)
|
|
|
Reclassification adjustment for actuarial
losses (gains) of defined benefit plans included in net income, net of income
tax of $(2) and $2 for the three months ended June 30, 2008 and
2007, respectively
|
|
4
|
|
(3
|
)
|
Prior service costs of defined benefit
plans, net of tax of $38 for the three months ended June 30, 2008
|
|
(67
|
)
|
|
|
Reclassification adjustment for prior
service costs of defined benefit plans included in net income, net of income
tax of $8 and $7 for the three months ended June 30, 2008 and 2007,
respectively
|
|
13
|
|
12
|
|
Unrealized holding gains on derivatives
during the period, net of income tax of $268 and $1,478 for the three months
ended June 30, 2008 and 2007, respectively
|
|
418
|
|
2,311
|
|
Reclassification adjustment for gains on
derivatives included in net income, net of income tax of $529 and $1,561 for
the three months ended June 30, 2008 and 2007, respectively
|
|
(825
|
)
|
(2,442
|
)
|
Comprehensive income
|
|
$
|
18,906
|
|
$
|
20,813
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
28,656
|
|
$
|
29,056
|
|
Foreign currency translation adjustment,
net of income tax of $17 and $361 for the six months ended June 30, 2008
and 2007, respectively
|
|
11,368
|
|
1,417
|
|
Actuarial loss on defined benefit plans net
of income tax of $411 for the six months ended June 30, 2008
|
|
(732
|
)
|
|
|
Reclassification adjustment for actuarial
losses (gains) of defined benefit plans included in net income, net of income
tax of $(2) and $4 for the six months ended June 30, 2008 and 2007,
respectively
|
|
4
|
|
(6
|
)
|
Prior service costs of defined benefit
plans, net of tax of $38 for the six months ended June 30, 2008
|
|
(67
|
)
|
|
|
Reclassification adjustment for prior
service costs of defined benefit plans included in net income, net of income
tax of $15 and $14 for the six months ended June 30, 2008 and 2007,
respectively
|
|
26
|
|
24
|
|
Unrealized holding gains on derivatives
during the period, net of income tax of $1,496 and $2,451 for the six months
ended June 30, 2008 and 2007, respectively
|
|
2,324
|
|
3,828
|
|
Reclassification adjustment for gains on
derivatives included in net income, net of income tax of $731 and $1,057 for
the six months ended June 30, 2008 and 2007, respectively
|
|
(1,141
|
)
|
(1,658
|
)
|
Comprehensive income
|
|
$
|
40,438
|
|
$
|
32,661
|
|
11
The components of accumulated other
comprehensive income at June 30, 2008 and December 31, 2007 were as
follows:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(in thousands)
|
|
Foreign currency translation adjustment,
net of tax of $561 and $544 at June 30, 2008 and December 31, 2007,
respectively
|
|
$
|
27,313
|
|
$
|
15,945
|
|
Actuarial losses of defined benefit plans,
net of tax of $2,814 and $2,405 at June 30, 2008 and December 31,
2007, respectively
|
|
(3,838
|
)
|
(3,110
|
)
|
Prior service costs of defined benefit
plans, net of tax of $278 and $255 at June 30, 2008 and
December 31, 2007, respectively
|
|
(492
|
)
|
(451
|
)
|
Unrealized gain (loss) on derivatives, net
of tax of $(568) and $197 at June 30, 2008 and December 31, 2007,
respectively
|
|
885
|
|
(298
|
)
|
|
|
$
|
23,868
|
|
$
|
12,086
|
|
4.
Restructuring
and other charges
North American magnet wire and copper rod restructuring
On January 23,
2008, the Company announced that it is consolidating and restructuring its
North American magnet wire and distribution and copper rod segments manufacturing
facilities. The changes are expected to more efficiently match production
capabilities to industry demand levels and to customer requirements. The
restructuring involves a phased closure of the magnet wire manufacturing and
copper rod continuous casting facilities located in Vincennes, Indiana, and the
relocation of existing production to other North American magnet wire and
distribution facilities. The closures are expected to be completed by the first
quarter of 2009. The Companys 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
$3 million relating to employee severance and retention and $4 million
relating to equipment relocation and facility closure costs associated with the
restructuring. The Company expects to incur the majority of these charges in
2008. The North American magnet wire and distribution and copper rod segment
restructuring activities for the six months ended June 30, 2008 are
summarized as follows:
|
|
Accelerated
Depreciation
|
|
Employee
Severance
|
|
Employee
Retention
|
|
Equipment
Relocation
and Other
Facility
Exit Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts charged to expense
|
|
$
|
10,316
|
|
$
|
2,306
|
|
$
|
48
|
|
$
|
1,679
|
|
$
|
14,349
|
|
Non-cash charges against assets
|
|
(10,316
|
)
|
|
|
|
|
|
|
(10,316
|
)
|
Cash payments
|
|
|
|
(435
|
)
|
|
|
(1,598
|
)
|
(2,033
|
)
|
Balance at June 30, 2008
|
|
$
|
|
|
$
|
1,871
|
|
$
|
48
|
|
$
|
81
|
|
$
|
2,000
|
|
Accelerated depreciation charges reflect
changes in estimated useful lives and residual values for long-lived assets
that will be taken out of service prior to the end of their original service
period and have been reported as a component of cost of goods sold in the
accompanying statement of operations. All other charges associated with the
North American magnet wire and copper rod restructuring have been reported as a
component of restructuring and other charges in the accompanying statement of
operations. Employee retention costs relate to incentives that will be paid to
Vincennes employees who remain employed until certain future termination dates
and meet specified safety and attendance goals and are accrued over the
retention period. Total restructuring costs of $14.3 million for the six months
ended June 30, 2008 include $12.4 million related to the North American
magnet wire and distribution segment and $1.9 million related to the copper rod
segment.
European magnet wire
restructuring
In March 2008, the Company announced
that Essex Europe had initiated discussions with the appropriate French
employee representative bodies for the potential closure of its magnet wire
manufacturing facility in Chauny, France. Discussions with the local employee
representative bodies were completed during the second quarter of 2008 and on June 30,
2008, the Company authorized the closure of the Chauny facility. The Chauny
facility is leased from Nexans through
12
October 2009 and currently has approximately 130 employees. The
changes are expected to more efficiently match the Companys production
capabilities to industry demand levels and to customer requirements. During the
three months ended June 30, 2008, Essex Europe also recorded a
restructuring provision of $2.8 million related to the consolidation of certain
of its administrative and production support functions in Germany. The total
estimated cost of these restructurings is approximately $22 million, which
primarily consists of (i) cash charges of approximately $18.7 million
relating to employee severance and related benefits and approximately $3.7
million related to equipment relocation and disposal and other costs associated
with the restructuring, (ii) non-cash charges of approximately $1.3
million, principally through accelerated depreciation, and (iii) non-cash
gains of $1.7 million attributable to employee benefit plan curtailments. The
Company expects to incur the majority of these charges in 2008 and the first
half of 2009. Restructuring and other charges for the six months ended June 30,
2008 related to the European magnet wire restructuring are summarized as
follows:
|
|
Accelerated
Depreciation
|
|
Employee
Severance
And Related
Benefits
|
|
Employee
Benefit Plan
Curtailment
Gains
|
|
Equipment
Relocation
and Other
Facility
Exit Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts charged to expense
|
|
$
|
1,246
|
|
$
|
15,112
|
|
$
|
(1,711
|
)
|
$
|
448
|
|
$
|
15,095
|
|
Non-cash charges against assets/liabilities
|
|
(1,246
|
)
|
|
|
1,711
|
|
|
|
465
|
|
Cash payments
|
|
|
|
(107
|
)
|
|
|
(448
|
)
|
(555
|
)
|
Balance at June 30, 2008
|
|
$
|
|
|
$
|
15,005
|
|
$
|
|
|
$
|
|
|
$
|
15,005
|
|
Accelerated depreciation charges reflect
changes in estimated useful lives and residual values for long-lived assets
that will be taken out of service prior to the end of their original service
period and have been reported as a component of cost of goods sold in the
accompanying statement of operations. All other charges associated with the
European magnet wire restructurings have been reported as a component of
restructuring and other charges in the accompanying statement of operations.
Other
In addition to the North American magnet
wire, copper rod and European magnet wire restructurings discussed above,
restructuring and other charges for the six months ended June 30, 2008
also include $2.5 million of professional fees and costs associated with the LS
Cable transaction (see note 1), $0.2 million of professional fees incurred in
connection with the Chauny restructuring and the write-off of $0.2 million of
deferred business acquisition costs.
Essex Europe recorded a restructuring
provision of $0.3 million during the six months ended June 30, 2007
related to a workforce reduction at its Viana de Castelo, Portugal
manufacturing facility. The majority of the costs related to severance payments
and related benefits and were paid during 2007. Restructuring and other charges
for the six months ended June 30, 2007 also included the write-off of $0.4
million of deferred business acquisition costs, $0.3 million of facility exit
costs primarily related to the closure of an insulation manufacturing facility
in our North American magnet wire and distribution segment and $0.2 million of
professional fees incurred in connection with the administration of Superior
TeleComs plan of reorganization.
5.
Acquisitions
A.E.V. acquisition
In April 2008,
Essex Europe acquired certain assets A.E.V. Limited, a United Kingdom based
distributor of magnet wire enamels and related products, for a total purchase
price of $3.0 million. The purchased assets consisted primarily of customer and
supplier lists, existing customer and supplier contracts, minor rewinding equipment
and racking and a limited amount of inventory. 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 acquired operations are included in
the Companys European magnet wire and distribution segment.
13
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 Companys European magnet wire
and distribution segment.
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
Companys Asia/Pacific magnet wire segment.
Essex Europe minority interest
acquisition
On June 27, 2007, as provided for in the
Essex Europe shareholders agreement, the Company exercised its option to
purchase Nexans 40% minority interest in Essex Europe for a cash payment of
$29.6 million, including acquisition costs of $0.2 million. The
acquisition of the minority interest was accounted for using the purchase
method of accounting.
The following pro forma consolidated results
of operations for the six months ended June 30, 2007 have been prepared as
if the acquisition of the Essex Europe minority interest had occurred at January 1,
2007. The extraordinary gain directly attributable to the transaction is
included in the pro forma consolidated results of operations.
Net sales
|
|
$
|
1,468,068
|
|
Income before extraordinary gain
|
|
28,317
|
|
Net income
|
|
31,856
|
|
Net income per share:
|
|
|
|
Basic
|
|
|
|
Income before extraordinary gain
|
|
1.40
|
|
Net income
|
|
1.58
|
|
Diluted
|
|
|
|
Income before extraordinary gain
|
|
1.38
|
|
Net income
|
|
1.55
|
|
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
provided 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.
14
6.
Debt
At June 30, 2008 and December 31,
2007, short-term borrowings and long-term debt consist of the following:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(in thousands)
|
|
Short-term borrowings:
|
|
|
|
|
|
Essex Europe factoring agreement
|
|
$
|
59,806
|
|
$
|
46,103
|
|
Essex Magnet Wire (Tianjin) Ltd. credit
facility
|
|
18,763
|
|
14,280
|
|
Essex Magnet Wire (Suzhou) Ltd. credit
facilities
|
|
|
|
5,476
|
|
|
|
$
|
78,569
|
|
$
|
65,859
|
|
Long-term debt:
|
|
|
|
|
|
9% senior notes (net of discount of $4,014
and $4,446 at June 30, 2008 and December 31, 2007, respectively)
|
|
$
|
253,086
|
|
$
|
252,654
|
|
Series A redeemable preferred stock of
Superior Essex Holding
|
|
5,000
|
|
5,000
|
|
Term loan of Essex Magnet Wire (Suzhou)
Ltd.
|
|
13,996
|
|
13,143
|
|
3% convertible bonds of Invex
|
|
9,219
|
|
8,432
|
|
Other
|
|
7,932
|
|
8,097
|
|
|
|
289,233
|
|
287,326
|
|
Less current portion of long-term debt
|
|
932
|
|
1,097
|
|
Total long-term debt
|
|
$
|
288,301
|
|
$
|
286,229
|
|
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 Companys 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 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
amended and restated 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. No borrowings were outstanding under the senior secured credit facility
at June 30, 2008 and undrawn availability was $224.5 million.
The senior secured credit facility contains
covenants which may limit Superior Essex Communications and Essex Groups 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.
The indenture governing the 9% senior notes
contains covenants which restrict the ability of the Company and certain of its
subsidiaries to, among other things: incur additional debt and issue preferred
stock; make certain distributions, investments and other restricted payments;
create certain liens; enter into transactions with affiliates; and merge, consolidate
or sell substantially all of the Companys assets.
Subsequent to June 30, 2008, the Company
amended and restated its senior secured credit facility and redeemed the 9%
senior notes and Series A preferred stock of Superior Essex Holding. See
note 15.
15
7.
Income
per share
The computation of basic and diluted income
before extraordinary gain per share for the three and six months ended June 30,
2008 and 2007 is as follows:
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic income before extraordinary gain per
common share
|
|
$
|
19,415
|
|
19,696
|
|
$
|
0.99
|
|
$
|
16,359
|
|
20,253
|
|
$
|
0.81
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
81
|
|
|
|
|
|
96
|
|
|
|
Performance share awards
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
124
|
|
|
|
|
|
178
|
|
|
|
Diluted income before extraordinary gain
per common share
|
|
$
|
19,415
|
|
19,909
|
|
$
|
0.98
|
|
$
|
16,359
|
|
20,527
|
|
$
|
0.80
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic income before extraordinary gain per
common share
|
|
$
|
26,856
|
|
19,729
|
|
$
|
1.36
|
|
$
|
25,517
|
|
20,203
|
|
$
|
1.26
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
81
|
|
|
|
|
|
104
|
|
|
|
Performance share awards
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
107
|
|
|
|
|
|
184
|
|
|
|
Diluted income before extraordinary gain
per common share
|
|
$
|
26,856
|
|
19,921
|
|
$
|
1.35
|
|
$
|
25,517
|
|
20,491
|
|
$
|
1.25
|
|
A total of 835,873 and 219,758 anti-dilutive
weighted average shares with respect to outstanding stock options, restricted
stock awards and contingently issuable performance share awards have been
excluded from the computation of diluted income per share for the three months
ended June 30, 2008 and 2007, respectively. A total of 584,630 and 121,145
anti-dilutive weighted average shares with respect to outstanding stock
options, restricted stock awards and contingently issuable performance share
awards have been excluded from the computation of diluted income per share for
the six months ended June 30, 2008 and 2007, respectively. The potential
dilutive effect of the $6 million Invex convertible bonds has not been
included in the diluted income per share calculations for the three and six
months ended June 30, 2008 as the Company intends to settle the debt in
cash.
8.
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 Companys board of directors was authorized to
grant stock options or restricted stock awards to employees, non-employee
directors and certain service providers. The 2003 Plan permitted 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
stocks fair market value at the date of grant. The term of stock options
granted under the 2003 Plan could not exceed 10 years.
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 Companys 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 stocks 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
16
pursuant to the 2003
Plan. In May 2007 and 2008, the shareholders of the Company approved
amendments to the 2005 Plan to, among other things, increase the number of
shares that may be issued under the Plan by 1,000,000 shares and adjust the
share reserve provisions. Immediately after the 2008 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 6,
2008, plus (iii) shares remaining available for issuance under the 2005
Plan as of May 5, 2008, 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.
In April 2007 and August 2007, the Company
granted performance share awards to certain of the Companys officers and key
employees under the 2005 Plan, as amended. Under the terms of the award the
executives may vest in up to 275,738 shares of the Companys common stock on December 31,
2009 contingent upon meeting specified performance goals during the three-year
period ended December 31, 2009. In April 2008, the Company granted
performance shares to certain of the Companys officers and key employees.
