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UNITED STATES
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, 2001
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)
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
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Common stock 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. [ ]
The aggregate market value of the Common voting stock based on a closing price
on the New York Stock Exchange on February 28, 2002 of $13.56 per share held by
non-affiliates of the registrant was $95,325,336. 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 28, 2002 there were 12,501,818 shares
outstanding of the Registrant's Common Stock.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and the Private Securities Litigation Reform Act of 1995, also known
collectively, as the Reform Act. Some, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from our expected future results,
performance or achievements expressed or implied by such forward-looking
statements. These risks and uncertainties include those discussed below and
those discussed in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Standard Motor Products, Inc. undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date this Report is filed with the Securities and Exchange Commission
or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Standard Motor Products (referred to herein as the "Company", "SMP" or
"we") manufactures and distributes replacement parts for motor vehicles
(automotive aftermarket industry). The Company is organized into two
principal segments, each focused on a specific type of replacement part.
The Engine Management Division consists primarily of ignition and emission
parts, on-board computers, ignition wires, battery cables and fuel system
parts. The Temperature Control Division consists primarily of air
conditioning compressors, other air conditioning parts and heater parts.
The Company sells its products primarily to warehouse distributors and
large auto parts retail chains. SMP's customers consist of most of the top
warehouse distributors and most of the leading auto parts retail chains,
including Advance Auto Parts, AutoZone, Carquest and NAPA Auto Parts. The
Company distributes parts under its own brand names, such as Standard,
Blue Streak and Four Seasons, and also under private labels for key
customers. In addition to its two principal operating segments, effective
with the beginning of fiscal 2000, the Company considers its European
Operations to be a separate operating segment along with its Canadian
operations. Both the European and Canadian operations consist of Engine
Management and Temperature Control related activities.
-2-
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The table below shows the Company's sales by operating segment and by
major product group within each segment. The Company's two reportable
operating segments are Engine Management and Temperature Control.
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2001 2000 1999
--------------------- -------------------------- -------------------------
% of % of % of
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ -----
ENGINE MANAGEMENT:
Ignition & Emission Parts $226,699 37.3% $226,297 37.5% $218,221 33.3%
Wires and Cables 60,869 10.0% 61,405 10.1% 61,275 9.4%
Fuel System Parts 8,380 1.3% 9,684 1.6% 12,265 1.9%
----- ---- ----- ---- ------ ----
TOTAL ENGINE MANAGEMENT 295,948 48.6% 297,386 49.2% 291,761 44.6%
------- ----- ------- ----- ------- -----
TEMPERATURE CONTROL:
Compressors 120,990 19.9% 122,113 20.2% 141,657 21.7%
Other Air Conditioning Parts 141,562 23.3% 130,579 21.6% 171,156 26.2%
Heating Parts 13,349 2.2% 12,012 2.0% 8,677 1.2%
------ ---- ------ ---- ----- ----
TOTAL TEMPERATURE CONTROL 275,901 45.4% 264,704 43.8% 321,490 49.1%
------- ----- ------- ----- ------- -----
All Other 36,224 6.0% 41,919 7.0% 41,031 6.3%
------ ---- ------ ---- ------ ----
TOTAL $608,073 100.0% $604,009 100.0% $654,282 100.0%
======== ====== ======== ====== ======== ======
The table below shows the Company's operating profit and identifiable
assets by reportable operating segment.
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2001 2000 1999
--------------------- -------------------------- -------------------------
Operating Identifiable Operating Identifiable Operating Identifiable
PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS
------ ------ ------ ------ ------ ------
Engine Management $ 26,415 $233,564 $ 37,964 $ 265,336 $ 26,104 $ 253,346
Temperature Control Systems 3,616 182,083 11,537 224,410 17,289 212,026
All Other (14,488) 93,782 (18,837) 59,650 (13,849) 90,649
-------- ------ -------- ------ -------- ------
TOTAL $ 15,543 $509,429 $ 30,664 $ 549,396 $ 29,544 $ 556,021
======== ======== ======== ========= ======== =========
"All Other" consists of items pertaining to the corporate headquarters
function, as well as the Canadian and European business units that do not
meet the criteria of a reportable operating segment.
-3-
(C) NARRATIVE DESCRIPTION OF BUSINESS
THE AUTOMOTIVE AFTERMARKET
A large, diverse number of manufacturers varying in product specialization
and size make up the automotive aftermarket industry. In addition to
manufacturing, aftermarket companies also allocate resources towards an
efficient distribution process and product engineering in order to
maintain the flexibility and responsiveness on which their customers
depend. The automotive aftermarket differs substantially from the original
equipment manufacturer supply business. Aftermarket manufacturers must be
efficient producers of small run 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. While sales of original equipment manufacturer
suppliers are tied closely to the North American production volumes of the
"Big Three" automakers, aftermarket manufacturers tend to follow different
trends (such as average vehicle age, increased pricing of new cars, total
miles driven per year, environmental laws becoming more stringent and the
quality of new cars and their related warranties).
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 original
equipment vehicle manufacturers.
ENGINE MANAGEMENT DIVISION
In the Company's Engine Management Division, replacement parts for
automotive ignition and emission control systems account for about 37% of
the Company's 2001 revenues. These parts include distributor caps and
rotors, electronic ignition control modules, voltage regulators, coils,
switches, sensors and EGR valves. The Company is a basic manufacturer of
many of the ignition parts it markets and continues to look at ways at
increasing the number of parts it manufactures, versus purchasing. These
products cover a wide range of applications, from 30-year old vehicles to
current models, both domestic and imports, including passenger cars and
light trucks. The products also cover certain off-road and marine
applications.
SMP offers products at three different price points under a
"good-better-best" concept. It began by offering ignition parts under the
"Standard" brand name that were equal in quality to original equipment
parts installed on new vehicles. Soon afterward, the Company pioneered the
concept of offering higher quality parts, sold under the Blue Streak brand
name, that were significantly better than original equipment. These
products were priced at a premium. SMP now offers lower-priced lines under
the Tru-Tech and Modern mechanic brand to compete with certain lower
priced private labels.
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. The Company
is a leader in the manufacture and sale of these engine management
component parts, including remanufactured automotive computers. The shift
from the traditional breaker-point ignition systems to electronic ignition
systems started approximately 25 years ago. The shift was a response to
pressures from the government and environmental groups to reduce national
fuel consumption and the level of pollutants from auto exhaust. Electronic
ignition systems enable the engine to improve fuel efficiency and reduce
this level of hazardous fumes in exhaust gases. In 2001, electronic
control modules and electronic voltage regulators comprised approximately
10% of the Company's total ignition and emission sales.
-4-
In 1992 the Company entered into a 50/50 joint venture, Blue Streak
Electronics, Inc., in Canada to rebuild automotive engine management
computers and mass air flow ("MAF") sensors. This joint ventures volume is
sold primarily to SMP and has positioned the Company as a key supplier in
the rapidly growing remanufactured electronics markets. In 1994, the
Company vastly increased its offering of remanufactured computers and
instituted a program to offer slower-moving items by overnight shipment
from its factory. This has enabled the Company's customers to expand their
coverage without increasing inventory investment. The joint venture has
further expanded its product range to include temperature control
computers, anti-lock brake system computers and air bag computers. In 1997
the joint venture launched an operation in Europe to serve that market and
an operation in Florida to better serve the United States market in
slow-moving items. 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.
The Company divides its 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.
The Company's sales of sensors, valves, solenoids and related parts have
increased steadily as automobile manufacturers equip their cars with more
complex engine management systems. Stricter government emission laws are
being implemented in various parts of the United States. Specifically, the
most significant law is 1990's Federal Clean Air Act. The I/M 240 section
of the Clean Air Act imposes strict emission control test standards on
existing as well as new vehicles, by means of a dynamometer test. The law
is widely expected to be gradually implemented throughout the United
States. In the future, we expect these new laws to have a positive impact
on sales of our ignition and emission controls parts. However, the timing
of such impact will depend on how quickly government agencies implement
these new procedures at state levels. Vehicles failing these new, more
stringent tests have required repairs utilizing parts sold by the Company.
In 2001, oxygen sensors comprised approximately 8% of total ignition and
emission parts sales.
Wire and cable parts account for about 10% of the Company's 2001 revenues.
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. The Company has historically offered a premium brand of ignition
wires and battery cables, which capitalize on the market's awareness of
the importance of quality. With the growing customer interest in
lower-priced products, the Company introduced a second line of wire and
cable products in 1989. This line has steadily expanded to include import
coverage, and in 1995 was reintroduced under the Tru-Tech brand name.
In 1999 the Company relocated two of its wire and cable operations, one in
Dallas, TX and the other in Bradenton, FL, to a new facility in Reynosa,
Mexico. The Mexican operation focuses on assembly and packaging of the
economy wire sets while the premium line is manufactured at the Company's
facility in Edwardsville, KS.
-5-
TEMPERATURE CONTROL DIVISION
The Company manufactures, re-manufactures, and markets a broad line of
replacement parts for automotive temperature control systems (air
conditioning and heating), primarily under the brand names of Four
Seasons, Everco, Factory Air, Trumark, NAPA and Carquest. The major
product groups sold by this division are compressors, other air
conditioning parts including small motors, fan clutches, dryers,
evaporators, accumulators and hoses, and heating parts, including heater
cores and valves. Total Temperature Control sales account for
approximately 45% of the Company's 2001 revenues.
A major factor in the Temperature Control division's business is the
federal regulation of chlorofluorocarbon refrigerants. United States
legislation phased out production of domestic R-12 refrigerant (e.g.,
DuPont's Freon) completely by the end of 1995. As the law became
effective, vehicle air conditioners needing repair or recharge were retro
fitted to use the new R-134a refrigerant. New vehicles began to use the
new refrigerants in 1993. Installers continue to seek training and
certification in the new technology and the Company's Temperature Control
division has taken the lead in providing this training and certification.
Technological changes necessitate many new parts, as well as new service
equipment. In anticipation of the CFC phaseout, in 1994 the Company
reengineered its compressor line to be able to operate efficiently
utilizing either R-12 or R-134a refrigerants, and remains a leader in
providing retrofit kits for conversion of R-12 systems.
In June 1995, the Company acquired Automotive Dryers, Inc and Air Parts,
Inc. to become a more basic manufacturer of the major product supplied by
the Temperature Control division and to gain access to the lower priced
tier of the market through a new distribution channel. Automotive Dryers,
Inc. manufacturers and distributes receiver filter dryers and accumulators
for mobile air conditioning systems, and is the leading independent
supplier of aftermarket evaporators and accumulators for high performance
cars in the United States. Air Parts, Inc. is a distributor of a limited,
no-frills line of parts for mobile air conditioning systems.
In December 1996, the Company acquired the Hayden Division of The Equion
Corporation, a basic manufacturer of fan clutches and oil coolers. This
acquisition expanded the profitable manufacturing base and greatly
expanded the distribution channels for this key product line.
To further leverage our strong base with retailers, in 1996 the Company
launched a small electric motor manufacturing and assembly facility in
Ontario, Canada. This has enhanced the sale of parts requiring small
motors.
In 1998, the Company exchanged its brake business for the Moog Automotive
temperature control business of Cooper Industries. The Moog acquisition
also expanded the Company's position in the small motor and heater parts
markets. In 1999 it acquired Eaglemotive Corporation, manufacturer of fan
clutches and oil coolers. In consolidating these two businesses with its
existing operations, the Company has closed three manufacturing facilities
and consolidated three distribution sites into one.
Temperature Control strengthened its presence in the international market
by opening a new European distribution center in Strasbourg, France, which
became fully operational in January of 1997. Four Seasons Europe will
assure the rapid availability of the Company's Temperature Control
products throughout Europe, Africa, and the Middle East. A joint venture
with Valeo, SA, one of the largest European automotive equipment
manufacturers was begun in April of 1997 to remanufacture air conditioner
compressors for the developing European market.
-6-
In January 2000, the Company completed the purchase of Vehicle Air
Conditioning Parts, located in England, which has subsequently been
renamed "Four Seasons UK, LTD." The purchase will assist in distributing
components for the repair of air conditioning systems. Total acquisition
price was approximately $1.4 million. In addition, in July 2000, the
Company completed the purchase of Automotive Heater Exchange SRL in Massa,
Italy.
THE COMPETITION
The Company is among the largest manufacturers of replacement parts for
product lines in our two divisions, namely Engine Management and
Temperature Control. The Company competes primarily on the basis of
product quality, price, customer service, product coverage, product
availability, order turn-around time and order fill rate. Management
believes the Company differentiates itself primarily through a
value-added, knowledgeable salesforce; extensive product coverage;
sophisticated parts cataloguing systems; and inventory levels sufficient
to meet the rapid delivery requirements of customers.
