SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-4743
STANDARD MOTOR PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 392-0200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------- -----------------------------------------
Common Stock, par value $2.00 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the voting common stock based on the closing price
on the New York Stock Exchange on June 30, 2003 (the last business day of
registrant's most recently completed second fiscal quarter) of $11.10 per share
held by non-affiliates of the registrant was $151,463,862. For purposes of the
foregoing calculation, all directors and officers have been deemed to be
affiliates, but the registrant disclaims that any of such are affiliates.
As of the close of business on February 27, 2004, there were 19,736,773
outstanding shares of the registrant's common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth
herein, is incorporated herein by reference from the registrant's definitive
proxy statement relating to the annual meeting of stockholders to be held in
2004, which definitive proxy statement shall be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year to which
this Report relates.
STANDARD MOTOR PRODUCTS, INC.
INDEX
PART I PAGE
Item 1 Business ............................................................................ 3
Item 2 Properties .......................................................................... 14
Item 3 Legal Proceedings ................................................................... 16
Item 4 Submission of Matters to a Vote of Security Holders ................................. 16
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ............... 17
Item 6 Selected Financial Data ............................................................. 17
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk .......................... 31
Item 8 Financial Statements and Supplementary Data ......................................... 32
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 33
Item 9A Controls and Procedures ............................................................. 33
PART III
Item 10 Directors and Executive Officers of the Registrant .................................. 33
Item 11 Executive Compensation .............................................................. 33
Item 12 Security Ownership of Certain Beneficial Owners and Management ...................... 34
Item 13 Certain Relationships and Related Transactions ...................................... 34
Item 14 Principal Accounting Fees and Services .............................................. 34
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 35
Signatures .......................................................................... 39
2
PART I
In this Annual Report on Form 10-K "Standard Motor Products," "we", "us", "our",
and the "Company" refer to Standard Motor Products, Inc. and its subsidiaries,
unless the context requires otherwise.
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS BASED ON EXPECTATIONS, ESTIMATES
AND PROJECTIONS AS OF THE DATE OF THIS FILING. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. SEE ITEM 7--
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FORWARD-LOOKING STATEMENTS."
ITEM 1. BUSINESS
OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific line of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts.
We sell our products primarily to warehouse distributors and large retail chains
in the United States, Canada and Latin America. We also sell our products in
Europe through our European Segment. Our customers consist of many of the
leading warehouse distributors, such as Carquest and NAPA Auto Parts, as well as
many of the leading auto parts retail chains, such as Advance Auto Parts,
AutoZone, CSK Auto, O'Reilly Automotive and Pep Boys. We distribute parts under
our own brand names, such as Standard, Blue Streak, Echlin, Niehoff and Four
Seasons, and through private labels, such as Carquest and NAPA Auto Parts.
BUSINESS STRATEGY
Our goal is to grow revenues and earnings and deliver returns in excess of our
cost of capital by providing high quality, low cost replacement parts in the
engine management and temperature control automotive aftermarkets. The key
elements of our strategy are as follows:
o MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE
MANAGEMENT AND TEMPERATURE CONTROL BUSINESSES. We are one of the
leading independent manufacturers serving North America and
other geographic areas in our core businesses of Engine
Management and Temperature Control. We believe that our success
is attributable to our emphasis on product quality, the breadth
and depth of our product lines for both domestic and imported
automobiles, and our reputation for outstanding customer
service, as measured by rapid order turn-around times and
high-order fill rates.
To maintain our strong competitive position in our markets, we
remain committed to the following:
o providing our customers with broad lines of high quality engine
management and temperature control products, supported by the
highest level of customer service and reliability;
o continuing to maximize our production and distribution
efficiencies;
o continuing to improve our cost position; and
o focusing further our engineering development efforts.
3
o PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND
TECHNICAL SUPPORT. Our goal is to increase sales to existing and
new customers by leveraging our skills in rapidly filling
orders, maintaining high levels of product availability and
providing technical support in a cost-effective manner. In
addition, our technically-skilled sales force professionals
provide product selection and application support to our
customers.
o EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our
sales by continuing to develop and expand the range of Engine
Management and Temperature Control products that we offer to our
customers. We are committed to investing the resources necessary
to maintain and expand our technical capability to manufacture
multiple product lines that incorporate the latest technologies
developed by OEMs in North America and Europe.
o BROADEN OUR CUSTOMER BASE. Our goal is to increase our business
by marketing our products more broadly to the distribution
businesses of OEMs who sell products to new car dealer service
areas.
o IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management
places significant emphasis on improving our financial
performance, by achieving operating efficiencies and improving
asset utilization, while maintaining product quality and high
customer order fill rates. We have a proven track record of
managing costs and improving operating efficiency through
consolidating redundant functions and realizing cost savings in
our business. We intend to continue to improve our operating
efficiency and cost position by:
o increasing cost-effective vertical integration in key product
lines through internal development;
o focusing on efficient inventory management, including warranty
and overstock return management;
o maintaining and improving our cost effectiveness and
competitive responsiveness to better serve the automotive
aftermarket customer base;
o adopting company-wide programs geared toward manufacturing and
distribution efficiency; and
o initiating company-wide overhead and operating expense cost
reduction programs, such as closing excess facilities.
o REDUCE OUR DEBT. We intend to apply any excess cash flow from
operations and the management of working capital to reduce our
outstanding indebtedness.
ACQUISITION
On June 30, 2003, we completed the acquisition of substantially all of the
assets and assumed substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM"). DEM's customers consist of many
of the leading warehouse distributors, such as NAPA Auto Parts, as well as many
of the leading auto parts retail chains, such as CSK Auto, O'Reilly Automotive
and Pep Boys. We are familiar with a great majority of them. Certain of these
customers are already customers of ours to a limited extent or are customers in
different product lines of ours. DEM's products enjoy strong brand recognition
with its many leading automotive product names, including Echlin, Borg Warner
and Niehoff, as well as with private labels through NAPA Auto Parts. In
connection with the acquisition, we have reviewed our operations and implemented
integration plans to restructure the operations of DEM. We will close seven of
the DEM facilities. See Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operation for further discussion.
On February 3, 2004, we acquired the Canadian distribution of Dana Corporation's
Engine Management Group for approximately $1 million. As part of the
acquisition, we acquired inventory and will be relocating it into our
distribution facility in Mississauga, Canada.
4
THE AUTOMOTIVE AFTERMARKET
The automotive aftermarket industry is comprised of a large, diverse number of
manufacturers varying in product specialization and size. In addition to
manufacturing, aftermarket companies allocate resources towards an efficient
distribution process and product engineering in order to maintain the
flexibility and responsiveness on which their customers depend. Aftermarket
manufacturers must be efficient producers of small lot sizes and do not have to
provide systems engineering support. Aftermarket manufacturers also must
distribute, with rapid turnaround times, products for a full range of vehicles
on the road.
The primary customers of the automotive aftermarket manufacturers are national
and regional warehouse distributors, large retail chains, automotive repair
chains and the dealer service networks of the OEM's.
During periods of economic decline or weakness, more automobile owners may
choose to repair their current automobiles using replacement parts rather than
purchasing new automobiles, which benefits the automotive aftermarket industry,
including suppliers like us. The automotive aftermarket industry is also
dependent on new car sales, although to a lesser degree than original equipment
manufacturers, or OEMs, and their suppliers, because these sales create the
total number of cars available for repair. Despite the current economic climate,
the current interest rate environment and aggressive financing programs by
automakers has increased demand for new cars and trucks, which should benefit
the automotive aftermarket manufacturers in the long term as vehicles age.
The automotive aftermarket industry differs substantially from the OEM supply
business. Unlike the OEM supply business that primarily follows trends in new
car production, the automotive aftermarket industry's performance primarily
tends to follow different trends, such as:
o growth in number of vehicles on the road;
o increase in average vehicle age;
o increase in total miles driven per year;
o new and modified environmental regulations;
o increase in pricing of new cars; and
o new car quality and related warranties.
Traditionally, the supply arms of OEMs and the independent manufacturers who
supply the original equipment part applications have supplied a majority of the
business to new car dealer networks. However, Ford and General Motors have
recently moved to make their supply arms more independent, which may provide
future opportunities for us to supply replacement parts to the dealer networks
of the OEM's, both for warranty and out-of-warranty repairs.
5
FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS
The table below shows our consolidated net sales by operating segment and by
major product group within each segment for the three years ended December 31,
2003. Our three reportable operating segments are Engine Management (i.e.
effective June 30, 2003, Engine Management includes DEM), Temperature Control
and Europe.
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------------------
2003 2002 2001
------------------------ ---------------------------- ------------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- ----------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission
Parts ................. $337,134 49.7% $232,511 38.9% $218,694 37.0%
Wires and Cables ......... 69,528 10.2% 63,267 10.6% 58,720 9.9%
Fuel System Parts ....... 7,713 1.1% 7,334 1.2% 8,084 1.4%
-------- ----- -------- ----- -------- -----
TOTAL ENGINE MANAGEMENT ....... 414,375 61.0% 303,112 50.7% 285,498 48.3%
-------- ----- -------- ----- -------- -----
TEMPERATURE CONTROL:
Compressors ............... 89,676 13.2% 105,301 17.6% 117,965 19.9%
Other Air Conditioning
Parts ................... 117,720 17.3% 136,973 22.9% 138,542 23.4%
Heating Parts ............ 12,180 1.8% 12,814 2.1% 13,349 2.3%
-------- ----- -------- ----- -------- -----
TOTAL TEMPERATURE CONTROL ... 219,576 32.3% 255,088 42.6% 269,856 45.6%
-------- ----- -------- ----- -------- -----
EUROPE:
Engine Management Parts . 27,514 4.1% 26,575 4.4% 26,315 4.4%
Temperature Control Parts 12,627 1.9% 9,453 1.6% 7,134 1.2%
-------- ----- -------- ----- -------- -----
TOTAL EUROPE ................. 40,141 6.0% 36,028 6.0% 33,449 5.6%
-------- ----- -------- ----- -------- -----
ALL OTHER .................... 4,691 0.7% 4,209 0.7% 2,849 0.5%
-------- ----- -------- ----- -------- -----
TOTAL ................... $678,783 100.0% $598,437 100.0% $591,652 100.0%
======== ===== ======== ===== ======== =====
The table below shows our operating profit and identifiable assets by operating
segment for the three years ended December 31, 2003.
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- --------------------------- --------------------------
OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE
PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Engine Management ........ $ 31,871 $ 448,687 $ 41,844 $ 247,318 $ 26,432 $ 233,564
Temperature Control ...... 4,702 150,248 10,095 157,343 3,624 182,083
Europe .................... (3,605) 31,188 (10,464) 30,728 (1,718) 40,407
All Other ................ (17,153) 64,402 (16,407) 55,369 (13,215) 53,375
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ................... $ 15,815 $ 694,525 $ 25,068 $ 490,758 $ 15,123 $ 509,429
=========== =========== =========== =========== =========== ===========
"All Other" consists of items pertaining to our corporate headquarters function,
as well as our Canadian business unit that do not meet the criteria of a
reportable operating segment.
6
ENGINE MANAGEMENT SEGMENT
BREADTH OF PRODUCTS. In our Engine Management Segment, which effective June 30,
2003 includes DEM, replacement parts for ignition and emission control systems
accounted for approximately 50%, 39% and 37% of our consolidated net sales in
2003, 2002 and 2001, respectively. These parts include distributor caps and
rotors, electronic ignition control modules, voltage regulators, coils,
switches, sensors and EGR valves. We are a basic manufacturer of many of the
ignition parts we market and continue to develop ways of increasing the number
of parts we manufacture, rather than purchasing such parts from third parties.
The Independence, Kansas DEM facility, which is one of the DEM facilities which
will remain operating, will further enhance our ability to be a basic
manufacturer with ignition and emission control systems.
COMPUTER CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped
with computer-controlled engine management systems to control ignition, emission
control and fuel injection. The on-board computers monitor inputs from many
types of sensors located throughout the vehicle, and control a myriad of valves,
switches and motors to manage engine and vehicle performance. Electronic
ignition systems enable the engine to improve fuel efficiency and reduce the
level of hazardous fumes in exhaust gases. Electronic control modules and
electronic voltage regulators comprised approximately 10%, 12% and 13% of our
total ignition and emission consolidated net sales in 2003, 2002 and 2001,
respectively.
In 1992, we entered into a 50/50 joint venture in Canada with Blue Streak
Electronics, Inc. to rebuild automotive engine management computers and mass air
flow sensors. The volume of products produced by the joint venture are sold
primarily to us and has positioned us as a key supplier in the growing
remanufactured electronics markets. The Blue Streak joint venture has further
expanded its product range to include computers used in temperature control,
anti-lock brake systems and air bags.
We divide our electronic operations between product design and highly automated
manufacturing operations in Orlando, Florida and assembly operations, which are
performed in assembly plants in Orlando and Hong Kong.
Government emission laws have been implemented throughout the majority of the
United States. The Clean Air Act, as amended in 1990, imposes strict emission
control test standards on existing and new vehicles, and remains the preeminent
legislation in the area of vehicle emissions. As many states have implemented
required inspection/maintenance tests, the Environmental Protection Agency,
through its rulemaking ability, has also encouraged both manufacturers and
drivers to reduce vehicle emissions. As the Clean Air Act was "phased in"
beginning in 1994, automobiles must now comply with emission standards from the
time they were manufactured, and in most states, until the last day they are in
use. This law has, and in the future we expect this law and other new government
emission laws to have, a positive impact on sales of our ignition and emission
controls parts. Vehicles failing these new, more stringent tests have required
repairs utilizing parts sold by us.
Our sales of sensors, valves, solenoids and related parts have increased
steadily as automobile manufacturers equip their cars with more complex engine
management systems.
WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 10%,
11% and 10% of our consolidated net sales in 2003, 2002 and 2001, respectively.
These products include ignition (spark plug) wires, battery cables and a wide
range of electrical wire, terminals, connectors and tools for servicing an
automobile's electrical system.
The largest component of this product line is the sale of ignition wire sets. We
have historically offered a premium brand of ignition wires and battery cables
which capitalize on the market's awareness of the importance of quality.
In 1999, we relocated two of our wire and cable operations, one in Dallas, Texas
and the other in Bradenton, Florida, to a new facility in Reynosa, Mexico. The
Mexican operation focuses on assembly and packaging of the economy wire sets,
while our premium line is manufactured at our facility in Edwardsville, Kansas.
7
With the acquisition of DEM's business, we acquired the ability to extrude our
own wire in Mishawaka, Indiana to be used in our ignition wire sets. This
vertical integration of a critical component offers us the ability to achieve
lower costs and our own controlled source of supply and quality.
TEMPERATURE CONTROL SEGMENT
We manufacture, remanufacture and market a broad line of replacement parts for
automotive temperature control and cooling systems (air conditioning, heating
and engine cooling), primarily under the brand names of Four Seasons, Factory
Air, Murray, Trumark, NAPA, Carquest, Hayden and Imperial. The major product
groups sold by our Temperature Control Segment are new and remanufactured
compressors, blower and radiator fan motors, dryers, evaporators, accumulators,
hoses, heater cores, heater valves, fan assemblies, fan clutches, engine oil
coolers, and transmission coolers. Our temperature control products accounted
for approximately 32%, 43% and 46% of our consolidated net sales in 2003, 2002
and 2001, respectively.
A major factor in the Temperature Control Segment's business is the federal
regulation of ozone depleting chlorofluorocarbon refrigerants United States
legislation phased out the production of domestic R-12 refrigerant. (e.g.,
DuPont's Freon) completely by the end of 1995. As the new law became effective,
vehicle air conditioners needing repair or recharge were retrofitted to use the
new R-134a refrigerant. New vehicle manufacturers began to use the new R-134a
refrigerant in 1993 and today the vast majority of the U.S. vehicle fleet uses
this refrigerant. Service dealers continue to seek training and certification in
the new technology and our Temperature Control Segment has taken the lead in
providing this training and certification. Additionally, we reengineered our
compressor line to be able to operate efficiently utilizing either R-12 or
R-134a refrigerants, and remain a leader in providing retrofit kits for
conversion of R-12 systems.
EUROPE SEGMENT
In July 1996, we acquired an equity interest in Standard Motor Products (SMP)
Holdings Limited (formerly Intermotor Holdings Limited) located in Nottingham,
England. This was our first investment in Europe. (During 2002, we acquired the
remaining equity interest bringing the Company's ownership percentage to 100%).
SMP Holdings Limited manufactures and distributes a broad line of engine
management products primarily to customers in Europe. Also in 1996, we expanded
our presence in Europe by opening a European distribution center in Strasbourg,
France for temperature control products. A joint venture (Blue Streak-Europe)
between SMP Holdings Limited and Blue Streak Electronics was also initiated in
1996, which supplies rebuilt engine computers for the European market.
Since 1996, we have made a series of smaller acquisitions supplementing both the
Engine Management and Temperature Control portions of the business. With respect
to the engine management business, in January 1999 we acquired Webcon UK
Limited, an assembler and distributor of fuel system components. (We
subsequently divested the Webcon product line in the third quarter of 2003
incurring an $0.8 million loss.) In 1999, we acquired Lemark Auto Accessories, a
supplier of wire sets. In January 1999, Blue Streak Europe acquired Injection
Correction UK LTD, and in September 2001, it also acquired TRW Inc.'s electronic
control unit remanufacturing division, also located in the United Kingdom. In
April of 2002, the wire business was further expanded by acquiring Carol Cable
Limited, a manufacturer and distributor of wire.
With respect to the temperature control portion of the business, following the
opening of the distribution center in France, in 1997 a joint venture was
entered into with Valeo, SA to remanufacture air conditioner compressors for the
European market. In addition, in January 2000 we acquired Four Seasons UK Ltd.
(formerly Vehicle Air Conditioning Parts Ltd.) a distributor of components for
the repair of air conditioning systems. In July 2000, the Temperature Control
business was further expanded by purchasing Automotive Heater Exchange SRL in
Italy.
Our European Segment accounted for approximately 6% of our consolidated net
sales in 2003, 2002, and 2001, respectively. Aftermarket margins are under
pressure from OE suppliers, while volumes are in a general decline in the
ignition and carburetor product lines. The combination of factors has had a
negative impact on Engine Management product sales with increasing amounts of
underabsorbed overhead. We are currently focusing on ways of reducing
manufacturing costs, including outsourcing products where their respective
8
volumes are declining and margins can be improved by outsourcing. In addition,
we have made investments in capital projects to facilitate the sale of new OE
niche customers and the aftermarket. We have also consolidated certain
facilities and are reducing costs wherever we can.
Unlike Engine Management sales, European Temperature Control product sales are
increasing. Through acquisitions and more importantly a growing market, net
sales have increased from $6.1 million in 2000 to $12.6 million in 2003. To
date, the focus has been on product coverage and high customer service levels.
We have consolidated certain facilities and are reducing costs wherever we can.
FINANCIAL INFORMATION ABOUT OUR FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We sell our line of products primarily in the United States, with additional
sales in Canada, Europe and Latin America. Our sales are substantially
denominated in U.S. dollars.