Under the terms of the award the executives may vest in up to 515,534 shares of
the Companys common stock on December 31, 2010 contingent upon meeting
specified performance goals during the three-year period ended December 31,
2010. 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 for the three and six months ended June 30,
2007 increased by $0.4 million and $1.3 million, respectively, as a result of
changes in the estimated number of performance shares that will ultimately
vest. Compensation expense is subject to future adjustment based upon changes
in expected performance.
Total compensation cost related to all stock-based
compensation plans was $0.8 million and $2.0 million for the three months ended
June 30, 2008 and 2007, respectively. Total compensation cost related to
all stock-based compensation plans was $1.7 million and $4.0 million for the
six months ended June 30, 2008 and 2007, respectively. As of June 30,
2008, there was $7.3 million of unrecognized compensation cost related to the
Companys stock-based compensation plans which is expected to be recognized
over a weighted average period of 2.3 years.
The following table summarizes stock option
activity for the six months ended June 30, 2008:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
394,993
|
|
$
|
17.54
|
|
|
|
|
|
Granted
|
|
40,652
|
|
28.76
|
|
|
|
|
|
Exercised
|
|
(79,404
|
)
|
16.06
|
|
|
|
|
|
Forfeitures
|
|
(5,974
|
)
|
16.39
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
350,267
|
|
$
|
19.20
|
|
6.9
|
|
$
|
8,907
|
|
Exercisable at June 30, 2008
|
|
210,641
|
|
$
|
15.86
|
|
6.2
|
|
$
|
6,061
|
|
Options to purchase 40,652 shares and 28,429 shares of
common stock with a weighted average Black Scholes fair value per option of
$13.08 and $16.54 were granted during the six months ended June 30, 2008
and 2007, respectively. The fair value for options granted during the six
months ended June 30, 2008 and 2007 was estimated at the date of grant
using the Black Scholes option pricing model and the following weighted average
assumptions:
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
Volatility
|
|
43
|
%
|
40
|
%
|
Dividend yield
|
|
0
|
%
|
0
|
%
|
Risk-free interest rate
|
|
2.9
|
%
|
4.7
|
%
|
Expected life (years)
|
|
6.2
|
|
6.2
|
|
The expected volatility is estimated using the
historical daily volatility of the Companys stock as well as the historical
volatilities of publicly-traded stock of certain of the Companys 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
17
options. The expected
term was determined using the simplified method, as prescribed by the
Securities and Exchange Commissions Staff Accounting Bulletin No. 107.
The following table summarizes the status of
the Companys unvested share awards, including the performance share awards
discussed above, for the six months ended June 30, 2008:
|
|
Shares
Outstanding
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested share awards outstanding at
December 31, 2007
|
|
422,555
|
|
$
|
31.66
|
|
Granted
|
|
574,383
|
|
29.06
|
|
Vested
|
|
(38,556
|
)
|
28.09
|
|
Forfeited
|
|
(1,768
|
)
|
29.94
|
|
Nonvested share awards outstanding at
June 30, 2008
|
|
956,614
|
|
$
|
30.25
|
|
Nonvested share awards at June 30,
2008 expected to vest
|
|
307,322
|
|
$
|
29.60
|
|
Concurrent with
the completion of the tender offer and purchase of the Companys shares by LS
Cable (see note 1), all outstanding and unexercised options, whether or not
vested, were vested and cancelled and converted to the right to receive a cash
payment from the Company equal to the excess, if any, of $45 over the exercise
price per share of the option. In addition, all outstanding unvested restricted
stock awards, performance share awards and restricted stock units were vested
and cancelled and converted to the right to receive a cash payment of $45 per
share. Outstanding performance share awards were deemed vested at target
performance levels. Upon completion of the merger, all of the Companys stock
plans will be terminated.
9.
Employee
benefits
The components of net periodic benefit cost
of the Companys defined benefit pension plans for the three and six months
ended June 30, 2008 and 2007 are presented below.
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
Service cost
|
|
$
|
787
|
|
$
|
730
|
|
Interest cost
|
|
2,524
|
|
2,250
|
|
Expected return on plan assets
|
|
(2,728
|
)
|
(2,528
|
)
|
Amortization of actuarial losses (gains)
|
|
6
|
|
(5
|
)
|
Amortization of prior service costs
|
|
22
|
|
19
|
|
Curtailment gain
|
|
1,011
|
|
|
|
|
|
$
|
1,622
|
|
$
|
466
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
Service cost
|
|
$
|
1,447
|
|
$
|
1,407
|
|
Interest cost
|
|
5,018
|
|
4,352
|
|
Expected return on plan assets
|
|
(5,459
|
)
|
(4,831
|
)
|
Amortization of actuarial losses (gains)
|
|
6
|
|
(10
|
)
|
Amortization of prior service costs
|
|
41
|
|
38
|
|
Curtailment gain
|
|
1,011
|
|
|
|
|
|
$
|
2,064
|
|
$
|
956
|
|
The Company recognized a curtailment gain of
$1.0 million with respect to its French defined benefit plan in connection with
the closure of its manufacturing facility in Chauny, France (see note 4).
The Companys cash contributions to the
defined benefit plans amounted to $2.0 million and $3.5 million during the
18
six months ended June 30, 2008 and 2007, respectively. The Company
expects to make additional cash contributions of $2.4 million for the remainder
of 2008.
In March 2008, the Compensation
Committee of the Board of Directors adopted an amended and restated Senior
Executive Retirement Plan (the Amended and Restated SERP) to replace the
Companys existing SERP agreement. The Amended and Restated SERP is effective April 1,
2008 and provides for, among other things, a reduction in the benefit accrual
rate from 2.5% per year in the case of the Chief Executive Officer and 2.0% in
the case of the Executive Vice Presidents to 1.5% for periods on and after January 1,
2009. In consideration of this reduction, the Company granted 41,167 restricted
stock awards to the affected officers on April 1, 2008. In connection with
the amendments to the SERP, the Company remeasured the SERP benefit obligation
as of April 1, 2008. The effect of the remeasurement was to increase the
benefit obligation by $1.2 million.
10.
Derivative
financial instruments
The Company, to a limited extent, 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 counterparties for foreign exchange forward contracts, commodity forward
price contracts and commodity futures contracts but the Company does not
anticipate nonperformance by any of these counterparties. 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 Companys most
significant raw material, has historically been subject to considerable
volatility. To manage the risk associated with such volatility, the Company
enters into copper futures purchase contracts to match the metal component of
customer product pricing with the copper 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 transactions are reflected in the statement of operations.
Hedge ineffectiveness, which is not significant, is immediately recognized in
earnings. The Companys copper futures purchase contracts designated as cash
flow hedges are summarized as follows at June 30, 2008 and December 31,
2007:
Type
|
|
Notional
Amount
|
|
Maturity
Date
|
|
Weighted
Average
Contract Rate
|
|
Fair Value
Gain (Loss)
|
|
|
|
(in thousands
of
pounds)
|
|
|
|
|
|
(in
thousands)
|
|
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
Copper
|
|
5,853
|
|
2008
|
|
$
|
3.60
|
|
$
|
1,598
|
|
Copper
|
|
2,133
|
|
2009
|
|
3.69
|
|
268
|
|
|
|
7,986
|
|
|
|
|
|
$
|
1,866
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
Copper
|
|
5,450
|
|
2008
|
|
3.14
|
|
$
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the unrealized gains on commodity
futures outstanding at June 30, 2008 are expected to be reclassified to
earnings within the next twelve months.
The Company also periodically enters into
commodity futures contracts which represent economic hedges but have not been
designated as hedges for accounting purposes (non-designated derivatives).
These futures contracts are intended to minimize the risks associated with
forward product pricing for customers and changing copper prices. The Company
uses copper futures purchase contracts to match the copper component of
customer product pricing with the copper cost component of the inventory
shipped. The Company uses copper futures sales contracts to fix a portion of
the gross margin related to the copper component of certain of our products.
Gains and losses on these non-designated derivatives are recorded in income as
a component of cost of goods sold. Net gains (losses) on non-designated
derivatives were $(1.0) million and $0.6 million, respectively, for the three
and six months ended June 30, 2008. The Company did not enter into any
non-designated derivatives during the six months ended June 30, 2007.
19
The Companys non-designated commodities
futures contracts outstanding at June 30, 2008 and 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)
|
|
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
Copper purchase contracts
|
|
4,207
|
|
2008
|
|
$
|
3.60
|
|
$
|
205
|
|
Copper purchase contracts
|
|
220
|
|
2009
|
|
3.35
|
|
81
|
|
Copper sales contracts
|
|
1,543
|
|
2008
|
|
3.85
|
|
(47
|
)
|
Copper sales contracts
|
|
110
|
|
2009
|
|
3.85
|
|
|
|
|
|
6,080
|
|
|
|
|
|
$
|
239
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
Copper purchase contracts
|
|
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 Companys 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 certain, but not all, of its foreign currency exposures through the use
of non-deliverable foreign currency forward exchange contracts. These contracts
generally have maturities of less than two months and represent non-designated
derivatives. 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. Net gains (losses) recognized on
foreign currency forward exchange contracts were $(0.4) million and $0.9
million for the three and six months ended June 30, 2008, respectively.
The Company also recognized gains of $0.3 million on foreign currency
transactions during the three months ended June 30, 2008 and losses of
$1.6 million on foreign currency transactions during the six months ended June 30,
2008.
20
The following table
summarizes information about foreign currency forward exchange contract
derivatives as of June 30, 2008 and December 31, 2007. These
contracts are generally executed on the last day of the reporting period and
therefore the fair value of contracts outstanding at June 30, 2008 and December 31,
2007 is not significant.
Derivatives
|
|
Notional Amount
|
|
Weighted
Average
Contract Rate
|
|
|
|
(in thousands)
|
|
|
|
June 30, 2008:
|
|
|
|
|
|
|
|
U.S. dollars for Euros
|
|
5,200
|
|
USD
|
|
0.64
|
|
Canadian dollars for U.S. dollars
|
|
1,500
|
|
USD
|
|
1.02
|
|
Canadian dollars for U.S. dollars
|
|
15,000
|
|
CAD
|
|
0.98
|
|
British pounds for Euros
|
|
10,700
|
|
EURO
|
|
0.79
|
|
Euros for U.S. dollars
|
|
3,924
|
|
EURO
|
|
1.57
|
|
British pounds for Euros
|
|
3,000
|
|
GBP
|
|
1.26
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
U.S. dollars for Euros
|
|
4,100
|
|
USD
|
|
0.68
|
|
Canadian dollars for U.S dollars
|
|
4,000
|
|
USD
|
|
0.99
|
|
Canadian dollars for U.S. dollars
|
|
13,000
|
|
CAD
|
|
1.01
|
|
British pounds for Euros
|
|
7,000
|
|
EURO
|
|
0.74
|
|
Euros for U.S. dollars
|
|
1,980
|
|
EURO
|
|
1.46
|
|
British pounds for Euros
|
|
1,700
|
|
GBP
|
|
1.35
|
|
11.
Commitments
and contingencies
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 known
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,
Essex Electric Inc., now known as Exeon Inc. (Exeon), and other
plaintiffs filed lawsuits (the 2003 Copper Action) 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) were held in escrow by plaintiffs counsel (the Escrowed
Settlement Proceeds). The Company and Exeon, each claimed to be entitled to
the Escrowed Settlement Proceeds and filed claims with respect to the Escrowed
Settlement Proceeds and matters related thereto.
In April 2008, the
Company and Exeon reached an agreement to settle their claims. Under this
settlement agreement, the Company received $19.6 million of the Escrowed
Settlement Proceeds. Legal fees relating to the Exeon matter have been expensed
as incurred. The settlement has been reflected as a gain in the accompanying
consolidated statements of operations for the three and six months ended June 30,
2008.
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.
Belden Technologies, Inc.
and Belden CDT (Canada) Inc. v. Superior Essex Inc. and Superior Essex
Communications L.P.,
Case No. 08-63, U.S. District Court for
the District of Delaware. The six patents-in-suit are directed to communication
cables
21
and related manufacturing processes in the premises
products field. Belden completed service of the Complaint and summons upon the
Company on April 10, 2008. The Company will vigorously defend against the
suit.
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
acquisitions. The Company is implementing its code of ethics and procedures to
assure compliance with laws and regulations throughout its operations. Through
its processes to ensure compliance with laws and regulations, in 2007 the
Company 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 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 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 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 Companys facilities in Mexico and China.
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 Companys 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 Internationals exposure, if any, in these
matters will not have a material adverse effect either individually, or in the
aggregate, upon the Companys 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 June 30, 2008. These accruals are not material to the
Companys 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 June 30, 2008, the Company had forward fixed-price copper purchase
commitments for delivery of 29.6 million pounds through April 2009
for $109.1 million. Additionally, at June 30, 2008, the Company had
forward purchase fixed-price commitments for 0.4 million
22
pounds of aluminum through December 2008,
227,000 megawatts of electricity through 2011 and 120,000 MMBTUs of natural gas
through December 2008 amounting to $0.6 million, $21.2 million and
$1.0 million, respectively.
Other
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 purchases at times and prices considered attractive. The
Company had repurchased 366,118 shares for $9.1 million as of December 31,
2007. In January 2008, the Company purchased an additional 495,661 shares
for $10.9 million and completed its repurchases under the plan. The share
repurchases were pursuant to a 10b5-1 trading plan. The Company repurchased a
total of 861,779 shares at an average price of $23.21 per share.
In connection with the execution of the Agreement
with LS Cable (see note 1), the Company entered into amended and restated
employment agreements with its chief executive officer and certain of its
executive vice presidents. The amended and restated employment agreements will
become effective upon completion of the tender offer for a term of two years
with automatic one-year renewals unless cancelled by either party upon 90 days
prior written notice. As an inducement to each of the executives to remain
employed by the Company, and in lieu of cash severance in the event of a
termination of employment by the Company without cause or resignation by the
executives for good reason during the initial term of the employment
agreements, the amended and restated employment agreements provide for an
aggregate signing bonus of $6.3 million payable on the later of January 2,
2009 or the third business day following the completion of the tender offer. In
addition, the amended and restated employment agreements provide for an
aggregate retention bonus of $2.1 million payable 18 months after completion of
the tender offer, subject to the executives continued employment through the
payment date.
12.
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 $52.6 million and $96.2 million for the three months ended June 30,
2008 and 2007, respectively, and $113.8 million and $171.1 million for the six
months ended June 30, 2008 and 2007, respectively. In December 2007,
Nexans provided notice that they did not intend to renew the pre-drawn wire
agreement under the current terms and conditions.
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 $5.3 million and $5.4 million for the three
months ended June 30, 2008 and 2007, respectively, and $11.0 million and
$11.7 million for the six months ended June 30, 2008 and 2007,
respectively. The Companys equity in the loss of Femco was $0.5 million and
$0.3 million for the six months ended June 30, 2008 and 2007,
respectively.
13.
Business
segments
The Company manufactures a portfolio of wire and cable
products for the communications, energy, automotive, industrial, and
commercial/residential end markets grouped into the following reportable
segments: (i) communications cable, (ii) North American magnet wire
and distribution, (iii) European magnet wire and distribution, (iv) Asia/Pacific
magnet wire and (v) copper rod. The communications cable segment
manufactures and markets 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 Companys
23
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 Companys 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 4.
The Companys chief operating decision maker evaluates
segment performance based on a number of factors with operating income, excluding
corporate and other costs and restructuring and other charges, being the most
critical. Accordingly, corporate and other costs and restructuring and other
charges are not allocated to the Companys reportable segments.