Although the Company is a leading independent manufacturer of automotive
replacement parts with strong brand name recognition, the Company faces
substantial competition in all markets that it serves. Certain major
manufacturers of replacement parts are divisions of companies having
greater financial resources than those of SMP. In addition, automobile
manufacturers supply virtually every replacement part sold by the Company,
although these manufacturers generally supply parts only for cars they
produce.
SALES AND DISTRIBUTION
The Company sells its products under proprietary brand names throughout
the United States, Canada, Latin America, Europe and the Middle East.
Products are distributed to warehouse distributors, including jobber
outlets located throughout the United States and Canada. The jobbers sell
the Company's products primarily to professional mechanics and to
consumers who perform their own automobile repairs. In addition, the
Company sells directly to large auto parts retail chains .
The Company has a direct sales force which generates demand for its
products by directing the major portion of its sales effort to its
customers' customers (i.e. jobbers and professional mechanics). The
Company conducts instructional clinics, which teach mechanics how to
diagnose and repair complex systems related to its products. It also
publishes and sells related service manuals and video cassettes and
provides a free technical information bulletin service to registered
mechanics. The Company's Standard Plus Club, a professional service dealer
network comprising approximately 7,800 members, offers technical and
business development support and has a technical service telephone hotline
which provides diagnostics and installation support.
In connection with the Company's sales activities, the Company offers
several types of discounts and or allowances. The Company believes these
discounts and allowances are common practice throughout the automotive
aftermarket industry. First, the Company offers cash discounts for paying
invoices in accordance with the discounted terms of the invoice. Secondly,
the Company offers pricing discounts based on volume and different product
lines purchased from the Company. Supplementally, certain 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 provided.
-7-
CUSTOMERS
The Company's customer base is comprised largely of warehouse
distributors, jobber outlets, retailers, other manufacturers and export
customers. In addition to serving our traditional customer base, we have
expanded into the retail market by commencing sales to large retail
chains.
Members of one marketing group represent the Company's largest group of
customers and accounted for approximately 14%, 15% and 14% of consolidated
net sales for the years ended December 31, 2001, 2000 and 1999,
respectively. One individual member of this marketing group accounted for
10%, 9% and 9% of net sales for the years ended December 31, 2001, 2000
and 1999, respectively. The Company's five largest individual customers,
including members of this marketing group, accounted for 42%, 33% and 35%
of net sales in 2001, 2000 and 1999, respectively.
The loss of one or more of these customers could have a material adverse
impact on the Company's business, financial condition and results of
operations.
SEASONALITY
Historically, the Company's operating results have fluctuated by quarter,
with the greatest sales and earnings occurring in the second and third
quarters of the year. It is in these quarters that demand for the
Company's products is typically the highest, specifically the Temperature
Control business.
This seasonality impacts profitability and working capital requirements.
In addition, this seasonality offers significant operational challenges in
the manufacturing and distribution functions. The Company traditionally
offers a pre-season selling program (Spring promotion) to limit these
challenges (e.g. rapid turnaround time of customer orders). The ultimate
consumer (the car owner) wants a repair done correctly and quickly, and
the Company's customers consider order turnaround time critical in
evaluating SMP's performance.
The pre-selling program primarily consists of two types of incentives and
relates to orders placed in the months of January through May. Customers
are offered a choice of an "off-invoice" discount or "dating terms" that
are established whereby longer payment terms are offered on a monthly
basis.
WORKING CAPITAL MANAGEMENT
Since the early 1990s, automotive aftermarket companies have been under
increasing pressure to provide broad SKU coverage in response to parts and
brand proliferation.
Since 1996, the Company has made significant changes to the inventory
management system to reduce inventory requirements. The Company launched a
new forecasting system in our Engine Management division that permitted a
significant reduction in safety stocks. The Engine Management division
also has introduced a new distribution system in the second half of 1999,
which permits pack-to-order systems to be implemented. Such systems permit
the Company 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.
In late 1997, we adopted Economic Value Added (EVA (R)) as our primary
financial measurement for evaluating investments and for determining
incentive compensation. EVA is equal to net operating profits after
economic taxes, less a charge for capital invested in the Company. The
charge for invested capital is equal to the product of the total capital
invested in the Company and the weighted average cost of capital for the
Company's target blend of debt and equity. The Company has consistently
assumed a 12% cost of capital. The Company's management places emphasis on
improving our financial performance, achieving operating efficiencies and
improving asset utilization.
-8-
The Company's 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 begin to be received. These increased working capital requirements
are funded by borrowings from our lines of credit.
SUPPLIERS
The principal raw materials purchased by the Company 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, the Company uses components
and cores (used parts) in its remanufacturing processes for computerized
electronics and air conditioning compressors.
SMP purchases most materials in the open market, but does have a limited
number of supply agreements on key components. A number of prime suppliers
make these materials available. In the case of cores, the Company obtains
them either from exchanges with customers who return cores when purchasing
remanufactured parts, or through direct purchases from a network of core
brokers. The Company believes 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, the Company continues
to develop its own sources through internal manufacturing capacity and/or
acquisitions.
PRODUCTION AND ENGINEERING
The Company engineers, tools and manufactures many of the components for
its products, except for certain commonly available small component parts
from outside suppliers. The Company also performs its 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, it conducts its own teardown, diagnostics, and
rebuilding for computer modules and air conditioning compressors. This
level of vertical integration has been found to provide advantages in
terms of cost, quality and availability. The Company intends to
selectively continue efforts toward further vertical integration to ensure
a consistent quality and supply of low cost components.
In 1990 the Company adopted the "just-in-time" cellular manufacturing
concept as a major program to lower costs and improve efficiency. The main
thrust of cellular manufacturing is the reduction of work-in-process and
finished goods inventory, and its implementation reduces the inefficient
operations that burden many manufacturing processes. To date, the Company
has substantially implemented the just-in-time manufacturing program at
the majority of its manufacturing facilities. The Company has also
initiated lean manufacturing techniques and in 2002 is evaluating Six
Sigma training with the assistance from General Electric.
In 2000 the Company started working on implementing a fully integrated
enterprise resource planning (ERP) system. The implementation is expected
to be fully completed in 2003. At that time, the system will encompass all
aspects of the supply chain, including procurement, manufacturing, sales,
distribution and finance, at all of the Company's facilities. It will also
serve as the foundation upon which the Company can facilitate its
E-commerce strategy.
-9-
INSURANCE
The Company maintains basic liability coverage (general, product and
automobile) of $1 million and umbrella liability coverage of $50 million.
Historically, the Company has not experienced casualty losses in any year
in excess of its coverage. Management has no reason to expect this
experience to change, but can offer no assurances that liability losses in
the future will not exceed the Company's coverage.
EMPLOYEES
The Company employs approximately 3,300 people in the United States,
Mexico, Canada, Puerto Rico, Europe and Hong Kong. Of these, approximately
2,200 are production employees. In addition, the Company has joint venture
operations in Canada, England and France. The Company operates primarily
in non-union facilities and has binding labor agreements with the workers
at its two unionized facilities. Edwardsville, Kansas production employees
of approximately 150, are covered by a United Auto Workers contract that
expires April 1, 2003. Long Island City, New York production employees of
approximately 100, are under a contract that expires October 2, 2004. The
Company believes that its facilities are in favorable labor markets with
ready access to adequate numbers of skilled and unskilled workers.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company sells its line of products primarily in the United States,
with additional sales through Canada, Latin America, Europe and the Middle
East. The Company's sales are substantially denominated in dollars. The
table below shows the sales by geographic area for the last three years:
(U.S. DOLLARS IN THOUSANDS)
Revenues
------------------------------------------------
2001 2000 1999
---- ---- ----
United States $ 532,922 $524,747 $ 578,549
Canada 27,632 26,553 27,331
Other Foreign 47,519 52,709 48,402
------------------------------------------------
Total $ 608,073 $604,009 $ 654,282
================================================
Export sales originating from the United States for the years ended
December 31, 2001, 2000 and 1999 were $14.1 million, $13.5 million, and
$11.8 million, respectively, and have been included in the category,
Other Foreign.
Long-Lived Assets
------------------------------------------------
2001 2000 1999
---- ---- ----
United States $118,455 $ 122,825 $125,766
Canada 2,829 3,511 3,897
Other Foreign 18,402 18,885 18,534
------------------------------------------------
Total $ 139,686 $ 145,221 $148,197
================================================
-10-
ITEM 2. PROPERTIES
The Company maintains its executive offices and a manufacturing plant at 37-18
Northern Boulevard, Long Island City, NY.
The table below describes the Company's principal physical properties. (For
information with respect to rentals, see note 17 of Notes to Consolidated
Financial Statements).
OWNED OR
STATE OR LEASE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY SQUARE FEET EXP. DATE
-------- ------- --------------------------- ----------- ---------
Corona CA Manufacturing and Distribution 78,200 2008
(Temperature Control)
Ontario CA Vacated-subleased 250,200 2003
Orlando FL Manufacturing (Ignition) 50,600 2006
Cumming GA Manufacturing (Temperature Control) 47,000 2007
Cumming GA Distribution (Temperature Control) 30,000 2007
Elk Grove Village IL Manufacturing (Temperature Control) 25,080 2002
Bensenville IL Vacated-subleased 14,000 2002
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 318,000 Owned
Manufacturing (Ignition)
Lewisville TX Administration and Distribution 415,000 2009
(Temperature Control)
Fort Worth TX Manufacturing & Distribution (Temperature 204,000 Owned
Control)
Fort Worth TX Manufacturing and Distribution 103,000 2004
(Temperature Control)
Grapevine TX Manufacturing (Temperature Control) 180,000 Owned
Grapevine TX Storage 83,125 2004
Irving TX Training Center 13,400 2004
Disputanta VA Distribution (Ignition) 411,000 Owned
Rural Retreat VA Vacated-subleased 72,400 2003
Fajardo PR Manufacturing (Ignition) 114,000 2007
Mississauga CANADA Administration and Distribution 128,400 2006
(Ignition, Wire, Temperature Control)
St. Thomas CANADA Manufacturing (Temperature Control) 40,000 Owned
Strasbourg FRANCE Administration and Distribution 16,146 2003
(Temperature Control)
Hong Kong HK Manufacturing (Ignition) 21,534 2003
Reynosa MEXICO Manufacturing (Wire) 62,500 2004
Nottingham ENGLAND Administration and Distribution 29,000 Owned
(Ignition and Wire)
Nottingham ENGLAND Manufacturing (Ignition and Wire) 46,777 Owned
Nottingham ENGLAND Manufacturing (Ignition) 10,000 2012
Sunbury @ Thames ENGLAND Distribution (Ignition and Temperature 28,095 2007
Control)
Massa ITALY Administration and Distribution 13,100 2004
(Temperature Control)
-11-
ITEM 3. LEGAL PROCEEDINGS
On January 28, 2000, a former significant customer of the Company currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including the Company. The claim
against the Company alleges $0.5 million (formerly $19.8 million) of
preferential payments in the 90 days prior to the related Chapter 11 bankruptcy
petition. In addition, this former customer seeks $10.5 million from the Company
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. The Company has purchased insurance with respect to the two
actions. The Company believes that these matters will not have a material effect
on the Company's consolidated financial statements taken as a whole.
The Company is involved in various other litigation and product liability
matters arising in the ordinary course of business. One of the product liability
matters involves a former Brake business of the Company. In 1986, the Company
acquired the business resulting in the assumption by the Company of certain
liabilities relating to any alleged exposure to asbestos-containing products
manufactured by the seller. In accordance with the related purchase agreement,
the Company agreed to assume the liabilities for all new claims filed after
fifteen years from the date of the purchase. The ultimate exposure to the
Company will depend upon the extent to which future claims are filed and the
amounts paid for indemnity and defense. At December 31, 2001, approximately 100
cases were outstanding whereby the Company is now responsible for any related
liabilities. Although the final outcome of this specific matter or any other
litigation or product liability matter cannot be determined, based on the
Company's understanding and evaluation of the relevant facts and circumstances,
it is management's opinion that the final outcome of these matters will not have
a material adverse effect on the Company's financial statements taken as a
whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-12-
PART II
ITEM 5: MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS:
--------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol SMP. The number of Shareholders of record of Common Stock on February 28,
2002 was approximately 550 including brokers who hold approximately 8,019,000
shares in street name. The following table shows the high and low sale prices on
the composite tape of, and the dividend paid per share on, the Common Stock
during the periods indicated.