The table below shows our consolidated net sales by geographic area for the
three years ended December 31, 2003:
Year Ended
December 31,
---------------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands)
United States ............. $ 584,853 $ 512,055 $ 515,322
Europe ..................... 40,141 36,028 33,449
Canada ..................... 38,187 32,188 28,811
Other Foreign ............. 15,602 18,166 14,070
---------- ---------- ----------
Total .................. $ 678,783 $ 598,437 $ 591,652
========== ========== ==========
The table below shows our long-lived assets by geographical area for the three
years ended December 31, 2003:
Year Ended
December 31,
---------------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands)
United States ............. $ 173,817 $ 109,778 $ 118,455
Europe ..................... 7,246 7,153 17,301
Canada ..................... 2,496 2,450 2,829
Other Foreign ............. 833 1,124 1,101
---------- ---------- ----------
Total .................. $ 184,392 $ 120,505 $ 139,686
========== ========== ==========
SALES AND DISTRIBUTION
Over the last ten years, there has been a trend toward consolidation in the
distribution chain, both by warehouse distributors and retailers, and both
vertically and horizontally. In the traditional distribution channel, where we
sell our products to warehouse distributors, such distributors supply auto parts
jobbers, who in turn sell to professional mechanics and to consumers who perform
automotive repairs themselves. In recent years, distributors have been
consolidating with other distributors, as well as jobbers. An increasing number
of distributors own their jobbers. In addition, in certain cases jobbers have
consolidated and formed their own buying group. In the retail distribution
channel, retailers, who buy directly from us, sell directly to technicians and
"do it yourselfers". Retailers are also consolidating among themselves and
expanding into the jobber market.
9
As automotive parts grow more complex, consumers are less likely to service
their own vehicles and may become more reliant on dealers and technicians. In
addition to new car sales, automotive dealers sell "name brand" aftermarket
parts and accessories and also service vehicles. The products available through
the dealers are purchased through the original equipment service network, or OES
network. Traditionally, the supply arms of OEM's have supplied a majority of OES
network. However, the supply arms of certain OEM's have become more independent,
which is providing opportunities for independent automotive aftermarket
manufacturers like us to supply the OES network.
We believe that our sales force is the premier direct sales force for our
product lines. We believe the primary reason for this reputation is our high
concentration of highly-qualified, well-trained salespeople dedicated to
geographic territories, which allows us to provide a level of customer service
that we believe is unmatched. From the outset, we thoroughly train our
salespeople both in the function and application of our product lines , as well
as in proven sales techniques. Customers, therefore, depend on these salespeople
as a reliable source for technical information. We give newly hired salespeople
extensive instruction at our training facility in Irving, Texas and have a
policy of continuing education that allows our sales force to stay current on
troubleshooting and repair techniques, as well as the latest automotive parts
and systems technology.
We generate demand for our products by directing a significant portion of our
sales effort to the end-customers' customers (i.e. jobbers and professional
technicians). We also conduct instructional clinics, which teach technicians how
to diagnose and repair complex systems related to our products. To help our
salespeople to be teachers and trainers, we focus our recruitment efforts on
candidates who already have strong technical backgrounds as well as sales
experience. We also create demand for our products through the Standard Plus
Club. Our Standard Plus Club, a professional service dealer network offers
technical and business development support and has a technical service telephone
hotline which provides diagnostics and installation support. This club is
available to technicians and provides training, special discount programs and
on-line diagnostics assistance.
In connection with our sales activities, we offer several types of discounts and
allowances. We believe these discounts and allowances are a common practice
throughout the automotive aftermarket industry. First, we offer cash discounts
for paying invoices in accordance with the discounted terms of the invoice.
Second, we offer pricing discounts based on volume and different product lines
purchased from us. Supplementally, rebates and discounts are provided to
customers as advertising and sales force allowances. In addition to the
aforementioned discounts and rebates, allowances for warranty and overstock
returns are also provided.
CUSTOMERS
Our customer base is comprised largely of warehouse distributors, large jobber
outlets, other manufacturers and export customers. In addition to serving our
traditional customer base, we have expanded into the retail market by selling to
large retail chains such as Advance Auto Parts, AutoZone, CSK Auto, O'Reilly
Automotive and Pep Boys. Our retail channel of distribution has grown
significantly from approximately $41 million in consolidated net sales to
retailers in 1993 to approximately $166 million in 2003.
In 1997, we commenced distributing our products through the OES supplier
channel, and sold approximately $3 million in consolidated net sales to OES
suppliers which increased to approximately $38 million in 2003.
Our five largest individual customers accounted for 43% of our 2003 consolidated
net sales. One individual customer accounted for 12% of our 2003 consolidated
net sales.
COMPETITION
We are a leading independent manufacturer of replacement parts for the product
lines in Engine Management and Temperature Control. We compete primarily on the
basis of price, product quality, customer service, product coverage, product
availability, order turn-around time and order fill rate. We believe we
differentiate ourselves from our competitors primarily through:
10
o a value-added, knowledgeable sales force;
o extensive product coverage;
o sophisticated parts cataloguing systems; and
o inventory levels sufficient to meet the rapid delivery
requirements of customers.
In the engine management business, we are one of the leading independent
manufacturers in the United States. Our significant competitors include Delco
Electonics Corporation, Delphi Corporation, Federal-Mogul Corporation, Robert
Bosch Corporation and Wells Manufacturing Corporation.
Our temperature control business is one of the leading independent producers and
distributors of a full line of temperature control products in North America and
other geographic areas. Delphi Corporation, Visteon Corporation, AC Delco,
Transpro, Inc. and Jordan Automotive Aftermarket, Inc. are some of our key
competitors in this market.
Although we are a leading independent manufacturer of automotive replacement
parts with strong brand name recognition, we face substantial competition in all
markets that we serve. The automotive aftermarket is highly competitive and our
success in the marketplace continues to depend on our ability to offer
competitive prices, improved products and expanded offerings in competition with
many other suppliers to the aftermarket. Some major manufacturers of replacement
parts are divisions of companies having greater financial, marketing and other
resources than we do. In addition, automobile manufacturers supply virtually
every replacement part sold by us, although these manufacturers generally supply
parts only for cars they produce.
SEASONALITY
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather.
For example, a cool summer may lessen the demand for our Temperature Control
products, while a hot summer may increase such demand. As a result of this
seasonality and variability in demand of our Temperature Control products, our
working capital requirements peak near the end of the second quarter, as the
inventory build-up of air conditioning products is converted to sales and
payments on the receivables associated with such sales have yet to be received.
During this period, our working capital requirements are typically funded by
borrowings from our revolving credit facility.
The seasonality of our business offers significant operational challenges in our
manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our "Spring promotion", in which customers
are offered a choice of a price discount or longer payment terms.
WORKING CAPITAL MANAGEMENT
Automotive aftermarket companies have been under increasing pressure to provide
broad SKU (stock keeping unit) coverage in response to parts and brand
proliferation. Since 1996, we have made significant changes to the inventory
management system to reduce inventory requirements. We launched a new
forecasting system in our Engine Management Segment that permitted a significant
reduction in safety stocks. Our Engine Management Segment also introduced a new
distribution system in the second half of 1999, which permits pack-to-order
systems to be implemented. Such systems permit us to retain slow moving items in
a bulk storage state until an order for a specific brand part is received. This
system reduces the volume of a given part in inventory and reduces the labor
requirements to package and repackage inventory. We instituted an aggressive
inventory reduction campaign initiated in 2001. We targeted a minimum $30
million inventory reduction in 2001, but exceeded our goal by reducing inventory
by $57 million that year. In 2002 and 2003, we further reduced inventory by $8
million and $4 million, respectively, before giving consideration to the DEM
acquisition. Importantly, while reducing inventory levels, we maintained
customer service fill rate levels of approximately 93%. By the end of 2004, we
plan on reducing inventories further as DEM begins to become integrated.
11
We face inventory management issues as a result of warranty and overstock
returns. Many of our products carry a warranty ranging from a 90-day limited
warranty to a lifetime limited warranty, which generally covers defects in
materials or workmanship and failure to meet industry published specifications.
In addition to warranty returns, we also permit our customers to return products
to us within customer-specific limits in the event that they have overstocked
their inventories. In particular, the seasonality of our Temperature Control
Segment requires that we increase our inventory during the winter season in
preparation of the summer selling season and customers purchasing such inventory
have the right to make returns.
In order to better control warranty and overstock return levels, beginning in
2000 we tightened the rules for authorized warranty returns, placed further
restrictions on the amounts customers can return and instituted a program so
that our management can better estimate potential future product returns. In
addition, with respect to our air conditioning compressors, our most significant
customer product warranty returns, we established procedures whereby a warranty
will be voided if a customer does not follow a twelve step warranty return
process.
Our profitability and working capital requirements have become more seasonal
with the increased sales mix of temperature control products. Our working
capital requirements peak near the end of the second quarter, as the inventory
build-up of air conditioning products is converted to sales and payments on the
receivables associated with such sales have yet to be received. These increased
working capital requirements are funded by borrowings from our revolving credit
facility.
SUPPLIERS
The principal raw materials purchased by us consist of brass, electronic
components, fabricated copper (primarily in the form of magnet and insulated
cable), ignition wire, stainless steel coils and rods, aluminum coils and rods,
lead, rubber molding compound, thermo-set and thermo plastic molding powders.
Additionally, we use components and cores (used parts) in our remanufacturing
processes for computerized electronics and air conditioning compressors.
We purchase many materials in the U.S. open market, but do have a limited number
of supply agreements on key components. A number of prime suppliers make these
materials available. In the case of cores, we obtain them either from exchanges
with customers who return cores when purchasing remanufactured parts, or through
direct purchases from a network of core brokers.
We believe there is an adequate supply of primary raw materials and cores. In
order to ensure a consistent, high quality, low cost supply of key components
for each product line, we continue to develop our own sources through internal
manufacturing capacity. Recently, prices of steel and other commodities have
risen. These increases did not have a material impact on us as we are not
dependent on any single commodity, however, there can be no assurance over the
long-term.
PRODUCTION AND ENGINEERING
We engineer, tool and manufacture many of the components for our products,
except for some commonly available small component parts from outside suppliers.
We also perform our own plastic and rubber molding operations, stamping and
machining operations, automated electronics assembly and a wide variety of other
processes. In the case of remanufactured components, we conduct our own
teardown, diagnostics and rebuilding for computer modules and air conditioning
compressors. We have found this level of vertical integration to provide
advantages in terms of cost, quality and availability. We intend to selectively
continue efforts toward further vertical integration to ensure a consistent
quality and supply of low cost components. The DEM acquisition has expanded our
ability to become a "basic" supplier.
12
We use the "just-in-time" cellular manufacturing concept as a major program to
lower costs and improve efficiency. The main thrust of "just-in-time" cellular
manufacturing is reducing work-in-process and finished goods inventory, and its
implementation reduces the inefficient operations that burden many manufacturing
processes. In 2000, we launched a program for the installation of a fully
integrated enterprise resource planning (ERP) system. The implementation was
completed in 2003 in our Temperature Control Segment. The existing Engine
Management information system continues to meet the needs of our Engine
Management Segment with DEM facilities being converted onto such systems during
2004.
EMPLOYEES
As of December 31, 2003, we employed approximately 3,500 people in the United
States, and 1,000 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong.
Of these, approximately 3,200 are production employees. With the closing of the
DEM facilities, during 2004, we expect a net reduction of approximately 600
people from the approximate 1,900 employed in June 2003. We operate primarily in
non-union facilities and have binding labor agreements with the workers at our
two unionized facilities. We have approximately 130 production employees in
Edwardsville, Kansas who are covered by a contract with The International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
("UAW") that expires April 7, 2005. As of December 31, 2003, approximately 130
of our production employees in Long Island City, New York are under a UAW
contract that expires October 2, 2004. We also have a union relationship in
Mexico with an agreement negotiated each year. The current union agreement in
Mexico, which covers approximately 250 employees, expires on January 29, 2005.
We believe that our facilities are in favorable labor markets with ready access
to adequate numbers of skilled and unskilled workers, and we believe our
relations with our union and non-union employees are good.
INSURANCE
We maintain basic liability coverage up to $2 million for automobile liability,
general and product liability and $50 million for umbrella liability coverage.
We also maintain two $10 million environmental policies to cover our existing
facilities, except for one of our facilities which is currently undergoing minor
environmental remediation and for the locations obtained from our acquisition of
DEM. The environmental remediation costs at such facility are covered by an
insurance policy of $3 million, which is subject to a $1.5 million deductible.
Historically, we have not experienced casualty losses in any year in excess of
our coverage. We have no reason to expect this experience to change, but can
offer no assurances that liability losses in the future will not exceed our
coverage.
AVAILABLE INFORMATION
We are a New York corporation founded in 1919. Our principal executive offices
are located at 37-18 Northern Boulevard, Long Island City, New York 11101, and
our main telephone number at that location is (718) 392-0200. Our Internet
address is WWW.SMPCORP.COM. We provide a link to reports we have filed with the
SEC. However, for those persons that make a request in writing or by e-mail
([email protected]), we will provide free of charge our Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 .
13
ITEM 2. PROPERTIES
We maintain our executive offices and a manufacturing plant in Long Island City,
New York.
The table below describes our principal physical properties.
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
- ------------------- ---------- --------------------------------------------------- ----------- -----------
ENGINE MANAGEMENT
Orlando FL Manufacturing (Ignition) 50,640 2007
Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned
Wilson NC Manufacturing (Ignition) 31,500 2008
Reno NV Distribution (Ignition) 67,000 Owned
Long Island City NY Administration and Manufacturing (Ignition) 294,000 Owned
Greenville SC Manufacturing (Ignition) 181,525 Owned
Disputanta VA Distribution (Ignition) 411,000 Owned
Fajardo Puerto Rico Manufacturing (Ignition) 114,000 2007
Hong Kong HK Manufacturing (Ignition) 21,350 2005
Reynosa Mexico Manufacturing (Wire) 62,500 2009
Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned
Nottingham England Manufacturing (Ignition) 46,777 Owned
Nottingham England Manufacturing (Ignition) 10,000 2012
Wellingborough England Manufacturing (Wire) 18,500 2017
ACQUIRED LOCATIONS FROM DEM
* Nashville TN Distribution 625,000 2021
* Branford CT Manufacturing 187,000 Owned
* Guilford CT Office, partial sub-lease 27,689 2006
* Northvale NJ Vacant 20,000 2004
Mishawaka IN Manufacturing 153,066 Owned
* Argos IN Manufacturing 65,520 Owned
* Franklin Park IL Office/Storage 136,600 2006
Independence KS Manufacturing 273,388 Owned
* Independence KS Vacant 51,770 Owned
Pensacola FL Storage 990 2004
* Locations that will be closed as previously announced in our integration
plans.
TEMPERATURE CONTROL
Corona CA Manufacturing and Distribution 78,200 2008
Lewisville TX Administration and Distribution 415,000 2009
Fort Worth TX Manufacturing and Distribution 204,000 Owned
Fort Worth TX Manufacturing and Distribution 103,000 2004
Grapevine TX Manufacturing 180,000 Owned
St. Thomas Canada Manufacturing 40,000 Owned
Strasbourg France Administration and Distribution 16,146 2004
Massa Italy Administration and Distribution 13,100 2004
Grapevine TX Storage 83,125 2004
Grapevine TX Storage 5,000 2005
14
ITEM 2. PROPERTIES (CONTINUED)
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
- ------------------- ---------- --------------------------------------------------- ----------- -----------
TEMPERATURE CONTROL/ENGINE MANAGEMENT
Mississauga Canada Administration and Distribution (Ignition, Wire, 128,400 2006
Temperature Control)
OTHER
Cumming GA Vacated 77,000 2007
Irving TX Training Center 13,400 2004
Long Island City NY Storage 16,234 2013
Sunbury at
Thames England Vacated but partially subleased 28,095 2007
The real property we own in Kansas, Nevada, South Carolina, Virginia and Texas
is encumbered by a mortgage or deed of trust, as applicable, in favor of General
Electric Capital Corporation, as agent for our secured revolving credit
facility.
15
ITEM 3. LEGAL PROCEEDINGS
On January 28, 2000, a former significant customer of ours which is currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court filed claims against
a number of its former suppliers, including us. The claim against us alleged
$0.5 million of preferential payments in the 90 days prior to the related
Chapter 11 bankruptcy petition. The claim pertaining to the preferential
payments was settled for an immaterial amount during the second quarter of 2002.
In addition, this former customer seeks $9.4 million from us for a variety of
claims including antitrust, breach of contract, breach of warranty and
conversion. These latter claims arise out of allegations that this customer was
entitled to various discounts, rebates and credits after it filed for
bankruptcy. We have purchased insurance with respect to the actions. On August
22, 2002, the court dismissed the antitrust claims. On July 8, 2003, the
remaining claims were settled without any material financial effect on our
business, financial condition or results of operations.
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2001, approximately 100 cases were outstanding for which we were
responsible for any related liabilities. At December 31, 2002, the number of
cases outstanding for which we were responsible for related liabilities
increased to approximately 2,500, which include approximately 1,600 cases filed
in December 2002 in Mississippi. We believe that these Mississippi cases filed
against us in December 2002 were due in large part to potential plaintiffs
accelerating the filing of their claims prior to the effective date of
Mississippi's tort reform statute in January 2003, which statute eliminated the
ability of plaintiffs to file consolidated cases. At December 31, 2003,
approximately 3,300 cases were outstanding for which we were responsible for any
related liabilities. Since inception in September 2001, the amounts paid for
settled claims are $1.1 million. We do not have insurance coverage for the
defense and indemnity costs associated with these claims. We recorded a
liability associated with future settlements through 2052 and recorded an after
tax charge of $16.9 million as a loss from a discontinued operation during the
third quarter of 2002 to reflect such liability. See Note 17 of Notes to
Consolidated Financial Statements for further discussion.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock trades publicly on the New York Stock Exchange under the
trading symbol "SMP." The following table shows the high and low sales prices
per share of our common stock as reported by the New York Stock Exchange and the
dividends declared per share for the periods indicated:
HIGH LOW DIVIDEND
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter......................... $ 15.70 $ 11.10 $ 0.09
Second Quarter........................ 13.62 10.50 0.09
Third Quarter......................... 11.72 9.25 0.09
Fourth Quarter........................ 12.36 9.10 0.09
FISCAL YEAR ENDED DECEMBER 31, 2002
First Quarter......................... $ 15.15 $ 12.90 $ 0.09
Second Quarter........................ 17.04 14.30 0.09
Third Quarter......................... 17.39 10.63 0.09
Fourth Quarter........................ 13.90 9.45 0.09
The last reported sale price of our common stock on the NYSE on February 27,
2004 was $13.88 per share. As of February 27, 2004, there were 490 holders of
record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our
board of directors and depend on our profitability, financial condition, capital
needs, future prospects, and other factors deemed relevant by our board. Our
current policy is to pay dividends on a quarterly basis. Our credit agreement
permits dividends and distributions by us provided specific conditions are met.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the last
five years ended December 31, 2003. This selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the notes thereto included elsewhere in this Form 10-K.
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Net sales(1)..................... $ 678,783 $598,437 $591,652 $601,392 $653,451
Gross profit(1).................. 174,772 157,544 139,055 162,701 170,809
Operating income................. 15,815 25,068 15,123 30,711 30,223
Earnings (loss) from continuing
operations (2)................. 224 6,091 (2,485) 9,729 7,625
Net earnings (loss)(3)(4)........ (1,518) (30,556) (2,485) 9,729 7,625
17
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
PER SHARE DATA:
Earnings (loss) from continuing
operations:
Basic........................ $ 0.01 $ 0.51 $ (0.21) $ 0.82 $ 0.58
Diluted...................... 0.01 0.51 (0.21) 0.81 0.58
Net earnings (loss) per common share:
Basic........................ (0.10) (2.57) (0.21) 0.82 0.58
Diluted...................... (0.10) (2.54) (0.21) 0.81 0.58
Cash dividends per common
share............................ 0.36 0.36 0.36 0.36 0.34
OTHER DATA:
Depreciation and amortization.... $17,092 $ 16,128 $18,909 $ 18,922 $ 17,230
Capital expenditures............. 8,926 7,598 13,740 16,652 14,423
Dividends........................ 5,615 4,290 4,236 4,324 4,456
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents........ $19,647 $ 9,690 $ 7,496 $7,699 $40,380
Working capital ................. 191,333 140,683 121,566 188,091 205,806
Total assets..................... 694,525 490,758 509,429 549,396 556,021
Total debt....................... 217,810 176,917 205,925 202,591 195,425
Long-term debt (excluding
current portion)............... 114,757 93,191 93,276 150,018 163,868
Stockholders' equity............. 226,041 153,881 185,687 194,305 203,518
(1) On January 1, 2002, we adopted the guidelines of the Emerging Issues Task
Force (EITF) entitled "Accounting for Certain Sales Incentives" and "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products." These guidelines address when sales incentives and
discounts should be recognized and the accounting for certain costs
incurred by a vendor on behalf of a customer, as well as where the related
revenues and expenses should be classified in the financial statements. Net
sales and gross profit amounts for the periods prior to 2002 included in
this Annual Report have been reclassified to conform to our 2002
presentation. As a result, certain costs of approximately $30.4 million,
$25.4 million and $18 million have been reclassified for December 31, 2001
and 2000 and 1999, respectively.
