Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 1-4743
STANDARD MOTOR PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(718) 392-0200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
As of the close of business on April 30, 2003 there were 12,558,009 outstanding
shares of the Registrant's Common Stock, par value $2.00 per share.
================================================================================
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements Operations and Retained Earnings
(Unaudited) for the Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 25
Signature 25
Certifications 26
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for shares and per share data)
March 31, December 31,
2003 2002
------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 7,254 $ 9,690
Marketable securities 7,200 7,200
Accounts receivable, net of
allowance for doubtful accounts and
discounts of $5,726 (2002 - $4,882) (Note 7) 140,636 117,644
Inventories (Notes 5 and 7) 179,572 174,785
Deferred income taxes 12,122 12,213
Prepaid expenses and other current assets 7,275 6,828
--------- ---------
Total current assets 354,059 328,360
--------- ---------
Property, plant and equipment, net of
accumulated depreciation (Notes 6 and 7) 101,183 103,822
Goodwill, net (Note 3) 16,683 16,683
Other assets 42,420 41,893
--------- ---------
Total assets $ 514,345 $ 490,758
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,703 $ 3,369
Current portion of long-term debt (Note 7) 3,755 4,108
Accounts payable 41,233 35,744
Sundry payables and accrued expenses 30,769 39,723
Accrued customer returns 13,831 16,341
Payroll and commissions 6,860 12,143
--------- ---------
Total current liabilities 101,151 111,428
--------- ---------
Long-term debt (Note 7) 202,601 169,440
Postretirement medical benefits
and other accrued liabilities 31,437 30,414
Accrued asbestos liabilities 25,577 25,595
--------- ---------
Total liabilities 360,766 336,877
--------- ---------
Commitments and contingencies (Notes 7,8,10,12 and 14)
Stockholders' equity (Notes 7,8,9,10 and 12):
Common stock - par value $2.00 per share:
Authorized - 30,000,000 shares, issued and
outstanding 12,033,009 and 11,957,009 shares
in 2003 and 2002, respectively) 26,649 26,649
Capital in excess of par value 1,565 1,764
Retained earnings 146,655 148,686
Accumulated other comprehensive loss (1,800) (2,581)
Treasury stock - at cost (1,291,467 and 1,367,467
shares in 2003 and 2002, respectively) (19,490) (20,637)
--------- ---------
Total stockholders' equity 153,579 153,881
--------- ---------
Total liabilities and stockholders' equity $ 514,345 $ 490,758
========= =========
See accompanying notes to consolidated financial statements.
-3-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands, except for shares and per share data)
Three Months Ended
March 31,
2003 2002
------------ -------------
(Unaudited)
Net sales $ 135,725 $ 126,321
Cost of sales 101,185 95,151
------------ ------------
Gross profit 34,540 31,170
Selling, general and administrative expenses 32,212 31,063
------------ ------------
Operating income 2,328 107
Other income (expense) - net (274) 668
Interest expense 3,018 3,462
------------ ------------
Loss from continuing operations before taxes (964) (2,687)
Income tax benefit (357) (766)
------------ ------------
Loss from continuing operations (607) (1,921)
Loss from discontinued operation, net of tax (348) (319)
------------ ------------
Loss before cumulative effect of accounting change (955) (2,240)
Cumulative effect of accounting change, net of tax (Note 3) -- (18,350)
------------ ------------
Net loss (955) (20,590)
Retained earnings at beginning of period 148,686 183,532
------------ ------------
147,731 162,942
Less: cash dividends for period 1,076 1,064
------------ ------------
Retained earnings at end of period $ 146,655 $ 161,878
============ ============
Per share data:
Net loss per common share - basic:
Loss per share from continuing operations $ (0.05) $ (0.16)
Discontinued operation (0.03) (0.03)
Cumulative effect of accounting change -- (1.55)
------------ ------------
Net loss per common share - basic $ (0.08) $ (1.74)
============ ============
Net loss per common share - diluted:
Loss per share from continuing operations $ (0.05) $ (0.16)
Discontinued operation (0.03) (0.03)
Cumulative effect of accounting change -- (1.55)
------------ ------------
Net loss per common share - diluted $ (0.08) $ (1.74)
============ ============
Average number of common shares 11,972,853 11,827,636
============ ============
Average number of common and dilutive shares 11,972,853 11,827,636
============ ============
See accompanying notes to consolidated financial statements.