Financial information with respect to reportable
segments is presented below. Corporate and other items shown below are provided
to reconcile to the accompanying consolidated statements of operations.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
213,741
|
|
$
|
235,738
|
|
$
|
410,217
|
|
$
|
451,736
|
|
North American magnet wire and distribution
|
|
312,834
|
|
296,045
|
|
608,613
|
|
542,759
|
|
European magnet wire and distribution
|
|
268,066
|
|
175,541
|
|
502,025
|
|
335,934
|
|
Asia/Pacific magnet wire
|
|
25,030
|
|
281
|
|
41,714
|
|
407
|
|
Copper rod
|
|
12,182
|
|
64,835
|
|
26,444
|
|
137,232
|
|
|
|
$
|
831,853
|
|
$
|
772,440
|
|
$
|
1,589,013
|
|
$
|
1,468,068
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
21,229
|
|
$
|
25,911
|
|
$
|
40,143
|
|
$
|
43,912
|
|
North American magnet wire and distribution (1)
|
|
13,171
|
|
12,813
|
|
18,969
|
|
22,335
|
|
European magnet wire and distribution (2)
|
|
7,410
|
|
5,801
|
|
13,817
|
|
11,856
|
|
Asia/Pacific magnet wire
|
|
(451
|
)
|
(1,152
|
)
|
(32
|
)
|
(2,128
|
)
|
Copper rod (3)
|
|
1,290
|
|
(136
|
)
|
(19
|
)
|
(182
|
)
|
Corporate and other
|
|
(6,147
|
)
|
(6,773
|
)
|
(13,978
|
)
|
(13,683
|
)
|
Income from settlement of litigation
|
|
19,584
|
|
|
|
19,584
|
|
|
|
Restructuring and other charges
|
|
(18,562
|
)
|
(413
|
)
|
(20,683
|
)
|
(1,287
|
)
|
|
|
$
|
37,524
|
|
$
|
36,051
|
|
$
|
57,801
|
|
$
|
60,823
|
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(in thousands)
|
|
Total assets:
|
|
|
|
|
|
Communications cable
|
|
$
|
382,720
|
|
$
|
377,895
|
|
North American magnet wire and distribution
|
|
349,944
|
|
336,231
|
|
European magnet wire and distribution
|
|
465,152
|
|
405,307
|
|
Asia/Pacific magnet wire
|
|
91,106
|
|
74,746
|
|
Copper rod
|
|
11,802
|
|
15,560
|
|
Corporate and other
|
|
8,963
|
|
5,651
|
|
|
|
$
|
1,309,687
|
|
$
|
1,215,390
|
|
(1)
Includes $2.9
million and $9.0 million of accelerated depreciation charges related to restructuring
activities for the three and six months ended June, 2008, respectively (see
note 4).
(2)
Includes $1.2
million of accelerated depreciation charges related to restructuring activities
for the three and six months ended June 30, 2008, respectively (see note
4).
(3)
Includes $1.3
million of accelerated depreciation charges related to restructuring activities
for the three and six months ended June 30, 2008 (see note 4).
24
14.
Supplemental
guarantor information
The 9% senior unsecured notes 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 Companys 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.
Balance Sheet Information
June 30, 2008
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,720
|
|
$
|
55,425
|
|
$
|
393
|
|
$
|
15,924
|
|
$
|
|
|
$
|
79,462
|
|
Accounts receivable, net
|
|
|
|
226,379
|
|
3,210
|
|
268,992
|
|
|
|
498,581
|
|
Inventories, net
|
|
|
|
161,691
|
|
19,706
|
|
139,433
|
|
|
|
320,830
|
|
Other current assets
|
|
1,570
|
|
6,973
|
|
593
|
|
20,575
|
|
(2,403
|
)
|
27,308
|
|
Total current assets
|
|
9,290
|
|
450,468
|
|
23,902
|
|
444,924
|
|
(2,403
|
)
|
926,181
|
|
Property, plant and equipment, net
|
|
2,011
|
|
174,280
|
|
17,986
|
|
140,618
|
|
|
|
334,895
|
|
Intangible and other long-term assets
|
|
12,469
|
|
28,176
|
|
11
|
|
20,829
|
|
(12,874
|
)
|
48,611
|
|
Investment in subsidiaries
|
|
319,503
|
|
181,484
|
|
250,191
|
|
|
|
(751,178
|
)
|
|
|
Intercompany accounts
|
|
153,986
|
|
|
|
42,695
|
|
|
|
(196,681
|
)
|
|
|
Total assets
|
|
$
|
497,259
|
|
$
|
834,408
|
|
$
|
334,785
|
|
$
|
606,371
|
|
$
|
(963,136
|
)
|
$
|
1,309,687
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
78,569
|
|
$
|
|
|
$
|
78,569
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
932
|
|
|
|
932
|
|
Accounts payable
|
|
1,079
|
|
123,230
|
|
5,973
|
|
141,305
|
|
|
|
271,587
|
|
Accrued expenses
|
|
11,280
|
|
28,058
|
|
395
|
|
83,847
|
|
(2,403
|
)
|
121,177
|
|
Total current liabilities
|
|
12,359
|
|
151,288
|
|
6,368
|
|
304,653
|
|
(2,403
|
)
|
472,265
|
|
Long term-debt
|
|
|
|
260,086
|
|
5,000
|
|
23,215
|
|
|
|
288,301
|
|
Other long-term liabilities
|
|
24,678
|
|
37,817
|
|
3,914
|
|
32,230
|
|
(12,874
|
)
|
85,765
|
|
Intercompany accounts
|
|
|
|
61,442
|
|
|
|
135,239
|
|
(196,681
|
)
|
|
|
Total liabilities
|
|
37,037
|
|
510,633
|
|
15,282
|
|
495,337
|
|
(211,958
|
)
|
846,331
|
|
Minority interest
|
|
|
|
|
|
|
|
3,134
|
|
|
|
3,134
|
|
Stockholders equity
|
|
460,222
|
|
323,775
|
|
319,503
|
|
107,900
|
|
(751,178
|
)
|
460,222
|
|
|
|
$
|
497,259
|
|
$
|
834,408
|
|
$
|
334,785
|
|
$
|
606,371
|
|
$
|
(963,136
|
)
|
$
|
1,309,687
|
|
25
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
|
|
26
Statement of Operations Information
Three Months Ended June 30, 2008
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
6,148
|
|
$
|
506,061
|
|
$
|
83,375
|
|
$
|
334,665
|
|
$
|
(98,396
|
)
|
$
|
831,853
|
|
Cost of goods sold
|
|
|
|
456,858
|
|
77,822
|
|
312,467
|
|
(92,248
|
)
|
754,899
|
|
Gross profit
|
|
6,148
|
|
49,203
|
|
5,553
|
|
22,198
|
|
(6,148
|
)
|
76,954
|
|
Selling, general and administrative expenses
|
|
(6,148
|
)
|
(27,478
|
)
|
(182
|
)
|
(12,792
|
)
|
6,148
|
|
(40,452
|
)
|
Restructuring and other charges
|
|
(2,656
|
)
|
(1,568
|
)
|
(439
|
)
|
(13,899
|
)
|
|
|
(18,562
|
)
|
Income from settlement of litigation
|
|
19,584
|
|
|
|
|
|
|
|
|
|
19,584
|
|
Operating income (loss)
|
|
16,928
|
|
20,157
|
|
4,932
|
|
(4,493
|
)
|
|
|
37,524
|
|
Interest expense
|
|
|
|
(7,200
|
)
|
(119
|
)
|
(3,872
|
)
|
2,639
|
|
(8,552
|
)
|
Interest income
|
|
2,186
|
|
192
|
|
510
|
|
67
|
|
(2,639
|
)
|
316
|
|
Other income (expense), net
|
|
1
|
|
19
|
|
7
|
|
(43
|
)
|
|
|
(16
|
)
|
Income (loss) before income taxes, equity in earnings of subsidiaries
and minority interest
|
|
19,115
|
|
13,168
|
|
5,330
|
|
(8,341
|
)
|
|
|
29,272
|
|
Income tax benefit (expense)
|
|
(5,115
|
)
|
(5,254
|
)
|
(1,857
|
)
|
2,372
|
|
|
|
(9,854
|
)
|
Equity in earnings of subsidiaries
|
|
5,415
|
|
(2,420
|
)
|
1,519
|
|
|
|
(4,514
|
)
|
|
|
Minority interest in income of subsidiary
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net income (loss)
|
|
$
|
19,415
|
|
$
|
5,494
|
|
$
|
4,992
|
|
$
|
(5,972
|
)
|
$
|
(4,514
|
)
|
$
|
19,415
|
|
27
Statement of Operations Information
Three Months Ended June 30, 2007
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
6,922
|
|
$
|
569,055
|
|
$
|
70,727
|
|
$
|
205,396
|
|
$
|
(79,660
|
)
|
$
|
772,440
|
|
Cost of goods sold
|
|
|
|
515,512
|
|
64,355
|
|
190,860
|
|
(72,738
|
)
|
697,989
|
|
Gross profit
|
|
6,922
|
|
53,543
|
|
6,372
|
|
14,536
|
|
(6,922
|
)
|
74,451
|
|
Selling, general and administrative expenses
|
|
(6,766
|
)
|
(29,765
|
)
|
(185
|
)
|
(8,193
|
)
|
6,922
|
|
(37,987
|
)
|
Restructuring and other charges
|
|
(121
|
)
|
(248
|
)
|
|
|
(44
|
)
|
|
|
(413
|
)
|
Operating income
|
|
35
|
|
23,530
|
|
6,187
|
|
6,299
|
|
|
|
36,051
|
|
Interest expense
|
|
(1
|
)
|
(8,222
|
)
|
(119
|
)
|
(1,591
|
)
|
2,461
|
|
(7,472
|
)
|
Interest income
|
|
1,919
|
|
893
|
|
518
|
|
|
|
(2,461
|
)
|
869
|
|
Other income, net
|
|
(35
|
)
|
295
|
|
(4
|
)
|
(153
|
)
|
|
|
103
|
|
Income before income taxes, equity in earnings of subsidiaries,
minority interest and extraordinary gain
|
|
1,918
|
|
16,496
|
|
6,582
|
|
4,555
|
|
|
|
29,551
|
|
Income tax expense
|
|
(859
|
)
|
(6,377
|
)
|
(2,335
|
)
|
(2,314
|
)
|
|
|
(11,885
|
)
|
Equity in earnings of subsidiaries
|
|
15,300
|
|
5,258
|
|
11,053
|
|
|
|
(31,611
|
)
|
|
|
Minority interest in income of subsidiaries
|
|
|
|
|
|
|
|
(1,307
|
)
|
|
|
(1,307
|
)
|
Extraordinary gain
|
|
3,539
|
|
3,539
|
|
3,539
|
|
3,189
|
|
(10,267
|
)
|
3,539
|
|
Net income
|
|
$
|
19,898
|
|
$
|
18,916
|
|
$
|
18,839
|
|
$
|
4,123
|
|
$
|
(41,878
|
)
|
$
|
19,898
|
|
28
Statement of Operations Information
Six Months Ended June 30, 2008
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
13,828
|
|
$
|
979,068
|
|
$
|
145,793
|
|
$
|
624,197
|
|
$
|
(173,873
|
)
|
$
|
1,589,013
|
|
Cost of goods sold
|
|
|
|
890,749
|
|
135,223
|
|
580,086
|
|
(160,045
|
)
|
1,446,013
|
|
Gross profit
|
|
13,828
|
|
88,319
|
|
10,570
|
|
44,111
|
|
(13,828
|
)
|
143,000
|
|
Selling, general and administrative expenses
|
|
(13,828
|
)
|
(58,249
|
)
|
(362
|
)
|
(25,489
|
)
|
13,828
|
|
(84,100
|
)
|
Restructuring and other charges
|
|
(2,656
|
)
|
(3,530
|
)
|
(479
|
)
|
(14,018
|
)
|
|
|
(20,683
|
)
|
Income from settlement of litigation
|
|
19,584
|
|
|
|
|
|
|
|
|
|
19,584
|
|
Operating income
|
|
16,928
|
|
26,540
|
|
9,729
|
|
4,604
|
|
|
|
57,801
|
|
Interest expense
|
|
|
|
(14,661
|
)
|
(238
|
)
|
(7,140
|
)
|
5,169
|
|
(16,870
|
)
|
Interest income
|
|
4,315
|
|
721
|
|
915
|
|
128
|
|
(5,169
|
)
|
910
|
|
Other income (expense), net
|
|
30
|
|
(546
|
)
|
(23
|
)
|
(629
|
)
|
|
|
(1,168
|
)
|
Income (loss) before income taxes, equity in earnings of subsidiaries
and minority interest
|
|
21,273
|
|
12,054
|
|
10,383
|
|
(3,037
|
)
|
|
|
40,673
|
|
Income tax benefit (expense)
|
|
(5,781
|
)
|
(5,035
|
)
|
(3,648
|
)
|
893
|
|
|
|
(13,571
|
)
|
Equity in earnings of subsidiaries
|
|
11,364
|
|
4,505
|
|
4,629
|
|
|
|
(20,498
|
)
|
|
|
Minority interest in income of subsidiary
|
|
|
|
|
|
|
|
(246
|
)
|
|
|
(246
|
)
|
Net income (loss)
|
|
$
|
26,856
|
|
$
|
11,524
|
|
$
|
11,364
|
|
$
|
(2,390
|
)
|
$
|
(20,498
|
)
|
$
|
26,856
|
|
29
Statement of Operations Information
Six Months Ended June 30, 2007
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
13,859
|
|
$
|
1,098,222
|
|
$
|
122,989
|
|
$
|
374,208
|
|
$
|
(141,210
|
)
|
$
|
1,468,068
|
|
Cost of goods sold
|
|
|
|
999,288
|
|
113,148
|
|
347,287
|
|
(127,351
|
)
|
1,332,372
|
|
Gross profit
|
|
13,859
|
|
98,934
|
|
9,841
|
|
26,921
|
|
(13,859
|
)
|
135,696
|
|
Selling, general and administrative expenses
|
|
(13,669
|
)
|
(58,324
|
)
|
(367
|
)
|
(15,085
|
)
|
13,859
|
|
(73,586
|
)
|
Restructuring and other charges
|
|
(201
|
)
|
(287
|
)
|
|
|
(799
|
)
|
|
|
(1,287
|
)
|
Operating income (loss)
|
|
(11
|
)
|
40,323
|
|
9,474
|
|
11,037
|
|
|
|
60,823
|
|
Interest expense
|
|
(3
|
)
|
(16,604
|
)
|
(238
|
)
|
(2,480
|
)
|
4,203
|
|
(15,122
|
)
|
Interest income
|
|
3,677
|
|
1,623
|
|
518
|
|
|
|
(4,203
|
)
|
1,615
|
|
Other income (expense), net
|
|
11
|
|
(235
|
)
|
(15
|
)
|
(409
|
)
|
|
|
(648
|
)
|
Income before income taxes, equity in earnings of subsidiaries,
minority interest and extraordinary gain
|
|
3,674
|
|
25,107
|
|
9,739
|
|
8,148
|
|
|
|
46,668
|
|
Income tax expense
|
|
(1,509
|
)
|
(9,336
|
)
|
(3,550
|
)
|
(4,399
|
)
|
|
|
(18,794
|
)
|
Equity in earnings of subsidiaries
|
|
23,352
|
|
7,736
|
|
17,163
|
|
|
|
(48,251
|
)
|
|
|
Minority interest in income of subsidiaries
|
|
|
|
|
|
|
|
(2,357
|
)
|
|
|
(2,357
|
)
|
Extraordinary gain
|
|
3,539
|
|
3,539
|
|
3,539
|
|
3,189
|
|
(10,267
|
)
|
3,539
|
|
Net income
|
|
$
|
29,056
|
|
$
|
27,046
|
|
$
|
26,891
|
|
$
|
4,581
|
|
$
|
(58,518
|
)
|
$
|
29,056
|
|
30
Statement of Cash Flows Information
Six Months Ended June 30, 2008
|
|
Parent
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash flows provided by (used for) operating
activities
|
|
$
|
26,080
|
|
$
|
(8,887
|
)
|
$
|
774
|
|
$
|
(8,164
|
)
|
$
|
|
|
$
|
9,803
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(672
|
)
|
(7,867
|
)
|
(4,416
|
)
|
(17,095
|
)
|
|
|
(30,050
|
)
|
Acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
(2,965
|
)
|
|
|
(2,965
|
)
|
Investment in subsidiaries
|
|
|
|
(12,000
|
)
|
|
|
|
|
12,000
|
|
|
|
Dividends received
|
|
|
|
|
|
238
|
|
|
|
(238
|
)
|
|
|
Other
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
Intercompany accounts
|
|
(8,839
|
)
|
|
|
3,629
|
|
|
|
5,210
|
|
|
|
Cash flows used for investing activities
|
|
(9,511
|
)
|
(19,835
|
)
|
(549
|
)
|
(20,060
|
)
|
16,972
|
|
(32,983
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings, net
|
|
|
|
|
|
|
|
7,616
|
|
|
|
7,616
|
|
Repayments of long-term debt
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
(250
|
)
|
Proceeds from exercise of stock options and
employee stock purchases
|
|
1,278
|
|
|
|
|
|
|
|
|
|
1,278
|
|
Capital contributions
|
|
|
|
|
|
|
|
3,000
|
|
(3,000
|
)
|
|
|
Treasury stock purchases
|
|
(10,869
|
)
|
|
|
|
|
|
|
|
|
(10,869
|
)
|
Dividends paid
|
|
|
|
(238
|
)
|
|
|
|
|
238
|
|
|
|
Other
|
|
562
|
|
|
|
|
|
|
|
|
|
562
|
|
Intercompany accounts
|
|
|
|
5,006
|
|
|
|
9,204
|
|
(14,210
|
)
|
|
|
Cash flows provided by (used for) financing
activities
|
|
(9,029
|
)
|
4,768
|
|
|
|
19,570
|
|
(16,972
|
)
|
(1,663
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
1,628
|
|
|
|
1,628
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
7,540
|
|
(23,954
|
)
|
225
|
|
(7,026
|
)
|
|
|
(23,215
|
)
|
Cash and cash equivalents at beginning of
period
|
|
180
|
|
79,379
|
|
168
|
|
22,950
|
|
|
|
102,677
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,720
|
|
$
|
55,425
|
|
$
|
393
|
|
$
|
15,924
|
|
$
|
|
|
$
|
79,462
|
|
31
Statement of Cash Flows Information
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Guarantor
|
|
|
|
|
|
|
|
Parent
|
|
Issuers
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash flows provided by operating (used for)
activities
|
|
$
|
10,242
|
|
$
|
65,258
|
|
$
|
7,273
|
|
$
|
(5,933
|
)
|
$
|
|
|
$
|
76,840
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(210
|
)
|
(6,818
|
)
|
(88
|
)
|
(11,235
|
)
|
|
|
(18,351
|
)
|
Acquisitions
|
|
(1,059
|
)
|
|
|
|
|
(47,275
|
)
|
|
|
(48,334
|
)
|
Investment in subsidiaries
|
|
|
|
(9,000
|
)
|
|
|
|
|
9,000
|
|
|
|
Dividends received
|
|
|
|
1,295
|
|
237
|
|
|
|
(1,532
|
)
|
|
|
Intercompany accounts
|
|
(13,144
|
)
|
|
|
(6,080
|
)
|
|
|
19,224
|
|
|
|
Other
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
Cash flows provided by (used for) investing
activities
|
|
(14,413
|
)
|
(14,497
|
)
|
(5,931
|
)
|
(58,510
|
)
|
26,692
|
|
(66,659