- ----- ------- -------- --------- ----------- ------ ------- ------- ------- ------------
2001 QUARTER HIGH LOW DIVIDEND 2000 QUARTER HIGH LOW DIVIDEND
- ---- ------- ---- --- -------- ---- ------- ---- --- --------
1st $ 10.60 $7.44 $ 0.09 1st $16.50 $12.63 $ 0.09
2nd $ 14.50 $9.90 $ 0.09 2nd $15.70 $7.38 $ 0.09
3rd $ 13.70 $11.65 $ 0.09 3rd $10.63 $7.94 $ 0.09
4th $ 14.95 $10.45 $ 0.09 4th $8.44 $6.44 $ 0.09
- ----- ------- -------- --------- ----------- ------ ------- ------- ------- ------------
The Board of Directors will consider the payment of future dividends on the
basis of earnings, capital requirements and the financial condition of the
Company. Subject to the Company's credit facility, dividends and distributions
may be restricted.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------
(In thousands, except per share data)
Net sales $ 608,073 $ 604,009 $ 654,282 $ 647,096 $ 557,210
Earnings (loss) before extraordinary item $ 312 $ 10,230 $ 8,685 $ 22,257 $ (34,524)
Net earnings (loss) $ (2,485) $ 9,729 $ 7,625 $ 22,257 $ (34,524)
Earnings (loss) per share before
extraordinary item - Basic $ 0.03 $ 0.86 $ 0.66 $ 1.70 $ (2.63)
Earnings (loss) per share - Basic $ (0.21) $ 0.82 $ 0.58 $ 1.70 $ (2.63)
Earnings (loss) per share - Diluted $ (0.21) $ 0.81 $ 0.58 $ 1.69 $ (2.63)
Working capital $ 228,356 $ 188,091 $ 205,806 $ 178,324 $ 177,426
Total assets $ 509,429 $ 549,396 $ 556,021 $ 521,556 $ 577,137
Long-term debt (excluding current portion) $ 200,066 $ 150,018 $ 163,868 $ 133,749 $ 159,109
Stockholders' equity $ 185,687 $ 194,305 $ 203,518 $ 205,025 $ 183,782
Stockholders' equity per share $ 15.77 $ 16.28 $ 15.57 $ 15.68 $ 14.01
Cash dividends per common share $ 0.36 $ 0.36 $ 0.34 $ 0.16 $ 0.32
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to our financial condition and our
results of operations for the three years ended December 31, 2001. You should
read this information in conjunction with Item 6. "Selected Consolidated
Financial Data" and our consolidated Financial Statements and related notes
thereto beginning on page F-1.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are 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; 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.
LIQUIDITY AND CAPITAL RESOURCES
In 2001, cash provided by operations amounted to $40.2 million, compared to cash
used in operations of $1.0 million in 2000 and cash provided by operations of
$21.0 million in 1999. The improvement is primarily attributable to the
Company's efforts to reduce inventory levels from their elevated levels of
December 31, 2000. This improvement was offset by a reduction in accounts
payable and the decrease in earnings.
Inventory decreased by $57.0 million as a result of the Company's inventory
reduction program, which resulted primarily from reduced production and
purchases, and where needed, the temporary closing of manufacturing facilities
The reductions have effected both the Engine Management and Temperature Control
segments. Inventory turnover was 2.1x in 2001 vs. 1.8 x in 2000, on a rolling
twelve-month basis, reflecting the high inventory levels at December 31, 2000
and should improve as a result of the inventory reduction efforts. Future
reductions are planned in 2002, however, such reductions are expected to be more
modest than 2001.
In comparing 2000 and 1999, there are two reasons for the increase in inventory
levels and the decrease in inventory turns (1.8 x in 2000 vs. 2.7 x in 1999).
First, with respect to the Temperature Control Segment, the business is highly
seasonal with sales of air conditioning parts being greatest in the second and
third quarters of the year. This seasonality requires the build-up of inventory
levels prior to the main selling season. As discussed in our comparison of the
year 2000 vs. 1999, Temperature Control sales were significantly below the prior
year and forecasted amounts. Although significant reductions were made to
Temperature Control production levels in 2000, the short fall in net sales more
than off-set such reductions. Second, with respect to the Engine Management
Segment, in the third quarter of 2000, Engine Management successfully acquired a
new major customer which required inventory levels to be increased in order to
fill the initial "pipeline" of orders from such customer. In addition, the
customer launch for new orders was extended into 2001, versus the fourth quarter
of 2000, as originally planned.
-14-
Cash used in investing activities was $14.2 million in 2001, compared to $18.7
million in 2000. The decrease is primarily due to a reduction in capital
expenditures and acquisitions. For the three years ended December 31, 2001,
2000, and 1999 capital expenditures totaled $13.7 million, $16.7 million and
$14.4 million, respectively.
In December 2001, the Company signed a letter of intent to acquire Carol Cable
Limited, a manufacturer and distributor of wire sets, based in England, for
approximately $1.7 million. Assets consist primarily of property plant and
equipment, and inventory. The purchase is expected to be completed in April 2002
with funds provided under the Company's line of credit.
On January 17, 2002, the Company purchased the Temperature Control business of
Hartle Industries for approximately $4.8 million. Assets acquired consist
primarily of property plant and equipment, and inventory. The purchase was
financed with funds provided under the Company's line of credit.
On March 20, 2002 the Company reached a definitive agreement to purchase the
aftermarket business of Sagem Inc., a subsidiary of Johnson Controls, for
approximately $11.5 million. Sagem Inc. is a basic manufacturer of fuel
injectors, a product line which prior to the acquisition, the Company has been
purchasing. Assets to be acquired consist primarily of property, plant and
equipment, and inventory. The purchase which is expected to close within sixty
days will be partially financed by the seller (approximately $7 million to be
paid over a two year period), with the remaining funds being provided under the
Company's line of credit.
Cash used in financing activities was $25.4 million in 2001, as compared to
$11.5 million in 2000. The increase in cash used was primarily due to the
Company's refinancing, as discussed below, offset by the discontinuance of stock
repurchases. Dividends paid for the three years ended December 31, 2001, 2000
and 1999 were $4.2 million, $4.3 million and $4.5 million, respectively. In the
third quarter of 1999, the Board of Directors increased the regular quarterly
dividend from $.08 to $.09 per share.
The Company, effective April 27, 2001 entered into an agreement with GE Capital
Corp. and a syndicate of lenders for a new secured revolving credit facility.
The former unsecured revolving credit facility was set to expire on November 30,
2001. The term of the new credit agreement is for a period of five years and
provides for a line of credit up to $225 million. The initial proceeds have been
used to refinance approximately $97 million of the outstanding indebtedness
under the Company's former bank line of credit, the 7.56% senior note of $52
million, a $25 million accounts receivable sale arrangement and the Canadian
Credit Facility of $5 million. The Company recorded an extraordinary loss of
approximately $2.8 million, net of taxes, in the second quarter of 2001, for a
prepayment penalty and write-off of unamortized fees for the retirement of the
above related debt. Availability under the new credit facility is based on a
formula of eligible accounts receivable, eligible inventory and eligible fixed
assets. Direct borrowings bear interest at the Prime Rate plus the applicable
margin (as defined) or the LIBOR Rate plus the applicable margin (as defined),
at the option of the Company. Borrowings are collateralized by accounts
receivable, inventory and fixed assets of the Company and its subsidiaries. The
terms of the new revolving credit facility contain, among other provisions,
requirements of maintaining defined levels of tangible net worth and specific
limits or restrictions on additional indebtedness, capital expenditures, liens
and acquisitions.
-15-
In July 2001, the Company entered into interest rate swap agreements to manage
its exposure to interest rate changes. The swaps effectively convert a portion
of the Company's variable rate debt under the revolving credit facility to a
fixed rate, without exchanging the notional principal amounts. At December 31,
2001, the Company had two outstanding interest rate swap agreements maturing in
January 2003 and 2004, with aggregate notional principal amounts of $75 million.
Under these agreements the Company receives a floating rate based on the LIBOR
interest rate, and pays a fixed rate of 4.92% on a notional amount of $45
million and 4.37% on a notional amount of $30 million.
On July 26, 1999, the Company issued 6.75% Convertible Subordinated Debentures
in the aggregate principal amount of $90 million. The Debentures are convertible
into approximately 2,796,000 shares of the Company's common stock, and mature on
July 15, 2009. The proceeds from the Convertible Debentures were used to prepay
an 8.6% senior note payable, reduce short term bank borrowings and repurchase a
portion of the Company's common stock.
The Company sold certain accounts receivable to an independent financial
institution, through its wholly-owned subsidiary, SMP Credit Corp., a qualifying
special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three
year agreement whereby it could sell up to a $25 million undivided ownership
interest in a designated pool of certain of these eligible receivables. This
agreement was terminated in 2001 as part of the new credit facility described
above. At December 31, 2000, net accounts receivable amounting to $25 million
had been sold under this agreement.
During the years 1998 through 2000, the Board of Directors authorized multiple
repurchase programs under which the Company could repurchase shares of its
common stock. During such years, $26.7 million (in aggregate) of common stock
has been repurchased to meet present and future requirements of the Company's
stock option programs and to fund the Company's ESOP. As of December 31, 2001
the Company has Board authorization to repurchase additional shares at a maximum
cost of $1.7 million.
The Company expects capital expenditures for 2002 to be approximately $14
million, primarily for new machinery and equipment.
The Company's profitability and working capital requirements have become more
seasonal with the increased sales mix of temperature control products. 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.
These increased working capital requirements are funded by borrowings from our
lines of credit.
The Company anticipates that its present sources of funds will continue to be
adequate to meet its near term needs.
COMPARISON OF 2001 TO 2000
Net sales in 2001 were $608.1 million, a slight increase of $4.1 million as
compared to net sales of $604.0 million in 2000. The increase in net sales was a
result of new business, offsetting decreases in our existing traditional
business lines. The Engine Management division benefited from a full year of
sales to the new major customer acquired during the third quarter of 2000,
(incremental sales of approximately $6 million in 2001) along with additional
wire set business from a major group of warehouse distributors. With respect to
Temperature Control, we regained a major retail customer we lost in early 2000
(net sales approximated $30 million in 2001, excluding pipeline fill). Excluding
this new business, sales to existing accounts decreased, primarily a result of
another cool summer for air conditioning, and the continuing inventory reduction
program on the part of many of our customers.
-16-
Gross margins, as a percentage of net sales, decreased to 27.9% from 31.1% in
2000. The overall decrease in gross margins was primarily due to our successful
inventory reduction programs. The reduction in gross margins was across all
product lines as the Company originally targeted a minimum $30 million inventory
reduction in 2001. Actual inventory reduction amounted to $57 million while
maintaining high customer service fill levels. These changes reflect the impact
of underabsorbed overhead costs as a result of cutting production and
temporarily closing manufacturing facilities at both Engine Management and
Temperature Control facilities. We expect 2002 gross margin increases in both
Engine Management and Temperature Control as a result of price increases and
improved fixed overhead absorption, despite further inventory reduction efforts.
Selling, general and administrative expenses (S,G&A) decreased by $3.1 million
to $154.3 million as compared to $157.4 million in 2000. This decrease reflects
the focus on the Company's cost reduction efforts with benefits primarily in the
marketing and distribution areas in the Temperature Control Segment.
Operating income decreased by $15.1 million as compared to 2000, primarily due
to the lower gross margins as discussed above.
Other income, net increased by $1.8 million as compared to 2000. The increase is
primarily due to the reduction of fees related to the termination of the sale of
accounts receivable agreement and an increase in interest and dividend income.
Interest expense decreased slightly by $0.6 million as compared to 2000, due to
lower interest rates and lower average borrowings.
Income tax expense decreased to $0.1 million in 2001 from $2.9 million in 2000.
The decrease is primarily due to overall lower earnings. The effective tax rate
increased from 22% in 2000 to 32% in 2001. The increase is primarily due to a
decrease in earnings from the Company's foreign subsidiaries, which have lower
tax rates then the United States statutory rate.
COMPARISON OF 2000 TO 1999
Net sales in 2000 were $604.0 million, a decrease of $50.3 million or 7.7% when
compared to 1999. Net sales in Temperature Control decreased by $56.8 million
primarily due to a significant retail customer achieving substantial inventory
reductions; loss of a major retail customer early in the year (contributed
approximately $18.5 million to the overall decrease); and a very cool and wet
summer in the northeast and mid-west. The customer that was lost in 2000 was
reacquired in the beginning of 2001. With respect to Engine Management, net
sales in 2000 were $297.4 million, an increase of $5.6 million or 1.9% when
compared to 1999. The increase reflects the successful acquisition of a major
new customer in the third quarter of 2000 (contributed approximately $6.4
million of net sales for the year ended December 31, 2000).