-4-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
March 31,
--------------------
2003 2002
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net loss $ (955) $(20,590)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 4,026 3,898
Gain on sale of property, plant & equipment -- (140)
Equity (income) loss from joint ventures 72 (113)
Employee stock ownership plan allocation 251 163
Cumulative effect of accounting change, net of tax -- 18,350
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable, net (22,992) (29,615)
Increase in inventories (4,787) (6,100)
Decrease (Increase) in prepaid expenses and other current assets 331 (1,335)
(Increase) Decrease in other assets (599) 5,748
Increase in accounts payable 5,489 17,675
Decrease in sundry payables and accrued expenses (8,954) (1,978)
(Decrease) Increase in other liabilities (6,148) 433
-------- --------
Net cash used in operating activities (34,266) (13,604)
-------- --------
Cash flows from investing activities:
Proceeds from the sale of property, plant & equipment 58 513
Capital expenditures (1,715) (2,508)
Payments for acquisitions, net of cash acquired -- (4,831)
-------- --------
Net cash used in investing activities (1,657) (6,826)
-------- --------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 34,647 17,215
Principal payments and retirement of long-term debt (505) (288)
Proceeds from exercise of employee stock options 10 74
Dividends paid (1,076) (1,064)
-------- --------
Net cash provided by financing activities 33,076 15,937
-------- --------
Effect of exchange rate changes on cash 411 (483)
Net decrease in cash and cash equivalents (2,436) (4,976)
Cash and cash equivalents at beginning of the period 9,690 7,496
-------- --------
Cash and cash equivalents at end of the period $ 7,254 $ 2,520
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,495 $ 4,971
======== ========
Income taxes $ 1,055 $ 121
======== ========
See accompanying notes to consolidated financial statements.
-5-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Standard Motor Products, Inc. (referred to hereinafter in these Notes to
Consolidated Financial Statements as the "Company," "we," "us," or "our") is
engaged in the manufacture and distribution of replacement parts for motor
vehicles in the automotive aftermarket industry.
The accompanying unaudited financial information should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2002.
The unaudited consolidated financial statements include the accounts of the
Company and all domestic and international companies 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 inter-company
items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the entire year.
Where appropriate, certain amounts in 2002 have been reclassified to conform
with the 2003 presentation.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 143, Accounting for Asset Retirement Obligations ("Statement No. 143"),
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Statement No. 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset. Statement No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, we will recognize a gain or
loss on settlement. Effective January 1, 2003, the Company adopted Statement No.
143, which did not have a material effect on our consolidated financial
statements.
RESCISSION OF FASB STATEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement
No. 145 eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board ("APB") No. 30, Reporting Results of Operations
("APB No. 30"). Statement No. 145 also requires sales-leaseback accounting for
lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections to
existing pronouncements. Effective January
-6-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1, 2003, the Company adopted Statement No. 145, which did not have a material
effect on our consolidated financial statements, however, Statement No. 145 will
require prior periods to be reclassified for any loss on extinguishment of debt
not meeting the criteria of APB No. 30.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("Statement No. 146"). Statement No. 146, which
is effective prospectively for exit or disposal activities initiated after
December 31, 2002, applies to costs associated with an exit activity, including
restructurings, or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Statement No. 146
requires that exit or disposal costs are recorded as an operating expense when
the liability is incurred and can be measured at fair value. Commitment to an
exit plan or a plan of disposal by itself will not meet the requirement for
recognizing a liability and the related expense under Statement No. 146. The
adoption of Statement No. 146 did not have a material effect on our consolidated
financial statements.
ACCOUNTING FOR AND DISCLOSURES OF GUARANTEES
In November 2002, the FASB issued interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("Interpretation No. 45"). Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. Interpretation No.
45 also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair market value of the obligations
it assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 did not have a material effect on our consolidated financial statements. See
Note 14 of Notes to Consolidated Financial Statements for discussion of product
warranty claims.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123
("Statement No. 148"). Statement No. 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, Statement No. 148 amends the
disclosure requirements of Statement No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002.
Effective January 1, 2003, the Company adopted Statement No. 148 and have
provided the disclosures required under Statement No. 148 in Note 10 of Notes to
Consolidated Financial Statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("Interpretation No.
46"). Interpretation No. 46 addresses the consolidation by business enterprises
of variable interest entities as defined in Interpretation No. 46.
Interpretation No. 46 applies immediately to variable interests in variable
interest entities obtained after January 31, 2003. For public enterprises with a
variable interest in a variable interest entity created before February 1, 2003,
Interpretation No 46 applies to those enterprises no later than the beginning of
the first interim or annual reporting period beginning after June 15, 2003.
Interpretation No. 46 requires certain disclosures in financial statements
issued after January 31, 2003. We currently have no contractual relationship or
other
-7-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
business relationship with a variable interest entity and therefore the adoption
of Interpretation No. 46 did not have a material effect on our consolidated
financial statements. However, if we enter into any arrangement with a variable
interest entity in the future, we will evaluate the impact of Interpretation No.
46 on our consolidated financial statements and related disclosures.
NOTE 3. GOODWILL
Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is no longer
amortized, but instead, is subject to an annual review for potential impairment.
Using the discounted cash flows method, based on the Company's weighted average
cost of capital and market multiples, the Company reviewed the fair values of
each of its reporting units. The decline in economic and market conditions,
higher integration costs than anticipated and the general softness in the
automotive aftermarket caused a decrease in the fair values of certain of the
Company's reporting units. As a result, the Company recorded an impairment loss
on goodwill as a cumulative effect of accounting change of $18.3 million, net of
tax, or $1.55 per diluted share during the first quarter of 2002. The impairment
loss relates to goodwill pertaining to certain of the Company's reporting units
within its European Operations for segment reporting and within its Temperature
Control Segment and recorded a charge of $10.9 million and $7.4 million,
respectively.
