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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
-------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(718) 392-0200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of the close of business on April 30, 2004, there were 19,759,439 outstanding
shares of the registrant's Common Stock, par value $2.00 per share.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets March 31, 2004 (Unaudited) and
December 31, 2003 3
Consolidated Statements of Operations and Retained Earnings
(Unaudited) for the Three Months Ended March 31, 2004
and 2003 4
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 27
2
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for shares and per share data)
March 31, December 31,
2004 2003
-----------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $17,880 $19,647
Accounts receivable, net of
allowance for doubtful accounts and
discounts of $5,646 (2003 - $5,009) (Note 7) 209,440 174,223
Inventories (Notes 5 and 7) 253,520 253,754
Deferred income taxes 13,166 13,148
Prepaid expenses and other current assets 10,733 7,399
------------ -----------
Total current assets 504,739 468,171
------------ -----------
Property, plant and equipment, net of
accumulated depreciation (Notes 6 and 7) 109,959 112,549
Goodwill (Note 3) 71,843 71,843
Other assets 40,777 41,962
------------ -----------
Total assets $727,318 $694,525
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 7) $126,746 $99,699
Current portion of long-term debt (Note 7) 3,243 3,354
Accounts payable 70,401 58,029
Sundry payables and accrued expenses 39,335 42,431
Restructuring accrual (Note 4) 14,500 16,000
Accrued rebates 20,152 18,989
Accrued customer returns 23,394 24,115
Payroll and commissions 13,045 14,221
------------ -----------
Total current liabilities 310,816 276,838
------------ -----------
Long-term debt (Note 7) 114,632 114,757
Postretirement medical benefits
and other accrued liabilities 38,253 36,848
Restructuring accrual (Note 4) 14,890 15,615
Accrued asbestos liabilities (Note 14) 23,787 24,426
------------ -----------
Total liabilities 502,378 468,484
------------ -----------
Commitments and contingencies (Notes 7,8,10,12 and 14)
Stockholders' equity (Notes 7,8,9,10 and 12):
Common stock - par value $2.00 per share:
Authorized - 30,000,000 shares;
issued 20,486,036 shares 40,972 40,972
Capital in excess of par value 57,987 58,086
Retained earnings 138,854 141,553
Accumulated other comprehensive income 4,577 4,814
Treasury stock - at cost (1,156,263 and 1,284,428
shares in 2004 and 2003, respectively) (17,450) (19,384)
------------ -----------
Total stockholders' equity 224,940 226,041
------------ -----------
Total liabilities and stockholders' equity $727,318 $694,525
============ ===========
See accompanying notes to consolidated financial statements.
3
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands, except for shares and per share data)
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
(Unaudited)
Net sales $ 204,781 $ 135,725
Cost of sales 153,821 101,185
------------ ------------
Gross profit 50,960 34,540
Selling, general and administrative expenses 47,328 31,990
Integration expenses 1,367 222
------------ ------------
Operating income 2,265 2,328
Other income (expense) - net 243 (274)
Interest expense 3,234 3,018
------------ ------------
Loss from continuing operations before taxes (726) (964)
Income tax benefit (181) (357)
------------ ------------
Loss from continuing operations (545) (607)
Loss from discontinued operation, net of tax (425) (348)
------------ ------------
Net loss (970) (955)
Retained earnings at beginning of period 141,553 148,686
------------ ------------
140,583 147,731
Less: cash dividends for period 1,729 1,076
------------ ------------
Retained earnings at end of period $ 138,854 $ 146,655
============ ============
PER SHARE DATA:
Net loss per common share - basic:
Loss per share from continuing operations $ (0.03) $ (0.05)
Discontinued operation (0.02) (0.03)
------------ ------------
Net loss per common share - basic $ (0.05) $ (0.08)
============ ============
Net loss per common share - diluted:
Loss per share from continuing operations $ (0.03) $ (0.05)
Discontinued operation (0.02) (0.03)
------------ ------------
Net loss per common share - diluted $ (0.05) $ (0.08)
============ ============
Average number of common shares 19,233,543 11,972,853
============ ============
Average number of common and dilutive shares 19,233,543 11,972,853
============ ============
See accompanying notes to consolidated financial statements.