(2) Effective January 1, 2003, we adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections ("Statement No. 145"). Statement No. 145 eliminates
the automatic classification of gain or loss on extinguishment of debt as
an extraordinary item of income and requires that such gain or loss be
evaluated for extraordinary classification under the criteria of Accounting
Principles Board ("APB") No. 30, Reporting Results of Operations. As a
result, the extraordinary loss on the early extinguishment of debt of
approximately $2.8 million, $0.5 million and $1.1 million has been
reclassified to interest expense for December 31, 2001, 2000 and 1999,
respectively.
(3) Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets ("SFAS No. 142"). In accordance with SFAS No. 142, goodwill will no
longer be amortized, but instead, will be subject to an annual review for
potential impairment. As a result, we recorded an impairment loss on
goodwill as a cumulative effect of accounting change of $18.3 million, net
of tax, or $1.55 per diluted share, during the first quarter of 2002. The
impairment loss relates to goodwill pertaining to certain of our reporting
units with our European Segment and with our Temperature Control Segment
and we recorded charges of $10.9 million related to our European Segment
and $7.4 million related to our Temperature Control Segment.
18
Upon adoption of SFAS No. 142, our earnings before cumulative effect of
accounting change for basic and diluted earnings per share adjusted to
exclude goodwill amortization expense (net of tax) are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
--------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported earnings (loss) before
cumulative effect of accounting
change ................................... $ (1,518) $ (12,206) $ (2,485) $ 9,729 $ 7,625
Add back: goodwill amortization
expense, net of tax ...................... -- -- 2,727 2,574 2,481
--------- ---------- --------- ---------- ----------
Adjusted earnings (loss) before
cumulative effect of accounting
change ................................... $ (1,518) $ (12,206) $ 242 $ 12,303 $ 10,106
========= ========== ========= ========== ==========
BASIC EARNINGS (LOSS) PER SHARE:
- -----------------------------------
Reported basic earnings (loss) per
share before cumulative effect
of accounting change ..................... $ (0.10) $ (1.03) $ (0.21) $ 0.82 $ 0.58
Add back: goodwill amortization
expense, net of tax ...................... -- -- 0.23 0.22 0.19
--------- ---------- --------- ---------- ----------
Adjusted basic earnings (loss) per
share before cumulative effect
of accounting change ..................... $ (0.10) $ (1.03) $ 0.02 $ 1.04 $ 0.77
========= ========== ========= ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE:
- -----------------------------------
Reported diluted earnings (loss)
per share before cumulative
effect of accounting change .............. $ (0.10) $ (1.01) $ (0.21) $ 0.81 $ 0.58
Add back: goodwill amortization
expense, net of tax ...................... -- -- 0.23 0.21 0.19
--------- ---------- --------- ---------- ----------
Adjusted diluted earnings (loss)
per share before cumulative
effect of accounting change .............. $ (0.10) $ (1.01) $ 0.02 $ 1.02 $ 0.77
========= ========== ========= ========== ==========
Upon adoption of SFAS No. 142, our net earnings (loss) for basic and diluted
earnings per share adjusted to exclude goodwill amortization expense (net of
tax) are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
--------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net earnings (loss) ........... $ (1,518) $ (30,556) $ (2,485) $ 9,729 $ 7,625
Add back: goodwill amortization expense,
net of tax .......................... -- -- 2,727 2,574 2,481
--------- ---------- --------- ---------- ----------
Adjusted net earnings (loss) ........... $ (1,518) $ (30,556) $ 242 $ 12,303 $ 10,106
========= ========== ========= ========== ==========
BASIC NET EARNINGS (LOSS) PER SHARE:
- ----------------------------------------
Reported basic net earnings (loss)
per share .......................... $ (0.10) $ (2.57) $ (0.21)$ 0.82 $ 0.58
Add back: goodwill amortization expense,
net of tax .......................... -- -- 0.23 0.22 0.19
--------- ---------- --------- ---------- ----------
Adjusted basic net earnings (loss)
per share ........................... $ (0.10) $ (2.57) $ 0.02 $ 1.04 $ 0.77
========= ========== ========= ========== ==========
DILUTED NET EARNINGS (LOSS) PER SHARE:
- ----------------------------------------
Reported diluted net earnings (loss)
per share ........................... $ (0.10) $ (2.54) $ (0.21) $ 0.81 $ 0.58
Add back: goodwill amortization expense,
net of tax .......................... -- -- 0.23 0.21 0.19
--------- ---------- --------- ---------- ----------
Adjusted diluted net earnings (loss)
per share ........................... $ (0.10) $ (2.54) $ 0.02 $ 1.02 $ 0.77
========= ========== ========= ========== ==========
(4) We recorded an after tax charge of $1.7 million and $18.3 million as a
loss from discontinued operations to account for potential costs
associated with our asbestos-related liability for the years ended
December 31, 2003 and 2002, respectively.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Report on Form 10-K contains forward-looking statements. Forward-looking
statements in this report are indicated by words such as "anticipates,"
"expects," "believes," "intends," "plans," "estimates," "projects" and similar
expressions. These statements represent our expectations based on current
information and assumptions. Forward-looking statements are inherently subject
to risks and uncertainties. Our actual results could differ materially from
those which are anticipated or projected as a result of certain risks and
uncertainties, including, but not limited to a number of factors, including
economic and market conditions; the performance of the aftermarket sector;
changes in business relationships with our major customers and in the timing,
size and continuation of our customers' programs; the ability of our customers
to achieve their projected sales; competitive product and pricing pressures;
increases in production or material costs that cannot be recouped in product
pricing; successful integration of acquired businesses; product liability
(including, without limitation, those related to estimates to asbestos-related
contingent liabilities) matters; as well as other risks and uncertainties, such
as those described under Quantitative and Qualitative Disclosures About Market
Risk and those detailed herein and from time to time in the filings of the
Company with the Securities and Exchange Commission. Those forward-looking
statements are made only as of the date hereof, and the Company undertakes no
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto. This discussion summarizes the
significant factors affecting our results of operations and the financial
condition of our business during each of the fiscal years in the three year
period ended December 31, 2003.
OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific segment of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts. We
sell our products primarily in the United States, Canada and Latin America. We
also sell our products in Europe through our European Segment.
As part of our efforts to grow our business, as well as to achieve increased
production and distribution efficiencies, on June 30, 2003 we completed the
acquisition of substantially all of the assets and assumed substantially all of
the operating liabilities of Dana Corporation's Engine Management Group
(subsequently referred to as "DEM"). Prior to the sale, DEM was a leading
manufacturer of aftermarket parts in the automotive industry focused exclusively
on engine management. Our plan is to restructure and to integrate the DEM
business into our existing Engine Management Business.
Under the terms of the acquisition, we paid Dana Corporation $91.3 million in
cash, issued an unsecured promissory note of $15.1 million, and issued 1,378,760
shares of our common stock valued at $15.1 million. Including transaction costs,
our total purchase price is expected to be approximately $130.5 million.
We have reviewed our operations and implemented integration plans to restructure
the operations of DEM. We announced in a press release on July 8, 2003, that we
would close seven of the DEM facilities. As part of the integration and
restructuring plans, we estimate total restructuring costs of $33.7 million.
Such amounts were recognized as liabilities assumed in the acquisition and
included in the allocation of the cost to acquire DEM.
20
Of the total restructuring costs, approximately $15.7 million relates to work
force reductions and employee termination benefits. The amount primarily
provides for severance costs relating to the involuntary termination of
approximately 1,400 employees, individually employed throughout DEM facilities
across a broad range of functions, including managerial, professional, clerical,
manufacturing and factory positions. During 2003, approximately $2.1 million of
termination benefits have been paid.
The restructuring also includes approximately $17.9 million associated with
exiting certain activities, primarily related to lease and contract termination
costs. Specifically, our plans are to consolidate seven DEM operations into our
existing plants. The restructuring accrual associated with other exiting
activities specifically includes incremental costs and contractual termination
obligations for items such as leasehold termination payments incurred as a
direct result of these plans. At December 31, 2003, one of the seven facilities
has been closed with the remainder expected to be vacated during 2004.
The DEM acquisition in 2003 was strategic and continues to be our primary focus
entering 2004. The critical goals we established for a successful integration
were to maintain the DEM customer base; reduce excess capacity by closing seven
of the acquired facilities in a 12 to 18 month timeframe; complete the
transition for $30-35 million of cash outlays during this same period in
restructuring and integration costs; and to achieve $50-55 million in estimated
annual savings. We believe we are on target for meeting all of these goals.
Based on our current expectations, we believe that the benefits from the above
savings will materialize as we progress throughout 2004 and the full extent
achieved in 2005.
On February 3, 2004, we acquired the Canadian distribution of Dana Corporation's
Engine Management Group for approximately $1 million. As part of the
acquisition, we acquired inventory and will be relocating it into our
distribution facility in Mississauga, Canada.
For additional information about our business, strategy and competitive
environment, refer to "Item 1 Business."
COMPARISON OF FISCAL YEARS 2003 AND 2002
SALES. On a consolidated basis, net sales for 2003 were $678.8 million, an
increase of $80.4 million, or 13.4%, compared to $598.4 million in 2002.
Excluding DEM net sales of $115.5 million, Engine Management net sales were
down $4.2 million during 2003 compared to 2002. The volume decline was in line
with our forecasts, and would have been mitigated if we had implemented normal
price level increases in 2003, which have been implemented in 2004. The
Temperature Control net sales decrease of $35.5 million was primarily due to the
loss of business with AutoZone and the very cool and wet weather conditions
existing in the spring and early summer.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 25.7% in 2003, from 26.3% in 2002. A combination of lower margins
from DEM and the loss in business in Temperature Control noted above, negatively
effected gross margins during the period. As DEM is integrated, we do expect
gross margins to improve as a result of operating efficiencies achieved in
overhead absorption and material costs reductions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) increased $26.4 million to $153.3 million in
2003, compared to $126.9 million in 2002. Excluding DEM SG&A expenses of $28.9
million, SG&A expenses decreased $2.5 million in 2003 versus 2002. During 2003
we incurred approximately $5.6 million of integration and restructuring expenses
of which $2.8 million related to DEM and the remaining balance relating to our
Temperature Control and European Segments compared to $2.2 million of
restructuring expenses in 2002. Reducing DEM SG&A expenses is a major focus
during the DEM integration and SG&A is expected to significantly decrease.
GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is no longer
amortized, but instead, is subject to an annual review for potential impairment.
We completed our annual impairment test during the fourth quarter of 2003 and
determined that our goodwill was not impaired.
21
During the first quarter of 2002, we performed our initial impairment test of
goodwill reviewing the fair values of each of our reporting units using the
discounted cash flows method, based on our weighted average cost of capital and
market multiples. The decline in economic and market conditions, higher
integration costs than anticipated and the general softness in the automotive
aftermarket caused a decrease in the fair values of certain of our reporting
units. As a result, we recorded an impairment loss on goodwill as a cumulative
effect of accounting change of $18.3 million, net of tax, or $1.55 per diluted
share during the first quarter of 2002. The impairment loss relates to goodwill
of $10.9 million in our European Segment and $7.4 million in our Temperature
Control Segment. In addition, during the fourth quarter of 2002 we wrote off
approximately $3.3 million for the impairment of goodwill associated with the
Engine Management reporting unit of our European Segment.
OPERATING INCOME. Operating income decreased by $9.3 million to $15.8 million in
2003, compared to $25.1 million in 2002. This decrease was primarily due to the
overall decrease in consolidated net sales as discussed above and the
acquisition of DEM.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased $3.7 million
primarily due to unfavorable foreign exchange losses and lower interest and
dividend income.
INTEREST EXPENSE. Interest expense decreased by $0.3 million in 2003, compared
to 2002, due to lower interest rates.
INCOME TAX PROVISION. The effective tax rate for continuing operations was 84%
in 2003 and 57% in 2002. The increase was primarily due to lower earnings in our
domestic operations as compared to 2002 and operating losses in our European
segment for which no income tax benefit has been recorded. Our foreign income
tax relates primarily to our profitable Canadian and Hong Kong operations.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation in 2003
reflects $1.7 million associated with asbestos-related legal expenses. In 2002,
the $18.3 million charge included a reserve for future indemnification and 2002
legal expenses. As discussed more fully in Note 17 of the notes to the
consolidated financial statements, we are responsible for certain future
liabilities relating to alleged exposure to asbestos containing products. Based
on the information contained in the September 2002 actuarial study, which
estimated an undiscounted liability for settlement payments ranging from $27.3
million to $58 million, and all other available information considered by us, we
recorded an after tax charge of $16.9 million as a loss from discontinued
operation during the third quarter of 2002 to reflect such liability, excluding
legal costs. We concluded that no amount within the range of settlement payments
was more likely than any other and, therefore, recorded the low end of the range
as the liability associated with future settlement payments through 2052 in our
consolidated financial statements, in accordance with generally accepted
accounting principles.
COMPARISON OF FISCAL YEARS 2002 AND 2001
SALES. On a consolidated basis, net sales for 2002 increased by $6.8 million
over 2001 to $598.4 million. This net increase was driven by a $17.6 million
increase in Engine Management, year over year. New business was the primary
contributor with gains achieved in the retail business where certain customers
expanded their own business; new wire and cable business acquired from an
existing customer; and new original equipment customers acquired through our
acquisition of Sagem Inc. in May of 2002.
With respect to Temperature Control, net sales for 2002 decreased by $14.8
million to $255.1 million. Net sales were unfavorable due to a combination of
factors including a partial loss in business with a significant retail customer
in 2002; 2001 net sales including approximately $7 million of "pipeline" orders
for a new customer which did not repeat in 2002; and distributors "working off
"inventory left over from previous mild summer seasons.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased to 26.3% in 2002 from 23.5% in 2001. The improvement in gross margins
reflects the return in 2002 to more normal production levels, as the aggressive
and successful inventory reduction campaign in 2001 benefited 2002, in both of
our major segments. Engine Management gross margins improved approximately 4
percentage points, while Temperature Control improved approximately 3.7
percentage points. 2002 gross margins also benefited from a decrease in warranty
returns in both Engine Management and Temperature Control. Overall, warranty
returns improved by approximately 1 percentage point, as a percentage of net
sales.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3 million to $126.9 million or 21.2% of net
sales in 2002, from $123.9 million or 20.9% of net sales in 2001. The increase
was primarily due to higher insurance and employee benefit costs. In addition,
we incurred approximately $2.2 million of restructuring costs related to the
consolidation of certain manufacturing and distribution facilities within the
Temperature Control Segment.
GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). In accordance with SFAS No. 142, goodwill will no longer be
amortized, but instead, will be subject to an annual review for potential
impairment. Using the discounted cash flows method, based on our weighted
average cost of capital and market multiples, we reviewed the fair values of
each of our reporting units. The decline in economic and market conditions,
higher integration costs than anticipated and the general softness in the
automotive aftermarket caused a decrease in the fair values of certain of our
reporting units. As a result, we recorded an impairment loss on goodwill as a
cumulative effect of accounting change of $18.3 million, net of tax, or $1.55
per diluted share during the first quarter of 2002. The impairment loss relates
to goodwill pertaining to certain of our reporting units within our European
Segment and our Temperature Control Segment for which we recorded charges of
$10.9 million and $7.4 million, respectively.
During the fourth quarter of 2002, we completed our review of goodwill for
potential impairment. After giving consideration to 2002 losses in Europe and
budgeted 2003 losses, we wrote-off approximately $3.3 million of the remaining
goodwill associated with the Engine Management reporting unit of the European
Segment. With respect to the European Segment, approximately $1.4 million of
goodwill remains on the December 31, 2002 balance sheet, all of which pertains
to the Temperature Control reporting unit.
OTHER INCOME. Other income, net increased approximately $0.4 million over 2001.
Contributing to the increase was the elimination of fees related to an accounts
receivable sales arrangement eliminated in April of 2001.
INTEREST EXPENSE. Interest expense decreased by approximately $7 million, as
compared to 2001. Contributing to overall decrease was lower borrowings (during
2002 total debt was reduced approximately $29 million) and lower interest rates.
Effective January 1, 2003, we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("Statement
No. 145"). Statement No. 145 eliminates the automatic classification of gain or
loss on extinguishment of debt as an extraordinary item of income and requires
that such gain or loss be evaluated for extraordinary classification under the
criteria of Accounting Principles Board ("APB") No. 30, Reporting Results of
Operations ("APB No. 30"). As a result, we reclassified the $2.8 million
extraordinary loss on the early extinguishment of debt recorded in 2001 to
interest expense.
INCOME TAXES. The overall effective tax rate increased from 25% in 2001 to 57%
in 2002. The significant increase is primarily the result of the operating
losses in our European Segment, for which no income tax benefit has been
recorded because it is more likely than not that such benefit will not be
realized in the near future. Supplementing the effect Europe had on the
effective rate is the increase in the Company's domestic earnings as a
percentage of overall earnings before taxes.
23
LOSS ON DISCONTINUED OPERATIONS. Loss on discontinued operations reflect the
charges associated with asbestos, including legal expenses. As discussed more
fully in Note 17 of the notes to the consolidated financial statements, we are
responsible for certain future liabilities relating to alleged exposure to
asbestos containing products. Based on the information contained in the
September 2002 actuarial study, which estimated an undiscounted liability for
settlement payments ranging from $27.3 million to $58 million, and all other
available information considered by us, and as further set forth in such Note
17, we recorded an after tax charge of $16.9 million as a loss from discontinued
operation during the third quarter of 2002 to reflect such liability. We
concluded that no amount within the range of settlement payments was more likely
than any other and, therefore, recorded the low end of the range as the
liability associated with future settlement payments through 2052 in our
consolidated financial statements, in accordance with generally accepted
accounting principles. Total legal expenses associated with asbestos related
matters totaled $0.9 million in 2002.
IMPACT OF INFLATION
Although inflation is not a significant issue, management believes it will be
able to continue to minimize any adverse effect of inflation on earnings through
cost reduction programs, including the sale of manufactured products, and, where
competitive situations permit, selling price increases. Recently, prices of
steel and other commodities have risen. These increases did not have a material
impact on us as we are not dependent on any single commodity, however there can
be no assurance over the long-term.
FUTURE RESULTS OF OPERATIONS
We continue to face competitive pressures. In order to sell at competitive
prices while maintaining profit margins we are continuing to focus on overhead
and cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the year ended December 31, 2003, cash provided by
operations amounted to $31.5 million, compared to $57 million in 2002 and $43.5
million in 2001.