NOTE 4. ACQUISITION
On February 7, 2003, we signed an agreement to purchase Dana Corporation's
Engine Management Group ("Dana's EMG Business") for a purchase price equal to
the closing net book value of the business, subject to a maximum purchase price
of $125 million. Dana's EMG Business is a leading manufacturer of aftermarket
parts in the automotive industry focused exclusively on engine management. We
intend to finance the acquisition and the payment of related fees and expenses
and restructuring and integration costs by (a) drawing on our revolving credit
facility, (b) issuing shares of our common stock and (c) obtaining seller
financing.
The acquisition purchase price is subject to a post-closing adjustment based
upon the book value of the acquired assets of Dana's EMG Business less the book
value of the assumed liabilities of Dana's EMG Business as of the close of
business on the closing date.
The acquisition is subject to our obtaining financing for the acquisition and
other customary closing conditions. We expect to close the acquisition during
the second quarter of 2003.
NOTE 5. INVENTORIES
March 31, December 31,
2002 2002
(unaudited)
---------------------------
(in thousands)
Finished Goods $ 142,111 $ 141,487
Work in Process 2,598 2,417
Raw Materials 34,863 30,881
---------- ----------
Total inventories $ 179,572 $ 174,785
========== ==========
-8-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
March 31, December 31,
2003 2002
(unaudited)
----------------------
(in thousands)
Land, buildings and improvements $ 66,435 $ 66,200
Machinery and equipment 121,012 120,655
Tools, dies and auxiliary equipment 20,114 19,962
Furniture and fixtures 25,656 25,831
Computer software 12,165 12,120
Leasehold improvements 7,152 7,164
Construction in progress 4,753 4,169
-------- --------
257,287 256,101
Less: accumulated depreciation and amortization 156,104 152,279
-------- --------
Total property, plant and equipment - net $101,183 $103,822
======== ========
NOTE 7. CREDIT FACILITIES AND LONG-TERM DEBT
March 31, December 31,
2003 2002
(unaudited)
----------------------------
Long Term Debt Consists of: (in thousands)
6.75% convertible subordinated debentures $ 90,000 $ 90,000
Revolving credit facility 109,562 76,249
Other 6,794 7,299
----------- -----------
206,356 173,548
Less: current portion 3,755 4,108
----------- -----------
Total non-current portion of
long-term debt $ 202,601 $ 169,440
=========== ===========
Effective April 27, 2001, we entered into an agreement with General Electric
Capital Corporation, as agent, and a syndicate of lenders for a secured
revolving credit facility. The term of the credit agreement was for a period of
five years and provided for a line of credit up to $225 million. We 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 our former debt.
On February 7, 2003, we amended our revolving credit facility to provide for an
additional $80 million commitment, subject to the terms and conditions therein,
which will become effective upon the closing of our acquisition of Dana's EMG
Business. This additional commitment increases the total amount available for
borrowing under our revolving credit facility to $305 million. In addition, in
order to facilitate the aggregate financing of the acquisition, we intend to
issue approximately $59 million of common stock in a public offering, which will
occur in connection with the closing of the acquisition. After applying all of
the net proceeds from the public offering of our common stock to repay a portion
of our outstanding indebtedness under our revolving credit facility, we intend
to borrow the entire cash portion of the purchase price of Dana's EMG Business
from our revolving credit facility upon the closing of the acquisition.
Availability under our revolving credit facility is based on a formula of
eligible accounts receivable, eligible inventory and eligible fixed assets, and
includes the purchased assets of Dana's EMG Business. We expect such
availability under the revolving credit facility, following the initial draw
down at the acquisition closing, to be sufficient to meet our ongoing operating
and integration costs.
-9-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Direct borrowings under our revolving credit facility bear interest at the prime
rate plus the applicable margin (as defined) or the LIBOR rate plus the
applicable margin (as defined), at our option. Borrowings are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of our domestic and Canadian subsidiaries. Our credit
facility prior to the acquisition provides for certain financial covenants
limiting our capital expenditures and requiring us to maintain a certain
tangible net worth at the end of each fiscal quarter. Following our acquisition
of Dana's EMG Business, the terms of our revolving credit facility provide for,
among other provisions, new financial covenants requiring us, on a consolidated
basis, (1) to maintain specified levels of EBITDA at the end of each fiscal
quarter through June 30, 2004, (2) commencing September 30, 2004 to
maintain specified levels of fixed charge coverage at the end of each fiscal
quarter (rolling twelve months) through 2007, and (3) to limit capital
expenditure levels for each fiscal year through 2007.
On July 26, 1999, 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 convertible debentures are convertible into 2,796,000 shares of
the Company's common stock.
NOTE 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
our exposure to interest rate changes. The swaps effectively convert a portion
of our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional principal amounts. At December 31, 2002, we had
two outstanding interest rate swap agreements (in an aggregate notional
principal amount of $75 million), one of which matured in January 2003 and one
of which is scheduled to mature in January 2004. Under these agreements, we
receive a floating rate based on the LIBOR interest rate, and pay a fixed rate
of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of
$30 million (matured in January 2003). If, at any time, the swaps are determined
to be ineffective, in whole or in part, due to changes in the interest rate swap
agreements, the fair value of the portion of the interest rate swap determined
to be ineffective will be recognized as gain or loss in the statement of
operations for the applicable period.