4
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (970) $ (955)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,574 4,026
Loss on sale of property, plant and equipment 7 --
Equity (income) loss from joint ventures (100) 72
Employee stock ownership plan allocation 411 251
Loss on discontinued operations, net of tax 425 348
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable, net (35,851) (22,992)
Decrease (Increase) in inventories 2,045 (4,787)
Decrease (Increase) in prepaid expenses and other current assets (2,120) 331
Decrease in other assets 1,285 1,820
Increase in accounts payable 2,818 3,219
Decrease in sundry payables and accrued expenses (1,933) (9,302)
Decrease in restructuring accrual (2,225) --
Decrease in other liabilities (1,818) (6,148)
-------- --------
Net cash used in operating activities (33,452) (34,117)
-------- --------
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment 50 58
Capital expenditures (1,964) (1,715)
Payments for acquisitions (984) --
-------- --------
Net cash used in investing activities (2,898) (1,657)
-------- --------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 27,047 34,647
Principal payments of long-term debt (236) (505)
Increase in overdraft balances 9,554 2,270
Debt issuance costs -- (2,419)
Proceeds from exercise of employee stock options 192 10
Dividends paid (1,729) (1,076)
-------- --------
Net cash provided by financing activities 34,828 32,927
-------- --------
Effect of exchange rate changes on cash (245) 411
Net decrease in cash and cash equivalents (1,767) (2,436)
Cash and cash equivalents at beginning of the period 19,647 9,690
-------- --------
Cash and cash equivalents at end of the period $ 17,880 $ 7,254
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,784 $ 4,495
======== ========
Income taxes $ 612 $ 1,055
======== ========
See accompanying notes to consolidated financial statements.
5
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Standard Motor Products, Inc. (referred to hereinafter in these Notes to
Consolidated Financial Statements as the "Company," "we," "us," or "our") is
engaged in the manufacture and distribution of replacement parts for motor
vehicles in the automotive aftermarket industry.
The accompanying unaudited financial information should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
The unaudited consolidated financial statements include our accounts and all
domestic and international companies in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant inter-company items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the entire year.
Where appropriate, certain amounts in 2003 have been reclassified to conform
with the 2004 presentation.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("FIN 46R"), 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.
Effective January 1, 2004, we adopted FIN 46R, which did not have a material
effect on our consolidated financial statements.
MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003
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 our footnote disclosures. 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.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In December 2003, FASB Statement No. 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement Benefits, was issued. Statement 132 (revised)
revises employers' disclosures about pension plans and other postretirement
benefit plans; it does not change the measurement or recognition of those plans.
The Statement retains and revises the disclosure requirements contained in the
original Statement
6
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
132. It also requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. Our disclosures in note 12 incorporate the
requirements of Statement 132 (revised).
NOTE 3. GOODWILL
The carrying value of goodwill for our segments as of March 31, 2004 were as
follows:
(in thousands)
Engine Management $ 65,650
Temperature Control 4,822
Europe 1,371
---------
Goodwill $ 71,843
=========
NOTE 4. ACQUISITIONS, RESTRUCTURING AND INTEGRATION 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. The average market price was based on the average closing
price for a range of trading days preceding the closing date of the acquisition.
Based on the estimated final purchase price, we expect to pay in cash an
additional $1.9 million. We also incurred an estimated $7.1 million in
transaction costs.
We issued to Dana Corporation on June 30, 2003 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 our 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.
7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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,
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 (not including
transaction costs).
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 three months ended March 31, 2003, as if the acquisition of
DEM had been completed at January 1, 2003. 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.
8
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended
(In thousands) March 31, 2003
------------------
Net sales $ 210,054
Loss from continuing operations $ (192)
Loss before cumulative effect of accounting change $ (540)
Net loss $ (540)
Net loss per common share:
Net loss Basic $ (0.03)
Net loss - Diluted $ (0.03)
On February 3, 2004, we acquired inventory from the Canadian distribution of
Dana Corporation's Engine Management Group for approximately $1.0 million. As
part of the acquisition, we will be relocating it into our distribution facility
in Mississauga, Canada.
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
(subsequently reduced to $33.7 million during 2003). Such amounts were
recognized as liabilities assumed in the acquisition and included in the
allocation of the costs to acquire DEM. Accordingly, such amounts resulted in
additional goodwill being recorded in connection with the acquisition.
Of the total restructuring accrual, approximately $15.8 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 year
ended December 31, 2003 and the three months ended March 31, 2004, termination
benefits of $2.1 million for each respective period have been charged to the
restructuring accrual. We expect to pay the remaining termination benefits by
December 31, 2004.
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.
During the first quarter of 2004, $0.1 million of costs have been charged to the
restructuring accrual. We expect to pay such costs through 2021.