The reduction in 2003 was primarily attributable to lower earnings from
continuing operations, a decrease in accounts payable and a lower decrease in
inventory in 2003, as compared to 2002. The improvement in 2002, as compared to
2001, was primarily attributable to improved earnings from continuing
operations, higher accounts payable and continued reductions in inventory.
Inventory reductions continue to be a focus of management.
For the year ended December 31, 2002, inventory decreased by an additional $8
million over the $57 million reduction in 2001, which resulted primarily from
reduced production and purchases, and where needed, the temporary closing of
manufacturing facilities. Inventory turnover was 2.2 x in 2003, 2.3 x in 2002
and 2.1x in 2001. Inventory turnover should improve as DEM is integrated, and
inventory "build-ups" needed to ensure order fulfillment are reduced as DEM is
effectively integrated.
INVESTING ACTIVITIES. Cash used in investing activities was $101.9 million for
the year ended December 31, 2003, compared to $26.9 million in 2002 and $14.2
million in 2001. The increase during 2003 was primarily due to the acquisition
of DEM as discussed more fully in Note 2. The increase during 2002 was primarily
due to acquisitions, partially offset by decreases in capital expenditures.
Assets acquired consist primarily of property, plant and equipment, receivables
and inventory. All acquisitions were financed with funds provided from our
secondary equity offering, revolving credit facility and seller financing.
In January 2002, we acquired the assets of a temperature control business from
Hartle Industries for $4.8 million. The assets consist primarily of property,
plant and equipment, and inventory. In April 2002, we acquired Carol Cable
Limited, a manufacturer and distributor of wire sets based in the United
Kingdom, for approximately $1.7 million. The assets from this acquisition
consist primarily of property, plant and equipment, and inventory. In addition,
during 2002, the Company paid approximately an additional $2.8 million for the
remaining equity interest in SMP Holdings Limited. In May 2002, we purchased the
aftermarket fuel injector business of Sagem Inc., a subsidiary of Johnson
Controls, for $10.5 million. Sagem Inc. is a basic manufacturer of fuel
injectors and was our primary supplier prior to the acquisition. Assets acquired
from this acquisition consist primarily of property, plant and equipment, and
inventory. The purchase was partially financed by the seller ($5.4 million to be
paid over a two year period), with the remaining funds being provided under our
revolving credit facility.
24
Capital expenditures for the three most recent fiscal years ended December 31
totaled $8.9 million in 2003, $7.6 million in 2002 and $13.7 million in 2001.
FINANCING ACTIVITIES. Cash provided by financing activities primarily for the
acquisition of DEM for the year ended December 31, 2003 was $75 million compared
to cash used in financing activities of $29.5 million for the year ended
December 31, 2002 and $28.7 million in 2001. Dividends paid for the three most
recent fiscal years ended December 31 were $5.6 million in 2003, $4.3 million in
2002 and $4.2 million in 2001. The decreased borrowings in 2002 and 2001
reflected our focus on reducing capital employed in the business.
Effective April 27, 2001, we entered into an agreement with General Electric
Capital Corporation, as agent, and a syndicate of lenders for a secured
revolving credit facility. The term of the credit agreement was for a period of
five years and provided for a line of credit up to $225 million.
On June 30, 2003 we completed an amendment to our revolving credit facility to
provide for an additional $80 million commitment, in connection with our
acquisition of DEM. This additional commitment increases the total amount
available for borrowing under our revolving credit facility to $305 million from
$225 million, which now expires in 2008. Availability under our revolving credit
facility is based on a formula of eligible accounts receivable, eligible
inventory and eligible fixed assets, and includes the purchased assets of DEM.
We expect such availability under the revolving credit facility, following the
initial draw down at the acquisition closing, to be sufficient to meet our
ongoing operating and integration costs.
Direct borrowings under our revolving credit facility bear interest at the prime
rate plus the applicable margin (as defined) or the LIBOR rate plus the
applicable margin (as defined), at our option. Borrowings are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of our domestic and Canadian subsidiaries. Our revolving
credit facility prior to the DEM acquisition provided for certain financial
covenants limiting our capital expenditures and requiring us to maintain a
certain tangible net worth at the end of each fiscal quarter. Following our
acquisition of DEM, the terms of our revolving credit facility provide for,
among other provisions, new financial covenants requiring us, on a consolidated
basis, (1) to maintain specified levels of EBITDA at the end of each fiscal
quarter through December 31, 2004, (2) commencing September 30, 2004, to
maintain specified levels of fixed charge coverage at the end of each fiscal
quarter (rolling twelve months) through 2007, and (3) to limit capital
expenditure levels for each fiscal year through 2007.
In addition, in order to facilitate the aggregate financing of the acquisition,
we completed a public equity offering of 5,750,000 shares of our common stock
for net proceeds of approximately $55.7 million and issued to Dana Corporation
1,378,760 shares of our common stock valued at approximately $15.1 million.
In connection with our acquisition of DEM, we issued to Dana Corporation an
unsecured subordinated promissory note in the aggregate principal amount of
approximately $15.1 million. The promissory note bears an interest rate of 9%
per annum for the first year, with such interest rate increasing by one-half of
a percentage point (0.5%) on each anniversary of the date of issuance. Accrued
and unpaid interest is due quarterly under the promissory note. The maturity
date of the promissory note is five and a half years from the date of issuance.
The promissory note may be prepaid in whole or in part at any time without
penalty.
On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The
loan is payable in monthly installments. The loan bears interest at a fixed rate
of 5.50% maturing in July 2018. The mortgage loan is secured by a building and
related property.
Our profitability and working capital requirements are seasonal due to the sales
mix of temperature control products. Our working capital requirements usually
peak near the end of the second quarter, as the inventory build-up of air
conditioning products is converted to sales and payments on the receivables
associated with such sales begin to be received. Our working capital is further
being impacted by restructuring and integration costs, as well as inventory
build-ups necessary to ensure order fulfillment during the DEM integration.
These increased working capital requirements are funded by borrowings from our
lines of credit. We anticipate that our present sources of funds will continue
to be adequate to meet our near term needs.
25
In October 2003, we entered into a new interest rate swap agreement with a
notional amount of $25 million that is to mature in October 2006. Under this
agreement, we receive a floating rate based on the LIBOR interest rate, and pay
a fixed rate of 2.45% on the notional amount of $25 million.
In July 2001, we entered into two interest rate swap agreements to manage our
exposure to interest rate changes. The swaps effectively convert a portion of
our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional amounts. At December 31, 2002, we had two
outstanding interest rate swap agreements (in an aggregate notional amount of
$75 million), one of which matured in January 2003 and one of which is scheduled
to mature in January 2004. Under these agreements, we receive a floating rate
based on the LIBOR interest rate, and pay a fixed rate of 4.92% on a notional
amount of $45 million and 4.37% on a notional amount of $30 million (matured in
January 2003). If, at any time, the swaps are determined to be ineffective, in
whole or in part, due to changes in the interest rate swap agreements, the fair
value of the portion of the interest rate swap determined to be ineffective will
be recognized as gain or loss in the statement of operations for the applicable
period.
On July 26, 1999, we issued our convertible debentures, payable semi-annually,
in the aggregate principal amount of $90 million. The debentures are convertible
into 2,796,120 shares of our common stock, and mature on July 15, 2009. The
proceeds from the sale of the debentures were used to prepay an 8.6% senior
note, reduce short term bank borrowings and repurchase a portion of our common
stock.
During the years 1998 through 2000, the Board of Directors authorized multiple
repurchase programs under which we could repurchase shares of our common stock.
During such years, $26.7 million (in the aggregate) of common stock has been
repurchased to meet present and future requirements of our stock option programs
and to fund our Employee Stock Option Plan (ESOP). As of December 31, 2003, we
have Board authorization to repurchase additional shares at a maximum cost of
$1.7 million. During 2003, 2002 and 2001, we did not repurchase any shares of
our common stock.
The following is a summary of our contractual commitments, inclusive of our
acquisition of DEM, as of December 31, 2003:
---------------------------------------------------------------------------
(IN THOUSANDS) 2004 2005 2006 2007 2008 THEREAFTER TOTAL
-------- -------- -------- -------- -------- -------- --------
Principal payments of
long term debt .......... $ 3,354 $ 555 $ 581 $ 610 $ 582 $112,429 $118,111
Operating leases ............ 12,824 12,156 9,322 5,752 4,512 39,481 84,047
Interest rate swap agreements 207 -- (59) -- -- -- 148
Severance payments related
to restructuring ........ 1,283 -- -- -- -- -- 1,283
-------- -------- -------- -------- -------- -------- --------
Total commitments . $ 17,668 $ 12,711 $ 9,844 $ 6,362 $ 5,094 $151,910 $203,589
======== ======== ======== ======== ======== ======== ========
The table above excludes approximately $14 million of severance expected to be
paid in 2004 after the DEM facilities are closed.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 of the notes to our consolidated annual
financial statements on this Annual Report on Form 10-K. Preparation of our
consolidated annual and quarterly financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting periods. We can give no assurance that actual
results will not differ from those estimates.
26
REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement
parts for motor vehicles from both our Engine Management and Temperature Control
Segments. We recognize revenue from product sales upon shipment to customers. As
described below, significant management judgments and estimates must be made and
used in connection with the revenue recognized in any accounting period.
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost
is generally determined on the first-in, first-out basis. Where appropriate,
standard cost systems are utilized for purposes of determining cost; the
standards are adjusted as necessary to ensure they approximate actual costs.
Estimates of lower of cost or market value of inventory are determined at the
reporting unit level and are based upon the inventory at that location taken as
a whole. These estimates are based upon current economic conditions, historical
sales quantities and patterns and, in some cases, the specific risk of loss on
specifically identified inventories.
We also evaluate inventories on a regular basis to identify inventory on hand
that may be obsolete or in excess of current and future projected market demand.
For inventory deemed to be obsolete, we provide a reserve on the full value of
the inventory. Inventory that is in excess of current and projected use is
reduced by an allowance to a level that approximates our estimate of future
demand.
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
Management must make estimates of potential future product returns related to
current period product revenue. Management analyzes historical returns, current
economic trends, and changes in customer demand when evaluating the adequacy of
the sales returns and other allowances. Significant management judgments and
estimates must be made and used in connection with establishing the sales
returns and other allowances in any accounting period. At December 31, 2003, the
allowance for sales returns was $24.1 million. Similarly, our management must
make estimates of the uncollectability of our accounts receivables Management
specifically analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. At December 31, 2003 the allowance for doubtful
accounts and for discounts was $5.0 million.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income, and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At December 31, 2003, we
had a valuation allowance of $23.2 million, due to uncertainties related to our
ability to utilize some of our deferred tax assets. The valuation allowance is
based on our estimates of taxable income by jurisdiction in which we operate and
the period over which our deferred tax assets will be recoverable.
In the event that actual results differ from these estimates, or we adjust these
estimates in future periods, we may need to establish an additional valuation
allowance which could materially impact our business, financial condition and
results of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important, which could trigger an impairment
review, include the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of our use of the acquired assets or the strategy for our overall
business; and significant negative industry or economic trends. With respect to
goodwill, we test for potential impairment in the fourth quarter of each year as
part of our annual budgeting process. We review the fair values of each of our
reporting units using the discounted cash flows method and market multiples.
27
RETIREMENT AND POSTRETIREMENT MEDICAL BENEFITS. Each year we calculated the
costs of providing retiree benefits under the provisions of SFAS 87 and SFAS
106. The key assumptions used in making these calculations are disclosed in
Notes 11 and 12 to our consolidated financial statements. The most significant
of these assumptions are the discount rate used to value the future obligation,
expected return on plan assets and health care cost trend rates. We select
discount rates commensurate with current market interest rates on high-quality,
fixed rate debt securities. The expected return on assets is based on our
current review of the long-term returns on assets held by the plans, which is
influenced by historical averages. The medical cost trend rate is based on our
actual medical claims and future projections of medical cost trends.
ASBESTOS RESERVE. We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. A September 2002 actuarial
study estimated a liability for settlement payments ranging from $27.3 million
to $58 million. We concluded that no amount within the range of settlement
payments was more likely than any other and, therefore, recorded the low end of
the range as the liability associated with future settlement payments through
2052 in our consolidated financial statements, in accordance with generally
accepted accounting principles.
As is our accounting policy, the actuarial study was updated as of August 31,
2003 using methodologies consistent with the September 2002 study. The updated
study has estimated an undiscounted liability for settlement payments, excluding
legal costs, ranging from $27 to $71 million for the period through 2052. We
continue to believe that no amount within the range was a better estimate after
the updated study, therefore, no adjustment was recorded as our consolidated
balance sheet at September 30, 2003 reflects a total liability of approximately
$27 million. Legal costs, which are expensed as incurred, are estimated to range
from $21 to $28 million during the same period. We plan on performing a similar
annual actuarial analysis during the third quarter of each year for the
foreseeable future. Based on this analysis and all other available information,
we will reassess the recorded liability, and if deemed necessary, record an
adjustment to the reserve, which will be reflected as a loss or gain from
discontinued operations. Legal expenses associated with asbestos-related matters
are expensed as incurred and recorded as a loss from discontinued operations in
the statement of operations.
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability and litigation. Establishing loss
reserves for these matters requires the use of estimates and judgment of risk
exposure and ultimate liability. We estimate losses using consistent and
appropriate methods; however, changes to our assumptions could materially affect
our recorded liabilities for loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 143, Accounting for Asset Retirement Obligations ("Statement No. 143"),
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Statement No. 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset. Statement No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, we will recognize a gain or
loss on settlement. Effective January 1, 2003, we adopted Statement No. 143,
which did not have a material effect on our consolidated financial statements.
28
RESCISSION OF FASB STATEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement
No. 145 eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board ("APB") No. 30, Reporting Results of Operations
("APB No. 30"). Statement No. 145 also requires sales-leaseback accounting for
lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections to
existing pronouncements. Effective January 1, 2003, we adopted Statement No.
145, which did not have a material effect on our consolidated financial
statements.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("Statement No. 146"). Statement No. 146, which
is effective prospectively for exit or disposal activities initiated after
December 31, 2002, applies to costs associated with an exit activity, including
restructurings, or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Statement No. 146
requires that exit or disposal costs are recorded as an operating expense when
the liability is incurred and can be measured at fair value. Commitment to an
exit plan or a plan of disposal by itself will not meet the requirement for
recognizing a liability and the related expense under Statement No. 146. The
adoption of Statement No. 146 did not have a material effect on our consolidated
financial statements.
ACCOUNTING FOR AND DISCLOSURES OF GUARANTEES
In November 2002, the FASB issued interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("Interpretation No. 45"). Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. Interpretation No.
45 also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair market value of the obligations
it assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 did not have a material effect on our consolidated financial statements. See
Note 17 of Notes to Consolidated Financial Statements for discussion of product
warranty claims.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123
("Statement No. 148"). Statement No. 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, Statement No. 148 amends the
disclosure requirements of Statement No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
We will be required to apply FIN 46R to variable interests in VIEs created after
29
December 31, 2003. For variable interests in VIEs created before January 1,
2004, the Interpretation will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created before January 1,
2004, the assets, liabilities and noncontrolling interests of the VIE initially
would be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE.
We are evaluating the impact of applying FIN 46R to existing VIEs in which it
has variable interests and has not yet completed this analysis. At this time, it
is anticipated that the effect on our consolidated balance sheet is not
material.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("Statement No.
150"). Statement No. 150 requires issuers to classify as liabilities (or assets
in some circumstances) three classes of freestanding financial instruments that
embody obligations for the issuer. Generally, Statement No. 150 was effective
for financial instruments entered into or modified after May 31, 2003, and was
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. Statement No. 150 did not have a material effect on our
consolidated financial statements.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange
and interest rates. These exposures are actively monitored by management. Our
exposure to foreign exchange rate risk is due to certain costs, revenues and
borrowings being denominated in currencies other than one of our subsidiary's
functional currency. Similarly, we are exposed to market risk as the result of
changes in interest rates which may affect the cost of our financing. It is our
policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
EXCHANGE RATE RISK
We have exchange rate exposure, primarily, with respect to the Canadian dollar
and the British pound. As of December 31, 2003, our financial instruments which
are subject to this exposure are immaterial, therefore the potential immediate
loss to us that would result from a hypothetical 10% change in foreign currency
exchange rates would not be expected to have a material impact on our earnings
or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation
in both of the exchange rates affecting both of the foreign currencies in which
the indebtedness and the financial instruments described above are denominated
and does not take into account the offsetting effect of such a change on our
foreign-currency denominated revenues.
INTEREST RATE RISK
We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in our debt portfolio. To manage a portion of
our exposure to interest rate changes, we enter into interest rate swap
agreements.
In October 2003, we entered into a new interest rate swap agreement with a
notional amount of $25 million that is to mature in October 2006. Under this
agreement, we receive a floating rate based on the LIBOR interest rate, and pay
a fixed rate of 2.45% on the notional amount of $25 million.
In July 2001, we entered into two interest rate swap agreements to manage our
exposure to interest rate changes. The swaps effectively convert a portion of
our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional amounts. At December 31, 2002, we had two
outstanding interest rate swap agreements (in an aggregate notional amount of
$75 million), one of which matured in January 2003 and one of which is scheduled
to mature in January 2004. Under these agreements, we receive a floating rate
based on the LIBOR interest rate, and pay a fixed rate of 4.92% on a notional
amount of $45 million and 4.37% on a notional amount of $30 million (matured in
January 2003). If, at any time, the swaps are determined to be ineffective, in
whole or in part, due to changes in the interest rate swap agreements, the fair
value of the portion of the interest rate swap determined to be ineffective will
be recognized as gain or loss in the statement of operations for the applicable
period.
At December 31, 2003, we had approximately $217.8 million in loans and financing
outstanding, of which approximately $118.1 million bear interest at fixed
interest rates and approximately $99.7 million bear interest at variable rates
of interest. We invest our excess cash in highly liquid short-term investments.
Our percentage of variable rate debt to total debt was 46% at December 31, 2003
and 2002. Depending upon the level of borrowings under our revolving credit
facility, the effect of a hypothetical, instantaneous and unfavorable change of
100 basis points in the interest rate may have approximately $1 million negative
impact on our earnings or cash flows.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS (Audited)
Independent Auditors' Report......................................... F-1
Consolidated Statements of Operations for the
years ended December 31, 2003,
2002 and 2001 F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002......... F-3
Consolidated Statements of Cash Flows for the
years ended December 31, 2003,
2002 and 2001................................................... F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended
December 31, 2003, 2002 and 2001................................ F-5
Notes to Consolidated Annual Financial Statements.................... F-6
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited the accompanying consolidated balance sheets of Standard Motor
Products, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Standard Motor
Products, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 5, the Company adopted Statement of Financial Accounting
Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS as of January 1, 2002.