NOTE 9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), net of income tax expense is as follows:
Three Months Ended
March 31,
------------------------
2003 2002
---- ----
(in thousands)
Net loss as reported $ (955) $(20,590)
Foreign currency translation adjustments 457 (207)
Change in fair value of interest
rate swap agreements 324 986
--------- ----------
Total comprehensive loss, net of taxes $ (174) $(19,811)
========= ==========
-10-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10. STOCK BASED COMPENSATION PLAN
Under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123"), the Company accounts for
stock-based compensation using the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock options granted during the three months ended March 31,
2003 were exercisable at prices equal to the fair market value of the Company's
common stock on the dates the options were granted; therefore, no compensation
cost has been recognized for the stock options granted. There were no stock
options granted during the first quarter of 2002.
If the Company accounted for stock-based compensation using the fair value
method of Statement No. 123, as amended by Statement No. 148, the effect on net
income (loss) and basic and diluted earnings (loss) per share would have been as
follows:
Three Months Ended
March 31,
----------------------------
2003 2002
---- ----
(in thousands, except
per share amounts)
Net loss, as reported $ (955) $(20,590)
Less: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects (34) (59)
--------- ----------
Pro forma net loss $ (989) $(20,649)
========= ==========
Loss per share:
Basic and diluted - as reported $ (0.08) $ (1.74)
========= ==========
Basic and diluted - pro forma $ (0.08) $ (1.75)
========= ==========
At March 31, 2003, in aggregate 1,265,441 shares of authorized but unissued
common stock were reserved for issuance under the Company's stock option plans.
NOTE 11. EARNINGS (LOSS) PER SHARE
Following are reconciliations of the earnings (loss) available to common
stockholders and the shares used in calculating basic and dilutive net earnings
(loss) per common share:
Three Months Ended
March 31,
(Unaudited)
-----------------------------------
2003 2002
---- ----
(in thousands, except share amounts)
Loss from continuing operations $(607) $ (1,921)
Loss from discontinued operation (348) (319)
Cumulative effect of accounting change - (18,350)
------------ ------------
Net loss available to common stockholders $(955) $ (20,590)
============ ============
Weighted average common shares outstanding - basic 11,972,853 11,827,636
Dilutive effect of stock options - -
------------ ------------
Weighted average common shares outstanding - diluted 11,972,853 11,827,636
============ ============
-11-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The average shares listed below were not included in the computation of diluted
earnings (loss) per share because to do so would have been anti-dilutive for the
periods presented.
Three Months Ended
March 31,
-------------- ----------------
2003 2002
---- ----
Stock options 1,001,908 720,752
Convertible debentures 2,796,120 2,796,120
============== =============
NOTE 12. EMPLOYEE BENEFITS
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. During March 2003, the Company
committed 75,000 shares to be released leaving 525,000 shares remaining in the
trust.
NOTE 13. INDUSTRY SEGMENTS
The Company's three reportable operating segments are Engine Management,
Temperature Control and Europe.
Three Months Ended March 31,
-------------------------------------------------
2003 2002
-------------------------------------------------
OPERATING OPERATING
INCOME INCOME
NET SALES (LOSS) NET SALES (LOSS)
--------- -------- --------- ------
(in thousands)
Engine Management $ 78,806 $ 9,652 $ 67,979 $ 7,140
Temperature Control 45,762 (2,193) 49,325 (2,148)
Europe 10,540 (486) 8,102 217
All Other 617 (4,645) 915 (5,102)
-------- -------- -------- --------
Consolidated $135,725 $ 2,328 $126,321 $ 107
======== ======== ======== ========
All other consists of items pertaining to Canadian operations and the corporate
headquarters function, which do not meet the criteria of a reportable operating
segment.
The carrying value of goodwill for the Company's segments as of March 31, 2003
were as follows:
(in thousands)
Engine Management $ 10,490
Temperature Control 4,822
Europe 1,371
-------------------
Goodwill, net $ 16,683
===================
-12-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14. COMMITMENTS AND CONTINGENCIES
On January 28, 2000, a former significant customer of ours, which is currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including us. The claim against us
alleged $0.5 million of preferential payments in the 90 days prior to the
related Chapter 11 bankruptcy petition. The claim pertaining to the preferential
payments was settled for an immaterial amount during the second quarter of 2002.
In addition, this former customer seeks $9.4 million from us for a variety of
claims including antitrust, breach of contract, breach of warranty and
conversion. These latter claims arise out of allegations that this customer was
entitled to various discounts, rebates and credits after it filed for
bankruptcy. We have purchased insurance with respect to the actions. On August
22, 2002, the court dismissed the antitrust claims. We believe that these
remaining matters will not have a material adverse effect on our business,
financial condition or results of operations.
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure to us will depend upon the number of claims filed against us
on or after September 1, 2001 and the amounts paid for indemnity and defense
thereof. At December 31, 2001, approximately 100 cases were outstanding for
which we were responsible for any related liabilities. At December 31, 2002, the
number of cases outstanding for which we were responsible for related
liabilities increased to approximately 2,500, which include approximately 1,600
cases filed in December 2002 in Mississippi. We believe that these Mississippi
cases filed against us in December 2002 were due in large part to potential
plaintiffs accelerating the filing of their claims prior to the effective date
of Mississippi's tort reform statue in January 2003, which statute eliminated
the ability of plaintiffs to file consolidated cases. At March 31, 2003,
approximately 2,700 cases were outstanding for which we were responsible for any
related liabilities. To date, the amounts paid for settled claims have been
immaterial. We do not have insurance coverage for the defense and indemnity
costs associated with these claims.