Selected information relating to the remaining restructuring costs is as
follows:
Workforce Other
(In thousands) Reduction Exit Costs Totals
----------- ----------- ---------
Restructuring liability at December 31, 2003 $ 13,615 $ 18,000 $31,615
Cash payments during first quarter of 2004 (2,124) (101) (2,225)
----------- ----------- ---------
Restructuring liability as of March 31, 2004 $ 11,491 $ 17,899 $29,390
----------- ----------- ---------
9
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTEGRATION EXPENSES
During the first quarter of 2004, we incurred $1.4 million of costs related to
the DEM integration. During the first quarter of 2003, we incurred $0.2 million
of costs related to the consolidation of facilities within our Temperature
Control segment.
NOTE 5. INVENTORIES
March 31, December 31,
2004 2003
(unaudited)
--------------------------
(in thousands)
Finished Goods $187,821 $ 191,340
Work in Process 6,757 7,913
Raw Materials 58,942 54,501
--------- ----------
Total inventories $253,520 $ 253,754
========= ==========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
March 31, December 31,
2004 2003
(unaudited)
-------------------------
(in thousands)
Land, buildings and improvements $ 71,944 $ 71,900
Machinery and equipment 136,916 136,551
Tools, dies and auxiliary equipment 22,403 22,046
Furniture and fixtures 27,071 26,984
Computer software 12,516 12,514
Leasehold improvements 7,293 7,285
Construction in progress 5,391 4,280
-------- --------
283,534 281,560
Less: accumulated depreciation and amortization 173,575 169,011
-------- --------
Total property, plant and equipment - net $109,959 $112,549
======== ========
NOTE 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, in connection with our acquisition of DEM we completed an
amendment to our revolving credit facility to provide for an additional $80
million commitment. 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. Available borrowings pursuant to the
formula at March 31, 2004 are $90.3 million.
Direct borrowings under our revolving credit facility bear interest at the prime
rate plus the applicable margin (as defined in the credit agreement) or the
LIBOR rate plus the applicable margin (as defined in the credit agreement), at
our option. Outstanding borrowings under this revolving credit facility,
classified as current liabilities, was $123 million and $95.9 million at March
31, 2004 and December 31, 2003, 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
10
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
amortization (EBITDA) as defined in the credit agreement, 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.
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, at the redemption prices set forth in the agreement
plus accrued interest. In addition, if a change in control, as defined in the
agreement, occurs 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 on June
30, 2003 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.
March 31, December 31,
2004 2003
(unaudited)
------------------------
(in thousands)
Long Term Debt Consists of:
6.75% convertible subordinated debentures $ 90,000 $ 90,000
Unsecured promissory note 15,125 15,125
Mortgage loan 9,715 9,824
Other 3,035 3,162
-------- --------
117,875 118,111
Less: current portion 3,243 3,354
-------- --------
Total non-current portion of
long-term debt $114,632 $114,757
======== ========
NOTE 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. We enter into 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 principal amounts.
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.
11
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In July 2001, we entered into two interest rate swap agreements with an
aggregate notional principal amount of $75 million, one of which matured in
January 2003 and the other maturing in January 2004. Under these agreements, we
received a floating rate based on the LIBOR interest rate, and paid a fixed rate
of 4.92% on a notional amount of $45 (matured in January 2004) 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.
NOTE 9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), net of income tax expense is as follows:
Three Months Ended
March 31,
2004 2003
--------------------
(in thousands)
Net loss as reported $ (970) $ (955)
Foreign currency translation adjustments (166) 457
Change in fair value of interest rate swap agreements (71) 324
------- -------
Total comprehensive loss, net of taxes $(1,207) $ (174)
======= =======
Accumulated other comprehensive income is comprised of the following:
March 31, December 31,
2004 2003
-----------------------
(in thousands)
Foreign currency translation adjustments $ 5,614 $ 5,780
Unrealized loss on interest rate swap agreement, net of tax (182) (111)
Minimum pension liability, net of tax (855) (855)
------- -------
Total accumulated other comprehensive income $ 4,577 $ 4,814
======= =======
NOTE 10. STOCK BASED COMPENSATION PLAN
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 interpretations. There
were no stock options granted during the first quarter of 2004. Stock options
granted during the three months ended March 31, 2003 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.