/s/ KPMG LLP
- ------------------------
New York, New York
March 26, 2004
F-1
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Net sales (Note 6) $ 678,783 $ 598,437 $ 591,652
Cost of sales 504,011 440,893 452,597
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 174,772 157,544 139,055
Selling, general and administrative expenses 153,303 126,901 123,932
Restructuring expenses 5,654 2,241 --
Goodwill impairment charge (Note 5) -- 3,334 --
- ---------------------------------------------------------------------------------------------------------------------
Operating income 15,815 25,068 15,123
Other income (expense), net (Note 13) (477) 3,187 2,763
Interest expense 13,907 14,244 21,202
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before taxes 1,431 14,011 (3,316)
Provision (benefit) for income taxes (Note 14) 1,207 7,920 (831)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 224 6,091 (2,485)
Loss from discontinued operation, net of tax of $581 and
$6,099 (Note 17) (1,742) (18,297) --
- ---------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (1,518) (12,206) (2,485)
Cumulative effect of accounting change, net of tax of $2,473 (Note 5) -- (18,350) --
- ---------------------------------------------------------------------------------------------------------------------
Net loss $ (1,518) $ (30,556) $ (2,485)
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) Per Common Share - Basic:
Earnings (loss) from continuing operations $ 0.01 $ 0.51 $ (0.21)
Discontinued operation (0.11) (1.54) --
Cumulative effect of accounting change -- (1.54) --
- ---------------------------------------------------------------------------------------------------------------------
Net loss Per Common Share - Basic $ (0.10) $ (2.57) $ (0.21)
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) Per Common Share - Diluted:
Earnings (loss) from continuing operations $ 0.01 $ 0.51 $ (0.21)
Discontinued operation (0.11) (1.52) --
Cumulative effect of accounting change -- (1.53) --
- ---------------------------------------------------------------------------------------------------------------------
Net loss Per Common Share - Diluted $ (0.10) $ (2.54) $ (0.21)
- ---------------------------------------------------------------------------------------------------------------------
Average number of common shares 15,744,930 11,914,968 11,774,591
Average number of common shares and dilutive common shares 15,793,008 12,008,496 11,774,591
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31,
----------------------
(IN THOUSANDS) 2003 2002
- ----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,647 $ 9,690
Marketable securities -- 7,200
Accounts receivable, less allowances for discounts and
doubtful accounts of $5,009 and $4,882 in 2003 and 2002,
respectively (Note 7) 174,223 117,644
Inventories (Notes 3 and 7) 253,754 174,785
Deferred income taxes (Note 14) 13,148 12,213
Prepaid expenses and other current assets 7,399 6,828
- ----------------------------------------------------------------------------------------
Total current assets 468,171 328,360
Property, plant and equipment, net (Notes 4 and 7) 112,549 103,822
Goodwill, net (Note 5) 71,843 16,683
Other assets (Notes 6 and 11) 41,962 41,893
- ----------------------------------------------------------------------------------------
Total assets $ 694,525 $ 490,758
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 7) $ 99,699 $ 79,618
Current portion of long-term debt (Note 7) 3,354 4,108
Accounts payable 58,029 35,744
Sundry payables and accrued expenses 42,431 31,074
Accrued customer returns 24,115 16,341
Restructuring accrual (Note 2) 16,000 --
Accrued rebates 18,989 8,649
Payroll and commissions 14,221 12,143
- ----------------------------------------------------------------------------------------
Total current liabilities 276,838 187,677
Long-term debt (Notes 7 and 8) 114,757 93,191
Postretirement medical benefits and
other accrued liabilities (Notes 11 and 12) 36,848 30,414
Restructuring accrual (Note 2) 15,615 --
Accrued asbestos liabilities (Note 17) 24,426 25,595
- ----------------------------------------------------------------------------------------
Total liabilities 468,484 336,877
========================================================================================
Commitments and contingencies (Notes 7, 9, 10, 11, 12 and
17) Stockholders' equity (Notes 7, 8, 9, 10 and 11):
Common Stock - par value $2.00 per share:
Authorized 30,000,000 shares, issued 20,486,036
and 13,324,476 shares in 2003 and 2002, respectively 40,972 26,649
Capital in excess of par value 58,086 1,764
Retained earnings 141,553 148,686
Accumulated other comprehensive income (loss) 4,814 (2,581)
Treasury stock - at cost (1,284,428 and 1,367,467 shares in
2003 and 2002, respectively) (19,384) (20,637)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 226,041 153,881
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 694,525 $ 490,758
========================================================================================
1
See accompanying notes to consolidated financial statements.
F-3
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
(IN THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $ (1,518) $ (30,556) $ (2,485)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 17,092 16,128 18,909
(Gain) loss on disposal of property, plant & equipment 1,001 (97) (265)
Equity income from joint ventures (27) (352) (844)
Employee stock ownership plan allocation 938 1,230 713
Tax benefit related to employee stock options -- 80 48
(Increase) decrease in deferred income taxes (1,632) 2,550 (3,628)
Cumulative effect of accounting change -- 18,350 --
Loss from discontinued operation 1,742 18,297 --
Goodwill impairment charge -- 3,334 --
Change in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable, net 8,583 1,302 13,296
Decrease in inventories 3,511 7,996 56,966
(Increase) decrease in prepaid expenses and other current assets 446 7,485 (1,821)
(Increase) decrease in other assets 1,802 (3,705) (1,687)
Increase (decrease) in accounts payable (9,471) 5,322 (30,502)
Increase(decrease) in sundry payables and accrued expenses 7,045 (3,215) (8,774)
Decrease in restructuring accrual (2,085) -- --
Increase in other liabilities 4,036 12,806 3,524
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,463 56,955 43,450
===========================================================================================================
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment 87 520 652
Capital expenditures (8,926) (7,598) (13,740)
Maturity of investments 7,200 -- --
Payments for acquisitions, net of cash acquired (100,249) (19,855) (1,069)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (101,888) (26,933) (14,157)
===========================================================================================================
CASH FLOWS FROM
FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit agreements 20,081 (31,246) 71,935
Principal payments and retirement of long-term debt (4,313) (3,181) (93,601)
Borrowings under new long-term debt 10,000 5,419 --
Proceeds from issuance of common stock, net of issuance costs 55,744 -- --
Increase in overdraft balances 1,509 3,830 --
Debt issuance costs (2,460) (602) (3,261)
Proceeds from exercise of employee stock options 91 589 473
Dividends paid (5,615) (4,290) (4,236)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 75,037 (29,481) (28,690)
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 5,345 1,653 (806)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,957 2,194 (203)
Cash and cash equivalents at beginning of year 9,690 7,496 7,699
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 19,647 $ 9,690 $ 7,496
- -----------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information: Cash paid
during the year for:
Interest $ 13,641 $ 14,362 $ 17,403
Income taxes $ 2,815 $ 1,549 $ 2,792
Non-cash investing and financing activities:
Common stock issued to seller for acquisition $ 15,125 $ -- $ --
Issuance of long-term debt to seller for acquisition $ 15,125 $ -- $ --
===========================================================================================================
See accompanying notes to consolidated financial statements.
F-4
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
Year Ended December 31, 2002 and 2001 2003,
- --------------------------------------------------------------------------------
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY
(IN THOUSANDS) STOCK PAR VALUE EARNINGS INCOME (LOSS) STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 26,649 $ 2,541 $190,253 $ (591) $(24,547) $194,305
Comprehensive Loss:
Net loss (2,485) (2,485)
Foreign currency translation adjustment (1,086) (1,086)
Unrealized loss on interest rate
swap agreements (2,045) (2,045)
--------
Total comprehensive loss (5,616)
Cash dividends paid (4,236) (4,236)
Exercise of employee stock options (295) 768 473
Tax benefits applicable to
the exercise of employee stock options 48 48
Employee Stock Ownership Plan (417) 1,130 713
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 26,649 1,877 183,532 (3,722) (22,649) 185,687
Comprehensive Loss:
Net loss (30,556) (30,556)
Foreign currency translation adjustment 1,295 1,295
Unrealized gain on interest rate
swap agreements, net of tax of $205 617 617
Minimum pension liability adjustment (771) (771)
--------
Total comprehensive loss (29,415)
Cash dividends paid (4,290) (4,290)
Exercise of employee stock options (291) 880 589
Tax benefits applicable to the exercise
of employee stock options 80 80
Employee Stock Ownership Plan 98 1,132 1,230
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 26,649 1,764 148,686 (2,581) (20,637) 153,881
Comprehensive Loss:
Net loss (1,518) (1,518)
Foreign currency translation adjustment 6,162 6,162
Unrealized gain on interest rate
swap agreements, net of tax of $439 1,317 1,317
Minimum pension liability adjustment (84) (84)
Total comprehensive loss 5,877
--------
Cash dividends paid (5,615) (5,615)
Issuance of common stock related
to acquisition 14,323 56,546 70,869
Exercise of employee stock options (30) 121 91
Employee Stock Ownership Plan (194) 1,132 938
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 $ 40,972 $ 58,086 $141,553 $ 4,814 $(19,384) $226,041
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these Notes to
Consolidated Financial Statements as "we," "us" or "our") is engaged in the
manufacture and distribution of replacement parts for motor vehicles in the
automotive after-market industry. The consolidated financial statements include
our accounts and all subsidiaries in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant intercompany items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have made a
number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Some of the more
significant estimates include allowances for doubtful accounts, inventory
valuation reserves, depreciation and amortization of long-lived assets, product
liability, asbestos and litigation matters, deferred tax asset valuation
allowance and sales return allowances. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Where appropriate, certain amounts in 2002 and 2001 have been reclassified to
conform with the 2003 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
MARKETABLE SECURITIES
During 2003, the held-to-maturity securities matured. At December 31, 2002,
held-to-maturity securities amounted to $7.2 million. Held-to-maturity
securities consist primarily of U.S. Treasury Bills and corporate debt
securities which are reported at amortized cost which approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative Instruments are accounted for in accordance with SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No.138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
These statements establish accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. For derivatives that have been formally
designated as a cash flow hedge (interest rate swap agreements), the effective
portion of changes in the fair value of the derivatives are recorded in
"accumulated other comprehensive income (loss)." Amounts in "accumulated other
comprehensive income (loss)" are reclassified into earnings in the "interest
expense" caption when interest expense on the underlying borrowings are
recognized.
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at cost and are depreciated using the straight-line
method of depreciation over the estimated useful lives as follows:
Estimated Life
--------------------
Buildings and Improvements 10 to 33-1/2 years
Machinery and equipment 7 to 12 years
Tools, dies and auxiliary equipment 3 to 8 years
Furniture and fixtures 3 to 12 years
Computer software 3 to 10 years
Leasehold improvements Shorter of life of
asset or lease term
GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases. We
adopted Statement of Financial Accounting Standards ("SFAS 142") in January
2002. Goodwill and certain other intangible assets having indefinite lives,
which were previously amortized on a straight-line basis over the periods
benefited, are no longer being amortized to earnings, but instead are subject to
periodic testing for impairment. Intangible assets determined to have definite
lives are amortized over their remaining useful lives.
Goodwill of a reporting unit is tested for impairment on an annual basis or
between annual tests if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying amount. To the
extent the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, we are required to perform a second step, as this is an
indication that the reporting unit goodwill may be impaired. In this step, we
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No. 141,
"Business Combinations." The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, we compare the carrying value of such
assets with finite lives to the estimated undiscounted future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair
value and their carrying value.
Prior to the adoption of SFAS No. 142, goodwill was assessed for recoverability
by determining whether the amortization of the goodwill balance over its
remaining life could be recovered
F-6
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill and other intangible asset impairment, if any, was measured
based on projected discounted future operating cash flows using a discount rate
reflecting our average cost of funds.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year end exchange
rates and revenues and expenses are translated at average exchange rates during
the year. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income (loss) and remains there
until the underlying foreign operation is liquidated or substantially disposed
of. Where the U.S. dollar is the functional currency, transaction gains or
losses arising from the remeasurement of financial statements are recorded in
the statement of operations under the caption "other income (expense)".
REVENUE RECOGNITION
We recognize revenues from product sales upon shipment to customers. We estimate
and record provisions for cash discounts, quantity rebates, sales returns and
warranties, in the period the sale is recorded, based upon our prior experience.
DEFERRED FINANCING COSTS
We have incurred costs in obtaining financing. These costs of $9.7 million have
been capitalized in other assets and are being amortized on a straight-line
basis over the life of the related financing arrangements through 2009. At
December 31, 2003 and 2002, total accumulated amortization was $3.6 million and
$2.3 million, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net postretirement benefit liability and related expense under our
benefit plans are determined on an actuarial basis. Benefits are determined
primarily based upon employees' length of service.
INCOME TAXES
Income taxes are calculated using the asset and liability method in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS")
No.109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities, as measured by the current enacted tax rates. Deferred tax expense
(benefit) is the result of changes in the deferred tax asset and liability.
NET EARNINGS PER COMMON SHARE
We present two calculations of earnings per common share. "Basic" earnings per
common share equals net income divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share equals net
income divided by the sum of weighted average common shares outstanding during
the period plus potentially dilutive common shares. Potentially dilutive common
shares that are anti-dilutive are excluded from net earnings per common share.
The following is a reconciliation of the shares used in calcu- lating basic and
dilutive net earnings per common share.
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------
Weighted average
common shares 15,745 11,915 11,775
- ----------------------------------------------------------------
Effect of stock options 48 93 --
- ----------------------------------------------------------------
Weighted average common
equivalent shares outstanding
assuming dilution 15,793 12,008 11,775
- ----------------------------------------------------------------
The average shares listed below were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for the
periods presented.
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------
Stock options 844 574 625
Convertible debentures 2,796 2,796 2,796
- ----------------------------------------------------------------
STOCK BASED COMPENSATION PLANS
Under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123"), we account for stock-based
compensation using the intrinsic value method in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and related inter- pretations.
Stock options granted during the years ended December 31, 2003, 2002 and 2001
were exercisable at prices equal to the fair market value of our common stock on
the dates the options were granted; therefore, no compensation cost has been
recognized for the stock options granted.
If we accounted for stock-based compensation using the fair value method of
Statement No. 123, as amended by Statement No. 148, the effect on net income
(loss) and basic and diluted earnings (loss) per share would have been as
follows:
Year Ended
December 31,
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- ---------------------------------------------------------------------------
Net loss, as reported $ (1,518) $(30,556) $ (2,485)
Less: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects (137) (235) (212)
- ---------------------------------------------------------------------------
Pro forma net loss $ (1,655) $(30,791) $ (2,697)
- ---------------------------------------------------------------------------
Loss per share:
Basic - as reported $ (0.10) $ (2.57) $ (0.21)
Basic - pro forma $ (0.11) $ (2.59) $ (0.23)
Diluted - as reported $ (0.10) $ (2.54) $ (0.21)
Diluted - pro forma $ (0.11) $ (2.56) $ (0.23)
- ---------------------------------------------------------------------------
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
2003 2002 2001
- ---------------------------------------------------------------------------
Expected option life 3.9 years 3.9 years 4.0 years
Expected stock volatility 38.9% 38.7% 38.6%
Expected dividend yield 2.6% 2.6% 2.8%
Risk-free interest rate 2.4% 1.8% 4.2%
Fair value of option $ 3.36 $ 4.07 $ 3.71
- ---------------------------------------------------------------------------
F-7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash investments and accounts receivable.
We place our cash investments with high quality financial institutions and limit
the amount of credit exposure to any one institution. With respect to accounts
receivable, such receivables are primarily from warehouse distributors and major
retailers in the automotive aftermarket industry located in the United States.
We perform ongoing credit evaluations of our customers' financial conditions.
Our five largest individual customers, including members of a marketing group,
accounted for 43%, 43% and 43% of consolidated net sales in 2003, 2002 and 2001,
respectively. Within our five largest customers, the largest customer accounted
for 12%, 14% and 10% of consolidated net sales in 2003, 2002 and 2001,
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 1, 2002, we adopted the guidelines of the Emerging Issues Task Force
Issue No. 01-09, Accounting Consideration Given by a Vendor to a Customer
(Including Reseller of the Vendor's Products) ("EITF 01-09"). These guidelines
address when sales incentives and discounts should be recognized and the
accounting for certain costs incurred by a vendor on behalf of a customer, as
well as where the related revenues and expenses should be classified in the
financial statements. Historically, we have provided certain consideration,
including rebates, product and discounts to customers and treated such costs as
advertising, marketing and sales force expenses. Such costs are now treated as a
reduction of revenues or as costs of sales. As a result, certain costs of
approximately $30.4 million have been reclassified from selling, general and
administrative expenses for the year ended December 31, 2001. These
reclassifications had no effect on net earnings.
SFAS 143
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 143, Accounting for Asset Retirement Obligations ("Statement No. 143"),
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Statement No. 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, we
will recognize a gain or loss on settlement. Effective January 1, 2003, we
adopted Statement No. 143, which did not have a material effect on our
consolidated financial statements.
SFAS 145
In April 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement
No. 145 eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board ("APB")No. 30, Reporting Results of Operations.
Statement No. 145 also requires sales-leaseback accounting for lease
modifications that have economic effects that are similar to sales-leaseback
transactions, and make various other technical corrections to existing
pronouncements. Effective January 1, 2003, we adopted the provisions of
Statement No. 145. As a result, the extraordinary loss on the early
extinguishment of debt of approximately $2.8 million has been reclassified to
interest expense for December 2001.
SFAS 146
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("Statement No. 146"). Statement No. 146, which
is effective prospectively for exit or disposal activities initiated after
December 31, 2002, applies to costs associated with an exit activity, including
restructurings, or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Statement No. 146
requires that exit or disposal costs are recorded as an operating expense when
the liability is incurred and can be measured at fair value. Commitment to an
exit plan or a plan of disposal by itself will not meet the requirement for
recognizing a liability and the related expense under Statement No. 146. The
adoption of Statement No. 146 did not have a material effect on our consolidated
financial statements.
FASB INTERPRETATION NO. 45
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("Interpretation" No. 45"). Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. Interpretaton No.
45 also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair market value of the obligations
it assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 did not have a material effect on our consolidated financial statements.
F-8
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
SFAS 148
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123
("Statement No. 148"). Statement No. 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, Statement No. 148 amends the
disclosure requirements of Statement No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002.
FASB INTERPRETATION NO. 46
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
We will be required to apply FIN 46R to variable interests in VIEs created after
December 31, 2003. For variable interests in VIEs created before January 1,
2004, the Interpretation will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created before January 1,
2004, the assets, liabilities and non-controlling interests of the VIE initially
would be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE.
We are evaluating the impact of applying FIN 46R to existing VIEs in which it
has variable interests and has not yet completed this analysis. At this time, it
is anticipated that the effect on the company's consolidated balance sheet is
not material.
SFAS 150
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("Statement No.
150"). Statement No. 150 requires issuers to classify as liabilities (or assets
in some circumstances) three classes of freestanding financial instruments that
embody obligations for the issuer. Generally, Statement No. 150 was effective
for financial instruments entered into or modified after May 31, 2003, and was
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. Statement No. 150 did not have a material effect on our
consolidated financial statements.
2. ACQUISITIONS AND RESTRUCTURING COSTS
ACQUISITION OF DANA'S EMG BUSINESS
On June 30, 2003, we completed the acquisition of substantially all of the
assets and assumed substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM"). Prior to the sale, DEM was a
leading manufacturer of aftermarket parts in the automotive industry focused
exclusively on engine management.
Under the terms of the acquisition, we paid Dana Corporation $91.3 million in
cash, issued an unsecured promissory note of $15.1 million, and issued 1,378,760
shares of our common stock valued at $15.1 million using an average market price
of $10.97 per share. Based on the estimated final purchase price, we expect to
pay in cash an additional $1.9 million. The average market price was based on
the average closing price for a range of trading days preceding the closing date
of the acquisition. We also incurred an estimated $7.1 million in transaction
costs.
We also issued to Dana Corporation an unsecured subordinated promissory note in
the aggregate principal amount of approximately $15.1 million. The promissory
note bears an interest rate of 9% per annum for the first year, with such
interest rate increasing by one-half of a percentage point (0.5%) on each
anniversary of the date of issuance. Accrued and unpaid interest is due
quarterly under the promissory note. The maturity date of the promissory note is
five and a half years from the date of issuance. The promissory note may be
prepaid in whole or in part at any time without penalty.