In evaluating our potential asbestos-related liability, we have considered
various factors including, among other things, an actuarial study performed by a
leading actuarial firm with expertise in assessing asbestos-related liabilities,
our settlement amounts and whether there are any co-defendants, the jurisdiction
in which lawsuits are filed, and the status and results of settlement
discussions. Actuarial consultants with experience in assessing asbestos-related
liabilities completed a study in September 2002 to estimate our potential claim
liability. The methodology used to project asbestos-related liabilities and
costs in the study considered: (1) historical data available from publicly
available studies; (2) an analysis of our recent claims history to estimate
likely filing rates for the remainder of 2002 through 2052; (3) an analysis of
our currently pending claims; and (4) an analysis of our settlements to date in
order to develop average settlement values. Based upon all the information
considered by the actuarial firm, the actuarial study estimated an undiscounted
liability for settlement payments, excluding legal costs, ranging from $27.3
million to $58 million for the period through 2052.
Accordingly, based on the information contained in the actuarial study and all
other available information considered by us, we recorded an after tax charge of
$16.9 million as a loss from discontinued operation during the third quarter of
2002 to reflect such liability, excluding legal costs. We concluded that no
amount within the range of settlement payments was more likely than any other
and, therefore, recorded the low end of the range as the liability associated
with future settlement payments through 2052 in our consolidated financial
statements, in accordance with generally accepted accounting principles. We plan
on performing a similar annual actuarial analysis during the third quarter of
each year for the foreseeable future. Given the uncertainties associated with
projecting such matters into the future, the short period of
-13-
time that we have been responsible for defending these claims, and other factors
outside our control, we can give no assurance that additional provisions will
not be required. Management will continue to monitor the circumstances
surrounding these potential liabilities in determining whether additional
provisions may be necessary. At the present time, however, we do not believe
that any additional provisions would be reasonably likely to have a material
adverse effect on our liquidity or consolidated financial position.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
The Company generally warrants its products against certain manufacturing and
other defects. These product warranties are provided for specific periods of
time of the product depending on the nature of the product. As of March 31, 2003
and 2002, the Company has accrued $11.3 million and $15.6 million, respectively,
for estimated product warranty claims. The accrued product warranty costs are
based primarily on historical experience of actual warranty claims. Warranty
claims expense for the three month periods ended March 31, 2003 and 2002, were
$10.2 million and $11.6 million, respectively.
The following table provides the changes in the Company's product warranties:
(in thousands)
Balance at January 1, 2003 $ 10,360
Liabilities accrued for current year sales 10,165
Settlements of warranty claims (9,220)
------------------
Balance at March 31, 2003 $ 11,305
==================
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS IN THIS REPORT ARE INDICATED BY WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "BELIEVES," "INTENDS," "PLANS," "ESTIMATES," "PROJECTS" AND SIMILAR
EXPRESSIONS. THESE STATEMENTS REPRESENT OUR EXPECTATIONS BASED ON CURRENT
INFORMATION AND ASSUMPTIONS. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT
TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO A NUMBER OF FACTORS, SUCH AS
ECONOMIC AND MARKET CONDITIONS; THE PERFORMANCE OF THE AFTERMARKET SECTOR;
CHANGES IN BUSINESS RELATIONSHIPS WITH OUR MAJOR CUSTOMERS AND IN THE TIMING,
SIZE AND CONTINUATION OF OUR CUSTOMERS' PROGRAMS; THE ABILITY OF OUR CUSTOMERS
TO ACHIEVE THEIR PROJECTED SALES; COMPETITIVE PRODUCT AND PRICING PRESSURES;
INCREASES IN PRODUCTION OR MATERIAL COSTS THAT CANNOT BE RECOUPED IN PRODUCT
PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED BUSINESSES; PRODUCT LIABILITY
(INCLUDING, WITHOUT LIMITATION, THOSE RELATED TO ESTIMATES TO ASBESTOS-RELATED
CONTINGENT LIABILITIES) MATTERS; AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH
AS THOSE DESCRIBED UNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK AND THOSE DETAILED HEREIN AND FROM TIME TO TIME IN THE FILINGS OF THE
COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. THOSE FORWARD-LOOKING
STATEMENTS ARE MADE ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE OR REVISE THE FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. THE FOLLOWING DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
FORM 10-Q.
BUSINESS OVERVIEW
Standard Motor Products, Inc. (referred to hereinafter as the "Company," "we,"
"us," and "our") is a leading independent manufacturer and distributor of
replacement parts for motor vehicles in the automotive aftermarket industry. We
are organized into two major operating segments, each of which focuses on a
specific segment of replacement parts. Our Engine Management Segment
manufactures ignition and emission parts, on-board computers, ignition wires,
battery cables and fuel system parts. Our Temperature Control Segment
manufactures and remanufactures air conditioning compressors, and other air
conditioning and heating parts. We sell our products primarily in the United
States, Canada and Latin America. We also sell our products in Europe through
our European Segment. We distribute our products through a variety of
distribution channels, including wholesale distributors, retail chains, service
chains and original equipment dealers.