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings, net
|
|
|
|
|
|
|
|
6,551
|
|
|
|
6,551
|
|
Repayments of long-term debt
|
|
|
|
|
|
|
|
(15,021
|
)
|
|
|
(15,021
|
)
|
Proceeds from exercise of stock options and
employee stock purchases
|
|
2,413
|
|
|
|
|
|
|
|
|
|
2,413
|
|
Capital contributions
|
|
|
|
|
|
|
|
7,200
|
|
(7,200
|
)
|
|
|
Dividends paid
|
|
|
|
(237
|
)
|
(1,295
|
)
|
|
|
1,532
|
|
|
|
Other
|
|
1,737
|
|
|
|
|
|
|
|
|
|
1,737
|
|
Intercompany accounts
|
|
|
|
(44,260
|
)
|
|
|
65,284
|
|
(21,024
|
)
|
|
|
Cash flows provided by (used for) financing
activities
|
|
4,150
|
|
(44,497
|
)
|
(1,295
|
)
|
64,014
|
|
(26,692
|
)
|
(4,320
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
(611
|
)
|
|
|
(611
|
)
|
Net increase (decrease) in cash and cash
equivalents
|
|
(21
|
)
|
6,264
|
|
47
|
|
(1,040
|
)
|
|
|
5,250
|
|
Cash and cash equivalents at beginning of
period
|
|
94
|
|
44,071
|
|
2
|
|
9,326
|
|
|
|
53,493
|
|
Cash and cash equivalents at end of period
|
|
$
|
73
|
|
$
|
50,335
|
|
$
|
49
|
|
$
|
8,286
|
|
$
|
|
|
$
|
58,743
|
|
15.
Subsequent
event
Subsequent to June 30, 2008, the Company was
acquired by LS Cable (see note 1). In connection with the acquisition, Superior
Essex Communications, Essex Group and Essex Group Canada, as borrowers, entered
into a second amended and restated loan agreement (the loan agreement) and
related security agreements, guaranties and other agreements with a syndicate of
financial institutions. This loan agreement amends and supplements the
Companys existing senior secured credit facility.
32
The amended and
restated loan agreement provides for senior secured asset-backed revolving
credit facilities (the new senior secured revolving credit facilities) in an
aggregate principal amount up to $350 million, consisting a U.S. revolver
facility of up to $330 million that may be borrowed by Superior Essex
Communications and Essex Group, and a Canadian revolver facility of up to the
U.S. dollar equivalent of $20 million that may be borrowed by Essex Group
Canada in either U.S. dollars or Canadian dollars. The principal amount
outstanding of the loans under the new senior secured revolving credit
facilities will be due and payable in full August, 2013.
Borrowings under the new senior secured credit facilities
bear interest at a per
annum rate equal to an applicable margin plus, at the applicable borrowers
option, either (1) if the loans are made in U.S. dollars, (a) the
adjusted LIBOR rate or (b) a U.S. base rate determined by reference to the
greater of (i) the U.S. prime rate and (ii) the federal funds rate
plus 0.50% or, (2) if the loans are made in Canadian dollars, (a) the
average rate applicable to Canadian dollar bankers acceptances, (b) the
Canadian prime rate or (c) the Canadian base rate.
The initial
applicable margin for borrowings under the senior secured term loan facilities
will be 0.50% with respect to U.S. base rate or Canadian base rate borrowings,
1.00% with respect to Canadian prime rate borrowings and 2.25% with respect to
LIBOR and Canadian BA rate borrowings. The initial applicable margin for
borrowings under the senior secured revolving credit facilities will be 0.25%
with respect to U.S. base rate or Canadian base rate borrowings, 0.75% with
respect to Canadian prime rate borrowings and 2.00% with respect to LIBOR and
Canadian BA rate borrowings. The applicable margin under the new senior secured
credit facilities may be adjusted based upon the average aggregate amount of
availability under the new senior secured revolving credit facilities, subject
to decrease if the Company, exclusive of its European Chinese subsidiaries, maintains
a total leverage ratio below a predetermined threshold.
The loan agreement
requires the borrowers to prepay any outstanding revolver loans with certain
extraordinary receipts, such as tax refunds, indemnity payments, pension
reversions and certain insurance proceeds. The borrowers may voluntarily prepay
outstanding loans under the new senior secured credit facilities at any time
without premium or penalty, other than customary breakage costs with respect
to LIBOR loans.
All obligations
under the new senior secured credit facilities are unconditionally guaranteed
by the Company and, subject to certain agreed-upon exceptions, each of the
Companys existing and future direct and indirect wholly-owned domestic
subsidiaries. All of the obligations
under the new senior secured credit facilities are secured, subject to
permitted liens and other agreed upon exceptions, by the Companys equity
interests in the borrowers, and by substantially all of the assets of the
borrowers and certain of the Companys other subsidiaries (which pledges are,
in the case of any foreign subsidiary, limited to 100% of the non-voting stock
(if any) and 65% of the voting stock of such foreign subsidiary).
The new senior
secured credit facilities contain a number of covenants that, among other
things and subject to certain agreed-upon exceptions, restrict the ability of
the borrowers and their subsidiaries to:
·
incur additional debt;
·
make distributions to the Company and its direct or
indirect parent companies, or redeem, repurchase or retire certain debt prior
to scheduled maturity;
·
make investments, loans, capital expenditures and
acquisitions;
·
pay dividends or other amounts to the borrowers from
their subsidiaries;
·
engage in transactions with affiliates of the
borrowers;
·
sell assets;
·
consolidate, merge, amalgamate, liquidate or wind up;
·
enter in hedging agreements other than ordinary course
of business hedges; and
·
create liens.
The amended and
restated loan agreement provides that at any time that availability under the
new senior secured revolving credit facilities falls below certain
predetermined thresholds, the borrowers are required to comply with a covenant
specifying a minimum ratio of consolidated EBITDA to the aggregate outstanding
principal and interest payments on certain debt (subject, in each case, to
certain customary exclusions). Failure to comply with such financial
maintenance ratio would constitute an event of default.
33
The amended and restated
loan agreement governing the new senior
secured credit facilities also contains certain customary affirmative covenants
and events of default.
A total of $275 million was
borrowed under the amended and restated credit facility upon closing. The
borrowed funds, together with cash on hand and intercompany loans and
investments from LS Cable was used to (i) defease and redeem the
outstanding 9% senior notes at 104.5% of par plus accrued interest ($277
million), (ii) redeem the outstanding Series A preferred stock of
Superior Essex Holding at par plus accrued interest, (iii) pay transaction
costs of approximately $31 million and (iv) fund payments of approximately
$36 million with respect to outstanding options and stock awards (see note 8).
In connection with the
merger and acquisition, Cyprus issued 172,660 shares of Series A voting
redeemable convertible preferred stock (the new series A preferred stock).
Proceeds from the issuance of the new Series A preferred stock amounted to
$172.7 million and were used by Cyprus to purchase outstanding shares of our
common stock pursuant to the Agreement and Plan of Merger. The new Series A
preferred stock will be a security of the Company upon completion of the merger
of Cyprus with and into Superior Essex Inc.
Holders of the new Series A
preferred stock are entitled to receive cumulative cash dividends payable
semi-annually in an amount equal to the greater of (i) $17.50 per share
and (ii) the aggregate per share amount of dividends or other
distributions on the common stock of Superior Essex Inc. The new Series A
preferred stock has a liquidation preference of $1,000 per share plus
accumulated and unpaid dividends. Each share of new Series A preferred
stock is automatically convertible 6 ½ years from the date of issue, or earlier
at the option of the holder, into one share of common stock of Superior Essex
Inc. Each share of new Series A preferred stock shall have one vote with
respect to all matters voted on by holders of the common stock of Superior
Essex Inc. The new Series A preferred stock is subject to redemption, in
whole but not in part, at the option of the holder at a price equal to (i) the
liquidation preference plus assumed dividends calculated thereon at 7% per
annum compounded annually, less (ii) dividends paid prior to the date of
redemption plus assumed dividends thereon calculated at 7% per annum compounded
annually from the date of such payment to the date of redemption.
34
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
General
We currently manufacture a portfolio of wire and cable products for the
communications, energy, automotive, industrial, and commercial/residential
end-markets grouped into the following segments: (i) communications cable,
(ii) North American magnet wire and distribution, (iii) European
magnet wire and distribution, (iv) Asia/Pacific magnet wire and (v)
copper rod. As a result of the Tianjin acquisition and certain management
reporting changes implemented during 2007, we began reporting a new segment,
the Asia/Pacific magnet wire segment. The Asia/Pacific magnet wire segment
includes the Tianjin, China business and our manufacturing operations in
Suzhou, China. Prior to the third quarter of 2007, the operations of the Suzhou
facility were 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.
Industry segment financial data for the three and six months ended June 30,
2008 and 2007 is included in Note 13 to the accompanying condensed
consolidated financial statements.
Overview
Our results for the three and six months
ended June 30, 2008 were significantly impacted by several factors. The
Invex, Simcoe and Tianjin acquisitions (see note 5 to the consolidated
financial statements) completed in the second and third quarters of 2007
contributed incremental sales of $108 million and $222 million and operating
income of $3.7 million and $10.2 million for the three six months ended June 30,
2008, respectively. In June 2007, we also acquired Nexans 40% minority
interest in Essex Europe (see note 5 to the consolidated financial
statements) thus eliminating the minority interest charge against the net
income of Essex Europe in subsequent periods. The negative impact on demand for
our products experienced in 2007 as a result of weakness in the U.S.
residential construction and housing market and soft demand in North American
and European manufacturing sectors has continued into 2008, and this trend is
expected to continue for the remainder of 2008. Excluding the impact of
business acquisitions made in 2007, all of our business segments, other than
our start-up operation in China, experienced reductions in sales volumes for
the three and six months ended June 30, 2008 as compared to the prior
comparable periods. Our results for the three and six months ended June 30,
2008 compared to the three and six months ended June 30, 2007 reflect the
favorable effects of the strengthened Euro to U.S. dollar exchange rate on the
translation of our European magnet wire and distribution segment operating
results. The average Euro to U.S. dollar exchange rate used to translate our
European magnet wire and distribution segment operating results increased 16%
for the three months ended June 30, 2008 compared to the three months
ended June 30, 2007 and 15% for the six months ended June 30, 2008
compared to the six months ended June 30, 2007.
Our operating income for the three months
ended June 30, 2008 increased $1.5 million compared to the three months
ended June 30, 2007 and decreased $3.0 million for the six months ended June 30,
2008 compared to the six months ended June 30, 2007. Operating income in
2008 was significantly impacted by the Invex, Simcoe and Tianjin acquisitions
which contributed incremental operating income of $3.7 million and $10.2
million for the three and six months ended June 30, 2008, respectively, as
compared to the respective 2007 periods. These positive contributions were
offset by accelerated depreciation of $4.1 million and $11.5 charged to costs
of goods sold for the three and six months ended June 30, 2008,
respectively, associated with the 2008 restructuring of our European and North
American magnet wire and distribution segments and copper rod segment as
discussed further below. Gross margin improvements, exclusive of the impacts of
the restructuring costs, in our communications cable and North American magnet
wire and distribution segments together partially offset the effects of sales
volume declines in 2008. Restructuring and other costs of $20.7 million for the
six months ended June 30, 2008 were substantially offset by a $19.6
million gain recognized from the settlement of the Exeon litigation in April 2008.
Copper is the primary raw material we use in
the manufacture of our wire and cable products. Over the past three years the
price of copper has escalated rapidly and has been subject to significant
volatility. We expect continued volatility in copper prices in the future.
Although we generally have the ability to adjust prices billed for our products
to properly match the copper cost component, rapid and significant fluctuations
in copper prices can impact our results. Additionally, changes in copper prices
impact our reported sales and gross margins due to the general pass through of
copper costs. The average daily COMEX price per pound of copper for the three
and six months ended June 30, 2008 increased approximately 10% and 19%
respectively, as compared to the three and six months ended June 30, 2007.
We estimate that our sales for the three and six
35
months ended June 30,
2008 increased approximately $49 million and $116 million compared to the three
and six months ended June 30, 2007 as a result of increased copper prices.