Significant warranty and overstock returns in our Temperature Control Segment
adversely impacted financial performance in 1999. With respect to warranty
returns, after thorough analysis of related warranty claims, the Company has
taken specific actions to reduce compressor warranty returns in 2000 and beyond.
The Company has instituted new counterperson and installer training programs;
increased emphasis on clinics and professional seminars for installers; and
tightened rules for authorized warranty returns (this the Company believes to be
the major improvement, which was previously not required).
Beginning in 2000, it is a requirement that each and every compressor returned
for warranty credit must have either a service repair work order or a purchase
receipt providing proof that a number of additional auxiliary parts were
replaced concurrently (i.e. accumulator, orifice tube, in-line filter,
condenser) and that an air conditioning system flushing with an approved solvent
was performed. If the twelve step process, is not performed as defined by the
Company, the warranty is void.
-17-
With respect to overstock returns, 1999 was adversely impacted by the Company's
decision to accept customer returns in connection with the Company's decision to
discontinue the offering of certain Temperature Control products. The year 2000
was absent of any such significant decision. In addition, during 2000, the
Company placed further restrictions on the amounts that customers can return as
overstock returns.
Gross margins, as a percentage of net sales, increased to 31.1% in 2000 from
28.8% in 1999. Temperature Control gross margins were positively impacted by
reduced customer returns and an increase in net pricing. Engine Management
margins were positively impacted by increased sales volume, increases in net
pricing and certain cost reductions activities discussed below.
In connection with cost reduction activities, the year 2000 was benefited by the
consolidation of three distribution centers into one in our Temperature Control
Segment; merging our existing fan clutch operations in our Temperature Control
Segment; and moving two U.S. manufacturing plants to a single facility in Mexico
in the Engine Management Segment. The aforementioned initiatives improved
operating income of Temperature Control and Engine Management Segments by
approximately $2.0 million and $1.5 million, respectively.
Selling, general and administrative expenses (SG&A) decreased approximately $1.2
million in 2000, primarily a result of the cost reduction efforts described in
the previous paragraph and a decrease in bad debt expense as compared to 1999.
Operating income increased by $1.1 million, or 3.8% in 2000. Results of the
Engine Management Division, as compared to a year ago, reflected an increase in
operating income of $11.9 million due to higher sales, favorable overhead
absorption and cost reduction activities. Operating Income at the Temperature
Control Division decreased by $5.8 million, primarily due to the net sales
decrease reasons cited above. The Company has strengthened its controls and
procedures for accepting authorized customer warranty returns in 2000, and has
completed the consolidation of its manufacturing and distribution facilities.
These changes have had a favorable impact on 2000 results and are expected to
provide future benefits.
Other income, net, was approximately $.5 million, comparing favorably to other
expense, net of $1.6 million in 1999. This is primarily the result of our 1999
decision to exit the Heat Battery joint venture in Canada.
Interest expense increased by approximately $2.1 million to $18 million in 2000,
primarily due to higher average borrowings resulting from elevated inventory
levels and decreased sales.
Income tax expense decreased from $3.3 million in 1999 to $2.9 million in 2000.
The effective tax rate also decreased from 28% in 1999 to 22% in 2000 due to an
increase in earnings from the Company's Puerto Rico and Hong Kong subsidiaries,
which have lower tax rates than the United States statutory rate.
On March 13, 2000, the Company prepaid the entire outstanding balance of the
10.22% senior note payable in the amount of $14 million. In connection with this
prepayment, the Company incurred an extraordinary loss of $0.5 million net of
taxes, for prepayment penalties and the write-off of deferred loan costs.
-18-
IMPACT OF INFLATION
Although inflation is not a significant issue, the Company's management believes
it will be able to continue to minimize any adverse effect of inflation on
earnings. This will be achieved principally by cost reduction programs and,
where competitive situations permit, selling price increases.
FUTURE RESULTS OF OPERATIONS
The Company continues to face competitive pressures. In order to sell at
competitive prices while maintaining profit margins, the Company is continuing
to focus on overhead and cost reductions. However, the Company's main focus
currently is to reduce inventory levels requiring reductions in production and
purchasing levels. Gross margins have been, and will continue to be negatively
impacted resulting from underabsorbed overhead.
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 this Annual Report on Form 10-K. Note that our preparation of this
Annual Report on Form 10-K 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 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 from primarily sales which include
replacement parts for motor vehicles, from both our Engine Management and
Temperature Control Divisions. The Company recognizes 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. Material differences may result in the amount and timing
of our revenue for any period if our management made different judgments or
utilized different estimates.
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
(See discussion on "Recently Issued Accounting Standards"). Material differences
may result in the amount and timing of our revenue for any period if management
made different judgments or utilized different estimates. 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.
-19-
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 us
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. We have recorded a
valuation allowance of $14.2 million as of December 31, 2001, 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
financial position and results of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles, long-lived assets and goodwill 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.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" became effective and as a result, we will cease to
amortize approximately $38 million of goodwill. We recorded approximately $3.6
million of amortization on these amounts during 2001. In lieu of amortization,
we are required to perform an initial impairment review of our goodwill in 2002
and an annual impairment review thereafter. (See discussion on "Recently Issued
Accounting Standards").
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability (including asbestos matters) and
litigation. Establishing loss reserves for these matters requires the use of
estimates and judgment in regards to 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 STANDARDS
In May 2000 and April 2001, the FASB Emerging Issues Task Force (the "EITF")
issued new guidelines entitled "Accounting for Certain Sales Incentives" and
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products" respectively, (the "Guidelines"). 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. The Guidelines, as amended, are effective beginning
January 1, 2002 and prior years' financial statements will be restated for
purposes of comparability. The adoption of these guidelines will not have an
effect on the Company's net earnings, however, certain costs incurred by the
Company and historically recorded as selling, general and administrative expense
will be reclassified and treated as a reduction from gross sales to derive at
net sales.
-20-
In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No.
141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria
to determine whether intangible assets acquired in a business combination should
be recognized and reported separately from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with an indefinite
life. SFAS No. 142 requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121 and
subsequently, SFAS No. 142 after its adoption. The Company adopted the
provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effective
January 1, 2002. As of the date of adoption of SFAS No. 142, the Company has
unamortized goodwill in the amount of $38 million. Amortization expense related
to goodwill was $3.6 million, $3.5 million and $3.4 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
Management is currently analyzing the impact of adoption of this Standard, but
believes this Standard is likely to result in the impairment of a portion of the
Company's goodwill. The Company has substantially completed the first step of
the initial impairment test required by the Standard and identified
approximately $16 million of goodwill that may be impaired based on the new
requirements. The Company will complete the impairment testing required to
determine the actual amount of goodwill impairment in the first fiscal quarter
of 2002. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard 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, the
Company will recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of Statement No. 143
for the quarter ending March 31, 2003. To accomplish this, the Company must
identify all legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption. The
determination of fair value is complex and will require the Company to gather
market information and develop cash flow models. Additionally, the Company will
be required to develop processes to track and monitor these obligations. Because
of the effort necessary to comply with the adoption of Statement No. 143, it is
not practicable for management to estimate the impact of adopting this Statement
at the date of this report.
-21-
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived assets that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, primarily related to foreign currency
exchange and interest rates. These exposures are actively monitored by
management. The Company's 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, the Company is exposed to
market risk as the result of changes in interest rates which may affect the cost
of its financing. It is the Company's policy and practice to use derivative
financial instruments only to the extent necessary to manage exposures. The
Company does not hold or issue derivative financial instruments for trading or
speculative purposes.
EXCHANGE RATE RISK
The Company has exchange rate exposure, primarily, with respect to the Canadian
Dollar and the British Pound. The Company's financial instruments which are
subject to this exposure amount to approximately $4.0 million, which includes
$7.7 million of indebtedness, $6.7 million in accounts payable and $10.4 million
of accounts receivable. The potential immediate loss to the Company that would
result from a hypothetical 10% change in foreign currency exchange rates would
not be expected to have a material impact on the earnings or cash flows of the
Company. 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 the
Company's foreign-currency denominated revenues.
-22-
INTEREST RATE RISK
The Company manages its 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 its exposure to interest rate changes, the Company has entered into
interest rate swap agreements, see Note 4 of Notes to Consolidated Financial
Statements. At December 31, 2001 the Company had approximately $206 million in
loans and financing outstanding, of which approximately $91 million bear
interest at fixed interest rates and approximately $115 million bear interest at
variable rates of interest. The Company invests its excess cash in highly liquid
short-term investments. As a result of the Company's refinancing agreement
during the second quarter 2001, as described in Note 8, of Notes to Consolidated
Financial Statements, the Company's percentage of variable rate debt to total
debt has increased from 23% at December 31, 2000 to 56% at December 31, 2001.
Depending upon the level of borrowings, under this credit facility, which may at
times approach $225 million, 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 the earnings or cash flows of the
Company.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2001 and 2000, 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,
2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
New York, New York
February 22, 2002
F1
Standard Motor Products, Inc. and Subsidiaries
Consolidated Statements of Operations
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------
(Dollars in thousands, except per share amounts) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Net sales (Note 6) $ 608,073 $ 604,009 $ 654,282
Cost of sales 438,215 415,965 466,110
- -----------------------------------------------------------------------------------------------------------
Gross profit 169,858 188,044 188,172
Selling, general and administrative expenses 154,315 157,380 158,628
- -----------------------------------------------------------------------------------------------------------
Operating income 15,543 30,664 29,544
Other income (expense), net (Notes 3 and 13) 2,343 497 (1,564)
Interest expense 17,430 18,045 15,951
- -----------------------------------------------------------------------------------------------------------
Earnings before taxes and extraordinary item 456 13,116 12,029
- -----------------------------------------------------------------------------------------------------------
Provision for income taxes (Note 14) 144 2,886 3,344
- -----------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 312 10,230 8,685
- -----------------------------------------------------------------------------------------------------------
Extraordinary loss on early extinguishment of debt, net of
taxes of $975, $364 and $707 in 2001, 2000 and 1999,
respectively. (Note 7) 2,797 501 1,060
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (2,485) $ 9,729 $ 7,625
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) Per Common Share - Basic:
Earnings before extraordinary item $ 0.03 $ 0.86 $ 0.66
Extraordinary (loss) from early extinguishment of debt (0.24) (0.04) (0.08)
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) Per Common Share - Basic $ (0.21) $ 0.82 $ 0.58
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) Per Common Share - Diluted:
Earnings before extraordinary item $ 0.03 $ 0.85 $ 0.66
Extraordinary (loss) from early extinguishment of debt (0.24) (0.04) (0.08)
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) Per Common Share - Diluted $ (0.21) $ 0.81 $ 0.58
- -----------------------------------------------------------------------------------------------------------
Average number of common shares 11,774,591 11,933,774 13,073,272
Average number of common shares and dilutive
common shares 11,830,737 11,974,341 13,145,743
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
Standard Motor Products, Inc. and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------
December 31,
----------------------
(Dollars in thousands) 2001 2000
- ------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,496 $ 7,699
Accounts receivable, less allowances for discounts and
doubtful accounts of $4,362 and $4,577 in 2001 and 2000,
respectively (Notes 3 and 7) 117,965 106,261
Inventories (Notes 4 and 7) 177,291 234,257
Deferred income taxes (Note 14) 12,316 12,482
Prepaid expenses and other current assets 13,881 12,060
- ------------------------------------------------------------------------------------
Total current assets 328,949 372,759
- ------------------------------------------------------------------------------------
Property, plant and equipment, net (Notes 5 and 7) 101,646 104,536
- ------------------------------------------------------------------------------------
Goodwill, net 38,040 40,685
- ------------------------------------------------------------------------------------
Other assets (Notes 6 and 11) 40,794 31,416
- ------------------------------------------------------------------------------------
Total assets $ 509,429 $ 549,396
- ------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - (Note 7) $ 4,075 $ 38,930
Current portion of long-term debt (Note 7) 1,784 13,643
Accounts payable 26,110 56,612
Sundry payables and accrued expenses 41,968 49,671
Accrued customer returns 18,167 17,693
Payroll and commissions 8,489 8,119
- ------------------------------------------------------------------------------------
Total current liabilities 100,593 184,668
- ------------------------------------------------------------------------------------
Long-term debt (Notes 7 and 8) 200,066 150,018
- ------------------------------------------------------------------------------------