ACQUISITION. On February 7, 2003, we signed an agreement to purchase Dana
Corporation's Engine Management Group ("Dana's EMG Business"), for a purchase
price equal to the closing net book value of the business, subject to a maximum
purchase price of $125 million. Dana's EMG Business is a leading manufacturer of
aftermarket parts in the automotive industry focused exclusively on engine
management. Dana's EMG Business manufacturers ignition systems, emission parts,
engine computers, ignition wires, battery cables and fuel system parts.
Customers of Dana's EMG Business include NAPA Auto Parts, CSK Auto, O'Reilly
Automotive and Pep Boys. We intend to integrate Dana's EMG Business into our
Engine Management Segment within 18 months from the closing of the acquisition.
We intend to finance the acquisition and the payment of related fees and
expenses and restructuring and integration costs by (a) drawing on our revolving
credit facility, (b) issuing shares of our common stock and (c) obtaining seller
financing.
The acquisition purchase price is subject to a post-closing adjustment based
upon the book value of the acquired assets of Dana's EMG Business less the book
value of the assumed liabilities of Dana's EMG Business as of the close of
business on the closing date.
The acquisition is subject to our obtaining financing for the acquisition and
other customary closing conditions. We expect to close the acquisition during
the second quarter of 2003.
-15-
SEASONALITY. Historically, our operating results have fluctuated by quarter,
with the greatest sales occurring in the second and third quarters of the year
and revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather.
For example, a cool summer may lessen the demand for our Temperature Control
products, while a hot summer may increase such demand. As a result of this
seasonality and variability in demand of our Temperature Control products, our
working capital requirements peak near the end of the second quarter, as the
inventory build-up of air conditioning products is converted to sales and
payments on the receivables associated with such sales have yet to be received.
During this period, our working capital requirements are typically funded by
borrowing from our revolving credit facility.
The seasonality of our business offers significant operational challenges in our
manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our "Spring Promotion", in which customers
are offered a choice of a price discount or longer payment terms.
INVENTORY MANAGEMENT. We instituted an aggressive inventory reduction campaign
initiated in 2001. We targeted a minimum $30 million inventory reduction in
2001, but exceeded our goal by reducing inventory by $57 million that year.
Importantly, while reducing inventory levels, we maintained customer service
fill rate levels of approximately 93%. In 2002, we further reduced inventory by
additional $8 million. In 2003, we plan to reduce inventory further.
We face inventory management issues as a result of warranty and overstock
returns. Many of our products carry a warranty ranging from a 90-day limited
warranty to a lifetime limited warranty, which generally covers defects in
materials or workmanship and failure to meet industry published specifications.
In addition to warranty returns, we also permit our customers to return products
to us within customer-specific limits in the event that they have overstocked
their inventories. In particular, the seasonality of our Temperature Control
Segment requires that we increase our inventory during the winter season in
preparation of the summer selling season and customers purchasing such inventory
have the right to make returns.
In order to better control warranty and overstock return levels, beginning in
2000, we tightened the rules for authorized warranty returns, placed further
restrictions on the amounts customers can return and instituted a program so
that our management can better estimate potential future product returns. In
addition, with respect to our air conditioning compressors, our most significant
customer product warranty returns, we established procedures whereby a warranty
will be voided if a customer does not follow a twelve step warranty return
process.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the first quarter of 2003, cash used in operations
amounted to $34.3 million, compared to $13.6 million in the same period of 2002.
The increase is primarily attributable to payments in accounts payable and
reductions in accrued expenses and other liabilities. This increase was
partially offset by lower increases in accounts receivable and inventory.
INVESTING ACTIVITIES. Cash used in investing activities was $1.7 million in the
first quarter of 2003, compared to $6.8 million in the same period of 2002. The
decrease is primarily due to reductions in capital expenditures and
acquisitions, which in 2002 reflected the acquisition of Hartle Industries.
FINANCING ACTIVITIES. Cash provided by financing activities was $33.1 million in
the first quarter of 2003, compared to $15.9 million in the same period of 2002.
The change is primarily due to the increased borrowings under the Company's line
of credit to finance the seasonal working capital needs of the Company.
-16-
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
Effective April 27, 2001, we entered into an agreement with General Electric
Capital Corporation, as agent, and a syndicate of lenders for a secured
revolving credit facility. The term of the credit agreement was for a period of
five years and provided for a line of credit up to $225 million. We 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 our former debt.
On February 7, 2003, we amended our revolving credit facility to provide for an
additional $80 million commitment, subject to the terms and conditions therein,
which will become effective upon the closing of our acquisition of Dana's EMG
Business. This additional commitment increases the total amount available for
borrowing under our revolving credit facility to $305 million. In addition, in
order to facilitate the aggregate financing of the acquisition, we are planning
on issuing approximately $59 million of common stock in a public offering, which
will occur in connection with the closing of the acquisition. After applying all
of the net proceeds from the public offering of our common stock to repay a
portion of our outstanding indebtedness under our revolving credit facility, we
intend to borrow the entire cash portion of the purchase price of Dana's EMG
Business from our revolving credit facility upon the closing of the acquisition.