12
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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:
Three Months Ended
March 31,
2004 2003
-----------------------
(in thousands, except
per share amounts)
Net loss, as reported $ (970) $ (955)
Less: Total stock-based employee compensation expense
determined under fair value method for all awards, net
of related tax effects (65) (34)
------- -------
Pro forma net loss $(1,035) $ (989)
======= =======
Loss per share:
Basic and diluted - as reported $ (0.05) $ (0.08)
======= =======
Basic and diluted - pro forma $ (0.05) $ (0.08)
======= =======
At March 31, 2004, an aggregate 1,244,609 shares of authorized but unissued
common stock were reserved for issuance under our stock option plans.
NOTE 11. EARNINGS (LOSS) PER SHARE
Following are reconciliations of the earnings (loss) available to common
stockholders and the shares used in calculating basic and dilutive net earnings
(loss) per common share:
Three Months Ended
March 31,
(Unaudited)
---------------------------------
2004 2003
---------------------------------
(in thousands, except share amounts)
Loss from continuing operations $ (545) $ (607)
Loss from discontinued operation (425) (348)
------------ ------------
Net loss available to common stockholders $ (970) $ (955)
============ ============
Weighted average common shares outstanding - basic 19,233,543 11,972,853
Dilutive effect of stock options -- --
------------ ------------
Weighted average common shares outstanding - diluted 19,233,543 11,972,853
============ ============
The average shares listed below were not included in the computation of diluted
earnings (loss) per share because to do so would have been anti-dilutive for the
periods presented.
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
Stock options 774,538 1,001,908
Convertible debentures 2,796,120 2,796,120
========= =========
13
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12. EMPLOYEE BENEFITS
In fiscal 2000, we created an employee benefits trust to which we contributed
750,000 shares of treasury stock to the trust. 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 their fiduciary duties. We have committed 225,000 shares in the prior
years. During March 2004, we committed 110,000 shares to be released leaving
415,000 shares remaining in the trust.
In October 2001, we adopted an unfunded Supplemental Executive Retirement Plan
(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.
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 components of net period benefit cost for the three months ended March 31,
are as follows:
Pension Benefits Postretirement Benefits
-------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------
(in thousands)
Service Cost $ 113 $ 88 $ 871 $ 637
Interest Cost 80 55 455 411
Amortization of prior service cost 28 28 31 31
Actuarial net (gain) loss 37 36 20 10
------ ------ ------ ------
Net periodic benefit cost $ 258 $ 207 $1,377 $1,089
====== ====== ====== ======
NOTE 13. INDUSTRY SEGMENTS
Our three reportable operating segments are Engine Management, Temperature
Control and Europe.
Three Months Ended March 31,
-----------------------------------------------------
2004 2003
-----------------------------------------------------
OPERATING OPERATING
NET SALES INCOME (LOSS) NET SALES INCOME (LOSS)
-----------------------------------------------------
(in thousands)
Engine Management $141,665 $ 9,093 $ 78,806 $ 9,652
Temperature Control 51,194 (1,168) 45,762 (2,193)
Europe 10,269 (221) 10,540 (486)
All Other 1,653 (5,439) 617 (4,645)
-------- -------- -------- --------
Consolidated $204,781 $ 2,265 $135,725 $ 2,328
======== ======== ======== ========
All Other consists of items pertaining to Canadian operations and the corporate
headquarters function, which do not meet the criteria of a reportable operating
segment.
14
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14. COMMITMENTS AND CONTINGENCIES
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 and March
31, 2004, approximately 3,300 and 3,400 cases, respectively, were outstanding
for which we were responsible for any related liabilities. Since inception in
September 2001, the amounts paid for settled claims are $1.5 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 million to $71 million for the period through
2052. We continue to believe that no amount within the range is a better
estimate after the updated study, therefore, no adjustment was recorded as our
consolidated balance sheet at September 30, 2003 reflected a total liability of
approximately $27 million. Legal costs, which are expensed as incurred, are
estimated to range from $21 million 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
15
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
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.
We generally warrant our products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time of
the product depending on the nature of the product. As of March 31, 2004 and
2003, we have accrued $14.7 million and $11.3 million, respectively, for
estimated product warranty claims. The accrued product warranty costs are based
primarily on historical experience of actual warranty claims. Warranty claims
expense for the three months ended March 31, 2004 and 2003, were $12.1 million
and $10.2 million, respectively.
The following table provides the changes in our product warranties:
Three Months Ended
March 31,
------------------------
2004 2003
------------------------
Balance, beginning of period $ 13,987 $ 10,360
Liabilities accrued for current year sales 12,064 10,165
Settlements of warranty claims (11,313) (9,220)
-------- --------
Balance, end of period $ 14,738 $ 11,305
======== ========
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q 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, SUCH AS
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 THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
FORM 10-Q.