Tender Offer and Merger
On June 11, 2008, the Company entered
into an Agreement and Plan of Merger (the Agreement) with LS Cable Ltd. (LS Cable),
a Korean company. Under the terms of the agreement, Cyprus Acquisition Merger
Sub Inc. (Cyprus), an indirect wholly-owned subsidiary of LS Cable, made a
cash tender offer to purchase all of the outstanding shares of Superior Essex
common stock for $45.00 per share. On August 4, 2008, Cyprus completed the
tender offer and acquired approximately 92% of the outstanding common stock of
Superior Essex Inc. In accordance with the terms of the Agreement, LS Cable will
merge Cyprus with and into Superior Essex Inc. and all remaining Superior Essex
Inc. common shares will be cancelled in exchange for the right to receive a
cash payment of $45 per share. Upon completion of the merger Superior Essex
Inc. will be an indirect subsidiary of LS Cable.
Results of Operations
Non-GAAP Financial Measures
In discussing our results of operations below, we present supplemental
net sales information adjusted to a constant $3.00/lb COMEX cost of copper for
our North American operations (or the equivalent SHME per kilogram value for
our China operations) and 4.90 per kilogram for our European operations, which
we refer to as copper-adjusted net sales or sales adjusted for a constant cost
of copper. We also present and discuss copper-adjusted gross profit margin
(gross profit divided by copper-adjusted net sales). Copper-adjusted net sales
and copper-adjusted gross profit margin are financial measures that are not
calculated in accordance with accounting principles generally accepted in the
United States of America, or non-GAAP financial measures. A non-GAAP financial
measure is defined as a numerical measure of a companys financial performance,
financial position or cash flows that (i) excludes amounts, or is subject
to adjustments that have the effect of excluding amounts, that are included in
the most directly comparable measure calculated and presented in accordance
with GAAP in the statement of operations, balance sheet or statement of cash
flows; or (ii) includes amounts, or is subject to adjustments that have
the effect of including amounts, that are excluded from the comparable measure
so calculated and presented. We believe sales adjusted for a constant cost of
copper and copper-adjusted gross profit margin are useful measures to aid in
analyzing period-to-period net sales and gross profit margins, particularly in
periods of changing copper prices. We also use copper-adjusted sales to
evaluate performance for certain executive compensation programs.
Copper-adjusted net sales has distinct limitations as compared to GAAP net
sales. By copper-adjusting net sales, in a declining copper cost environment,
it may not be apparent that net sales are declining on an actual basis.
Furthermore, by copper-adjusting gross profit margins in a rising copper cost
environment, it may not be apparent that the gross profit margins are declining
on an actual basis. Management compensates for these limitations by using the
GAAP results in conjunction with copper-adjusted net sales and gross profit
margins. Net sales adjusted for a constant cost of copper and copper-adjusted
gross profit margin as used by us may not be comparable to similarly titled
measures of other companies.
36
Three Months Ended June 30,
2008 Compared to the Three Months Ended June 30, 2007
Net sales
The following table provides net sales and supplemental copper-adjusted
sales information for the three months ended June 30, 2008 and 2007:
|
|
Actual
|
|
Copper-adjusted
|
|
|
|
Three Months Ended
June 30,
|
|
%
|
|
Three Months Ended
June 30,
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
213,741
|
|
$
|
235,738
|
|
(9
|
)%
|
$
|
199,122
|
|
$
|
237,028
|
|
(16
|
)%
|
North American magnet wire and distribution
|
|
312,834
|
|
296,045
|
|
6
|
%
|
273,456
|
|
279,200
|
|
(2
|
)%
|
European magnet wire and distribution
|
|
268,066
|
|
175,541
|
|
53
|
%
|
249,589
|
|
161,316
|
|
55
|
%
|
Asia/Pacific magnet wire
|
|
25,030
|
|
281
|
|
|
*
|
22,877
|
|
247
|
|
|
*
|
Copper rod
|
|
12,182
|
|
64,835
|
|
(81
|
)%
|
9,668
|
|
56,461
|
|
(83
|
)%
|
|
|
831,853
|
|
772,440
|
|
8
|
%
|
754,712
|
|
734,252
|
|
3
|
%
|
Constant cost of copper adjustment
|
|
|
|
|
|
|
|
77,141
|
|
38,188
|
|
|
|
Total
|
|
$
|
831,853
|
|
$
|
772,440
|
|
8
|
%
|
$
|
831,853
|
|
$
|
772,440
|
|
8
|
%
|
Average daily COMEX price per pound of
copper
|
|
$
|
3.80
|
|
$
|
3.46
|
|
10
|
%
|
|
|
|
|
|
|
*
Comparisons are
not meaningful due to the Tianjin acquisition in July 2007 and the
start-up of operations in Suzhou in 2007.
Sales for our communications cable segment for the three months ended June 30,
2008 were $213.7 million, a decrease of $22.0 million, or 9%, as compared to
sales of $235.7 million for the three months ended June 30, 2007. We
estimate that sales increased approximately $20 million in the 2008 quarter due
to the pass-through of increased copper prices with the offsetting decrease of
$42.0 million primarily attributable to declines in copper OSP unit volume. The
decline in copper OSP unit volume was attributable to overall decreases in
market-related demand as a result of the slowdown in new home construction,
continued loss of access lines by major telephone companies and the increased
use of fiber optic cable in telephone networks. These market-related trends are
expected to continue. The decrease in copper-adjusted sales for the three
months ended June 30, 2008 compared to the three months ended June 30,
2007 reflects declines in copper OSP unit volume discussed above as well as a
decrease in premise product sales.
Sales for our North American magnet wire and
distribution segment were $312.8 million for the three months ended June 30,
2008, an increase of $16.8 million, or 6%, as compared to sales of $296.0
million for the three months ended June 30, 2007. Sales for the three
months ended June 30, 2008 include estimated incremental sales of
approximately $11 million attributable to the Simcoe operations acquired in
late April 2007 and an estimated $26 million impact from the pass through
of increased copper prices. These increases were partially offset by
comparative volume decreases resulting from weakness in the U.S. heating,
ventilation and air conditioning, heavy appliance and other end markets tied to
residential construction activity as well as weakness in the U.S. automotive
market. On a copper-adjusted basis, sales for the three months ended June 30,
2008 decreased 2% as sales attributable to the Simcoe acquisition were more
than offset by the effects of volume decreases discussed above.
Sales for the European magnet wire and
distribution segment were $268.1 million for the three months ended June 30,
2008 compared to $175.5 million for the three months ended June 30, 2007,
an increase of $92.6 million. Sales for the three months ended June 30,
2008 include $82.4 million attributable to the Invex acquisition and an
estimated $28 million positive impact from the strengthening of the Euro to U.S.
dollar conversion rate during the second quarter of 2008 as compared to the
prior year second quarter. These increases were partially offset by comparative
volume decreases primarily resulting from reductions in unit demand due to
weakness in the European end markets. On a copper-adjusted basis, sales
increased 55% for the three months ended June 30, 2008 compared to the
prior year second quarter. Excluding the effects of the Invex acquisition
37
and the strengthening
Euro against the U.S. dollar, copper-adjusted sales decreased 9% for the three
months ended June 30, 2008 compared to the three months ended June 30,
2007 due to the decrease in unit volume as discussed above.
Sales for the Asia/Pacific magnet wire
segment for the three months ended June 30, 2008 consist of $15.2 million
of revenues from the Tianjin acquisition and $9.8 million related to our
operation in Suzhou, China which began initial commercial production in the
first quarter of 2007. We expect volumes at the Suzhou operation to increase
during the remainder of 2008 as prospective customers complete their product
qualification processes.
Copper rod sales for the three months ended June 30,
2008 were $12.2 million compared to $64.8 million for the three months ended June 30,
2007, a decrease of $52.6 million. The decrease in sales primarily reflects a
planned reduction in total copper rod production, including a rationalization
of third-party copper rod sales, implemented in 2007 and continuing into 2008,
and an increase in the percentage of copper rod used for internal production.
In the fourth quarter of 2007 we reduced the number of our copper rod
continuous casting units in operation from two to one in as part of this
planned rationalization. We believe this will enable us to improve the
utilization and efficiency of our copper rod casting operation.
Gross profit
The gross profit margin for the three months
ended June 30, 2008 was 9.3% compared to 9.6% for the three months ended June 30,
2007. Gross profit margin on a copper-adjusted basis was 10.2% for the three
months ended June 30, 2008 and 10.1% for the comparable 2007 quarter.
Gross profit and gross profit margins for the three months ended June 30,
2008 were impacted by $4.1 million of accelerated depreciation recorded in
connection with the North American magnet wire and distribution and copper rod
restructuring which reduced consolidated gross margins and copper-adjusted
gross margins by 50 basis points. This negative impact was substantially offset
by an estimated $5.0 gross profit benefit in the three months ended June 30,
2008 from the liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years. The comparative gross profit margins were
significantly impacted by the effect of the 2008 sales and copper-adjusted
sales declines for the copper rod segment, whose sales generally allow for
fixed cost recovery at gross profit margins that are generally break even.
Accordingly, the decreases in sales and copper-adjusted sales in the copper rod
segment for the three months ended June 30, 2008 compared to the three
months ended June 30, 2007 did not result in a proportionate reduction in
gross profit. The combined copper-adjusted gross margin for our communications
cable, North American and European magnet wire and distribution segments, which
contribute substantially all of our gross profit, was 10.5% for the three
months ended June 30, 2008 compared to 11.1% for the three months ended June 30,
2007. Gross profit for the three months ended June 30, 2008 was $77.0
million compared to gross profit of $74.5 million for the three months ended June 30,
2007. The increase in gross profit was primarily attributable to the Invex,
Simcoe and Tianjin acquisitions ($7.3 million) as well as gross profit margin
improvements in our communications cable segment which more than offset the
negative impact of sales volume declines and a decrease in gross profit margin
for our European magnet wire and distribution segment.
Copper-adjusted gross profit margins in our
communications cable business increased for the three months ended June 30,
2008 compared to the prior year first quarter due primarily to production cost
efficiencies and product mix.
Copper-adjusted gross profit margins for our
North American magnet wire and distribution business for the three months ended
June 30, 2008 were essentially unchanged from the three months ended June 30,
2007. The positive benefits of LIFO liquidation ($3.6 million) and improved
product mix were substantially offset by higher energy costs and lower cost
absorption due to reduced sales volumes
Copper-adjusted gross profit margin for the
European magnet wire and distribution segment decreased slightly for the three
months ended June 30, 2008 compared to the three months ended June 30,
2007 due primarily to unfavorable product mix
.
Our Asia/Pacific magnet wire segment reported
gross profit of $0.5 million for the three months ended June 30, 2008
attributable to the Tianjin business as we continue to incur negative gross
margins in our Suzhou start-up operation.
Selling, general and administrative expenses
Selling, general and administrative expenses
(SG&A expense) of $40.4 million for the three months ended June 30,
2008 increased $2.4 million as compared to SG&A expense of $38.0 million
for the three months ended June 30, 2007 primarily due to SG&A expense
of the acquired entities ($3.6 million) and the effects of the
strengthened Euro to U.S. dollar
38
exchange rate
which increased reported SG&A expense of our European operations
($1.2 million), offset by decreases in stock-based compensation ($1.2
million) and the recovery of a prior period bad debt ($0.9 million).
Restructuring and other charges
On
January
23, 2008, the Company announced that it is consolidating
and restructuring its North American magnet wire and distribution and copper
rod segments manufacturing facilities. The changes are expected to more
efficiently match production capabilities to industry demand levels and to
customer requirements. The restructuring involves a phased closure of the
magnet wire manufacturing and copper rod continuous casting facilities located
in Vincennes, Indiana, and the relocation of existing production to other North
American magnet wire and distribution facilities. The closures are expected to
be completed by the first quarter of 2009. Our 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 $3 million relating to employee severance and
retention and $4 million relating to equipment relocation and facility closure
costs associated with the restructuring. We expect to incur the majority of
these charges in 2008. During the three months ended June 30, 2008,
restructuring and other charges include $0.8 million of severance and retention
costs and $1.2 million of equipment relocation and other closure costs related
to the North American magnet wire and distribution and copper rod segment
restructurings.
In March 2008, the Company announced that Essex Europe had
initiated discussions with the appropriate French employee representative
bodies for the potential closure of its magnet wire manufacturing facility in
Chauny, France. Discussions with the local employee representative bodies were
completed during the second quarter of 2008 and on June 30, 2008, the
Company authorized the closure of the Chauny facility. The Chauny facility is
leased from Nexans through October 2009 and currently has approximately
130 employees. The changes are expected to more efficiently match the Companys
production capabilities to industry demand levels and to customer requirements.
During the three months ended June 30, 2008, Essex Europe also recorded a
restructuring provision of $2.8 million related to the consolidation of certain
of its administrative and production support functions in Germany. The total
estimated cost of these restructurings is approximately $22 million, which
primarily consists of (i) cash charges of approximately $18.7 million
relating to employee severance and related benefits and approximately $3.7
million related to equipment relocation and disposal and other costs associated
with the restructuring, (ii) non-cash charges of approximately $1.3
million, principally through accelerated depreciation, and (iii) non-cash
gains of $1.7 million attributable to employee benefit plan curtailments. The
Company expects to incur the majority of these charges in 2008 and the first
half of 2009. During the three months ended June 30, 2008, restructuring
and other charges include $15.1 million of severance and related termination
benefits, $0.4 million of equipment relocation and other closure costs and
employee benefit plan curtailment gains of $1.7 million due to the attributable
to the European magnet wire and distribution restructuring.
In addition to the North American magnet
wire, copper rod and European magnet wire restructurings discussed above,
restructuring and other charges for the three months ended June 30, 2008
also include $2.5 million of professional fees and costs associated with the LS
Cable transaction, $0.1 million of professional fees incurred in connection
with the Chauny restructuring and the write-off of $0.2 million of deferred
business acquisition costs.
In
January 2008, we executed an eleven year lease for a new corporate and
communications cable headquarters building which we plan to occupy in the third
quarter of 2008. The new lease provides for various incentives which will be
deferred and amortized over the term of the new lease. As a result of the
relocation, we expect to incur accelerated depreciation charges related to
leasehold improvements in our current office of $0.5 million and lease
termination costs of approximately $1 million.
During the
three months ended June 30, 2007 we recorded restructuring and other charges of $0.4
million consisting of $0.3 million of ongoing facility exit costs related to a
former North American magnet wire and distribution segment warehouse and $0.1
million of professional fees incurred in connection with the administration of
Superior TeleComs plan of reorganization.
Operating income
The following table sets forth information regarding our operating
income by segment for the three months ended June 30, 2008 and 2007. We
measure our segment operating performance based primarily on segment operating
income, excluding restructuring and other charges.
39
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Operating income (loss)
|
|
|
|
|
|
Communications cable
|
|
$
|
21,229
|
|
$
|
25,911
|
|
North American magnet wire and distribution
(1)
|
|
13,171
|
|
12,813
|
|
European magnet wire and distribution (2)
|
|
7,410
|
|
5,801
|
|
Asia/Pacific magnet wire
|
|
(451
|
)
|
(1,152
|
)
|
Copper rod
|
|
1,290
|
|
(136
|
)
|
Corporate and other
|
|
(6,147
|
)
|
(6,773
|
)
|
Income from settlement of litigation
|
|
19,584
|
|
|
|
Restructuring and other charges
|
|
(18,562
|
)
|
(413
|
)
|
|
|
$
|
37,524
|
|
$
|
36,051
|
|
(1)
Includes
$2.9 million of accelerated depreciation charges related to restructuring
activities for the three months ended June 30, 2008.
(2)
Includes
$1.2 million of accelerated depreciation charges related to restructuring
activities for the three months ended June 30, 2008.