Availability under our revolving credit facility is based on a formula of
eligible accounts receivable, eligible inventory and eligible fixed assets, and
includes the purchased assets of Dana's EMG Business. We expect such
availability under the revolving credit facility, following the initial draw
down at the acquisition closing, to be sufficient to meet our ongoing operating
and integration costs.
Direct borrowings under our revolving credit facility bear interest at the prime
rate plus the applicable margin (as defined) or the LIBOR rate plus the
applicable margin (as defined), at our option. Borrowings are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of our domestic and Canadian subsidiaries. Our credit
facility prior to the acquisition provides for certain financial covenants
limiting our capital expenditures and requiring us to maintain a certain
tangible net worth at the end of each fiscal quarter. Following our acquisition
of Dana's EMG Business, the terms of our revolving credit facility provide for,
among other provisions, new financial covenants requiring us, on a consolidated
basis, (1) to maintain specified levels of EBITDA at the end of each fiscal
quarter through June 30, 2004, (2) commencing September 30, 2004 to
maintain specified levels of fixed charge coverage at the end of each fiscal
quarter (rolling twelve months) through 2007, and (3) to limit capital
expenditure levels for each fiscal year through 2007.
The Company's profitability and its working capital requirements have become
more seasonal with the 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.
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 the 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 March 31,
2003, the Company has Board authorization to repurchase additional shares at a
maximum cost of $1.7 million. During the first quarters of 2003 and 2002, the
Company did not repurchase any shares of its common stock.
In July 2001, we entered into interest rate swap agreements to manage our
exposure to interest rate changes. The swaps effectively convert a portion of
our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional principal amounts. At December 31, 2002, we had
two outstanding interest rate swap agreements (in an aggregate notional
principal amount of $75 million), one of which matured in January 2003 and one
of which is scheduled to mature in January 2004. Under these agreements, we
receive a floating rate based on the LIBOR interest rate, and pay a fixed rate
of
-17-
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30
million (matured in January 2003). If, at any time, the swaps are determined to
be ineffective, in whole or in part, due to changes in the interest rate swap
agreements, the fair value of the portion of the interest rate swap determined
to be ineffective will be recognized as gain or loss in the statement of
operations for the applicable period.
On July 26, 1999, we issued our convertible debentures, payable semi-annually,
in the aggregate principal amount of $90 million. The debentures are convertible
into 2,796,120 shares of our common stock, and mature on July 15, 2009. The
proceeds from the sale of the debentures were used to prepay an 8.6% senior
note, reduce short term bank borrowings and repurchase a portion of our common
stock.
We are contractually obligated to make certain payments as disclosed in Item 7
of Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2002.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THE
THREE MONTHS ENDED MARCH 31, 2002
SALES. Consolidated net sales in the first quarter of 2003 were $135.7 million,
an increase of $9.4 million, or 7.4%, compared to $126.3 million in the first
quarter of 2002. Contributing to the sales increase was Engine Management and
Europe, which accounted for $10.8 million and $2.2 million, respectively.
Facilitating the increase in Engine Management was the expansion of business of
certain existing retail customers and new traditional business. The increase was
offset by a decline of $3.6 million of net sales in Temperature Control,
primarily due to the loss of the AutoZone business, a retail customer.
AutoZone's decision to move their Temperature Control business to other
suppliers is estimated to reduce our consolidated net sales by approximately $25
million in 2003 versus 2002.
GROSS MARGINS. Overall gross margins for the quarter reflected a slight
improvement to 25.4% from 24.7%. The loss in business in Temperature Control
noted above, may negatively effect our overhead absorption with decreased
volumes. Appropriate cost cutting measures are being considered to mitigate such
loss, at the operating earnings level.
GOODWILL. Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is
no longer amortized, but instead, is subject to an annual review for potential
impairment. Using the discounted cash flows method, based on the Company's
weighted average cost of capital and market multiples, the Company reviewed the
fair values of each of its reporting units. The decline in economic and market
conditions, higher integration costs than anticipated and the general softness
in the automotive aftermarket caused a decrease in the fair values of certain of
the Company's reporting units. As a result, the Company recorded an impairment
loss on goodwill as a cumulative effect of accounting change of $18.3 million,
net of tax, or $1.55 per diluted share during the first quarter of 2002. The
impairment loss relates to goodwill pertaining to certain of the Company's
reporting units within its Europe Segment and within its Temperature Control
Segment and recorded a charge of $10.9 million and $7.4 million, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses increased by $1.1 million to $32.2 million in the first quarter of
2003, compared to $31.1 million in the first quarter of 2002. This increase was
primarily due to the overall increase in net sales. However, as a percentage of
net sales, selling, general and administrative expenses decreased to 23.7% in
the first quarter of 2003 from 24.6% in the first quarter of 2002.
OPERATING INCOME. Operating income increased by $2.2 million to $2.3 million in
the first quarter of 2003, compared to $0.1 million in the first quarter of
2002. This increase was primarily due to the overall increase in net sales and
the Company's continued cost reduction activities.
-18-
OTHER INCOME (EXPENSE), NET. Other income, net, decreased primarily due to
losses related to joint ventures and unfavorable foreign exchange losses.