Postretirement benefits other than pensions and
other accrued liabilities (Notes 11 and 12) 23,083 20,405
- ------------------------------------------------------------------------------------
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 and outstanding
11,823,650 and 11,695,179 shares in
2001 and 2000, respectively 26,649 26,649
Capital in excess of par value 1,877 2,541
Retained earnings 183,532 190,253
Accumulated other comprehensive loss (3,722) (591)
- ------------------------------------------------------------------------------------
208,336 218,852
Less: Treasury stock - at cost (1,500,826 and 1,629,297
shares in 2001 and 2000, respectively) 22,649 24,547
- ------------------------------------------------------------------------------------
Total stockholders' equity 185,687 194,305
- ------------------------------------------------------------------------------------
Total liabilities and stockholder' equity $ 509,429 $ 549,396
- ------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
Standard Motor Products, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (2,485) $ 9,729 $ 7,625
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 18,909 18,922 17,230
Gain on disposal of property, plant & equipment (265) (99) (2,564)
Equity (income) loss from joint ventures (844) (702) 4,118
Employee stock ownership plan allocation 713 1,032 1,739
Tax benefit related to employee stock options 48 -- 290
Increase in deferred income taxes (3,628) (897) (4,552)
Extraordinary loss on repayment of debt 3,772 865 1,767
Change in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable, net 13,296 14,793 10,782
(Increase) decrease in inventories 56,966 (44,666) (5,944)
(Increase) decrease in prepaid expenses and other current assets (1,821) 388 (947)
(Increase) decrease in other assets (7,745) 3,811 (1,514)
Increase (decrease) in accounts payable (30,502) 14,413 (10,349)
Increase (decrease) in sundry payables and accrued expenses (9,749) (16,724) 1,129
Increase (decrease) in other liabilities 3,524 (1,818) 2,174
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 40,189 (953) 20,984
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment 652 657 8,420
Capital expenditures, net of effects from acquisitions (13,740) (16,652) (14,423)
Payments for acquisitions, net of cash acquired (1,069) (2,718) (17,381)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,157) (18,713) (23,384)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit agreements 71,935 36,285 (819)
Net proceeds from issuance of long-term debt -- -- 86,568
Principal payments and retirement of other long-term debt (93,601) (29,119) (54,664)
Proceeds from exercise of employee stock options 473 -- 1,830
Purchase of treasury stock -- (14,345) (9,765)
Dividends paid (4,236) (4,324) (4,456)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (25,429) (11,503) 18,694
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (806) (1,512) 629
- --------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (203) (32,681) 16,923
Cash and cash equivalents at beginning of year 7,699 40,380 23,457
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 7,496 $ 7,699 $ 40,380
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 17,403 $ 18,943 $ 14,733
Income taxes $ 2,792 $ 2,776 $ 6,205
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
Standard Motor Products, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------------------------------------
Accumulated
Capital in Other
Common Excess of Retained Comprehensive Treasury
Stock Par Value Earnings Income (Loss) Stock Total
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 26,649 $ 2,951 $181,679 $ (516) $ (5,738) $205,025
Comprehensive Income:
Net earnings 7,625 7,625
Foreign currency translation adjustment 1,230 1,230
--------
Total comprehensive income 8,855
Cash dividends paid (4,456) (4,456)
Exercise of employee stock options (381) 2,211 1,830
Tax benefits applicable to
the exercise of employee stock options 290 290
Employee Stock Ownership Plan 97 1,642 1,739
Purchase of treasury stock (9,765) (9,765)
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 26,649 2,957 184,848 714 (11,650) 203,518
Comprehensive Income:
Net earnings 9,729 9,729
Foreign currency translation adjustment (1,305) (1,305)
--------
Total comprehensive income 8,424
Cash dividends paid (4,324) (4,324)
Employee Stock Ownership Plan (416) 1,448 1,032
Purchase of treasury stock (14,345) (14,345)
- --------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------
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. (the "Company") is engaged in the manufacture and
sale of automotive replacement parts. The consolidated financial statements
include the accounts of the Company and all subsidiaries in which the Company
has more than a 50% equity ownership. The Company's 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, management of the
Company has 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 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 2000 and 1999 have been reclassified to
conform with the 2001 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
At December 31, 2001 and 2000, 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. As of December 31, 2001, the held-to-maturity
securities mature within two years.
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
In June 1998 and June 2000, the FASB issued 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 "other
comprehensive income (loss)". Payment or receipts on interest rate swap
agreements are recorded in the "interest expense" caption in the statement of
operations. The Company had no outstanding derivatives as of January 1, 2001.
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 10 years or life of lease
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, has been amortized on a straight-line basis over the estimated
period of expected benefit, generally 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. Accumulated
amortization at December 31, 2001 and 2000 was $16.4 million and $12.8 million.
Goodwill will no longer be amortized upon adoption of Statement of Financial
Accounting Standards (SFAS) No.142, "Goodwill and Other Intangible Assets," (See
discussion in "Recently Issued Accounting Standards").
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
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.
F-6
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
The Company recognizes revenues from product sales upon shipment to customers.
The Company estimates and records provisions for cash discounts, quantity
rebates, sales returns and warranties, in the period the sale is recorded, based
upon its prior experience.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net postretirement benefit liability and related expense under the
Company's 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 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 and 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
The Company presents 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 calculating basic and
dilutive net earnings per common share.
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Weighted average
common shares 11,775 11,934 13,073
Effect of stock options 56 40 73
- --------------------------------------------------------------------------------
Weighted average common
equivalent shares outstanding
assuming dilution 11,831 11,974 13,146
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) 2001 2000 1999
- --------------------------------------------------------------------------------
Stock options 625 861 552
Convertible debentures 2,796 2,796 1,165
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance with the
provisions of SFAS No.123 "Accounting for Stock Based Compensation". As
permitted by this statement, the Company has chosen to continue to apply the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" and
related interpretations including SFAS interpretation No.44, "Accounting for
certain transactions involving stock compensation and interpretation of APB
No.25," issued in March 2001. Accordingly, no compensation expense has been
recognized for options granted because the exercise price is equal to the fair
value of the stock at the date of grant. As required, the Company provides pro
forma net income and pro forma earnings per share disclosures for stock option
grants, as if the fair value based method defined in SFAS No.123 had been
applied.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with high quality
financial institutions and limits 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. The Company performs ongoing credit
evaluations of its customers' financial conditions. Members of one marketing
group represent the Company's largest group of customers and accounted for
approximately 14%, 15% and14% of consolidated net sales for the years ended
December 31, 2001, 2000 and 1999, respectively. One individual member of this
marketing group accounted for 10%, 9%, and 9% of net sales for the years ended
December 31, 2001, 2000 and 1999, respectively. The Company's five largest
individual customers, including members of this marketing group, accounted for
42%, 33% and 35% of net sales in 2001, 2000 and 1999, respectively.
Recently Issued Accounting Standards
In May 2000 and April 2001, the FASB Emerging Issues Task force (the "EITF")
issued new guidelines entitled "Accounting for Certain Sales Incentives" and
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the "Vendor's Products", respectively, (the "Guidelines"). 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. The Guidelines, as amended, are effective beginning
January 1, 2002 and prior years' financial statements will be restated for
purposes of comparability. The adoption of these guidelines will not have an
effect on the Company's net earnings, however, certain costs incurred by the
Company and historically recorded as selling, general and administrative expense
will be reclassified and treated as a reduction from gross sales to derive at
net sales.
F-7
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
In June 2001, the FASB issued SFAS No.141, Business Combinations, (SFAS No.141)
and SFAS No.142, Goodwill and Other Intangible Assets (SFAS No.142). SFAS No.141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No.141 also specifies criteria
to determine whether intangible assets acquired in a business combination should
be recognized and reported separately from goodwill. SFAS No.142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No.142. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with an indefinite
life. SFAS No.142 requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.121 and
subsequently, SFAS No.142 after its adoption. The Company adopted the provisions
of SFAS No.141 as of July 1, 2001, and SFAS No.142 is effective January 1, 2002.
As of the date of adoption of SFAS No.142, the Company has unamortized goodwill
in the amount of $38 million. Amortization expense related to goodwill was $3.6
million, $3.5 million and $3.4 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Management is currently analyzing the impact of adoption of this Standard, but
believes this Standard is likely to result in the impairment of a portion of the
Company's goodwill. The Company has substantially completed the first step of
the initial impairment test required by the Standard and identified
approximately $16 million of goodwill that may be impaired based on the new
requirements. The Company will complete the impairment testing required to
determine the actual amount of goodwill impairment in the first fiscal quarter
of 2002. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
2. ACQUISITIONS
In January 2000, the Company completed the purchase of Vehicle Air Conditioning
Parts, located in England, which has subsequently been named "Four Seasons UK,
LTD." In July 2000, the Company completed the purchase of Automotive Heater
Exchange SRL in Massa, Italy. In addition, during 2000 and 2001, the Company
increased its ownership percentage in Standard Motor Products Holdings Limited,
formerly Intermotor Holdings Limited, from 74.25% to 86%. In aggregate,
approximately $3.8 million was incurred in connection with these acquisitions.
Such acquisitions had an immaterial effect on net earnings.
During 1999, the Company acquired and accounted for as a purchase, the following
business: In January 1999, the Company acquired 85% of the stock of Webcon UK
Limited, and, through its UK joint venture Blue Streak Europe Limited, Webcon's
affiliate Injection Correction UK Limited located in Sunbury-on-Thames England,
for approximately $3.5 million. The remaining 15% was acquired in January 2000.
The acquisition increased consolidated net sales by approximately $12 million in
1999 and had an immaterial effect on net earnings for the year ended December
31, 1999.
In February 1999, the Company acquired 100% of the stock of Eaglemotive
Corporation for approximately $12.4 million. The acquisition increased
consolidated net sales by approximately $22 million in 1999 and had an
immaterial effect on net earnings for the year ended December 31, 1999.
In April 1999, the Company acquired Lemark Auto Accessories Limited, located in
Redditch, England, for approximately $1.9 million. The acquisition increased
consolidated net sales by approximately $3 million and had an immaterial effect
on net earnings for the year ended December 31, 1999.
The Company's acquisitions were funded from cash and short term borrowings.
Assets acquired in all of the acquisitions consisted primarily of inventory and
property, plant and equipment. The purchase prices have been allocated to the
assets acquired and liabilities assumed based on the fair value at the dates of
acquisition. In aggregate, the excess of the purchase price over the fair value
of the net assets acquired during 2001, 2000 and 1999 was approximately $1.1
million, $2.6 million and $5.7 million, respectively. The operating results of
these acquired businesses have been included in the consolidated financial
statements from the date of each respective acquisition.
In December 2001, the Company signed a letter of intent to acquire Carol Cable
Limited, a manufacturer and distributor of wire sets, based in England for
approximately $1.7 million. Assets consist primarily of property plant and
equipment, and inventory. The purchase is expected to be completed in April 2002
with funds provided under the Company's line of credit.
3. SALE OF ACCOUNTS RECEIVABLE
The Company sold certain accounts receivable through its wholly-owned
subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May
1999 SMP Credit Corp. and an independent financial institution entered into a
three year agreement whereby SMP Credit Corp. could sell up to a $25 million
undivided ownership interest in a designated pool of certain of these eligible
receivables. This agreement was terminated in 2001 as part of the new credit
facility described in Note 7. At December 31, 2000, net accounts receivables
amounting to $25 million had been sold under this agreement. These sales were
reflected as reductions of trade accounts receivable and the related fees and
discounting expense were recorded as other expense.
4. INVENTORIES
December 31,
---------------------------
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Finished goods $141,799 $165,381
Work in process 3,155 3,552
Raw materials 32,337 65,324
- --------------------------------------------------------------------------------
Total inventories $177,291 $234,257
- --------------------------------------------------------------------------------
F-8
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
December 31,
-----------------------
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Land, buildings and improvements $ 60,665 $ 60,435
Machinery and equipment 109,617 101,884
Tools, dies and auxiliary equipment 17,815 12,035
Furniture and fixtures 27,643 28,340
Computer software 10,231 4,824
Leasehold improvements 7,450 7,475
Construction in progress 6,440 12,328
-------- --------
239,861 227,321
Less accumulated depreciation
and amortization 138,215 122,785
- --------------------------------------------------------------------------------
Total property, plant and
equipment, net $101,646 $104,536
- --------------------------------------------------------------------------------
Depreciation expense was $15.3 million, $15.4 million and $13.8 million for
2001, 2000 and 1999, respectively.
6. Other ASSETS
December 31,
---------------------
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Marketable securities $ 7,200 $ 7,200
Unamortized customer supply agreements 1,892 2,365
Equity in joint ventures 2,149 1,956
Deferred income taxes 12,653 8,859
Deferred loan costs 5,389 3,864
Other 11,511 7,172
- --------------------------------------------------------------------------------
Total other assets $40,794 $31,416
- --------------------------------------------------------------------------------
Included in Other is a preferred stock investment in a customer of the Company.