Operating income for the communications cable segment decreased $4.7
million for the three months ended June 30, 2008 compared to the 2007 second
quarter primarily due to a decrease in gross profit. Communications cable
segment gross profit increases resulting from improved gross margins were more
than offset by the impact of reduced sales volumes.
Operating income for our North American
magnet wire and distribution segment for the three months ended June 30,
2008 increased $0.4 million as compared to the three months ended June 30,
2007 due primarily to reduced SG&A expenses due to reduced hiring and
relocation costs and environmental remediation costs incurred during the three
months ended June 30, 2007 related to one of our former manufacturing
sites.
Operating income for the European magnet wire
and distribution segment increased $1.6 million for the three months ended June 30,
2008 compared to the three months ended June 30, 2007 as operating income
improvements attributable to the Invex acquisition ($2.8 million) and currency
exchange rates ($0.9 million) were largely offset by reduced gross profit
resulting from volume and gross margin declines.
The Asia/Pacific magnet wire segment reported
an operating loss of $0.5 million for the three months ended June 30, 2008
compared to an operating loss of $1.2 million for the three months ended June 30,
2007. The improvement in 2007 is attributable to the Tianjin operation which
had operating income of $0.6 for the three months ended June 30, 2008. The
Tianjin operating income was offset by operating losses incurred in connection
with our Suzhou operations due to unabsorbed production costs and the resulting
negative gross margins realized on initial sales.
The copper rod segments reported operating
income of $1.3 million for the three months ended June 30, 2008 compared
to an operating loss of $0.1 million for the three months ended June 30,
2007. The 2008 operating income primarily results from a decrease in SG&A
expense attributable to a $0.8 million bad debt recovery. Copper rod sales
generally allow for fixed cost recovery at gross profit margins that are generally
break even.
Corporate and other charges consist primarily of parent company and
corporate payroll costs, including stock-based compensation charges, corporate
headquarters costs and corporate professional fees and compliance costs. The
decrease in corporate and other costs for the three months ended June 30,
2008 compared to the three months ended June 30, 2007 is primarily due to
a decrease in incentive-based compensation , including stock-based
compensation, partially offset by increased legal fees associated with the
Exeon litigation and other professional fees.
Consolidated operating
income for the three months ended June 30, 2008 included restructuring and
other charges of $18.6 million compared to $0.4 million of such charges for the
three months ended June 30, 2007, the components of which are discussed
above. In addition, during the three months ended June 30, 2008,
we
settled our litigation with Exeon. Under the settlement agreement, we received
$19.6 million in cash which has been reflected as a gain during the three
months ended June 30, 2008 (see note 11 to the consolidated condensed
financial statements).
40
Interest expense, interest income and other income(expense)
Interest
expense for the quarter ended June 30, 2008 was $8.6 million compared to
interest expense of $7.5 million for the quarter
ended June 30,
2007. The increase in interest expense is due to interest on borrowings to
finance our Suzhou and the acquired Invex and Tianjin operations
.
Other expense for the three months ended June 30,
2008 and 2007 includes income of $0.1 million and $0.1 million, respectively,
related to our 50% owned joint venture, Femco Magnet Wire Corporation, an
equity-method investee. Other expense for the three months ended June 30,
2008 also includes net
foreign
exchange losses of $0.1 million. Foreign exchange gains for the three months
ended June 30, 2007 were not significant.
Income tax expense
Our
effective income tax rate for the three months ended June 30, 2008 was 34%
compared to an effective tax rate of 40% for the three months ended June 30,
2007. The decrease in the effective rate is primarily due to lower effective
rates in certain foreign jurisdictions, the discrete effect of favorable
adjustments to research and development tax credits. The effective tax rate for
the three months ended June 30, 2008 is less than the U.S. statutory rate
of 35% due to the lower foreign effective tax rates and the discrete second quarter
2008 item discussed above which more than offset the negative impact of state
taxes
, valuation allowances provided with respect to operating losses
incurred by our Suzhou operation and liabilities for uncertain tax positions
recorded in accordance with FASB Interpretation No. 48 (FIN 48).
Six Months Ended June 30,
2008 Compared to the Six Months Ended June 30, 2007
Net sales
The following table provides net sales and supplemental copper-adjusted
sales information for the six months ended June 30, 2008 and 2007:
|
|
Actual
|
|
Copper-adjusted
|
|
|
|
Six Months Ended
June 30,
|
|
%
|
|
Six Months Ended
June 30,
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications cable
|
|
$
|
410,217
|
|
$
|
451,736
|
|
(9
|
)%
|
$
|
386,722
|
|
$
|
448,941
|
|
(14
|
)%
|
North American magnet wire and distribution
|
|
608,613
|
|
542,759
|
|
12
|
%
|
547,251
|
|
539,706
|
|
1
|
%
|
European magnet wire and distribution
|
|
502,025
|
|
335,934
|
|
49
|
%
|
478,730
|
|
321,759
|
|
49
|
%
|
Asia/Pacific magnet wire
|
|
41,714
|
|
407
|
|
|
*
|
39,370
|
|
380
|
|
|
*
|
Copper rod
|
|
26,444
|
|
137,232
|
|
(81
|
)%
|
22,039
|
|
136,888
|
|
(84
|
)%
|
|
|
1,589,013
|
|
1,468,068
|
|
8
|
%
|
1,474,112
|
|
1,447,674
|
|
2
|
%
|
Constant cost of copper adjustment
|
|
|
|
|
|
|
|
114,901
|
|
20,394
|
|
|
|
Total
|
|
$
|
1,589,013
|
|
$
|
1,468,068
|
|
8
|
%
|
$
|
1,589,013
|
|
$
|
1,468,068
|
|
8
|
%
|
Average daily COMEX price per pound of
copper
|
|
$
|
3.69
|
|
$
|
3.09
|
|
19
|
%
|
|
|
|
|
|
|
*
Comparisons
are not meaningful due to the Tianjin acquisition in July 2007 and the
start-up of operations in Suzhou in 2007.
Sales for our communications cable segment for the six months ended June 30,
2008 were $410.2 million, a decrease of $41.5 million, or 9%, as compared to
sales of $451.7 million for the six months ended June 30, 2007. We
estimate that sales increased approximately $26 million in the 2008 period due
to the pass-through of increased copper prices with the offsetting decrease of
$67.5 million primarily attributable to declines in copper OSP unit volume. The
decline in copper OSP unit volume was attributable to overall decreases in
market-related demand as a result of the slowdown in new home construction,
continued loss of access lines by major telephone companies and the increased
use of fiber optic cable in telephone networks. The decrease in copper-
adjusted sales for the six months ended June 30, 2008 compared to the six
41
months ended June 30, 2007
reflects declines in copper OSP unit volume discussed above as well as a
decrease in premise product sales.
Sales for our North American magnet wire and
distribution segment were $608.6 million for the six months ended June 30,
2008, an increase of $65.8 million, or 12%, as compared to sales of $542.8
million for the six months ended June 30, 2007. Sales for the six months
ended June 30, 2008 include estimated incremental sales of approximately
$44 million attributable to the Simcoe operations acquired in April 2007
and an estimated $62 million impact from the pass through of increased copper
prices. These increases were partially offset by comparative volume decreases
resulting from weakness in the U.S. heating, ventilation and air conditioning,
heavy appliance and other end markets tied to residential construction activity
as well as weakness in the U.S. automotive market. On a copper-adjusted basis,
sales for the six months ended June 30, 2008 increased 1% as sales
attributable to the Simcoe acquisition more than offset the effects of volume
decreases discussed above.
Sales for the European magnet wire and distribution segment were $502.0
million for the six months ended June 30, 2008 compared to $335.9 million
for the six months ended June 30, 2007, an increase of $166.1 million.
Sales for the six months ended June 30, 2008 include $152.7 million
attributable to the Invex acquisition and an estimated $51 million positive
impact from the strengthening of the Euro to U.S. dollar conversion rate during
the first six months of 2008 as compared to the prior year first six months.
These increases were partially offset by comparative volume decreases primarily
resulting from reductions in unit demand due to weakness in the European end
markets and the full effects of a planned rationalization of low margin
customers implemented during the first quarter of 2007. On a copper-adjusted
basis, sales increased 49% for the six months ended June 30, 2008 compared
to the prior year first six months. Excluding the effects of the Invex
acquisition and the strengthening Euro against the U.S. dollar, copper-adjusted
sales decreased 10% for the six months ended June 30, 2008 compared to the
six months ended June 30, 2007 due to the decrease in unit volume as
discussed above.
Sales for the Asia/Pacific magnet wire segment for the six months ended
June 30, 2008 consist of $25.0 million of revenues from the Tianjin acquisition
and $16.7 million related to our operation in Suzhou, China which began initial
commercial production in the first quarter of 2007.
Copper rod sales for the six months ended June 30, 2008 were $26.4
million compared to $137.2 million for the six months ended June 30, 2007,
a decrease of $110.8 million. The decrease in sales primarily reflects a
planned reduction in total copper rod production, including a rationalization
of third-party copper rod sales, implemented in 2007 and continuing into 2008, and
an increase in the percentage of copper rod used for internal production.
Gross profit
The gross profit margin for the six months ended June 30, 2008 was
9.0% compared to 9.2% for the six months ended June 30, 2007. Gross profit
margin on a copper-adjusted basis was 9.7% for the six months ended June 30,
2008 and 9.4% for the comparable 2007 period. Gross profit and gross profit
margins for the six months ended June 30, 2008 were significantly impacted
by $11.5 million of accelerated depreciation recorded in connection with the
European and North American magnet wire and distribution and copper rod
segments restructurings. The impact of the accelerated depreciation was to
reduce consolidated gross margins and copper-adjusted gross margins by 70 basis
points and 80 basis points, respectively. This negative impact was partially
offset by an estimated $5.0 benefit in the six months ended June 30, 2008
from the liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years. The comparative gross profit margins were also
significantly impacted by the effect of the sales and copper-adjusted sales
declines for the copper rod segment, whose sales generally allow for fixed cost
recovery at gross profit margins that are generally break even. Accordingly,
the decreases in sales and copper-adjusted sales in the copper rod segment for
the six months ended June 30, 2008 compared to the six months ended June 30,
2007 did not result in a proportionate reduction in gross profit. The combined
copper-adjusted gross margin for our communications cable, North American and
European magnet wire and distribution segments, which contribute substantially
all of our gross profit, was 10.0%, net of 60 basis points attributable to
restructuring related accelerated depreciation, for the six months ended June 30,
2008 compared to 10.4% for the six months ended June 30, 2007. Gross
profit for the six months ended June 30, 2008 was $143.0 million compared
to gross profit of $135.7 million for the six months ended June 30, 2007.
The increase in gross profit was primarily attributable to the Invex, Simcoe
and Tianjin acquisitions ($17.2 million) as well as gross profit margin improvements
in our communications cable segment which more than offset the negative impact
of sales volume declines and restructuring related accelerated depreciation
charges ($11.5 million).
42
Copper-adjusted
gross profit margins in our communications cable business increased for the six
months ended June 30, 2008 compared to the prior year first quarter due
primarily to improved copper cost recovery of approximately $2 to $3 million in
the first quarter of 2008 and continued benefits from production cost
efficiencies.
Copper-adjusted
gross profit margin for our North American magnet wire and distribution
business for the six months ended June 30, 2008, excluding the effects of
restructuring related accelerated depreciation, increased compared to the prior
year first quarter due primarily to improved pricing in the distribution market
and product mix, including the impact of higher margin energy-related products
produced by our Simcoe operation, and LIFO liquidation benefits of $3.6
million. These positive factors were partially offset by an estimated $1.1
million of transitional supply chain costs related to a temporary disruption in
the availability of internally produced enamel wire coating during the first
quarter of 2008 as well as higher energy costs and lower cost absorption due to
reduced sales volumes.
Copper-adjusted
gross profit margin for the European magnet wire and distribution segment
decreased for the six months ended June 30, 2008 compared to the six
months ended June 30, 2007 due primarily to unfavorable product mix.
Our Asia/Pacific
magnet wire segment reported gross profit of $1.7 million for the six months
ended June 30, 2008 attributable to the Tianjin business as we continue to
incur negative gross margins in our Suzhou start-up operation. Additionally,
gross profit for the Asia/Pacific magnet wire business for the six months ended
June 30, 2008 includes $1.3 million of gains on non-designated copper
futures purchase contracts which serve as economic hedges of future customer
sale commitments.
Our copper rod
segment reported a negative gross profit of $0.4 million for the six months
ended June 30, 2008 compared to approximate break-even margins in the
prior year comparable six-month period due to the effect of restructuring
related accelerated depreciation of $1.3 million.
Selling,
general and administrative expenses
Selling, general and administrative expenses (SG&A expense) of
$84.1 million for the six months ended June 30, 2008 increased $10.5
million as compared to SG&A expense of $73.6 million for the six months
ended June 30, 2007 primarily due to SG&A expense of the acquired
entities ($7.0 million), the effects of the strengthened Euro to U.S. dollar
exchange rate which increased reported SG&A expense of our European
operations ($2.3 million) and increased legal
fees associated with the Exeon litigation and other
professional fees ($0.5 million).
Restructuring
and other charges
Restructuring
and other charges for the six months ended June 30, 2008 include $2.4
million of severance and
retention costs and $1.7 million of equipment relocation and other
closure costs attributable to the North American magnet wire and distribution
and copper rod segment restructurings discussed above.
Restructuring
and other charges for the six months ended June 30, 2008 include $15.1
million of severance and related termination benefits, $0.4 million of
equipment relocation and other closure costs and employee benefit plan
curtailment gains of $1.7 million due to the attributable to the European
magnet wire and distribution restructuring discussed above.
In
addition to the North American magnet wire, copper rod and European magnet wire
restructurings, restructuring and other charges for the six months ended
June 30, 2008 also include $2.5 million of professional fees and costs
associated with the LS Cable transaction, $0.1 million of professional fees
incurred in connection with the Chauny restructuring and the write-off of $0.2
million of deferred business acquisition costs.
During
the six months ended June 30, 2007 we recorded a restructuring provision
of $0.3 million related to a workforce reduction at our European magnet wire
and distribution segments Viana de Castelo, Portugal manufacturing facility.
The majority of the costs related to severance payments and related benefits.
All amounts are expected to be paid during 2007. We also recorded restructuring
and other charges of $0.3 million of ongoing facility exit costs related to a former
North American magnet wire and distribution segment warehouse, $0.4 million of
deferred business acquisition costs and and $0.2 million of professional fees
incurred in connection with the administration of Superior TeleComs plan of
reorganization.
43
Operating income
The
following table sets forth information regarding our operating income by
segment for the six months ended June 30, 2008 and 2007. We measure our
segment operating performance based primarily on segment operating income,
excluding restructuring and other charges.
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Operating income (loss)
|
|
|
|
|
|
Communications cable
|
|
$
|
40,143
|
|
$
|
43,912
|
|
North American magnet wire and distribution (1)
|
|
18,969
|
|
22,335
|
|
European magnet wire and distribution (2)
|
|
13,817
|
|
11,856
|
|
Asia/Pacific magnet wire
|
|
(32
|
)
|
(2,128
|
)
|
Copper rod (3)
|
|
(19
|
)
|
(182
|
)
|
Corporate and other
|
|
(13,978
|
)
|
(13,683
|
)
|
Income from settlement of litigation
|
|
19,584
|
|
|
|
Restructuring and other charges
|
|
(20,683
|
)
|
(1,287
|
)
|
|
|
$
|
57,801
|
|
$
|
60,823
|
|
(1)
Includes $9.0 million of
accelerated depreciation charges related to restructuring activities for the
six months ended June 30, 2008.
(2)
Includes $1.2 million of
accelerated depreciation charges related to restructuring activities for the
six months ended June 30, 2008.
(3)
Includes $1.3 million of
accelerated depreciation charges related to restructuring activities for the
six months ended June 30, 2008.