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 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 acquisition, 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. We expect to pay in cash an
additional $1.9 million, based on the estimated final purchase price. Including
transaction costs, our total purchase price is expected to be approximately
$130.5 million.
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 would close seven of the DEM
facilities. As part of the integration and restructuring plans, we estimated
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.
Of the total restructuring costs, approximately $15.8 million related 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.
17
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 inventory from the Canadian distribution of
Dana Corporation's Engine Management Group for approximately $1.0 million. As
part of the acquisition, we will be relocating it into our distribution facility
in Mississauga, Canada.
SEASONALITY. Historically, our operating results have fluctuated by quarter,
with the greatest sales occurring in the second and third quarters of the year
and 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
borrowing 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.
INVENTORY MANAGEMENT. 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.
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.
18
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the first quarter of 2004, cash used in operations
amounted to $33.5 million, compared to $34.1 million in the same period of 2003.
The decrease is primarily attributable to lower reductions in accrued expenses
and other liabilities. This decrease was partially offset by higher increases in
accounts receivable.
INVESTING ACTIVITIES. Cash used in investing activities was $2.9 million in the
first quarter of 2004, compared to $1.7 million in the same period of 2003. The
increase is primarily due to the inventory acquisition from the Canadian
distribution of Dana Corporation's Engine Management Group.
FINANCING ACTIVITIES. Cash provided by financing activities was $34.8 million in
the first quarter of 2004, compared to $32.9 million in the same period of 2003.
The change is primarily due to an increase in overdraft balances offset by
decreased borrowings under our line of credit.
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, in connection with our acquisition of DEM, we completed an
amendment to our revolving credit facility to provide for an additional $80
million commitment. 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 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 in the credit agreement) or the
LIBOR rate plus the applicable margin (as defined in the credit agreement), 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. 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, on June 30, 2003 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.
19
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
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.
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 with an
aggregate notional amount of $75 million, one of which matured in January 2003
and the other maturing in January 2004. Under these agreements, we received a
floating rate based on the LIBOR interest rate, and payed 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.
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 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. There have been no significant
changes to this information at March 31, 2004.
---------------------------------------------------------------------------------
(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.
20
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 TO THE THREE MONTHS ENDED
MARCH 31, 2003
SALES. Consolidated net sales in the first quarter of 2004 were $204.8 million,
an increase of $69.1 million, or 51%, compared to $135.7 million in the first
quarter of 2003. The net sales increase was primarily related to the acquisition
of Dana Corporation's Engine Management Division (DEM). Net sales generated in
the first quarter of 2004 from DEM were approximately $60 million. Excluding DEM
net sales, our core Engine Management net sales were up $2.9 million or 3.6% in
the first quarter of 2004. In our Temperature Control business, net sales were
ahead of last year's comparable quarter by $5.4 million or 11.9%.
GROSS MARGINS. Gross margins were down slightly at 24.9% in the first quarter of
2004 compared to 25.4% in the first quarter of 2003, primarily due to the DEM
integration. However, we were able to recover the gross margin slippage with a
percentage reduction in selling, general and administrative expenses, an
indication that economies from the DEM integration are beginning to be realized.
The net result was that operating income, excluding restructuring expenses,
increased $1.1 million in the first quarter of 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $15.3 million to $47.3 million in the first
quarter of 2004, compared to $32 million in the first quarter of 2003. This
increase was primarily due to the DEM integration. However, as a percentage of
net sales, selling, general and administrative expenses decreased to 23.1% in
the first quarter of 2004 from 23.6% in the first quarter of 2003.
INTEGRATION EXPENSES. Integration expenses in the first quarter of 2004 were
$1.4 million, all related to the DEM integration compared to $0.2 million in the
first quarter of 2003 primarily related to expenses for consolidation of
facilities within our Temperature Control segment.
OPERATING INCOME. Operating income was $2.3 million in the first quarter of
2004, compared to $2.3 million in the first quarter of 2003. We continue to make
good progress with our DEM integration. At this point, all planned moves for
manufacturing facilities are expected to be completed by the end of the second
quarter of 2004. Distribution and administrative facility moves are in varying
stages and are expected to be complete by the early part of the third quarter of
2004. As previously stated, we believe the DEM integration will enable us to
generate incremental profits throughout 2004 and an ongoing $40-45 million
operating income from the acquisition beginning in 2005.
OTHER INCOME (EXPENSE), NET. Other income, net, increased primarily due to
reduced foreign exchange losses.