In connection with the acquisition of DEM, we completed a public equity offering
of 5,750,000 shares of our common stock for net proceeds of approximately $55.7
million. The net proceeds from this equity offering were used to repay a portion
of our outstanding indebtedness under our revolving credit facility with General
Electric Capital Corporation. On June 30, 2003, we also completed an amendment
to our revolving credit facility, which increased the amount available under the
credit facility by $80 million, to $305 million, as discussed more fully in Note
7 of Notes to Consolidated Financial Statements. We then financed the cash
portion of the acquisition purchase price and the costs associated with the
acquisition by borrowing from our amended credit facility.
The preliminary purchase price of the acquisition is summarized as follows (In
thousands):
Value of common stock issued $ 15,125
Unsecured promissory note 15,125
Cash consideration 93,172
- ------------------------------------------------------
Total consideration 123,422
Transaction costs 7,077
- ------------------------------------------------------
Total purchase price $ 130,499
- ------------------------------------------------------
The acquisition purchase price is subject to a final valuation of consideration
which primarily relates to a post-closing adjustment, based upon the final book
value of the acquired assets of DEM less the book value of the assumed
liabilities of DEM as of the close of business on the closing date, subject to a
maximum purchase price of $125 million.
F-9
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
The following table summarizes the components of the net assets acquired (In
thousands):
Accounts receivable $ 65,162
Inventories 82,480
Property, plant and equipment 17,165
Goodwill 55,160
Other assets 128
- -------------------------------------------------
Total assets acquired $220,095
- -------------------------------------------------
Accounts payable $ 30,247
Sundry payables and accrued expenses 32,152
Accrued customer returns 7,013
Payroll and commissions 3,984
Other liabilities 16,200
- -------------------------------------------------
Total liabilities assumed 89,596
- -------------------------------------------------
Net assets acquired $130,499
- -------------------------------------------------
The purchase price allocation is preliminary and is dependent on our final
analysis of the net assets acquired, including intangibles which is expected to
be completed by June 30, 2004. The acquisition was accounted for as a purchase
transaction in accordance with SFAS No. 141, and accordingly, the net tangible
assets acquired were recorded at their fair value at the date of the
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired was recorded as goodwill. Goodwill of $55.2 million
resulting from this acquisition has been assigned to our Engine Management
reporting unit. Goodwill associated with this acquisition will be deductible for
tax purposes.
The following table represents our unaudited pro forma consolidated statement of
operations for the years ended December 31, 2003 and 2002, as if the acquisition
of DEM had been completed at January 1, 2003 and 2002, respectively. The pro
forma information is presented for comparative purposes only and does not
purport to be indicative of what would have occurred had the acquisition
actually been made at such date, nor is it necessarily indicative of future
operating results.
Year Ended
December 31,
-----------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------
Net sales $ 822,515 $ 882,401
Loss from continuing operations $ (2,246) $ (36,231)
Loss before cumulative effect
of accounting change $ (3,988) $ (54,528)
Net loss $ (3,988) $ (72,878)
Net loss per common share:
Net loss Basic $ (0.21) $ (3.82)
Net loss - Diluted $ (0.21) $ (3.82)
- ---------------------------------------------------------------
RESTRUCTURING COSTS
In connection with the acquisition, we have reviewed our operations and
implemented integration plans to restructure the operations of DEM. We announced
in a press release on July 8, 2003 that we will close seven DEM facilities. As
part of the integration and restructuring plans, we accrued an initial
restructuring liability of approximately $34.7 million at June 30, 2003. Such
amounts were recognized as liabilities assumed in the acquisition and included
in the allocation of the cost to acquire DEM. Accordingly, such amounts
resulted in additional goodwill being recorded in connection with the
acquisition.
Of the total restructuring accrual, approximately $16.8 million related to work
force reductions and represented employee termination benefits. The accrual
amount primarily provides for severance costs relating to the involuntary
termination of approximately 1,400 employees, individually employed throughout
DEM's facilities across a broad range of functions, including managerial,
professional, clerical, manufacturing and factory positions. During the third
and fourth quarters of 2003, $2.1million of termination benefits have been
charged to the accrual. In addition, during 2003 there were non-cash adjustments
of $1.1 million, as workforce reduction costs were less than amounts originally
estimated.
The restructuring accrual also includes approximately $17.9 million associated
with exiting certain activities, primarily related to lease and contract
termination costs. Specifically, our plans are to consolidate certain of DEM
operations into our existing plants. The restructuring accrual associated with
other exiting activities specifically includes incremental costs and contractual
termination obligations for items such as leasehold termination payments
incurred as a direct result of these plans, which will not have future benefits.
Selected information relating to the restructuring costs included in the
allocation of the cost to acquire DEM is as follows:
Workforce Other
(IN THOUSANDS) Reduction Exit Costs Total
- -----------------------------------------------------------------
Initial restructuring
liability $ 16,800 $ 17,900 $ 34,700
Cash payments (2,085) -- (2,085)
Adjustments (1,100) 100 (1,000)
- -----------------------------------------------------------------
Restructuring liability
as of December 31, 2003 $ 13,615 $ 18,000 $ 31,615
- -----------------------------------------------------------------
In January 2002, we acquired the assets of a Temperature Control business from
Hartle Industries for $4.8 million. The assets acquired consist primarily of
property, plant and equipment, and inventory.
In April 2002, we acquired Carol Cable Limited, a manufacturer and distributor
of wire sets, based in England, for $1.7 million. The assets acquired consist
primarily of property, plant and equipment, and inventory. In addition, during
2002 we acquired the remaining equity interest in SMP Holdings Limited.
In May 2002, we purchased the aftermarket fuel injector business of Sagem Inc.,
a subsidiary of Johnson Controls, for $10.5 million. Sagem Inc. is a basic
manufacturer of fuel injectors, and was the primary supplier to us prior to our
acquisition. The assets acquired consist primarily of property, plant and
equipment, and inventory. The purchase was partially financed by the seller
($5.4 million to be paid over a two-year period), with the remaining funds being
provided under our revolving credit facility.
Our 2002 acquisitions did not have a material effect on our consolidated
financial statements.
F-10
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
On February 3, 2004, we acquired the Canadian distribution of Dana Corporation's
Engine Management Group for approximately $1.0 million. As part of the
acquisition we acquired inventory and will be relocating it into our
distribution facility in Mississauga, Canada.
3. INVENTORIES
December 31,
--------------------
(IN THOUSANDS) 2003 2002
- ----------------------------------------------------------
Finished goods $191,340 $141,487
Work in process 7,913 2,417
Raw materials 54,501 30,881
- ----------------------------------------------------------
Total inventories $253,754 $174,785
- ----------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
December 31,
--------------------
(IN THOUSANDS) 2003 2002
- ----------------------------------------------------------
Land, buildings and improvements $ 71,900 $ 66,200
Machinery and equipment 136,551 120,655
Tools, dies and auxiliary equipment 22,046 19,962
Furniture and fixtures 26,984 25,831
Computer software 12,514 12,120
Leasehold improvements 7,285 7,164
Construction in progress 4,280 4,169
- ----------------------------------------------------------
281,560 256,101
Less accumulated depreciation
and amortization 169,011 152,279
- ----------------------------------------------------------
Total property, plant and
equipment, net $112,549 $103,822
- ----------------------------------------------------------
Depreciation expense was $17.1 million, $16.1 million and $18.9 million for
2003, 2002 and 2001, respectively.
5. GOODWILL
Effective January 1, 2002, we adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). In accordance with SFAS No. 142, goodwill is no longer amortized, but
instead, is subject to an annual review for potential impairment. We completed
our annual impairment test during the fourth quarter of 2003 and determined that
our goodwill was not impaired.
During the first quarter of 2002, we performed our initial impairment test of
goodwill reviewing the fair values of each of our reporting units using the
discounted cash flows method, based on our weighted average cost of capital, and
market multiples. The decline in economic and market conditions, higher
integration costs than anticipated and the general softness in the automotive
aftermarket caused a decrease in the fair values of certain of our reporting
units. As a result, we recorded an impairment loss on goodwill as a cumulative
effect of accounting change of $18.3 million, net of tax, or $1.55 per diluted
share during the first quarter of 2002. The impairment loss relates to our
European Operation and Temperature Control Segment for which we recorded a
charge of $10.9 million and $7.4 million, respectively. During the fourth
quarter of 2002, we completed our annual-review of goodwill for potential
impairment. After consideration to 2002 losses and budgeted 2003 losses, we
wrote-off our remaining goodwill associated with the Engine Management reporting
unit of our European Segment. With respect to our European Segment,
approximately $1.4 million of goodwill remains on the December 31, 2003 and 2002
balance sheet, all of which pertains to the Temperature Control reporting unit.
Engine Temperature
(IN THOUSANDS) Management Control Europe Total
- --------------------------------------------------------------------
Balance as of
December 31, 2002 $ 10,490 $ 4,822 $ 1,371 $ 16,683
Goodwill acquired 55,160 -- 55,160
- ---------------------------------------------------------------------
Balance as of
December 31, 2003 $ 65,650 $ 4,822 $ 1,371 $ 71,843
- ---------------------------------------------------------------------
Upon adoption of SFAS No. 142, our earnings (loss) before cumulative effect of
accounting change for basic and diluted earnings (loss) per share adjusted to
exclude goodwill amortization expense (net of taxes) were as follows:
December 31,
-----------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001
- -------------------------------------------------------------------------------------
Reported loss before cumulative effect
of accounting change $(1,518) $(12,206) $ (2,485)
Add back: goodwill amortization expense, net
of tax -- -- 2,727
- -------------------------------------------------------------------------------------
Adjusted earnings (loss) before cumulative
effect of accounting change $(1,518) $(12,206) $ 242
- -------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Reported basic (loss) per share before
cumulative effect of accounting change $ (0.10) $ (1.03) $ ( 0.21)
Add back: goodwill amortization expense,
net of tax -- -- 0.23
- -------------------------------------------------------------------------------------
Adjusted basic earnings (loss) per share
before cumulative effect of accounting change $ (0.10) $ (1.03) $ 0.02
- -------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Reported diluted loss per share
before cumulative effect of accounting change $ (0.10) $ (1.01) $ (0.21)
Add back: goodwill amortization expense,
net of tax -- -- 0.23
- -------------------------------------------------------------------------------------
Adjusted diluted earnings (loss) per share
before cumulative effect of accounting change $ (0.10) $ (1.01) $ 0.02
- -------------------------------------------------------------------------------------
Upon adoption of SFAS No. 142, our net earnings (loss) for basic and diluted
earnings per share adjusted to exclude goodwill amortization expense (net of
tax) were as follows:
December 31,
-------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001
- ---------------------------------------------------------------------------------
Reported net loss $(1,518) $(30,556) $(2,485)
Add back: goodwill amortization expense, net
of tax -- -- 2,727
- --------------------------------------------------------------------------------
Adjusted net earnings (loss) $(1,518) $(30,556) $ 242
- --------------------------------------------------------------------------------
Basic net earnings (loss) per share:
Reported basic net earnings (loss) per share $ (0.10) $ (2.57) $ (0.21)
Add back: goodwill amortization expense, net
of tax -- -- 0.23
- --------------------------------------------------------------------------------
Adjusted basic net earnings (loss) per share $ (0.10) $ (2.57) $ 0.02
- --------------------------------------------------------------------------------
Diluted net earnings (loss) per share:
Reported diluted net earnings (loss) per
share $ (0.10) $ (2.54) $ (0.21)
- --------------------------------------------------------------------------------
Add back: goodwill amortization expense, net
of tax -- -- 0.23
Adjusted diluted net earnings (loss) per share $ (0.10) $ (2.54) $ 0.02
- --------------------------------------------------------------------------------
F-11
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
6. OTHER ASSETS
December 31,
(IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------
Unamortized customer supply agreements $ 946 $ 1,419
Equity in joint ventures 2,322 2,202
Deferred income taxes 19,389 18,692
Deferred financing costs 6,131 4,472
Other 13,174 15,108
- -------------------------------------------------------------------
Total other assets $ 41,962 $ 41,893
- -------------------------------------------------------------------
Included in the above caption "Other" is a preferred stock investment of $1.5
million in a customer. Net sales to this customer amounted to $53.0 million,
$60.0 million and $57.9 million in 2003, 2002 and 2001, respectively.
7. CREDIT FACILITIES AND LONG-TERM DEBT
Effective April 27, 2001, we entered into an agreement with General Electric
Capital Corporation, as agent, and a syndicate of lenders for a secured
revolving credit facility. The term of the credit agreement was for a period of
five years and provided for a line of credit up to $225 million.
On June 30, 2003, we completed an amendment to our revolving credit facility to
provide for an additional $80 million commitment, in connection with our
acquisition of DEM. This additional commitment increases the total amount
available for borrowing under our revolving credit facility to $305 million from
$225 million, which expires in 2008. Availability under our revolving credit
facility is based on a formula of eligible accounts receivable, eligible
inventory and eligible fixed assets.
At December 31, 2003 and 2002, the interest rate on the Company's revolving
credit facilities was 3.6% and 3.4%, respectively. Direct borrowings under our
revolving credit facility bear interest at the prime rate plus the applicable
margin (as defined) or the LIBOR rate plus the applicable margin (as defined),
at our option. Outstanding borrowings under this revolving credit facility,
classified as current liabilities was $95.9 million and $76.2 million at
December 31, 2003 and 2002, respectively. Borrowings are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of our domestic and Canadian subsidiaries. The terms of
our revolving credit facility provide for, among other provisions, financial
covenants requiring us, on a consolidated basis, (1) to maintain specified
levels of earnings before interest, taxes, depreciation and amortization
(EBITDA), as defined, at the end of each fiscal quarter through December 31,
2004, (2) commencing September 30, 2004, to maintain specified levels of fixed
charge coverage at the end of each fiscal quarter (rolling twelve months)
through 2007, and (3) to limit capital expenditure levels for each fiscal year
through 2007. The Company was in compliance with the covenants at December 31,
2003.
In addition, a foreign subsidiary of ours has a revolving credit facility. The
amount of short-term bank borrowings outstanding under this facility was $3.8
million and $3.4 million at December 31, 2003 and 2002, respectively. The
weighted average interest rates on these borrowings at December 31, 2003 and
2002 were 6.3% and 6.5%, respectively. On July 26, 1999, we completed a public
offering of convertible subordinated debentures amounting to $90 million. The
convertible debentures carry an interest rate of 6.75%, payable semi-annually,
and will mature on July 15, 2009. The convertible debentures are convertible
into 2,796,120 shares of our common stock. We may, at our option, redeem some or
all of the Debentures at any time on or after July 15, 2004, for a redemption
price equal to the issuance price plus accrued interest. In addition, if a
change in control, as defined, occurs at the Company, we will be required to
make an offer to purchase the convertible debentures at a purchase price equal
to 101% of their aggregate principal amount, plus accrued interest.
In connection with our acquisition of DEM, we issued to Dana Corporation an
unsecured subordinated promissory note in the aggregate principal amount of
approximately $15.1 million. The promissory note bears an interest rate of 9%
per annum for the first year, with such interest rate increasing by one-half of
a percentage point (0.5%) on each anniversary of the date of issuance. Accrued
and unpaid interest is due quarterly under the promissory note. The maturity
date of the promissory note is five and a half years from the date of issuance.
The promissory note may be prepaid in whole or in part at any time without
penalty.
On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The
loan is payable in monthly installments. The loan bears interest at a fixed rate
of 5.50% maturing in July 2018. The mortgage loan is secured by a building and
related property.
Long-term debt consists of:
December 31,
(IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------
6.75% convertible subordinated debentures $ 90,000 $90,000
Unsecured promissory note 15,125 --
Mortgage loan 9,824 --
Other 3,162 7,299
- -------------------------------------------------------------------
118,111 97,299
Less current portion 3,354 4,108
- -------------------------------------------------------------------
Total non-current portion of
long-term debt $114,757 $93,191
- -------------------------------------------------------------------
Maturities of long-term debt during the five years ending December 31, 2004
through 2008 are $3.4 million, $0.6 million, $0.6 million, $0.6 million and $0.6
million, respectively.
8. INTEREST RATE SWAP AGREEMENTS
We do not enter into financial instruments for trading or speculative purposes.
The principal financial instruments used for cash flow hedging purposes are
interest rate swaps.
In October 2003, we entered into a new interest rate swap agreement with a
notional amount of $25 million that is to mature in October 2006. Under this
agreement, we receive a floating rate based on the LIBOR interest rate, and pay
a fixed rate of 2.45% on the notional amount of $25 million.
In July 2001, we entered into two interest rate swap agreements to manage our
exposure to interest rate changes. The swaps effectively convert a portion of
our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional amounts. At December 31, 2002, we had two
outstanding interest rate swap agreements (in an aggregate notional amount of
$75 million), one of
F-12
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
which matured in January 2003 and the other is scheduled to mature in January
2004. Under these agreements we receive a floating rate based on the LIBOR
interest rate, and pay a fixed rate of 4.92% on a notional amount of $45 million
and 4.37% on a notional amount of $30 million(matured in January 2003).
If, at any time, the swaps are determined to be ineffective, in whole or in
part, due to changes in the interest rate swap or underlying debt agreements,
the fair value of the portion of the interest rate swap determined to be
ineffective will be recognized as gain or loss in the statement of operations in
the "interest expense" caption for the applicable period. It is not expected
that any gain or loss will be reported in the statement of operations during the
year ending December 31, 2004 nor was any recorded in 2003, 2002 or 2001.
9. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par value, and
our Board of Directors are vested with the authority to establish and designate
series of preferred, to fix the number of shares therein and the variations in
relative rights as between series. On December 18, 1995, our Board of Directors
established a new series of preferred shares designated as Series A
Participating Preferred Stock. The number of shares constituting the Series A
Preferred Stock is 30,000. The Series A Preferred Stock is designed to
participate in dividends, ranks senior to our common stock as to dividends and
liquidation rights and has voting rights. Each share of the Series A Preferred
Stock shall entitle the holder to one thousand votes on all matters submitted to
a vote of the stockholders of the Company. No such shares were outstanding at
December 31, 2003.
On January 17, 1996, our Board of Directors adopted a Shareholder Rights Plan
(Plan). Under the Plan, the Board declared a dividend of one Preferred Share
Purchase Right (Right) for each of our outstanding common shares . The dividend
was payable on March 1, 1996, to the shareholders of record as of February 15,
1996. The Rights are attached to and automatically trade with the outstanding
shares of our common stock.
The Rights will become exercisable only in the event that any person or group of
affiliated persons becomes a holder of 20% or more of our outstanding common
shares, or commences a tender or exchange offer which, if consummated, would
result in that person or group of affiliated persons owning at least 20% of our
outstanding common shares. Once the rights become exercisable they entitle all
other shareholders to purchase, by payment of an $80.00 exercise price, one
one-thousandth of a share of Series A Participating Preferred Stock, subject to
adjustment, with a value of twice the exercise price. In addition, at any time
after a 20% position is acquired and prior to the acquisition of a 50% position,
our Board of Directors may require, in whole or in part, each outstanding Right
(other than Rights held by the acquiring person or group of affiliated persons)
to be exchanged for one share of common stock or one one-thousandth of a share
of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per
Right at any time prior to their expiration on February 28, 2006.
During the years 1998 through 2000, our Board of Directors authorized multiple
repurchase programs under which we could repurchase shares of our common stock.
During such years, $26.7 million (in aggregate) of common stock has been
repurchased to meet present and future requirements of our stock option programs
and to fund our ESOP. As of December 31, 2003, we have Board authorization to
repurchase additional shares at a maximum cost of $1.7 million. During 2003,
2002 and 2001, we did not repurchase any shares of our common stock.