Net sales to such customer amounted to $57.9 million, $57.4 million and $58.0
million in 2001, 2000 and 1999, respectively.
7. CREDIT FACILITIES AND LONG-TERM DEBT
The Company, effective April 27, 2001 entered into an agreement with GE Capital
Corp. and a syndicate of lenders for a new secured revolving credit facility.
The former unsecured revolving credit facility was set to expire on November 30,
2001. The term of the new credit agreement is for a period of five years and
provides for a line of credit up to $225 million. The initial proceeds have been
used to refinance approximately $97 million of the outstanding indebtedness
under the Company's former bank line of credit, a 7.56% senior note of $52
million, a $25 million accounts receivable sales arrangement and a Canadian
Credit Facility of $5 million. The Company recorded an extraordinary loss of
approximately $2.8 million, net of taxes, in the second quarter of 2001, for a
prepayment penalty and write-off of unamortized fees for the retirement of the
above related debt. Availability under the new credit facility is based on a
formula of eligible accounts receivable, eligible inventory and eligible fixed
assets. Direct borrowings bear interest at the Prime Rate plus the applicable
margin (as defined) or the LIBOR Rate plus the applicable margin (as defined),
at the option of the Company. At December 31, 2001 and 2000, the interest rate
on the Company's revolving credit facilities was 4.30% and 9.75%, respectively.
Borrowings are collateralized by accounts receivable, inventory and fixed assets
of the Company and its subsidiaries. The terms of the new revolving credit
facility contain, among other provisions, requirements of maintaining defined
levels of tangible net worth and specific limits or restrictions on additional
indebtedness, capital expenditures, liens and acquisitions. The Company was in
compliance with the covenants at December 31, 2001.
In addition, a foreign subsidiary of the Company has a revolving credit
facility. The amount of short-term bank borrowings outstanding under that
facility was $4.1 million and $3.9 million at December 31, 2001 and 2000,
respectively. At December 31, 2001, the foreign subsidiary was not in compliance
with certain covenants, for which it received waivers and amendments. The
weighted average interest rates on these borrowings at December 31, 2001 and
2000 were 6.4% and 6.9%, respectively.
On July 26, 1999, the Company 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 Debentures are convertible into approximately 2,796,000 shares of
the Company's common stock. The Company may, at its 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, the Company 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. The Company
incurred fees in relation to the offering of approximately $3.4 million. Net
proceeds from the offering were used to pre-pay a senior note payable, including
prepayment penalties, repurchase a portion of the Company's common stock and pay
down short term bank borrowings.
Under the terms of the 7.56% senior note agreement, the Company was required to
repay the loan in seven equal annual installments beginning in 2000. This senior
note was paid off as part of the new revolving credit facility.
Under the terms of a Canadian (CDN) credit agreement, the Company was required
to repay the loan as follows: $2 million CDN in 2001 and a final payment of $6
million CDN in 2002. This credit agreement was paid off as part of the new
revolving credit facility.
December 31,
----------------------
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
6.75% convertible subordinated debentures $ 90,000 $ 90,000
Revolving credit facility 106,790 --
7.56% senior note -- 62,571
Canadian Credit Facility -- 5,335
Other 5,060 5,755
- --------------------------------------------------------------------------------
201,850 163,661
Less current portion 1,784 13,643
- --------------------------------------------------------------------------------
Total non-current portion of
long-term debt $200,066 $150,018
- --------------------------------------------------------------------------------
Maturities of long-term debt during the five years ending December 31, 2002
through 2006 are $1.8 million, $1.3 million, $1.1 million, $0.6 million and
$106.9 million, respectively.
F-9
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
8. INTEREST RATE SWAP AGREEMENTS
The Company does 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 July 2001, the Company entered into interest rate swap agreements to manage
its exposure to interest rate changes. The swaps effectively convert a portion
of the Company's variable rate debt under the revolving credit facility to a
fixed rate, without exchanging the notional principal amounts. At December 31,
2001, the Company had two outstanding interest rate swap agreements maturing in
January 2003 and 2004, with aggregate notional principal amounts of $75 million.
Under these agreements the Company receives a floating rate based on the LIBOR
interest rate, and pays a fixed rate of 4.92% on a notional amount of $45
million and 4.37% on a notional amount of $30 million. If, at any time, the
swaps are determined to be ineffective, in all 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 in the period. It is not expected that any gain or loss
will be reported in the statement of operations during the year ending December
31, 2002.
9. STOCKHOLDERS' EQUITY
The Company has authority to issue 500,000 shares of preferred stock, $20 par
value, and the Board of Directors is 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, the 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 the Company's 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, 2001.
On January 17, 1996, the 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 outstanding common share of the Company. 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 the Company's 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 the Company's 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 the Company's 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, the 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, the Board of Directors authorized multiple
repurchase programs under which the Company could repurchase shares of its
common stock. During such years, $26.7 million (in aggregate) of common stock
has been repurchased to meet present and future requirements of the Company's
stock option programs and to fund the Company's ESOP. As of December 31, 2001,
the Company has Board authorization to repurchase additional shares at a maximum
cost of $1.7 million.
10. STOCK OPTIONS
The Company has principally two fixed stock-based compensation plans. Under the
1994 Omnibus Stock Option Plan, as amended, the Company is 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, the
Company is 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, 2001, in aggregate 1,320,280 shares
of authorized but unissued common stock were reserved for issuance under the
Company's stock option plans.
As permitted under SFAS No.123, the Company continues to apply the provisions of
APB Opinion No. 25 for stock-based awards granted to employees. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value method of SFAS No.123, the Company's net
earnings (loss) per share would have changed to the pro forma amounts as
follows:
(Dollars in thousands except
per share data) 2001 2000 1999
- --------------------------------------------------------------------------------
Net earnings(loss) As reported $(2,485) $ 9,729 $7,625
Pro forma $(2,697) $ 8,708 $6,648
Basic earnings(loss) As reported $ (0.21) $ 0.82 $ 0.58
per share Pro forma $ (0.23) $ 0.73 $ 0.51
Diluted earnings As reported $ (0.21) $ 0.81 $ 0.58
(loss) per share Pro forma $ (0.23) $ 0.72 $ 0.51
- --------------------------------------------------------------------------------
F-10
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
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:
2001 2000 1999
- --------------------------------------------------------------------------------
Expected option life 4.0 years 4.3 years 4.3 years
Expected stock volatility 38.6% 39.1% 39.5%
Expected dividend yield 2.8% 3.8% 1.8%
Risk-free interest rate 4.2% 4.6% 6.6%
Fair value of option $ 3.71 $ 2.53 $ 7.97
A summary of the status of the Company's stock option plans follow:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding at
beginning of year 1,189 $16.60 808 $20.40 793 $ 19.58
Granted 10 13.05 498 10.73 136 23.73
Exercised (55) 9.29 -- -- (100) 17.83
Forfeited (133) 18.18 (117) 17.78 (21) 23.13
- --------------------------------------------------------------------------------
Outstanding at
end of year 1,011 $16.76 1,189 $16.60 808 $ 20.40
- --------------------------------------------------------------------------------
Options exercisable at
end of year 671 526 431
- --------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------
Weighted-Average
Shares Remaining
Range of Outstanding Contractual Life Weighted-Average
Exercise Prices at 12/31/01 (Years) Exercise Price
- --------------------------------------------------------------------------------
$ 6.56 $11.29 386 6.1 $ 9.92
$13.05 - $16.94 139 1.6 $ 16.05
$20.50 - $24.84 486 3.5 $ 22.40
- --------------------------------------------------------------------------------
STOCK OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
Range of Shares Exercisable Weighted-Average
Exercise Prices at 12/31/01 Exercise Price
- --------------------------------------------------------------------------------
$6.56 - $23.84 671 $19.17
- --------------------------------------------------------------------------------
11. RETIREMENT BENEFIT PLANS
The Company has a defined benefit pension plan covering certain former employees
of the Company's former Brake business.
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) 2001 2000
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 8,957 $ 9,271
Interest cost 629 658
Actuarial loss (gain) 93 (102)
Benefits paid (866) (870)
- --------------------------------------------------------------------------------
Benefit Obligation at End of Year $ 8,813 $ 8,957
- --------------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $12,063 $12,755
Actual return on plan assets (135) 178
Benefits paid (866) (870)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year 11,062 $ 12,063
- --------------------------------------------------------------------------------
Funded status 2,249 $ 3,106
Unrecognized net actuarial gain (1,386) (2,654)
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 863 $ 452
- --------------------------------------------------------------------------------
Weighted average assumptions are as follows:
December 31,
--------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Discount rates 7.25% 7.50% 7.50%
Expected long-term rate
of return on assets 8.00% 8.00% 8.00%
- --------------------------------------------------------------------------------
Components of net periodic (benefit) cost follow:
December 31,
-----------------------------------
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Service cost $ -- $ -- $ --
Interest cost 629 658 651
Return on assets (928) (988) (900)
Amortization of prior service cost -- -- --
Recognized actuarial (gain) loss (112) (127) (60)
- --------------------------------------------------------------------------------
Net periodic (benefit) cost $ (411) $ (457) $ (309)
- --------------------------------------------------------------------------------
In addition, the Company participates 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. The Company has not received
information from the plans' administrators to determine its share, if any, of
unfunded vested benefits.
The Company and certain of its 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
employer Plans and Other Plans
- --------------------------------------------------------------------------------
Years ended December 31,
2001 $299,000 $2,449,000
2000 344,000 2,319,000
1999 $348,000 $2,332,000
- --------------------------------------------------------------------------------
The Company has an Employee Stock Ownership Plan and Trust for employees who are
not covered by a collective bargaining agreement. 75,000 shares each were
granted to employees during 2001, 2000 and 1999, under the terms of the ESOP.
These shares were funded directly from treasury stock.
In fiscal 2000, the Company created an employee benefits trust to which it
contributed 750,000 shares of treasury stock. The Company is authorized to
instruct the trustees to distribute such shares toward the satisfaction of the
Company's 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 $0.7
million in 2001, $1.0 million in 2000 and $1.7 million in 1999.
F-11
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
In August 1994 the Company established an unfunded Supplemental Executive
Retirement Plan (SERP) for key employees of the Company. Under the plan, these
employees may elect to defer a portion of their compensation and, in addition,
the Company may at its discretion make contributions to the plan on behalf of
the employees. Such contributions were $37,000, $24,000 and $98,000 in 2001,
2000, and1999, respectively.
On October 1, 2001, the Company adopted a second unfunded SERP. The SERP is a
defined benefit plan pursuant to which the Company will pay supplemental pension
benefits to certain key employees upon retirement based upon the employees'
years of service and compensation. For the year ended December 31, 2001,
approximately $0.9 million of benefits were accrued and $0.1 million was charged
to expense. The projected benefit obligation and accumulated benefit obligation
were $1.3 million and $0.9 million, respectively, at December 31, 2001. The
costs and benefit obligations were determined using a discount rate and an
expected rate of return on assets of 7.25% at December 31, 2001.
12. POSTRETIREMENT MEDICAL BENEFITS
The Company provides certain medical and dental care benefits to eligible
retired employees. The Company's 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) 2001 2000
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 17,447 $ 18,369
Service cost 1,500 1,377
Interest cost 1,314 1,152
Actuarial (gain) loss 1,180 (2,586)
Benefits paid (957) (865)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 20,484 $ 17,447
- --------------------------------------------------------------------------------
Funded status $(20,484) $(17,447)
Unrecognized prior service cost 914 1,038
Unrecognized net actuarial gain (2,582) (3,996)
- --------------------------------------------------------------------------------
Accrued benefit cost $(22,152) $(20,405)
- --------------------------------------------------------------------------------
Components of net periodic benefit cost follow:
December 31,
----------------------------------
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Service cost $ 1,500 $ 1,377 $ 1,284
Interest cost 1,314 1,152 1,221
Amortization of prior service cost 124 124 124
Recognized actuarial gain (232) (275) (8)
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 2,706 $2,378 $ 2,621
- --------------------------------------------------------------------------------
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
2001 2000 1999
---------------------------
Discount Rate 7.25% 7.50% 7.50%
Current medical cost trend rate 9% 10% 7%
Current dental cost trend rate 5% 5.5% 6%
Ultimate medical cost trend rate 5% 5% 6%
Year trend rate declines to ultimate 2005 2005 2002
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 2001:
1-Percentage- 1-Percentage-
(In thousands) Point Increase Point Decrease
- --------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 269 $ (221)
Effect on post retirement
benefit obligation $1,539 $(1,300)
- --------------------------------------------------------------------------------
13. OTHER INCOME (EXPENSE), NET
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Interest and dividend income $ 1,336 $ 1,038 $ 1,637
Loss on sale of accounts
receivable (Note 3) (484) (1,567) (1,281)
Income (loss) from joint ventures 844 702 (4,118)
Gain on disposal of property,
plant and equipment 265 99 2,564
Other - net 382 225 (366)
- --------------------------------------------------------------------------------
Total other income (expense), net $ 2,343 $ 497 $(1,564)
- --------------------------------------------------------------------------------
In connection with the Company's Heat Battery joint venture in Canada, in the
fourth quarter of 1999, it was mutually agreed between the joint venture
participants, that due to lack of significant commercial success and recurring
losses, the joint venture would close. In connection with this decision, the
Company recorded an approximate $4.0 million charge relating to writing down the
Company's investment to net realizable value.