Operating
income for the communications cable segment decreased $3.8 million for the six
months ended June 30, 2008 compared to the same 2007 six-month period.
Communications cable segment gross profit increases resulting from improved
gross margins were more than offset by the effects of sales volume decreases
and an increase in SG&A expense of $0.4 million due primarily to higher
salaries and benefits.
Operating income for our North American magnet wire and distribution
segment for the six months ended June 30, 2008 decreased $3.3 million
as compared to the six months ended June 30, 2007 due primarily to
restructuring related accelerated depreciation ($9.0 million) and increased
SG&A expenses primarily resulting from increased employee compensation,
benefits and hiring related costs ($0.8 million). These negative factors were
partially offset by operating income contributed by the Simcoe operation ($2.3
million) and improved gross margins (including LIFO liquidation benefits of
$3.6 million), exclusive of accelerated depreciation charges.
Operating income for the European magnet wire and distribution segment
increased $1.9 million for the six months ended June 30, 2008
compared to the six months ended June 30, 2007 as operating income
improvements attributable to the Invex acquisition ($5.4 million) and currency
exchange rates ($1.8 million) were largely offset by reduced gross profit
resulting from volume and gross margin declines.
The Asia/Pacific magnet wire segment reported a minimal operating loss
for the six months ended June 30, 2008 compared to an operating loss of
$2.1 million for the six months ended June 30, 2007. The improvement in
2007 is attributable to the Tianjin operation which had operating income of
$2.3 million for the six months ended June 30, 2008. The Tianjin operating
income was offset by operating losses incurred in connection with our Suzhou
operations due to unabsorbed production costs and the resulting negative gross
margins realized on initial sales.
The copper rod segments operating loss for the six months ended
June 30, 2008 reflects $1.3 million of restructuring related accelerated
depreciation net of a benefit of $0.8 million from recovery of a prior bad debt
write-off. Copper rod sales generally allow for fixed cost recovery at gross
profit margins that
are
generally break even.
Corporate and
other charges consist primarily of parent company and corporate payroll costs,
including stock-based compensation charges, corporate headquarters costs and
corporate professional fees and compliance costs. The increase in
44
corporate and other costs
for the six months ended June 30, 2008 compared to the six months ended
June 30, 2007 is primarily due to increased legal fees associated with the
Exeon litigation and other professional fees partially offset by a decrease in
incentive-based compensation, including stock-based compensation expenses.
Consolidated
operating income for the six months ended June 30, 2008 included
restructuring and other charges of $20.7 million compared to
$1.3 million of such charges for the six months ended June 30, 2007,
the components of which are discussed above. In addition, in April 2008,
we settled our
litigation with Exeon. Under the settlement agreement, we received $19.6
million in cash which has been reflected as a gain during the six months ended
June 30, 2008 (see note 11 to the consolidated condensed financial
statements).
Interest
expense, interest income and other income(expense)
Interest expense for the
six months ended June 30, 2008 was $16.9 million compared to interest
expense of $15.1 million for the six months ended June 30, 2007. The
increase in interest expense is due to interest on borrowings to finance our
Suzhou and the acquired Invex and Tianjin operations. Other expense for the six
months ended June 30, 2008 and 2007 includes losses of $0.5 million and
$0.3 million, respectively, related to our 50% owned joint venture, Femco
Magnet Wire Corporation, an equity-method investee. Other expense for the six
months ended June 30, 2008 and 2007 also includes net foreign exchange
losses of $0.7 million and $0.3 million, respectively.
Income
tax expense
Our
effective income tax rate for the six months ended June 30, 2008 was 33%
compared to an effective tax rate of 40% for the six months ended June 30,
2007. The decrease in the effective rate is primarily due to lower effective
rates in certain foreign jurisdictions, the discrete effects of favorable
adjustments to state effective tax rates and
research and development tax credits
. The effective
tax rate for the six months ended June 30, 2008 is less than the U.S.
statutory rate of 35% due to the lower foreign effective tax rates and the
discrete items discussed above which more than offset the negative impact of
state taxes, valuation allowances provided with respect to operating losses
incurred by our Suzhou operation and liabilities for uncertain tax positions
recorded in accordance with FASB Interpretation No. 48 (FIN 48).
Liquidity and Capital Resources
Cash
from Operating, Investing and Financing Activities
We
reported cash provided by operating activities of $9.8 million for the six
months ended June 30, 2008 compared to cash provided by operating
activities of $76.8 million for the six months ended June 30, 2007. Cash
provided by operating activities for the six months ended June 30, 2008
was positively impacted by cash proceeds of $19.6 million received during the
second quarter of 2008 upon settlement of the Exeon litigation. Cash provided
by operating activities for the six months ended June 30, 2008 included a
net working capital increase of $52.1 million compared to a net working
capital decrease of $24.5 million for the six months ended June 30, 2007.
We have historically experienced a first and second quarter seasonal increase
in our working capital resulting from increased production, inventory stocking
levels and related sales attributable to historically higher customer demand
levels in March through October. Normal seasonal increases in accounts receivable
experienced in the first six months of 2007, however, were more than offset by
a decrease in inventories due to reduced production in response to lower sales
volumes, particularly in the communications cable segment. The increase in
working capital for the six months ended June 30, 2008 also reflects the
increase in the average cost of copper in our working capital accounts as
compared to December 31, 2007. Average copper prices have increased 17% in
the second quarter of 2008 as compared to the fourth quarter of 2007. Cash used
by investing activities for the six months ended June 30, 2008 includes
capital expenditures of $30.0 million compared to $18.4 million for the six
months ended June 30, 2007. The increased capital expenditures primarily
reflect capital expenditures by our European magnet wire and distribution
segment as production lines are modified and updated in preparation for the
transfer of production from the closed plant in Chauny, France. Cash used by
investing activities for the six months ended June 30, 2007 includes
payments of $29.4 to acquire Nexans 40% minority interest in Essex Europe,
$13.6 million related to the Simcoe acquisition and $4.1 million of additional
contingent consideration paid to Nexans based on the achievement of specified
levels of profitability by Essex Europe in 2006. Cash used by financing
activities for the six months ended June 30, 2008 includes $10.9 million
expended for open market purchases of our common stock pursuant to our stock
repurchase program announced in December 2007. Cash used for financing
activities of $4.3 million for the six months ended June 30, 2007 includes
the $15.0 million repayment of Essex Europes subordinated note which was
accelerated as a result of our acquisition of Nexans minority interest.
Repayment of the subordinated note was financed by borrowing under the Essex
Europe factoring agreement.
45
Capital
Resources
Senior
Secured Credit Facilities
Subsequent to
June 30, 2008, the Company was acquired by LS Cable (see note 1 to the
consolidated condensed financial statements). In connection with the
acquisition, Superior Essex Communications, Essex Group and Essex Group Canada,
as borrowers, entered into a second amended and restated loan agreement (the
loan agreement) and related security agreements, guaranties and other
agreements with a syndicate of financial institutions. This loan agreement
amends and supplements our existing senior secured credit facility.
The amended and
restated loan agreement provides for senior secured asset-backed revolving
credit facilities (the new senior secured revolving credit facilities) in an
aggregate principal amount up to $350 million, consisting a U.S. revolver
facility of up to $330 million that may be borrowed by Superior Essex
Communications and Essex Group, and a Canadian revolver facility of up to the
U.S. dollar equivalent of $20 million that may be borrowed by Essex Group
Canada in either U.S. dollars or Canadian dollars. The principal amount
outstanding of the loans under the new senior secured revolving credit
facilities will be due and payable in full August, 2013.
Borrowings
under the new senior secured credit facilities
bear interest at a per annum rate equal to an applicable margin plus, at the
applicable borrowers option, either (1) if the loans are made in U.S.
dollars, (a) the adjusted LIBOR rate or (b) a U.S. base rate
determined by reference to the greater of (i) the U.S. prime rate and
(ii) the federal funds rate plus 0.50% or, (2) if the loans are made
in Canadian dollars, (a) the average rate applicable to Canadian dollar
bankers acceptances, (b) the Canadian prime rate or (c) the Canadian
base rate.
The initial
applicable margin for borrowings under the senior secured term loan facilities
will be 0.50% with respect to U.S. base rate or Canadian base rate borrowings,
1.00% with respect to Canadian prime rate borrowings and 2.25% with respect to
LIBOR and Canadian BA rate borrowings. The initial applicable margin for
borrowings under the senior secured revolving credit facilities will be 0.25%
with respect to U.S. base rate or Canadian base rate borrowings, 0.75% with
respect to Canadian prime rate borrowings and 2.00% with respect to LIBOR and
Canadian BA rate borrowings. The applicable margin under the new senior secured
credit facilities may be adjusted based upon the average aggregate amount of
availability under the new senior secured revolving credit facilities, subject
to decrease if the Company, exclusive of its European and Chinese subsidiaries,
maintains a total leverage ratio below a predetermined threshold.
The loan agreement
requires the borrowers to prepay any outstanding revolver loans with certain
extraordinary receipts, such as tax refunds, indemnity payments, pension
reversions and certain insurance proceeds. The borrowers may voluntarily prepay
outstanding loans under the new senior secured credit facilities at any time
without premium or penalty, other than customary breakage costs with
respect to LIBOR loans.
All obligations
under the new senior secured credit facilities are unconditionally guaranteed
by us and, subject to certain agreed-upon exceptions, each of our existing and
future direct and indirect wholly-owned domestic subsidiaries. All of our obligations
under the new senior secured credit facilities are secured, subject to
permitted liens and other agreed upon exceptions, by our equity interests in
the borrowers, and by substantially all of the assets of the borrowers and
certain of our other subsidiaries (which pledges are, in the case of any
foreign subsidiary, limited to 100% of the non-voting stock (if any) and 65% of
the voting stock of such foreign subsidiary).
The new senior
secured credit facilities contain a number of covenants that, among other
things and subject to certain agreed-upon exceptions, restrict the ability of
the borrowers and their subsidiaries to:
·
incur additional debt;
·
make distributions to us and our direct or indirect
parent companies, or redeem, repurchase or retire certain debt prior to
scheduled maturity;
·
make investments, loans, capital expenditures and
acquisitions;
·
pay dividends or other amounts to the borrowers from
their subsidiaries;
·
engage in transactions with affiliates of the borrowers;
46
·
sell assets;
·
consolidate, merge, amalgamate, liquidate or wind up;
·
enter in hedging agreements other than ordinary course
of business hedges; and
·
create liens.
The amended and
restated loan agreement provides that at any time that availability under the
new senior secured revolving credit facilities falls below certain
predetermined thresholds, the borrowers are required to comply with a covenant
specifying a minimum ratio of consolidated EBITDA to the aggregate outstanding
principal and interest payments on certain debt (subject, in each case, to
certain customary exclusions). Failure to comply with such financial
maintenance ratio would constitute an event of default.
The amended and
restated loan agreement governing our new senior secured credit facilities also
contains certain customary affirmative covenants and events of default.
Preferred
Stock
In connection with
the acquisition of the Company by LS Cable, Cyprus issued 172,660 shares of
Series A voting redeemable convertible preferred stock (the new Series A
preferred stock). Proceeds from the issuance of the new Series A preferred
stock amounted to $172.7 million and were used by Cyprus to purchase
outstanding shares of our common stock pursuant to the Agreement and Plan of
Merger. The new Series A preferred stock will be a security of the Company
upon completion of the merger of Cyprus with and into Superior Essex Inc.
Holders of the new
Series A preferred stock are entitled to receive cumulative cash dividends
payable semi-annually in an amount equal to the greater of (i) $17.50 per
share and (ii) the aggregate per share amount of dividends or other
distributions on the common stock of Superior Essex Inc. The new Series A
preferred stock has a liquidation preference of $1,000 per share plus
accumulated and unpaid dividends. Each share of new Series A preferred
stock is automatically convertible 6 ½ years from the date of issue, or earlier
at the option of the holder, into one share of common stock of Superior Essex
Inc. Each share of new Series A preferred stock shall have one vote with
respect to all matters voted on by holders of the common stock of Superior
Essex Inc. The new Series A preferred stock is subject to redemption, in
whole but not in part, at the option of the holder at a price equal to
(i) the liquidation preference plus assumed dividends calculated thereon
at 7% per annum compounded annually, less (ii) dividends paid prior to the
date of redemption plus assumed dividends thereon calculated at 7% per annum
compounded annually from the date of such payment to the date of redemption.
Liquidity
A total of $275
million was borrowed under the new senior secured credit facilities in
connection with the closing of the acquisition. The borrowed funds, together
with cash on hand and intercompany loans and investments from LS Cable were
used to (i) defease and redeem all of the outstanding 9% senior notes at
104.5% of par plus accrued interest ($277 million), (ii) redeem the
outstanding Series A preferred stock of Superior Essex Holding at par plus
accrued interest, (iii) pay transaction costs of approximately $31 million
and (iv) fund payments of approximately $36 million with respect to
outstanding options and stock awards (see note 8 to the consolidated condensed
financial statements).
Our principal cash requirements generally include funding of our
working capital, interest payments on the new senior secured credit facilities,
dividends payments on the new Series A preferred stock, principal and
interest payments on the China term and working capital loans, redemption of
Invexs 6 million convertible bonds, capital expenditures currently
estimated at approximately $60 to $70 million for 2008, severance and
other benefit payments in connection with the closure of our Vincennes, Indiana
facility and Chauny, France facility and obligations related to our defined
benefit pension plans. In addition, significant increases in the price of
copper and the resultant increase in accounts receivable and, to a lesser
degree, inventory, impacts our working capital funding requirements. Average copper
prices have increased 17% in the second quarter of 2008 as compared to the
fourth quarter of 2007.
We believe that our cash on hand, together with cash provided by
operations and borrowing availability under our new senior secured credit
facilities, the Essex Europe factoring agreement and the Tianjin credit
facility will be sufficient to meet our obligations and fund our working
capital requirements for the foreseeable future.
47
New Accounting Pronouncements
Effective January 1,
2008, we adopted certain provisions of Statement of Financial Accounting
Standards 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 assets and liabilities measured at fair value on a recurring and
non-recurring basis in periods subsequent to initial recognition. SFAS
No. 157 establishes a hierarchy for fair value measurements and related
disclosures as follows: Level 1 - fair value measurements based on quoted
prices in active markets for identical assets or liabilities; Level 2 fair
value measurements based upon significant observable market data other than
quoted prices included within Level 1or significant unobservable inputs that
are corroborated by observable market data; and Level 3 fair value
measurements based on significant unobservable inputs that are not corroborated
by observable market data. Application of SFAS No. 157 to nonfinancial
assets and liabilities measured at fair value on a nonrecurring basis is
effective for fiscal years beginning after November 15, 2008 with earlier
application permitted. We have not implemented SFAS No. 157 for such
assets and liabilities. See note 1 to the accompanying consolidated financial
statements.
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. We are currently evaluating the
effects, if any, that FAS 141(R) may have on our 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 parents 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 will be applied
prospectively as of the beginning of the fiscal year in which the Statement is
initially applied, except for the presentation and disclosure requirements. The
presentation and disclosure requirements will be applied retrospectively for
all periods presented. We are currently evaluating the effects, if any, that
FAS 160 may have on our consolidated financial statements; however
adoption of FAS 160 will result in the reclassification of the Companys
minority interest in subsidiary to equity.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161,
Disclosures about
Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133
(FAS 161). FAS 161 requires enhanced disclosures
about an entitys derivative and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash
flows. FAS161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. FAS 161 encourages, but does not require, comparative disclosures
for earlier periods at initial adoption. We are currently evaluating the
effects that FAS 161 will have on our consolidated financial statements.
In April 2008 the FASB
issued FASB Staff Position No.142-3,
Determination
of the Useful Life of Intangible Assets
(FSP 142-3). FSP 142-3
amends the factors that should
be considered in developing
renewal
or
extension assumptions
used to
determine
the
useful life of a recognized intangible asset under FASB Statement No.