Accumulated other comprehensive income (loss) is comprised of the following:
December 31,
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------
Foreign currency translation adjustments $ 5,780 $ (382)
Unrealized loss on interest rate swap
agreement, net of tax (111) (1,428)
Minimum pension liability, net of tax (855) (771)
- ---------------------------------------------------------------------
Total accumulated other comprehensive
income (loss) $ 4,814 $ (2,581)
- ---------------------------------------------------------------------
10. STOCK BASED COMPENSATION PLANS
We have principally two fixed stock-based compensation plans. Under the 1994
Omnibus Stock Option Plan, as amended, we are authorized to issue 1,500,000
stock options. The options become exercisable over a three to five year period
and expire at the end of five years following the date they become exercisable.
Under the 1996 Independent Directors' Stock Option Plan, we are authorized to
issue 50,000 stock options. The options become exercisable one year after the
date of grant and expire at the end of ten years following the date of grant. At
December 31, 2003, in aggregate 1,262,774 shares of authorized but unissued
common stock were reserved for issuance under our stock option plans. A summary
of the status of our stock option plans follow:
2003 2002 2001
- -------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(SHARES IN THOUSANDS) SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------------------------------------------------------------------
Outstanding at
beginning of year 910 $17.14 1,011 $16.76 1,189 $16.60
Granted 346 14.69 10 14.43 10 13.05
Exercised (3) 9.79 (54) 9.74 (55) 9.29
Forfeited (90) 18.29 (57) 16.91 (133) 18.18
- -------------------------------------------------------------------------------------
Outstanding at
end of year 1,163 $16.33 910 $17.14 1,011 $16.76
- -------------------------------------------------------------------------------------
Options exercisable
at end of year 800 748 671
- -------------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING
- -------------------------------------------------------------------------------------
Shares Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/03 Contractual Life (Years) Exercise Price
- -------------------------------------------------------------------------------------
$ 6.56 - $11.29 320 4.6 $ 9.92
$13.05 - $16.94 418 5.4 $ 14.85
$20.50 - $24.84 425 1.9 $ 22.62
STOCK OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------
Range of Shares Exercisable Weighted-Average
Exercise Prices at 12/31/03 Exercise Price
- -------------------------------------------------------------------------------------
$ 6.56 - $11.29 300 $10.14
$13.05 - $16.94 75 $15.58
$20.50 - $24.84 425 $22.62
- -------------------------------------------------------------------------------------
F-13
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
11. RETIREMENT BENEFIT PLANS
We had a defined benefit pension plan covering certain former employees of our
former Brake business. During 2002, a partial settlement of the plan occurred in
conjunction with the purchase of non-participating annuity contracts for plan
members. The final settlement under the plan will occur when the remaining
assets under the plan are distributed. All pension benefit obligations have been
satisified and the projected benefit obligation under the plan is $0.
The following table represents a reconciliation of the beginning and ending
benefit obligation, the fair value of plan assets and the funded status of the
plan:
December 31,
---------------------
(IN THOUSANDS) 2003 2002
- ----------------------------------------------------------------
Benefit obligation at beginning of year $ -- $ 8,813
Interest cost -- 368
Actuarial loss -- 1,096
Settlement -- (9,793)
Benefits paid -- (484)
- ----------------------------------------------------------------
Benefit obligation at end of year $ -- $ --
- ----------------------------------------------------------------
Fair value of plan assets at
beginning of year $ 746 $ 11,062
Settlement -- (9,793)
Actual return on plan assets (25) (39)
Benefits paid -- (484)
- ----------------------------------------------------------------
Fair value of plan assets at end of year $ 721 $ 746
- ----------------------------------------------------------------
Funded status $ 721 $ 746
Unrecognized net actuarial loss 81 56
- ----------------------------------------------------------------
Prepaid benefit cost $ 802 $ 802
- ----------------------------------------------------------------
Weighted average assumptions are as follows:
December 31,
----------------------------
2003 2002 2001
- -----------------------------------------------------------------------
Discount rates N/A 6.50% 7.25%
Expected long-term rate
of return on assets N/A 8.00% 8.00%
- -----------------------------------------------------------------------
Components of net periodic (benefit) cost follow:
December 31,
----------------------------
(IN THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------
Interest cost $ -- $ 368 $ 629
Return on assets (8) (530) (928)
Settlement -- 228 --
Recognized actuarial (gain) loss 8 (5) (112)
- -----------------------------------------------------------------------
Net periodic (benefit) cost $ -- $ 61 $ (411)
- -----------------------------------------------------------------------
In addition, we participate in several multi employer plans which provide
defined benefits to substantially all unionized workers. The Multi employer
Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers
associated with multi employer plans. We have not received information from the
plans' administrators to determine our share, if any, of unfunded vested
benefits.
We and certain of our subsidiaries also maintain various defined contribution
plans, which include profit sharing and provide retirement benefits for other
eligible employees.
The provisions for retirement expense in connection with the plans are as
follows:
Multi- Defined Contribution
(IN THOUSANDS) employer Plans and Other Plans
- -----------------------------------------------------------------------
Year ended December 31,
2003 $ 225 $ 3,518
2002 306 2,553
2001 299 2,449
- -----------------------------------------------------------------------
We have an Employee Stock Ownership Plan and Trust for employees who are not
covered by a collective bargaining agreement. 75,000 shares were granted to
employees during 2003, 2002 and 2001, under the terms of the ESOP. These shares
were funded directly from treasury stock.
In fiscal 2000, we created an employee benefits trust to which we contributed
750,000 shares of treasury stock. We are authorized to instruct the trustees to
distribute such shares toward the satisfaction of our future obligations under
employee benefit plans. The shares held in trust are not considered outstanding
for purposes of calculating earnings per share until they are committed to be
released. The trustees will vote the shares in accordance with its fiduciary
duties.
The provision for expense in connection with the ESOP was approximately $0.9
million in 2003, $1.2 million in 2002 and $0.7 million in 2001.
In August 1994, we established an unfunded Supplemental Executive Retirement
Plan (SERP) for key employees. Under the plan, these employees may elect to
defer a portion of their compensation and, in addition, we may at our discretion
make contributions to the plan on behalf of the employees. Such contributions
were $99,000, $46,000 and $37,000 in 2003, 2002 and 2001, respectively.
On October 1, 2001, we adopted a second unfunded SERP. The SERP is a defined
benefit plan pursuant to which we will pay supplemental pension benefits to
certain key employees upon retirement based upon the employees' years of service
and compensation.
December 31,
---------------------------
(IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------
Benefit obligation at beginning of year $ 2,275 $ 1,342
Service cost 351 211
Interest cost 220 140
Actuarial loss 1,407 582
- -------------------------------------------------------------------
Benefit obligation at end of year $ 4,253 $ 2,275
- -------------------------------------------------------------------
Funded status $ (4,253) $ (2,275)
Unrecognized prior service cost 1,022 1,132
Additional minimum pension liability (1,877) (1,298)
Unrecognized net actuarial loss 1,800 538
- -------------------------------------------------------------------
Accrued benefit cost $ (3,308) $ (1,903)
- -------------------------------------------------------------------
Components of net periodic benefit cost follow:
December 31,
---------------------------
(IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------
Service cost $ 351 $ 211
Interest cost 220 140
Amortization of prior service cost 110 110
Amortization of unrecognized loss 146 44
- -------------------------------------------------------------------
Net periodic benefit cost $ 827 $ 505
- -------------------------------------------------------------------
F-14
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
December 31,
---------------------------------
2003 2002
- ----------------------------------------------------------------
Discount rates 6.00% 6.50%
Salary increase 4% 4%
- ----------------------------------------------------------------
12. POSTRETIREMENT MEDICAL BENEFITS
We provide certain medical and dental care benefits to eligible retired
employees. Our current policy is to fund the cost of the health care plans on a
pay-as-you-go basis. The following table represents a reconciliation of the
beginning and ending benefit obligation and the funded status of the plan:
December 31,
--------------------------
(IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------
Benefit obligation at beginning of year $ 26,188 $ 20,484
Service cost 2,547 1,765
Interest cost 1,642 1,517
Actuarial loss 1,637 3,375
Benefits paid (1,087) (953)
- -------------------------------------------------------------------
Benefit obligation at end of year $ 30,927 $ 26,188
- -------------------------------------------------------------------
Funded status $ (30,927) $(26,188)
Unrecognized prior service cost 666 790
Unrecognized net actuarial loss 2,442 846
- -------------------------------------------------------------------
Accrued benefit cost $ (27,819) $(24,552)
- -------------------------------------------------------------------
Components of net periodic benefit cost follow:
December 31,
------------------------------------
(IN THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------------
Service cost $ 2,547 $ 1,765 $ 1,500
Interest cost 1,642 1,517 1,314
Amortization of prior service cost 124 124 124
Recognized actuarial (gain) loss 41 (53) (232)
- -----------------------------------------------------------------------------
Net periodic benefit cost $ 4,354 $ 3,353 $ 2,706
- -----------------------------------------------------------------------------
Actuarial assumptions used to determine costs and benefit
obligations are as follows:
2003 2002 2001
- -----------------------------------------------------------------------------
Discount Rate 6.0% 6.5% 7.25%
Current medical cost trend rate 12% 12% 9%
Current dental cost trend rate 5% 5% 5%
Ultimate medical cost trend rate 5% 5% 5%
Year trend rate declines to ultimate 2005 2005 2005
- -----------------------------------------------------------------------------
We expect to pay benefits of approximately $1.2 million to our unfunded
postretirement benefit plan in 2004. Our measurement date for this plan is
December 31.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for 2003:
1-Percentage- 1-Percentage-
(IN THOUSANDS) Point Increase Point Decrease
- ------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 446 $ (359)
Effect on post retirement
benefit obligation $ 2,544 $ (2,110)
- ------------------------------------------------------------------------
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act") was signed into law. Since specific authoritative
guidance on accounting for the federal subsidy is pending, FASB has permitted
companies to defer the accounting for the effects of the Act. Accordingly, we
have elected to defer the accounting for the changes in the Act, therefore, the
impact of the Act has not been reflected in the accounting for our
postretirement medical benefits or in disclosures above. We will account for the
effects of the Act in the period in which authoritative guidance is issued,
which could require a change in previously reported information.
13. OTHER INCOME (EXPENSE), NET
Year Ended December 31,
---------------------------------
(IN THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------
Interest and dividend income $ 446 $ 1,338 $ 1,336
Loss on sale of accounts
receivable -- -- (484)
Income from joint ventures 27 352 844
Gain (loss) on disposal of property,
plant and equipment (301) 97 265
Gain (loss) on foreign exchange (1,357) 108 366
Other income (expense) - net 708 1,292 436
- -----------------------------------------------------------------------
Total other income (expense), net $ (477) $ 3,187 $ 2,763
- -----------------------------------------------------------------------
14. INCOME TAXES
The income tax provision (benefit) consists of the following:
Year Ended December 31,
--------------------------------
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------
Current:
Domestic $ 804 $ 2,422 $ 1,124
Foreign 2,035 2,948 1,673
- ----------------------------------------------------------------------
Total Current 2,839 5,370 2,797
- ----------------------------------------------------------------------
Deferred:
Domestic (1,617) 3,350 (3,408)
Foreign (15) (800) (220)
- ----------------------------------------------------------------------
Total Deferred (1,632) 2,550 (3,628)
- ----------------------------------------------------------------------
Total income tax provision (benefit) $ 1,207 $ 7,920 $ (831)
- ----------------------------------------------------------------------
We have not provided for federal income taxes on the undistributed income of our
foreign subsidiaries because of the availability of foreign tax credits and/or
our intention to permanently reinvest such undistributed income. Cumulative
undistributed earnings of foreign subsidiaries on which no United States income
tax has been provided were $43.2 million at the end of 2003, 37.7 million at the
end of 2002, $32.9 million at the end of 2001.
Earnings (loss) before income taxes for foreign operations (excluding Puerto
Rico) amounted to approximately $1.5 million, ($4.6) million, and $2.5 million,
in 2003, 2002, and 2001, respectively. U.S. taxes on the earnings of the Puerto
Rican subsidiary are largely eligible for tax credits against U.S. income taxes
(phased out effective 2005) and are partially exempt from Puerto Rican income
taxes under a tax exemption grant expiring in 2016.
F-15
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Reconciliations between the U.S. federal income tax rate and our effective
income tax rate as a percentage of earnings from continuing operations before
income taxes are as follows:
Year Ended December 31,
----------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------
U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate
resulting from:
State and local income taxes, net
of federal income tax benefit (7.2) 4.1 21.4
Non-deductible items, net 59.9 3.4 60.5
Income (benefit) taxes on foreign
income (111.0) (2.4) (91.9)
Change in valuation allowance 107.6 16.4 --
- -----------------------------------------------------------------------------
Effective tax rate 84.3% 56.5% 25.0%
- -----------------------------------------------------------------------------
The following is a summary of the components of the net deferred tax assets and
liabilities recognized in the accom- panying consolidated balance sheets:
December 31,
-------------------------
(IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------
Deferred tax assets:
Inventories $ 7,060 $ 6,025
Allowance for customer returns 6,453 6,152
Postretirement benefits 10,989 10,390
Allowance for doubtful accounts 1,173 1,442
Accrued salaries and benefits 3,430 3,339
Net operating loss and tax credit
carry forwards 17,988 14,084
Goodwill 2,581 3,578
Accrued asbestos liabilities 10,430 10,765
Other 5,583 5,580
- -------------------------------------------------------------------
65,687 61,355
Valuation allowance (23,239) (21,698)
- -------------------------------------------------------------------
Total $ 42,448 $ 39,657
- -------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 8,747 $ 7,565
Promotional costs 395 1,106
Goodwill 688 --
Other 81 81
- -------------------------------------------------------------------
Total 9,911 8,752
- -------------------------------------------------------------------
Net deferred tax assets $ 32,537 $ 30,905
- -------------------------------------------------------------------
During 2003, we increased the valuation allowance by $1.5 million. At December
31, 2003, we have approximately $28.0 million of domestic and foreign net
operating loss carry forwards of which $13.6 million will expire between 2021
and 2023 and the remainder (foreign) have an indefinite carry forward period. We
also have foreign tax credit carry forwards of approximately $1.4 million which
expire between 2004 and 2007. We also have alternative minimum tax credit carry
forwards of approximately $6.9 million for which there is no expiration date.
We believe that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the net deferred tax assets.
However, if we are unable to generate sufficient taxable income in the future
through our operations, increases in the valuation allowance may be required.
15. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of SFAS No. 131, we have three reportable operating
segments which are the major product areas of the automotive aftermarket in
which we compete. Engine Management consists primarily of ignition and emission
parts, wire and cable, and fuel system parts. Temperature Control consists
primarily of compressors, other air conditioning parts and heater parts. The
third reportable operating segment is Europe which consists of both Engine
Management and Temperature Control reporting units. The accounting policies of
each segment are the same as those described in the summary of significant
accounting policies (see Note 1). The following tables contain financial
information for each reportable segment:
Year ended December 31, 2003
---------------------------------------------------------------------------
Engine Temperature European Other
(IN THOUSANDS) Management Control Group Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------
Net Sales $414,375 $219,576 $ 40,141 $ 4,691 $678,783
- ----------------------------------------------------------------------------------------------------------
Depreciation and
amortization 9,362 5,688 1,046 996 17,092
- ----------------------------------------------------------------------------------------------------------
Operating income 31,871 4,702 (3,605) (17,153) 15,815
- ----------------------------------------------------------------------------------------------------------
Investment in equity
affiliates -- -- 42 2,280 2,322
- ----------------------------------------------------------------------------------------------------------
Capital expenditures 5,473 2,438 1,015 -- 8,926
- ----------------------------------------------------------------------------------------------------------
Total Assets $448,687 $150,248 $ 31,188 $ 64,402 $694,525
- ----------------------------------------------------------------------------------------------------------
Our five largest individual customers, including members of one marketing group
accounted for 43% of consolidated net sales in 2003. 29% and 14% of these net
sales were generated from our Engine Management and Temperature Control seg-
ments, respectively.
Year ended December 31, 2002
---------------------------------------------------------------------------
Engine Temperature European Other
(IN THOUSANDS) Management Control Group Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------
Net Sales $303,112 $255,088 $ 36,028 $ 4,209 $598,437
- ----------------------------------------------------------------------------------------------------------
Depreciation and
amortization 8,660 5,484 902 1,082 16,128
- ----------------------------------------------------------------------------------------------------------
Operating income 41,844 10,095 (10,464) (16,407) 25,068
- ----------------------------------------------------------------------------------------------------------
Investment in equity
affiliates -- -- 185 2,017 2,202
- ----------------------------------------------------------------------------------------------------------
Capital expenditures 3,465 2,066 1,831 236 7,598
- ----------------------------------------------------------------------------------------------------------
Total Assets $247,318 $157,343 $ 30,728 $ 55,369 $490,758
- ----------------------------------------------------------------------------------------------------------
Our five largest individual customers, including members of one marketing group
accounted for 43% of consolidated net sales in 2002. 22% and 21% of these net
sales were generated from our Engine Management and Temperature Control seg-
ments, respectively.
Year ended December 31, 2001
---------------------------------------------------------------------------
Engine Temperature European Other
(IN THOUSANDS) Management Control Group Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------
Net Sales $285,498 $269,856 $ 33,449 $ 2,849 $591,652
- ----------------------------------------------------------------------------------------------------------
Depreciation and
amortization 9,649 6,462 1,961 837 18,909
- ----------------------------------------------------------------------------------------------------------
Operating income 26,432 3,624 (1,718) (13,215) 15,123
- ----------------------------------------------------------------------------------------------------------
Investment in equity
affiliates 105 -- 166 1,878 2,149
- ----------------------------------------------------------------------------------------------------------
Capital expenditures 4,724 6,781 775 1,460 13,740
- ----------------------------------------------------------------------------------------------------------
Total Assets $233,564 $182,083 $ 40,407 $ 53,375 $509,429
- ----------------------------------------------------------------------------------------------------------
F-16
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Our five largest individual customers, including members of one marketing group
accounted for 43% of consolidated net sales in 2001. 18% and 25% of these net
sales were generated from our Engine Management and Temperature Control
segments, respectively.
Other Adjustments consist of items pertaining to our corporate headquarters
function, as well as our Canadian business unit that does not meet the criteria
of a reportable operating segment under SFAS No.131.
REVENUE
----------------------------------------------
Year ended December 31,
----------------------------------------------
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------
United States $ 584,853 $ 512,055 $ 515,322
Europe 40,141 36,028 33,449
Canada 38,187 32,188 28,811
Other Foreign 15,602 18,166 14,070
- ----------------------------------------------------------------------
Total $ 678,783 $ 598,437 $ 591,652
- ----------------------------------------------------------------------
LONG LIVED ASSETS
----------------------------------------------
Year ended December 31,
----------------------------------------------
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------
United States $ 173,817 $ 109,778 $ 118,455
Europe 7,246 7,153 17,301
Canada 2,496 2,450 2,829
Other Foreign 833 1,124 1,101
- ----------------------------------------------------------------------
Total $ 184,392 $ 120,505 $ 139,686
- ----------------------------------------------------------------------
Revenues are attributed to countries based upon the location of the customer.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments.
MARKETABLE SECURITIES
The fair values of investments are estimated based on quoted market prices for
these or similar instruments.
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted market prices
or current rates offered to us for debt of the same remaining maturities.
INTEREST RATE SWAPS
The fair value of our financial instruments are based on market quotes and
represents the net amount required to terminate the position, taking into
consideration market rates and counterparty credit risk.