14. INCOME TAXES
The income tax provision (benefit) consists of the following:
2001 2000 1999
- --------------------------------------------------------------------------------
Current:
Domestic $ 2,099 $ 1,260 $ 4,376
Foreign 1,673 2,523 3,520
- --------------------------------------------------------------------------------
Total Current 3,772 3,783 7,896
- --------------------------------------------------------------------------------
Deferred:
Domestic (3,408) (1,103) (5,167)
Foreign (220) 206 615
- --------------------------------------------------------------------------------
Total Deferred (3,628) (897) (4,552)
- --------------------------------------------------------------------------------
Total income tax provision $ 144 $ 2,886 $ 3,344
- --------------------------------------------------------------------------------
The Company has not provided for federal income taxes on the undistributed
income of its foreign subsidiaries because of the availability of foreign tax
credits and/or the Company's intention to permanently reinvest such
undistributed income. Cumulative undistributed earnings of foreign subsidiaries
on which no United States income tax has been provided were $28.2 million at the
end of 2001, $27.5 million at the end of 2000, and $25.5 million at the end of
1999.
F-12
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Earnings before income taxes for foreign operations (including Puerto Rico)
amounted to approximately $7 million, $14 million, and $13 million in 2001,
2000, and 1999, respectively. Earnings of the Puerto Rico subsidiary are not
subject to United States income taxes and are partially exempt from Puerto Rican
income taxes under a tax exemption grant expiring on December 31, 2002. The
Company intends on renewing grant prior to the expiration date. The tax benefits
of the exemption, reduced by a minimum tollgate tax instituted in 1993, amounted
to $0.12 per share share in 2001(2000 - $0.23; 1999 - $0.14).
Reconciliations between the U.S. federal income tax rate and the Company's
effective income tax rate as a percentage of earnings from continuing operations
before income taxes are as follows:
2001 2000 1999
- --------------------------------------------------------------------------------
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 21.4 1.2 2.9
Non-deductible items, net 60.5 0.1 0.8
Benefits of income subject to taxes at
lower than the U.S. federal rate (85.3) (14.3) (11.0)
Other -- -- 0.1
- --------------------------------------------------------------------------------
Effective tax rate 31.6% 22.0% 27.8%
- --------------------------------------------------------------------------------
The following is a summary of the components of the net deferred tax assets and
liabilities recognized in the accompanying consolidated balance sheets:
December 31,
------------------------
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Deferred tax assets:
Inventories $ 6,044 $ 7,639
Allowance for customer returns 7,069 7,332
Postretirement benefits 8,751 8,060
Allowance for doubtful accounts 1,587 1,604
Accrued salaries and benefits 2,938 3,342
Net operating loss and tax credit
carryforwards 14,990 8,270
Other 6,551 7,188
-------- --------
47,930 43,435
-------- --------
Valuation allowance (14,171) (14,171)
-------- --------
Total $ 33,759 $ 29,264
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 6,702 $ 4,717
Promotional costs 1,036 915
Other 1,052 2,291
-------- --------
Total 8,790 7,923
- --------------------------------------------------------------------------------
Net deferred tax assets $ 24,969 $ 21,341
- --------------------------------------------------------------------------------
The Company believes 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 the Company is unable to generate sufficient taxable
income in the future through its operations, increases in the valuation
allowance may be required.
15. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of SFAS No. 131, the Company has two reportable operating
segments which are the major product areas of the automotive aftermarket in
which the Company competes. The Engine Management Division consists primarily of
ignition and emission parts, wires and cables, and fuel system parts. The
Temperature Control Division consists primarily of compressors, other air
conditioning parts and heater parts. 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:
For the year ended December 31, 2001
----------------------------------------------------
Engine Temperature Other
(In thousands) Management Control Adjustments Consolidated
- --------------------------------------------------------------------------------
Net Sales $295,948 $275,901 $ 36,224 $608,073
- --------------------------------------------------------------------------------
Depreciation and
amortization 9,649 6,462 2,798 18,909
- --------------------------------------------------------------------------------
Operating income 26,415 3,616 (14,488) 15,543
- --------------------------------------------------------------------------------
Investment in equity
affiliates 105 -- 2,044 2,149
- --------------------------------------------------------------------------------
Capital expenditures 4,724 6,781 2,235 13,740
- --------------------------------------------------------------------------------
Total Assets $233,564 $182,083 $ 93,782 $509,429
- --------------------------------------------------------------------------------
For the year ended December 31, 2000
--------------------------------------------------
Engine Temperature Other
(In thousands) Management Control Adjustments Consolidated
- --------------------------------------------------------------------------------
Net Sales $297,386 $264,704 $ 41,919 $604,009
- --------------------------------------------------------------------------------
Depreciation and
amortization 10,293 6,116 2,513 18,922
- --------------------------------------------------------------------------------
Operating income 37,964 11,537 (18,837) 30,664
- --------------------------------------------------------------------------------
Investment in equity
affiliates 105 -- 1,851 1,956
- --------------------------------------------------------------------------------
Capital expenditures 8,914 6,454 1,284 16,652
- --------------------------------------------------------------------------------
Total Assets $265,336 $224,410 $ 59,650 $549,396
- --------------------------------------------------------------------------------
For the year ended December 31, 1999
------------------------------------------------------
Engine Temperature Other
(In thousands) Management Control Adjustments Consolidated
- --------------------------------------------------------------------------------
Net Sales $291,761 $321,490 $ 41,031 $654,282
- --------------------------------------------------------------------------------
Depreciation and
amortization 8,535 5,949 2,746 17,230
- --------------------------------------------------------------------------------
Operating income 26,104 17,289 (13,849) 29,544
- --------------------------------------------------------------------------------
Investment in equity
affiliates 105 272 1,062 1,439
- --------------------------------------------------------------------------------
Capital expenditures 7,118 7,026 279 14,423
- --------------------------------------------------------------------------------
Total Assets $253,346 $212,026 $ 90,649 $556,021
- --------------------------------------------------------------------------------
Other Adjustments consist of items pertaining to the corporate headquarters
function, as well as Canadian and European business units that do not meet the
criteria of a reportable operating segment under SFAS No.131.
F-13
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Revenue
------------------------------
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
United States $532,922 $524,747 $578,549
Canada 27,632 26,553 27,331
Other Foreign 47,519 52,709 48,402
- --------------------------------------------------------------------------------
Total $608,073 $604,009 $654,282
- --------------------------------------------------------------------------------
Long Lived Assets
--------------------------------
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
United States $118,455 $122,825 $125,766
Canada 2,829 3,511 3,897
Other Foreign 18,402 18,885 18,534
- --------------------------------------------------------------------------------
Total $139,686 $145,221 $148,197
- --------------------------------------------------------------------------------
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 the Company's long-term debt is estimated based on quoted
market prices or current rates offered to the Company for debt of the same
remaining maturities.
INTEREST RATE SWAPS
The fair value of the Company's 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 the Company's financial instruments are as follows:
December 31, 2001 Carrying Fair
(In thousands) Amount Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 7,496 $ 7,496
Marketable securities 7,200 7,400
Long-term debt (201,850) (177,520)
Interest rate swaps $ (2,045) $ (2,045)
- --------------------------------------------------------------------------------
December 31, 2000 Carrying Fair
(In thousands) Amount Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 7,699 $ 7,699
Marketable securities 7,200 7,200
Long-term debt $(163,661) $(107,174)
- --------------------------------------------------------------------------------
17. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three-years ended December 31, 2001 was as follows:
Real
(In thousands) Total Estate Other
- --------------------------------------------------------------------------------
2001 $8,673 $6,508 $2,165
2000 9,797 7,217 2,580
1999 $8,176 $5,124 $3,052
- --------------------------------------------------------------------------------
At December 31, 2001, the Company is obligated to make minimum rental payments
(exclusive of real estate taxes and certain other charges) through 2011, under
operating leases for real estate, as follows :
(In thousands)
- --------------------------------------------------------------------------------
2002 $6,196 2005 3,695
2003 5,392 2006 3,532
2004 4,137 Thereafter 5,417
- --------------------------------------------------------------------------------
Total $28,369
The Company also has lease and sub-lease agreements in place for various
properties under its control. The Company expects to receive operating lease
payments from lessees during the five years ending December 31, 2002 through
2006 of $1.7 million, $1.0 million, $0.6 million, $0.6 million, and $0.6
million, respectively.
At December 31, 2001, the Company had outstanding letters of credit aggregating
approximately $0.5 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.
The Company has entered into Change in Control arrangements with two key
officers of the Company. 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 the Company currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including the Company. The claim
against the Company alleges $0.5 million (formerly $19.8 million) of
preferential payments in the 90 days prior to the related bankruptcy petition.
In addition, this former customer seeks $10.5 million from the Company 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. The Company has purchased insurance with respect to the two actions.
The Company believes that these matters will not have a material effect on the
Company's consolidated financial statements taken as a whole.
F-14
Standard Motor Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
The Company is involved in various other litigation and product liability
matters arising in the ordinary course of business. One of the product liability
matters involves a former Brake business of the Company. In 1986, the Company
acquired the business resulting in the assumption by the Company of certain
liabilities relating to any alleged exposure to asbestos-containing products
manufactured by the seller. In accordance with the related purchase agreement,
the Company agreed to assume the liabilities for all new claims filed after
fifteen years from the date of the purchase. The ultimate exposure to the
Company will depend upon the extent to which future claims are filed and the
amounts paid for indemnity and defense. At December 31, 2001, approximately 100
cases were outstanding whereby the Company is now responsible for any related
liabilities. Although the final outcome of this specific matter or any other
litigation or product liability matter cannot be determined, based on the
Company's understanding and evaluation of the relevant facts and circumstances,
it is management's opinion that the final outcome of these matters will not have
a material adverse effect on the Company's financial statements taken as a
whole.
18. SUBSEQUENT EVENTS (UNAUDITED)
On January 17, 2002 the Company purchased the Temperature Control business of
Hartle Industries for approximately $4.8 million. Assets acquired consist
primarily of property, plant and equipment, and inventory. The purchase was
financed with funds provided under the Company's line of credit. On March 20,
2002, the Company reached a definitive agreement to purchase the aftermarket
business of Sagem Inc., a subsidiary of Johnson Controls for approximately $11.5
million. Sagem Inc. is a basic manufacturer of fuel injectors, a product line
which prior to the acquisition, the Company has been purchasing. Assets to be
acquired consist primarily of property, plant and equipment, and inventory. The
purchase which is expected to close within sixty days will be partially financed
by the seller (approximately $7 million to be paid over a two year period), with
the remaining funds being provided under the Company's line of credit.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
Dec. 31, Sept. 30, June 30, Mar. 31,
Quarter Ended 2001 2001 2001 2001
- --------------------------------------------------------------------------------
Net Sales $101,947 $163,670 $186,911 $155,545
- --------------------------------------------------------------------------------
Gross Profit 25,788 50,193 48,912 44,965
- --------------------------------------------------------------------------------
Earnings (loss) before
extraordinary item (6,330) 3,748 2,275 619
- --------------------------------------------------------------------------------
Extraordinary item -
loss on early extinguishment
of debt, net of taxes -- -- (2,797) --
- --------------------------------------------------------------------------------
Net Earnings (loss) $ (6,330) $ 3,748 $ (522) $ 619
- --------------------------------------------------------------------------------
Net Earnings (loss)
before extraordinary item
per common share:
Basic $ (0.54) $ 0.32 $ 0.19 $ 0.05
Diluted $ (0.54) $ 0.32 $ 0.19 $ 0.05
- --------------------------------------------------------------------------------
Net Earnings (loss)
per common share:
Basic $ (0.54) $ 0.32 $ (0.05) $ 0.05
Diluted $ (0.54) $ 0.32 $ (0.05) $ 0.05
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
Dec. 31, Sept. 30, June 30, Mar. 31,
Quarter Ended 2000 2000 2000 2000
- --------------------------------------------------------------------------------
Net Sales $116,627 $166,065 $ 175,112 $ 146,205
- --------------------------------------------------------------------------------
Gross Profit 33,626 51,160 56,494 46,764
- --------------------------------------------------------------------------------
Earnings (loss) before
extraordinary item (2,049) 4,858 7,036 385
- --------------------------------------------------------------------------------
Extraordinary item -
loss on early extinguishment
of debt, net of taxes -- -- -- 501
- --------------------------------------------------------------------------------
Net Earnings (loss) $ (2,049) $ 4,858 $ 7,036 $ (116)
- --------------------------------------------------------------------------------
Net Earnings (loss)
before extraordinary item
per common share:
Basic $ (0.18) $ 0.41 $ 0.59 $ 0.03
Diluted $ (0.18) $ 0.40 $ 0.54 $ 0.03
- --------------------------------------------------------------------------------
Net Earnings (loss)
per common share:
Basic $ (0.18) $ 0.41 $ 0.59 $ (0.01)
Diluted $ (0.18) $ 0.40 $ 0.54 $ (0.01)
- --------------------------------------------------------------------------------
F-15
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information relating to Directors and Executive Officers is set
forth in the 2002 Annual Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Management Remuneration and Transactions
is set forth in the 2002 Annual Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information relating to Security Ownership of Certain Beneficial
Owners and Management is set forth in the 2002 Annual Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related
Transactions is set forth under "Certain Transactions" in the
2002 Annual Proxy Statement.
-24-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
14(A). DOCUMENT LIST
(1) Among the responses to this Item 14(a) are the following
financial statements.