INTEREST EXPENSE. Interest expense increased by $0.2 million in the first
quarter 2004 compared to the same period in 2003, due to higher borrowings under
our revolving credit facility.
INCOME TAX BENEFIT. The effective tax rate for continuing operations decreased
from 37% in the first quarter of 2003 to 25% in first quarter of 2004, primarily
due to anticipated reduced losses in our European segment, for which no income
tax benefit is being recorded. In addition, higher earnings are anticipated in
our Hong Kong and Puerto Rico operations, which are lower tax rate
jurisdictions. The 25% current effective tax rate reflects our anticipated tax
rate for the balance of the year.
LOSS FROM DISCONTINUED OPERATION. Losses from discontinued operation reflect
legal expenses associated with our asbestos related liability. We recorded $0.4
million and $0.3 million as a loss from discontinued operations for the three
months ended March 31, 2004 and 2003, respectively. As discussed more fully in
note 14 of our notes to our consolidated financial statements, we are
responsible for certain future liabilities relating to alleged exposure to
asbestos containing products.
21
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 in the notes to the consolidated financial
statements of our Annual Report on Form 10-K for the year ended December 31,
2003. Note that our preparation of this Quarterly Report on Form 10-Q 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 period. There can be no assurance that actual
results will not differ from those estimates.
REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement
parts for motor vehicles, from our Engine Management, Temperature Control and
European 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. The
preparation of financial statements requires our management to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our 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
March 31, 2004, the allowance for sales returns was $23.4 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 March 31,
2004, the allowance for doubtful accounts and for discounts was $5.6 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.
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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 March 31, 2004, we
had a valuation allowance of approximately $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, if necessary, we will 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.
RETIREMENT AND POSTRETIREMENT MEDICAL BENEFITS. Each year we calculate 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 of our Annual Report on Form 10-K for the year ended December 31, 2003. 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 million to $71 million for the period through
2052. We continue to believe that no amount within the range is a better
estimate after the updated study, therefore, no adjustment was recorded as our
consolidated balance sheet at September 30, 2003 reflected a total liability of
approximately $27 million. Legal costs, which are expensed as incurred, are
estimated to range from $21 million 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.
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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
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("FIN 46R"), 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.
Effective January 1, 2004, we adopted FIN 46R, which did not have a material
effect on our consolidated financial statements.
MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003
In December 2003, the Medicate 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 our footnote disclosures. 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.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In December 2003, FASB Statement No. 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement Benefits, was issued. Statement 132 (revised)
revises employers' disclosures about pension plans and other postretirement
benefit plans; it does not change the measurement or recognition of those plans.
The Statement retains and revises the disclosure requirements contained in the
original Statement 132. It also requires additional disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. The Statement
generally is effective for fiscal years ending after December 15, 2003. Our
disclosures in Note 12 incorporate the requirements of Statement 132 (revised).
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ITEM 3. 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. We
have exchange rate exposure primarily with respect to the Canadian Dollar and
the British Pound. Our exposure to foreign exchange rate risk is due to certain
costs, revenues and borrowings being denominated in currencies other than a
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 its
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.
We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in its debt portfolio. To manage a portion of
our exposure to interest rate changes, we enter into interest rate swap
agreements, see note 8 of notes to our consolidated financial statements. We
invest our excess cash in highly liquid short-term investments. Our percentage
of variable rate debt to total debt is 46% at December 31, 2003 and 52% at March
31, 2004.
Other than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K
for the year ended December 31, 2003.
ITEM 4. 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"), as of the end of the period covered by this report. Based on
their evaluation, our principal executive officer and principal
financial officer concluded that the Company's disclosure controls 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 and March
31, 2004, approximately 3,300 and 3,400 cases, respectively, were outstanding
for which we were responsible for any related liabilities. Since inception in
September 2001, the amounts paid for settled claims are $1.5 million. We do not
have insurance coverage for the defense and indemnity costs associated with
these claims.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT(S)
10.12 Second Amendment to Amended and Restated Credit Agreement dated
February 7, 2003, among Standard Motor Products, Inc. as Borrower
and General Electric Capital Corp. and Bank of America, as Lenders,
filed with this report.
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.
(b) REPORTS ON FORM 8-K
On March 8, 2004, 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 December 31, 2003 and a quarterly dividend. A copy of the
press release was filed as an exhibit to such Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
(Registrant)
(Date): May 10, 2004 /S/ JAMES J. BURKE
--------------------------------------------
James J. Burke
Vice President Finance,
Chief Financial Officer
(Principal Financial and Accounting Officer)
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