The estimated fair values of our financial instruments are as follows:
DECEMBER 31, 2003 CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE
- -------------------------------------------------------------------
Cash and cash equivalents $ 19,647 $ 19,647
Long-term debt (118,111) (116,570)
Interest rate swaps (148) (148)
- -------------------------------------------------------------------
DECEMBER 31, 2002 CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE
- -------------------------------------------------------------------
Cash and cash equivalents $ 9,690 $ 9,690
Marketable securities 7,200 7,200
Long-term debt (97,299) (80,188)
Interest rate swaps (1,905) (1,905)
- -------------------------------------------------------------------
17. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three-years ended December 31, 2003 was as follows:
(IN THOUSANDS) TOTAL ESTATE OTHER
- -------------------------------------------------------------------
2003 $12,286 $9,143 $3,143
2002 8,434 6,282 2,152
2001 8,673 6,508 2,165
- -------------------------------------------------------------------
At December 31, 2003, we are obligated to make minimum rental payments through
2021, under operating leases which are as follows :
(IN THOUSANDS)
- ------------------------------------------------------------------------
2004 ............... $12,824 2007 .............. 5,752
2005 ............... 12,156 2008 .............. 4,512
2006 ............... 9,322 Thereafter ........ 39,481
- ------------------------------------------------------------------------
Total ............. $84,047
- ------------------------------------------------------------------------
We also have lease and sub-lease agreements in place for various properties
under our control. We expect to receive operating lease payments from lessees
during the five years ending December 31, 2004 through 2008 of $0.6 million,
$0.6 million, $0.6 million, $0.6 million, and $0.5 million, respectively.
We generally warrant our products against certain manufac turing and other
defects. These product warranties are vided for specific periods of time of the
product depend ing on the nature of the product. As of December 31, 2003 and
2002, we have accrued $14.0 million and $10.4 million, respectively, for
estimated product warranty claims. The accrued product warranty costs are based
primarily on torical experience of actual warranty claims. Warranty expense for
each of the years 2003, 2002 and 2001 were: $46.6 million, $46.7 million and
$52.2 million, respectively.
The following table provides the changes in our product warranties:
Year Ended December 31,
-----------------------------
(IN THOUSANDS) 2003 2002
- -----------------------------------------------------------------------------
Balance, beginning of period $10,360 $ 12,743
Assumed liabilities from acquisition of
DEM 3,600 --
Liabilities accrued for current year sales 46,592 46,671
Settlements of warranty claims (46,565) (49,054)
- -----------------------------------------------------------------------------
Balance, end of period $13,987 $ 10,360
- -----------------------------------------------------------------------------
F-17
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
At December 31, 2003, we had outstanding letters of credit aggregating
approximately $4.0 million. The contract amount of the letters of credit is a
reasonable estimate of their value as the value for each is fixed over the life
of the commitment.
We entered into Change in Control arrangements with two key officers. In the
event of a Change of Control (as defined), each executive will receive severance
payments, (as defined), and certain other benefits.
On January 28, 2000, a former significant customer of ours, which is currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including us. The claim against us
alleged $0.5 million of preferential payments in the 90 days prior to the
related Chapter 11 bankruptcy petition. The claim pertaining to the preferential
payments was settled for an immaterial amount during the second quarter of 2002.
In addition, this former customer seeks $9.4 million from us for a variety of
claims including antitrust, breach of contract, breach of warranty and
conversion. These latter claims arise out of allegations that this customer was
entitled to various discounts, rebates and credits after it filed for
bankruptcy. We have purchased insurance with respect to the actions. On August
22, 2002, the court dismissed the antitrust claims. On July 8, 2003, the
remaining claims were settled without any material financial effect on our
business, financial condition or results of operations.
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2001, approximately 100 cases were outstanding for which we were
responsible for any related liabilities. At December 31, 2002, the number of
cases outstanding for which we were responsible for related liabilities
increased to approximately 2,500, which include approximately 1,600 cases filed
in December 2002 in Mississippi. We believe that these Mississippi cases filed
against us in December 2002 were due in large part to potential plaintiffs
accelerating the filing of their claims prior to the effective date of
Mississippi's tort reform statue in January 2003, which statute eliminated the
ability of plaintiffs to file consolidated cases. At December 31, 2003,
approximately 3,300 cases were outstanding for which we were responsible for any
related liabilities. Since inception in September 2001, the amounts paid for
settled claims are $1.1 million. We do not have insurance coverage for the
defense and indemnity costs associated with these claims.
In evaluating our potential asbestos-related liability, we have considered
various factors including, among other things, an actuarial study performed by a
leading actuarial firm with expertise in assessing asbestos-related liabilities,
our settlement amounts and whether there are any co-defendants, the jurisdiction
in which lawsuits are filed, and the status and results of settlement
discussions. Actuarial consultants with experience in assessing asbestos-related
liabilities completed a study in September 2002 to estimate our potential claim
liability. The methodology used to project asbestos-related liabilities and
costs in the study considered: (1) historical data available from publicly
available studies; (2) an analysis of our recent claims history to estimate
likely filing rates for the remainder of 2002 through 2052; (3) an analysis of
our currently pending claims; and (4) an analysis of our settlements to date in
order to develop average settlement values. Based upon all the information
considered by the actuarial firm, the actuarial study estimated an undiscounted
liability for settlement payments, excluding legal costs, ranging from $27.3
million to $58 million for the period through 2052. Accordingly, based on the
information contained in the actuarial study and all other available information
considered by us, we recorded an after tax charge of $16.9 million as a loss
from discontinued operation during the third quarter of 2002 to reflect such
liability, excluding legal costs. We concluded that no amount within the range
of settlement payments was more likely than any other and, therefore, recorded
the low end of the range as the liability associated with future settlement
payments through 2052 in our consolidated financial statements, in accordance
with generally accepted accounting principles.
As is our accounting policy, the actuarial study was updated as of August 31,
2003 using methodologies consistent with the September 2002 study. The updated
study has estimated an undiscounted liability for settlement payments, excluding
legal costs, ranging from $27 to $71 million for the period through 2052. We
continue to believe that no amount within the range was a better estimate after
the updated study, therefore, no adjustment was recorded as our consolidated
balance sheet at September 30, 2003 reflects a total liability of approximately
$27 million. Legal costs, which are expensed as incurred, are estimated to range
from $21 to $28 million during the same period. We plan on performing a similar
annual actuarial analysis during the third quarter of each year for the
foreseeable future. Given the uncertainties associated with projecting such
matters into the future, the short period of time that we have been responsible
for defending these claims, and other factors outside our control, we can give
no assurance that additional provisions will not be required. Management will
continue to monitor the circumstances surrounding these potential liabilities in
determining whether additional provisions may be necessary. At the present time,
however, we do not believe that any additional provisions would be reasonably
likely to have a material adverse effect on our liquidity or consolidated
financial position.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
F-18
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
18. QUARTERLY FINANCIAL DATA unit (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Dec. 31, Sept. 30, June 30, Mar. 31,
Quarter Ended 2003 2003 2003 2003
- -----------------------------------------------------------------------------------
Net Sales $ 162,454 $ 214,479 $ 166,125 $ 135,725
- -----------------------------------------------------------------------------------
Gross Profit 38,125 58,288 43,819 34,540
- -----------------------------------------------------------------------------------
Earnings (loss) from continuing
operations (5,511) 2,042 4,300 (607)
- -----------------------------------------------------------------------------------
Loss from discontinued
operation, net of taxes (370) (591) (433) (348)
- -----------------------------------------------------------------------------------
Net Earnings (loss) $ (5,881) $ 1,451 $ 3,867 $ (955)
- -----------------------------------------------------------------------------------
Net Earnings (loss) from continuing operations per common
share:
Basic $ (0.29) $ 0.11 $ 0.34 $ (0.05)
Diluted $ (0.29) $ 0.11 $ 0.34 $ (0.05)
- -----------------------------------------------------------------------------------
Net Earnings (loss)
per common share:
Basic $ (0.31) $ 0.08 $ 0.31 $ (0.08)
Diluted $ (0.31) $ 0.08 $ 0.31 $ (0.08)
- -----------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Dec. 31, Sept. 30, June 30, Mar. 31,
Quarter Ended 2002 2002 2002 2002
- -----------------------------------------------------------------------------------
Net Sales $ 107,856 $ 183,631 $ 180,629 $ 126,321
- -----------------------------------------------------------------------------------
Gross Profit 29,127 50,608 46,833 30,976
- -----------------------------------------------------------------------------------
Earnings (loss) from continuing
operations (8,087) 9,832 6,267 (1,921)
- -----------------------------------------------------------------------------------
Loss from discontinued
operation, net of taxes (254) (16,918) (806) (319)
- -----------------------------------------------------------------------------------
Cumulative effect of accounting
change, net of taxes -- -- -- (18,350)
- -----------------------------------------------------------------------------------
Net Earnings (loss) $ (8,341) $ (7,086) $ 5,461 $ (20,590)
- -----------------------------------------------------------------------------------
Net Earnings (loss) from continuing operations per common share:
Basic $ (0.68) $ 0.82 $ 0.53 $ (0.16)
Diluted $ (0.68) $ 0.72 $ 0.48 $ (0.16)
- -----------------------------------------------------------------------------------
Net Earnings (loss)
per common share:
Basic $ (0.70) $ (0.59) $ 0.46 $ (1.74)
Diluted $ (0.70) $ (0.42) $ 0.43 $ (1.74)
- -----------------------------------------------------------------------------------
The fourth quarter of 2003 reflects unfavorable adjustments including
approximately $2.9 million of integration and restructuring costs related to DEM
and our Temperature Control Segment; and a $2 million additional inventory
obsolescence provision for Temperature Control inventory due to reduced sales
volume.
The fourth quarter of 2002 reflects unfavorable adjustments including
approximately $1.6 million of restructuring costs related to the consolidation
of certain manufacturing and distributing facilities within the Temperature
Control Segment; and a writeoff of approximately $3.3 million for the impairment
of goodwill associated with the Engine Management reporting unit of the Europe
Segment.
F-19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on
their evaluation, our principal executive officer and principal
financial officer concluded that the Company's disclosure and
procedures are effective.
(b) There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our
internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation referenced in
paragraph (a) above.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to the information in our 2004 Proxy Statement set forth
under the captions "Election of Directors" "Information About Nominees"
and "Executive Compensation."
CODE OF ETHICS
We have adopted a code of business conduct and ethics for Directors,
Officers and Employees. The Code of Ethics is available on our website
at WWW.SMPCORP.COM. Shareholders may request a free copy of the Code of
Ethics from:
Standard Motor Products, Inc.
Attention: Investor Relations
37-18 Northern Blvd.
Long Island City, NY 11101
(718) 392-0200
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information in our 2004 Proxy Statement set forth
under captions "Information Regarding Executive Officer Compensation"
and "Information Regarding the Board and its Committees - Directors
Compensation."
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by
reference to the information in our 2004 Proxy Statement set forth
under the captions "Equity Compensation Plan Information" and
"Information Regarding Beneficial Ownership of Principal Shareholders,
Directors and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information in our 2004 Proxy Statement set forth
under the captions "Certain Relationships and Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by
reference to the information in our 2004 Proxy Statement set forth
under the captions "Audit and Non-Audit Fees."
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
15(A). DOCUMENT LIST
(1) Among the responses to this Item 15(a) are the following financial
statements.
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Operations - Years Ended December 31, 2003,
2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years Ended December 31, 2003,
2002 and 2001
Notes to Consolidated Financial Statements
(2) The following financial schedule and related report for the years
2003, 2002 and 2001 is submitted herewith:
Independent Auditors' Report of Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not
applicable or the information is included in the financial
statements or notes thereto.
(3) Exhibits required by Item 601 of Securities and Exchange Commission
Regulations S-K: See "Exhibit Index".
15(B). REPORTS ON FORM 8-K
On October 31, 2003, we filed a current report on Form 8-K reporting
under Item 9 - Regulation FD Disclosure (Information furnished pursuant
to Item 12 - Results of Operations and Financial Condition) that Standard
Motor Products, Inc. issued a press release announcing its financial
results for the quarter ended September 30, 2003 and a quarterly
dividend. A copy of the press release was filed as an exhibit to such
Form 8-K.
35
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
2.1 Asset Purchase Agreement, dated as of February 7, 2003, by and among
Dana Corporation, Automotive Controls Corp., BWD Automotive Corporation,
Pacer Industries, Inc., Ristance Corporation, Engine Controls
Distribution Services, Inc., as Sellers, and Standard Motor Products,
Inc., as Buyer (incorporated by reference to Standard Motor Products,
Inc.'s Current Report on Form 8-K (File No. 001-04743), Filed on
February 10, 2003).
3.1 By-laws filed as an Exhibit of Company's annual report on Form 10-K for
the year ended December 31, 1986.
3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as an
Exhibit of Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
3.3 Restated Articles of Incorporation, dated February 15, 1996, filed as an
Exhibit of Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
3.4 Restated By-Laws dated May 23, 1996, filed as an Exhibit of the
Company's annual report on Form 10-K for the year ended December 31,
1996.
4.1 Restated Certificate of Incorporation, dated July 31, 1990 (incorporated
by reference to Exhibit 4.2 of Standard Motor Products, Inc.'s
Registration Statement on Form S-8 (Registration No. 333-51565), dated
May 1, 1998).
4.2 Certificate of Amendment to the Restated Certificate of Incorporation,
dated July 31, 1990 (incorporated by reference to Exhibit 4.3 of
Standard Motor Products, Inc.'s Registration Statement on Form S-8
(Registration No. 333-51565), filed on May 1, 1998).
4.3 Restated By-Laws, dated May 23, 1996 (incorporated by reference to
Exhibit 3.4 of Standard Motor Products, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996).
36
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
4.4 Form of Subordinated Debenture Indenture (including form of convertible
debenture) (incorporated by reference to Exhibit 4.1 to Standard Motor
Products, Inc.'s Amendment No. 2 to its Registration Statement on Form
S-3 (Registration No. 333-79177), filed on July 20, 1999).
4.5 Rights Agreement, dated as of February 15, 1996, between Standard Motor
Products, Inc. and Registrar & Transfer Co., as rights agent
(incorporated by reference to Standard Motor Products, Inc.'s
Registration Statement on Form 8-A (File No. 001-04743), filed on April
11, 1996).
4.6 Form of Share Ownership Agreement by and between Standard Motor
Products, Inc. and Dana Corporation (incorporated by reference to
Standard Motor Products, Inc.'s Current Report on Form 8-K (File No.
001-04743), filed on February 10, 2003).
10.1 Employee Stock Ownership Plan and Trust dated January 1, 1989 filed as
an Exhibit of Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
10.2 Supplemental Executive Retirement Plan dated August 15, 1994 filed as an
Exhibit of Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.3 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc. is filed
as Exhibit 4.1 of the Company's Registration Statement on Form S-8
(33-58655).
10.4 1996 Independent Outside Directors Stock Option Plan of Standard Motors
Products, Inc. filed as an Exhibit of Company's annual report on Form
10-K for the year ended December 31, 1996.
10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended, is filed as Exhibit 4.1 to the Company's Registration Statement
on Form S-8 (333-51565), dated May 1, 1998.
10.6 Credit Agreement dated April 27, 2001 among Standard Motor Products,
Inc. and subsidiaries, as Borrowers and GE Capital Corp. as Agent and
Lender, GMAC Commercial Credit LLC, on Lender and Syndication Agent and
Bank of America, N.A., as Lender and Documentation Agent.
10.7 The 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc. as
Amended and restated, is filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (33359524), dated April 25, 2001.
37
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.8 Supplemental Compensation Plan effective October 1, 2001.
10.9 Change of Control Agreement dated December 12, 2001 between Standard
Motor Products, Inc. and John Gethin.
10.10 Change of Control Agreement dated December 12, 2001 between Standard
Motor Products, Inc. and James Burke.
10.11 First Amendment to Amended and Restated Credit Agreement, dated June 27,
2003, among Standard Motor Products, Inc., as Borrower and General
Electric Capital Corp. and Bank of America, as Lenders.
21 List of Subsidiaries of Standard Motor Products, Inc.
23 Consent of Independent Auditors - KPMG LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
STANDARD MOTOR PRODUCTS, INC.
(REGISTRANT)
/S/ LAWRENCE I. SILLS
-----------------------------------------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
/S/ JAMES J. BURKE
-----------------------------------------------------
James J. Burke
Vice President, Finance; Chief Financial Officer
New York, New York
March 30, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 30, 2004 /S/ LAWRENCE I. SILLS
-----------------------------------------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
March 30, 2004 /S/ ARTHUR D. DAVIS
-----------------------------------------------------
Arthur D. Davis, Vice Chairman and Director
March 30, 2004 /S/ MARILYN F. CRAGIN
-----------------------------------------------------
Marilyn F. Cragin, Director
March 30, 2004 /S/ SUSAN F. DAVIS
-----------------------------------------------------
Susan F. Davis, Director
March 30, 2004 /S/ ARTHUR S. SILLS
-----------------------------------------------------
Arthur S. Sills, Director
March 30, 2004 /S/ PETER J. SILLS
-----------------------------------------------------
Peter J. Sills, Director
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Standard Motor Products, Inc.:
Under date of March 26, 2004, we reported on the consolidated balance sheets of
Standard Motor Products, Inc. and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2003, as contained in the annual report on Form 10-K for the year
2003. Our report contains an explanatory paragraph that the Company adopted
Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS as of January 1, 2002. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
-----------------------
New York, New York
March 26, 2004
40
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2003, 2002 and 2001
ADDITIONS
---------
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER (1) DEDUCTIONS END OF YEAR
--------------- --------------- -------------- -------------- ---------------
YEAR ENDED DECEMBER 31, 2003:
Allowance for doubtful accounts $ 3,568,000 $ 813,000 $ 330,000 $ 1,702,000 $ 3,009,000
Allowance for discounts 1,314,000 9,615,000 800,000 9,729,000 2,000,000
--------------- --------------- -------------- -------------- ---------------
$ 4,882,000 $ 10,428,000 $ 1,130,000 $ 11,431,000 $ 5,009,000
=============== =============== ============== ============== ===============
Allowance for sales returns $ 16,341,000 $ 83,087,000 $ 7,013,000 $ 82,326,000 $ 24,115,000
=============== =============== ============== ============== ===============
Allowance for inventory valuation $ 14,291,000 $ 5,613,000 $ 27,442,000 $ 5,543,000 $ 41,803,000
=============== =============== ============== ============== ===============
YEAR ENDED DECEMBER 31, 2002:
Allowance for doubtful accounts $ 2,917,000 $ 489,000 $ 162,000 $ -- $ 3,568,000
Allowance for discounts 1,445,000 8,611,000 -- 8,742,000 1,314,000
--------------- --------------- -------------- --------------- ---------------
$ 4,362,000 $ 9,100,000 $ 162,000 $ 8,742,000 $ 4,882,000
=============== =============== ============== ============== ===============
Allowance for sales returns $ 18,167,000 $ 73,030,000 $ -- $ 74,856,000 $ 16,341,000
=============== =============== ============== ============== ===============
Allowance for inventory valuation $ 13,895,000 $ 1,265,000 $ -- $ 869,000 $ 14,291,000
=============== =============== ============== ============== ===============
YEAR ENDED DECEMBER 31, 2001:
Allowance for doubtful accounts $ 2,979,000 $ 598,000 $ -- $ 660,000 $ 2,917,000
Allowance for discounts 1,598,000 9,353,000 -- 9,506,000 1,445,000
--------------- --------------- -------------- --------------- ---------------
$ 4,577,000 $ 9,951,000 $ -- $ 10,166,000 $ 4,362,000
=============== =============== ============== ============== ===============
Allowance for sales returns $ 17,693,000 $ 94,122,000 $ -- $ 93,648,000 $ 18,167,000
=============== =============== ============== ============== ===============
Allowance for inventory valuation $ 12,930,000 $ 4,387,000 $ -- $ 3,422,000 $ 13,895,000
=============== =============== ============== ============== ===============
(1) Allowance acquired through acquisition during the year ended December 31,
2003.
41