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - December 31, 2001
and 2000
Consolidated Statements of Operations
- Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders'
Equity
- Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows-
- Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) The following financial schedule for the years 2001,
2000 and 1999 is submitted herewith:
SCHEDULE
Independent Auditors' Report on 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" beginning on page 26.
14(B). REPORTS ON FORM 8-K
No reports on Form 8-K were required to be filed for the
three-months ended December 31, 2001.
-25-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE
NUMBER NUMBER
- ------ ------
2.1 Asset Exchange Agreement dated as of March 28, 1998 among SMP *
Motor Products, LTD., Standard Motor Products, Inc., Cooper Industries
(Canada) Inc., Moog Automotive Company and Moog Automotive
Products, Inc., filed as an Exhibit of Company's report on
Form 8-K dated March 28, 1998.
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 Form of Subordinated Debenture Indenture (including form of convertible *
debenture) (filed as Exhibit 4.1 to Amendment No. 2 to the
Registration Statement on Form S-3 (333-79177) filed on
July 20, 1999.)
4.2 Registration of Preferred Share Purchase Rights filed on Form 8-A on *
February 29, 1996.
10.1 Note Purchase Agreement dated October 15, 1989 between the *
Company and the American United Life Insurance Company, the
General American Life Insurance Company, the Jefferson-Pilot
Life Insurance Company, the Ohio National Life Insurance
Company, the Crown Insurance Company, the Great-West Life
Assurance Company, the Guarantee Mutual Life Company, the
Security Mutual Life Insurance Company of Lincoln, Nebraska,
and the Woodmen Accident and Life Company filed as an
Exhibit of Company's Annual Report on Form 10-K for the year
ended December 31, 1989.
-26-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE
NUMBER NUMBER
- ------ ------
10.2 Note Agreement of November 15, 1992 between the Company and *
Kemper Investors Life Insurance Company, Federal Kemper Life
Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life
Association, American Motorists Insurance Company, American
Manufacturers Mutual Insurance Company, Allstate Life Insurance
Company, Teachers Insurance & Annuity Association of America, and
Phoenix Home Life Mutual Insurance Company filed as an Exhibit of
Company's Annual Report on Form 10-K for the year ended December 31,
1992.
10.3 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.
10.4 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.
10.5 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).
10.6 Note Purchase Agreement dated December 1, 1995 between *
the Company and Metropolitan Life Insurance Company, the
Travelers Insurance Company Connecticut Life Insurance Company,
CIGNA Property and Casualty Insurance Company, Life
Insurance Company of North America and American United Life
Insurance Company filed as an Exhibit of Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
10.7 Credit Agreement of May 1, 1996 between the Company and *
Canadian Imperial Bank of Commerce ("CIBC") filed as an
Exhibit of Company's annual report on Form 10-K for the year
ended December 31, 1996.
10.8 Letter Agreement dated September 25, 1996 amending the *
Note Agreement between the Company and Canadian Imperial
Bank of Commerce ("CIBC") filed as an Exhibit of Company's
annual report on Form 10-K for the year ended December 31, 1996.
-27-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE
NUMBER NUMBER
10.9 Letter Agreement of September 30, 1996 amending the *
Note Agreement between the Company and Mutual Life Insurance
Company, Allstate Life Insurance Company, Teachers Insurance
and Annuity Association of America and Phoenix Home Life
Mutual Insurance Company dated November 15, 1992 filed as an
Exhibit of Company's annual report on Form 10-K for the year
ended December 31, 1996.
10.10 Letter Agreement of November 22, 1996 amending the *
Note Agreement between the Company and Mutual Life
Insurance Company, Allstate Life Insurance Company,
Teachers Insurance and Annuity Association of America, and
Phoenix Home Life Mutual Insurance Company with amendment
dated September 30, 1996, dated November 15, 1992, filed as an Exhibit
of Company's annual report on Form 10-K for the year ended
December 31, 1996.
10.11 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.
10.12 Letter Agreement of March 27, 1998 amending the Note Agreement *
between the Company and the American United Life Insurance Company, the
Great American Life Insurance Company, the Jefferson-Pilot Life
Insurance Company, the Ohio National Life Insurance Company, the Crown
Insurance Company, the Great-West Life Insurance Company, the Security
Mutual Life Insurance Company, Woodmen Accident and Life Insurance
Company and Nomura Holding America, Inc. dated October 15, 1989, filed
as an Exhibit of Company's report on Form 8-K dated March 28, 1998.
10.13 Letter Agreement of March 27, 1998 amending the Note Agreement *
between the Company and Kemper Investors Life Insurance Company,
Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty
Company, Fidelity Life Association, American Motorists Insurance
Company, American Manufacturers Mutual Insurance Company, Allstate Life
Insurance Company, Teachers Insurance & Annuity Association of America,
and Phoenix Home Life Mutual Insurance Company dated November 15, 1992,
filed as an Exhibit of Company's report on Form 8-K dated March 28,
1998.
-28-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE
NUMBER NUMBER
10.14 Letter Agreement of March 27, 1998 amending the Note Agreement *
between the Company and Metropolitan Life Insurance Company, the
Travelers Insurance Company, Connecticut Life Insurance Company, CIGNA
Property and Casualty Insurance Company, Life Insurance Company of
North America and American United Life Insurance Company dated December
1, 1995, filed as an Exhibit of Company's report on Form 8-K dated
March 28, 1998.
10.15 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.
10.16 Credit Agreement dated November 30, 1998 among Standard Motor *
Products, Inc., Lenders party thereto, The Chase Manhattan Bank and
Canadian Imperial Bank of Commerce.
10.17 Form of First Amendment, dated as of December 8, 1998 *
to the Credit Agreement, dated as of November 30, 1998,
among Standard Motor Products, Inc., Lenders party thereto,
The Chase Manhattan Bank and Canadian Imperial Bank of
Commerce (filed as Exhibit 10.14 to Amendment No. 2
to the Registration Statement on Form S-3 (333-79177)
filed on July 20, 1999.)
10.18 Form of Second Amendment, dated as of July 16, 1999 to *
the Credit Agreement, dated as of November 30, 1998,
among Standard Motor Products, Inc., Lenders party thereto,
The Chase Manhattan Bank and Canadian Imperial Bank of
Commerce (filed as Exhibit 10.15 to Amendment No. 2
to the Registration Statement on Form S-3 (333-79177)
filed on July 20, 1999.)
10.19 Credit Agreement of March 31, 1998, as amended & *
restated as at November 30, 1998, between the Registrant
and Canadian Imperial Bank of Commerce ("CIBC") filed as
Exhibit 10.16 on Form 10-Q for the quarter ended June 30, 1999.
10.20 Form of Third Amendment dated October 18, 1999 to the Credit *
Agreement dated November 30, 1998 among Standard Motor
Products, Inc., Lenders party thereto, The Chase Manhattan Bank
and Canadian Imperial Bank of Commerce.
-29-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE
NUMBER NUMBER
10.21 Form of Fourth Amendment dated March 3, 2000 to the Credit *
Agreement dated November 30, 1998 among Standard Motor
Products, Inc., Lenders party thereto, The Chase Manhattan Bank
and Canadian Imperial Bank of Commerce.
10.22 Form of Fifth Amendment dated August 11, 2000 to the Credit *
Agreement dated November 30, 1998 among Standard Motor Products,
Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian
Imperial Bank of Commerce.
10.23 Form of Sixth Amendment dated March 14, 2001 to the Credit *
Agreement dated November 30, 1998 among Standard Motor Products,
Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian
Imperial Bank of Commerce.
10.24 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.
10.25 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.
10.26 Supplemental Compensation Plan effective October 1, 2001, filed with 10.26
this Report.
10.27 Change of Control Agreement dated December 12, 2001 between Standard
Motor Products, Inc. and John Gethin, filed with Report. 10.27
10.28 Change of Control Agreement dated December 12, 2001 between 10.28
Standard Motor Products, Inc. and James Burke, filed with Report.
21. List of Subsidiaries of Standard Motor Products, Inc. 34
23 Consent of Independent Auditors KPMG LLP 35
* Incorporated by reference.
-30-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
(COMPANY)
LAWRENCE I. SILLS
-------------------------------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and
Director
JAMES J. BURKE
-----------------------------
James J. Burke
Vice President, Finance; Chief Financial
Officer
New York, New York
March 29, 2002
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 Company and in
the Capacities and on the dates indicated:
March 29, 2002 LAWRENCE I. SILLS
------------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
March 29, 2002 ARTHUR D. DAVIS
---------------
Arthur D. Davis, Vice Chairman and Director
March 29, 2002 MARILYN F. CRAGIN
-------------------------
Marilyn F. Cragin, Director
March 29, 2002 SUSAN F. DAVIS
--------------
Susan F. Davis, Director
March 29, 2002 ARTHUR S. SILLS
---------------
Arthur S. Sills, Director
March 29, 2002 PETER J. SILLS
--------------
Peter J. Sills, Director
-31-
The Board of Directors and Stockholders
Standard Motor Products, Inc.:
Under date of February 22, 2002, we reported on the consolidated balance sheets
of Standard Motor Products, Inc. and subsidiaries as of December 31, 2001, and
2000, 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, 2001, as contained in the annual report on Form 10-K
for the year 2001. 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, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
New York, New York
February 22, 2002
-32-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2001, 2000 and 1999
ADDITIONS
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ------- -------- -------- ---------- -----------
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 -- -- 153,000 1,445,000
---------------- --------------- -------------- -------------- ---------------
$ 4,577,000 $ 598,000 $ -- $ 813,000 $ 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
================ =============== ============== ============== ===============
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful accounts $ 2,619,000 $ 699,000 $ -- $ 339,000 $ 2,979,000
Allowance for discounts 1,992,000 -- 394,000 1,598,000
---------------- --------------- -------------- -------------- ---------------
$ 4,611,000 $ 699,000 $ -- $ 733,000 $ 4,577,000
================ =============== ============== ============== ===============
Allowance for sales returns $ 22,698,000 $ 100,403,000 $ -- $ 105,408,000 $ 17,693,000
================ =============== ============== ============== ===============
Allowance for inventory valuation $ 13,766,000 $ 3,165,000 $ -- $ 4,001,000 $ 12,930,000
================ =============== ============== ============== ===============
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts $ 2,664,000 $ 2,387,000 $ 611,000 $ 3,043,000 $ 2,619,000
Allowance for discounts 1,861,000 -- 131,000 -- 1,992,000
---------------- --------------- -------------- -------------- ---------------
$ 4,525,000 $ 2,387,000 $ 742,000 $ 3,043,000 $ 4,611,000
================ =============== ============== ============== ===============
Allowance for sales returns $ 16,296,000 $ 115,749,000 $ -- $ 109,347,000 $ 22,698,000
================ =============== ============== ============== ===============
Allowance for inventory valuation $ 18,221,000 $ 1,911,000 $ 599,000 $ 6,965,000 $ 13,766,000
================ =============== ============== ============== ===============
-33-