142,
Goodwill and Other Intangible
Assets
.
The intent of FSP 142-3 is to
improve the consistency between the useful life of a recognized intangible
asset under Statement 142 and the period of expected cash flows used to
measure the fair value of the
asset under FASB Statement No. 141
(revised 2007),
Business Combinations,
and other U.S.
generally
accepted
accounting principles. FSP 142-3
is effective
for financial
statements issued for fiscal years beginning after December
15, 2005. Early adoption is prohibited. The Company is currently
evaluating the effects, if any, that FSP 142-3 will
have on its consolidated financial statements.
48
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We,
to a limited extent, use or have used forward fixed price contracts and
derivative financial instruments to manage commodity price, interest rate and
foreign currency exchange risks. We do not hold or issue financial instruments
for investment or trading purposes. We are exposed to credit risk in the event
of nonperformance by counterparties for foreign exchange forward contracts,
commodity forward price contracts and commodity futures contracts but we do not
anticipate nonperformance by any of these counterparties. The amount of such
exposure is generally limited to any unrealized gains within the underlying
contracts.
Commodity price risk management
The
cost of copper, our most significant raw material, has historically been
subject to considerable volatility. To manage the risk associated with such volatility,
we enter into copper futures purchase contracts to match the metal component of
customer product pricing with the copper 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 transactions are reflected in the statement of operations.
Hedge ineffectiveness, which is not significant, is immediately recognized in
earnings. Our copper futures purchase contracts designated as cash flow hedges
are summarized as follows at June 30, 2008 and December 31, 2007:
Type
|
|
Notional
Amount
|
|
Maturity
Date
|
|
Weighted
Average
Contract Rate
|
|
Fair Value
Gain (Loss)
|
|
|
|
(in thousands of
pounds)
|
|
|
|
|
|
(in
thousands)
|
|
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
Copper
|
|
5,853
|
|
2008
|
|
$
|
3.60
|
|
$
|
1,598
|
|
Copper
|
|
2,133
|
|
2009
|
|
3.69
|
|
268
|
|
|
|
7,986
|
|
|
|
|
|
1,866
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
Copper
|
|
5,450
|
|
2008
|
|
3.14
|
|
$
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
All
of the unrealized gains on commodity futures outstanding at June 30, 2008
are expected to be reclassified to earnings within the next twelve months.
We
also periodically enter into commodity futures contracts which represent economic
hedges but have not been designated as hedges for accounting purposes
(non-designated derivatives). These futures contracts are intended to
minimize the risks associated with forward product pricing for customers and
changing copper prices. We use copper futures purchase contracts to match the
copper component of customer product pricing with the copper cost component of
the inventory shipped. We use copper futures sales contracts to fix a portion
of the gross margin related to the copper component of certain of our products.
Gains and losses on these non-designated derivatives are recorded in income as
a component of cost of goods sold. Our non-designated commodities futures
contracts outstanding at June 30, 2008 and 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)
|
|
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
Copper purchase contracts
|
|
4,207
|
|
2008
|
|
$
|
3.60
|
|
$
|
205
|
|
Copper purchase contracts
|
|
220
|
|
2009
|
|
3.35
|
|
81
|
|
Copper sales contracts
|
|
1,543
|
|
2008
|
|
3.85
|
|
(47
|
)
|
Copper sales contracts
|
|
110
|
|
2009
|
|
3.85
|
|
|
|
|
|
6,080
|
|
|
|
|
|
$
|
239
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
Copper purchase contracts
|
|
2,876
|
|
2008
|
|
3.07
|
|
$
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Foreign
currency exchange risk management
We engage in the
sale and purchase of products which result in accounts receivable and accounts
payable denominated in foreign currencies. Additionally, we enter 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 our results of operations. We attempt to manage our
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, we hedge certain, but not
all, of our foreign currency exposures through the use of non-deliverable
foreign currency forward exchange contracts. These contracts generally have
maturities of less than two months and represent non-designated derivatives.
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
following
table summarizes information about foreign currency forward exchange contract
derivatives as of June 30, 2008 and December 31, 2007. These
contracts are generally executed on the last day of the reporting period and
therefore the fair value of contracts outstanding at June 30, 2008 and
December 31, 2007 is not significant.
|
|
|
|
Weighted
|
|
Derivatives
|
|
Notional Amount
|
|
Average
Contract Rate
|
|
|
|
(in thousands)
|
|
|
|
June 30, 2008:
|
|
|
|
|
|
|
|
U.S. dollars for Euros
|
|
5,200
|
|
USD
|
|
0.64
|
|
Canadian dollars for U.S. dollars
|
|
1,500
|
|
USD
|
|
1.02
|
|
Canadian dollars for U.S. dollars
|
|
15,000
|
|
CAD
|
|
0.98
|
|
British pounds for Euros
|
|
10,700
|
|
EURO
|
|
0.79
|
|
Euros for U.S. dollars
|
|
3,924
|
|
EURO
|
|
1.57
|
|
British pounds for Euros
|
|
3,000
|
|
GBP
|
|
1.26
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
U.S. dollars for Euros
|
|
4,100
|
|
USD
|
|
0.68
|
|
Canadian dollars for U.S. dollars
|
|
4,000
|
|
USD
|
|
0.99
|
|
Canadian dollars for U.S. dollars
|
|
13,000
|
|
CAD
|
|
1.01
|
|
British pounds for Euros
|
|
7,000
|
|
EURO
|
|
0.74
|
|
Euros for U.S. dollars
|
|
1,980
|
|
EURO
|
|
1.46
|
|
British pounds for Euros
|
|
1,700
|
|
GBP
|
|
1.35
|
|
Purchase Commitments
We accept certain customer orders for future delivery at fixed prices.
As copper is the most significant raw material used in the manufacturing
process, we enter into forward fixed-price purchase commitments with our
suppliers for copper to match our cost to the value of the copper expected to
be billed to customers. At June 30, 2008, we had forward fixed price
copper purchase commitments for delivery of 29.6 million pounds through
April 2009 for $109.1 million. Additionally at June 30, 2008, we had
forward purchase fixed price commitments for 0.4 million pounds of aluminum
through December 2008, 227,000 megawatts of electricity through 2011 and
120,000 MMBTUs of natural gas through December 2008 amounting to $0.6
million, $21.2 million and $1.0 million, respectively.
50
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
As
of the end of the period covered by this Form 10-Q, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (Exchange Act), under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in providing reasonable
assurance that information required to be disclosed by us in reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms,
including reasonable assurance that information required to be disclosed in
reports filed or submitted by us under the Exchange Act is accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, in a manner to allow timely decisions regarding the required
disclosure. A system of controls, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the system of controls
are met, and no evaluation of controls provides absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. Notwithstanding the above, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
are effective at a reasonable assurance level as of June 30, 2008.
Changes
in Internal Controls Over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during the most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
51
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
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.
Belden Technologies, Inc. and Belden CDT
(Canada) Inc. v. Superior Essex Inc. and Superior Essex Communications L.P.,
Case
No. 08-63, U.S. District Court for the District of Delaware. The six
patents-in-suit are directed to communication cables and related manufacturing
processes in the premises products field. Belden completed service of the
Complaint and summons upon the Company on April 10, 2008. The Company will
vigorously defend against the suit.
In 2003, Superior TeleCom and Essex Electric Inc., now known as
Exeon Inc. (Exeon), each filed lawsuits (the 2003 Copper Action) 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) were held in escrow by
plaintiffs counsel (the Escrowed Settlement Proceeds). The Company and Exeon
each claimed to be entitled to the Escrowed Settlement Proceeds and filed
claims with respect to the Escrowed Settlement Proceeds and matters thereto.
In April 2008, the Company and Exeon reached an agreement to
settle their claims. Under this settlement agreement, the Company received
$19.6 million of the Escrowed Settlement Proceeds.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table provides information about our purchases of shares of our
common stock during the quarter ended June 30, 2008:
Period
|
|
Total Number of
Shares Purchased
|
|
Average Price Paid
per Share
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
|
|
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
April 2008
|
|
4,301
|
|
$
|
29.32
|
|
|
|
|
|
May 2008
|
|
|
|
|
|
|
|
|
|
June 2008(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Represents shares withheld
from members of management to satisfy minimum statutory tax withholdings due as
a result of the vesting restricted stock awards.
52
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
following matters were submitted to a vote of security holders at the Companys
annual meeting of shareowners held on May 6, 2008:
|
|
Votes Cast
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Votes
|
|
Election of Class II directors:
|
|
|
|
|
|
|
|
|
|
Stephanie W. Bergeron
|
|
12,602,657
|
|
5,221,258
|
|
154,820
|
|
|
|
Thomas H. Johnson
|
|
16,654,176
|
|
1,169,740
|
|
154,820
|
|
|
|
Perry J. Lewis
|
|
16,967,282
|
|
850,382
|
|
161,074
|
|
|
|
Company proposals to:
|
|
|
|
|
|
|
|
|
|
Authorize amendments to the Superior Essex Inc. 2005 Incentive Plan
|
|
15,115,543
|
|
1,140,706
|
|
244,932
|
|
1,477,557
|
|
Ratification of appointment of PricewaterhouseCoopers LLP as independent
registered public accounting firm
|
|
17,284,342
|
|
542,393
|
|
152,002
|
|
|
|
53
ITEM 6.
EXHIBITS
Exhibit
Number
|
|
Description
|
2.1
|
|
Agreement
and Plan of Merger, dated as of June 11, 2008, by and between LS Cable
Ltd. and Superior Essex Inc. (incorporated herein by reference to
Exhibit 2.1 to the Current Report on Form 8-K of Superior Essex
Inc. dated June 13, 2008).
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Superior Essex Inc. (incorporated
herein by reference to Exhibit 3.1 to the Annual Report on
Form 10-K of Superior Essex Inc. for the year ended
December 31, 2006 (the 2006 Superior Essex 10-K))
|
3.2
|
|
Restated
By-Laws of Superior Essex Inc. (incorporated herein by reference to
Exhibit 3.1 to the Current Report on Form 8-K of Superior Essex Inc.
dated March 12, 2008).
|
4.1
|
|
Indenture
dated as of April 14, 2004 among Superior Essex Communications LLC
and Essex Group, Inc., as Co-Issuers, the Guarantors named therein and The
Bank of New York Trust Company, N.A., as Trustee (incorporated herein by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of
Superior Essex Inc. for the quarter ended March 31, 2004 (the Q1
2004 Form 10-Q)).
|
4.2
|
|
Form of
9% Senior Series B Note due 2012 (included in Exhibit 4.1)
(incorporated herein by reference to Exhibit 10.3 to the Q1 2004
Form 10-Q).
|
4.3
|
|
Registration
Rights Agreement, dated as of November 10, 2003, by and among Superior
Essex Inc., the holders of Registrable Common Stock (as defined therein)
and the holders of the Warrants (as defined therein) and such other Persons
who may become a party thereto pursuant to Section 16 or
19(i) thereof (incorporated herein by reference to
Exhibit 10(b) to the Superior Essex Form 10).
|
4.4
|
|
Specimen
Common Stock Certificate (incorporated herein by reference to
Exhibit 4.11 to the Superior Essex Form S-3).
|
4.5
|
|
Third
Supplemental Indenture dated September 12, 2005 among Superior Essex
Communications LP, Essex Group, Inc., certain subsidiary guarantors
named therein and The Bank of New York Trust Company, N.A. (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K of
Superior Essex dated September 12, 2005).
|
10.1*
|
|
Amended
and Restated Agreement dated February 25, 2008, between Denys Gounot, DG
Network and Superior Essex Inc. (incorporated herein by reference to
Exhibit 48 to the Annual Report on Form 10-K of Superior Essex Inc.
for the year ended December 31, 2007)
|
10.2*
|
|
Amended
and Restated Employment Agreement dated March 19, 2008 between Stephen
M. Carter and Superior Essex (incorporated herein by reference to
Exhibit 10.1 to the Current Report on Form 8-K of Superior Essex
dated March 19, 2008)
|
10.3*
|
|
Amended
and Restated Employment Agreement dated March 19, 2008 between David S.
Aldridge and Superior Essex (incorporated herein by reference to
Exhibit 10.2 to the Current Report on Form 8-K of Superior Essex
dated March 19, 2008)
|
10.4*
|
|
Amended
and Restated Employment Agreement dated March 19, 2008 between Barbara
L. Blackford and Superior Essex (incorporated herein by reference to
Exhibit 10.3 to the Current Report on Form 8-K of Superior Essex
dated March 19, 2008)
|
10.5*
|
|
Amended
and Restated Employment Agreement dated March 19, 2008 between Justin F.
Deedy, Jr. and Superior Essex (incorporated herein by reference to
Exhibit 10.4 to the Current Report on Form 8-K of Superior Essex
dated March 19, 2008)
|
10.6*
|
|
Amended
and Restated Employment Agreement dated March 19, 2008 between H. Patrick
Jack and Superior Essex (incorporated herein by reference to
Exhibit 10.5 to the Current Report on Form 8-K of Superior Essex
dated March 19, 2008)
|
10.7*
|
|
Amended
and Restated Employment Agreement dated March 19, 2008 between J. David
Reed and Superior Essex (incorporated herein by reference to
Exhibit 10.6 to the Current Report on Form 8-K of Superior Essex
dated March 19, 2008)
|
10.8*
|
|
Amended
and Restated Senior Executive Retirement Plan (incorporated herein by
reference to Exhibit 10.7 to the Current Report on Form 8-K of
Superior Essex dated March 19, 2008)
|
10.9*
|
|
Long-Term
Incentive Plan (incorporated herein by reference to Exhibit 10.9 to the
Current Report on Form 8-K of Superior Essex dated March 19, 2008)
|
10.10*
|
|
Amended
and Restated Executive Bonus Plan (incorporated herein by reference to
Exhibit 10.10 to the Quarterly Report on Form 10-Q of Superior
Essex Inc. for the quarter ended March 31, 2008)
|
10.11*
|
|
Amended
and Restated Employment Agreement dated June 11, 2008 between Stephen M.
Carter and Superior Essex Inc. (incorporated herein by reference to
Exhibit 10.1 to the Current Report on Form 8-K of Superior Essex
dated June 13, 2008)
|
54
10.12*
|
|
Amended
and Restated Employment Agreement dated June 11, 2008 between David S.
Aldridge and Superior Essex Inc. (incorporated herein by reference to
Exhibit 10.2 to the Current Report on Form 8-K of Superior Essex
dated June 13, 2008)
|
10.13*
|
|
Amended
and Restated Employment Agreement dated June 11, 2008 between Justin F.
Deedy, Jr. and Superior Essex Inc. (incorporated herein by reference to
Exhibit 10.3 to the Current Report on Form 8-K of Superior Essex
dated June 13, 2008)
|
10.14*
|
|
Amended
and Restated Employment Agreement dated June 11, 2008 between Barbara L.
Blackford and Superior Essex Inc. (incorporated herein by reference to
Exhibit 10.3 to the Current Report on Form 8-K of Superior Essex
dated June 13, 2008)
|
10.16
|
|
Amended
director compensation schedule, effective July 1, 2008, to the Director
Compensation Plan approved December 5, 2006.
|
31.1
|
|
Rule 13a-14(a) certification
of the Chief Executive Officer.
|
31.2
|
|
Rule 13a-14(a) certification
of the Chief Financial Officer.
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
|
*
Management contract or
compensatory plan or arrangement.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Superior
Essex Inc.
|
|
|
|
By:
|
/s/
DAVID S. ALDRIDGE
|
|
|
David
S. Aldridge
|
|
|
Executive
Vice President, Chief Financial Officer
|
|
|
and
Treasurer
|
|
|
(duly
authorized officer and principal financial
|
Date:
August 7, 2008
|
|
officer)
|
55
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