INTEREST EXPENSE. Interest expense decreased by $0.4 million in the first
quarter 2003 compared to the same period in 2002, due to lower average
borrowings and lower interest rates.
INCOME TAX PROVISION. The effective tax rate for continuing operations increased
from 29% in the first quarter of 2002 to 37% in first quarter of 2003, primarily
due to lower earnings at our foreign operations and operating losses in our
European Segment, for which no income tax benefit is being recorded by the
Company. The 37% current effective tax rate reflects the Company's anticipated
tax rate for the balance of the year.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation reflects the
charges associated with asbestos, including legal expenses. As discussed in Note
14 of the notes to the consolidated financial statements, the Company is
responsible for certain future liabilities relating to alleged exposure to
asbestos containing products. Based on the information contained in the
September 2002 actuarial study, which estimated an undiscounted liability for
settlement payments ranging from $27.3 million to $58 million, and all other
available information considered by the Company, and as further set forth in
such Note 14, the Company recorded an after tax charge of $16.9 million as a
loss from discontinued operation during the third quarter of 2002 to reflect
such liability, excluding legal costs. The Company concluded that no amount
within the range of settlement payments was more likely than any other and,
therefore, recorded the low end of the range as the liability associated with
future settlement payments through 2052 in the Company's consolidated financial
statements, in accordance with generally accepted accounting principles.
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 the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. Note that our preparation of this Quarterly Report on Form
10-Q requires us to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our consolidated financial statements, and the
reported amounts of revenue and expenses during the reporting period. There can
be no assurance that actual results will not differ from those estimates.
REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement
parts for motor vehicles, from both our Engine Management and Temperature
Control Segments. We recognize revenue from product sales upon shipment to
customers. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period.
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost
is generally determined on the first-in, first-out basis. Where appropriate,
standard cost systems are utilized for purposes of determining cost; the
standards are adjusted as necessary to ensure they approximate actual costs.
Estimates of lower of cost or market value of inventory are determined at the
reporting unit level and are based upon the inventory at that location taken as
a whole. These estimates are based upon current economic conditions, historical
sales quantities and patterns and, in some cases, the specific risk of loss on
specifically identified inventories.
We also evaluate inventories on a regular basis to identify inventory on hand
that may be obsolete or in excess of current and future projected market demand.
For inventory deemed to be obsolete, we provide a reserve on the full value of
the inventory. Inventory that is in excess of current and projected use is
reduced by an allowance to a level that approximates our estimate of future
demand.
-19-
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The
preparation of financial statements requires our management to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our management must make estimates of potential future product
returns related to current period product revenue. Management analyzes
historical returns, current economic trends, and changes in customer demand when
evaluating the adequacy of the sales returns and other allowances. Significant
management judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any accounting period. At
March 31, 2003, the allowance for sales returns totaled $13.8 million.
Similarly, our management must make estimates of the uncollectability of our
accounts receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. At
March 31, 2003, the allowance for doubtful accounts and for discounts totaled
$5.7 million.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income, and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At March 31, 2003, we
had a valuation allowance of approximately $22 million, due to uncertainties
related to our ability to utilize some of our deferred tax assets. The valuation
allowance is based on our estimates of taxable income by jurisdiction in which
we operate and the period over which our deferred tax assets will be
recoverable.
In the event that actual results differ from these estimates, or we adjust these
estimates in future periods, we may need to establish an additional valuation
allowance which could materially impact our business, financial condition and
results of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important, which could trigger an impairment
review, include the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of our use of the acquired assets or the strategy for our overall
business; and significant negative industry or economic trends. With respect to
goodwill, if necessary, we will test for potential impairment in the fourth
quarter of each year as part of our annual budgeting process. We review the fair
values of each of our reporting units using the discounted cash flows method and
market multiples.
RETIREMENT AND POSTRETIREMENT MEDICAL BENEFITS. Each year we calculate the costs
of providing retiree benefits under the provisions of SFAS 87 and SFAS 106. The
key assumptions used in making these calculations are disclosed in Notes 12 and
13 of our Annual Report on Form 10-K for the year ended December 31, 2002. The
most significant of these assumptions are the discount rate used to value the
future obligation, expected return on plan assets and health care cost trend
rates. We select discount rates commensurate with current market interest rates
on high-quality, fixed rate debt securities. The expected return on assets is
based on our current review of the long-term returns on assets held by the
plans, which is influenced by historical averages. The medical cost trend rate
is based on our actual medical claims and future projections of medical cost
trends.
-20-
ASBESTOS RESERVE. The Company is responsible for certain future liabilities
relating to alleged exposure to asbestos-containing products. A September 2002
actuarial study estimated a liability for settlement payments ranging from $27.3
million to $58 million. The Company concluded that no amount within the range of
settlement payments was more likely than any other and, therefore, recorded the
low end of the range as the liability associated with future settlement payments
through 2052 in the Company's consolidated financial statements, in accordance
with generally accepted accounting principles. The Company plans on performing a
similar annual actuarial analysis during the third quarter of each year for the
foreseeable future. Based on this analysis and all other available information,
the Company will reassess the recorded liability, and if deemed necessary,
record an adjustment to the reserve, which will be reflected as a loss or gain
from discontinued operations. Legal expenses associated with asbestos- related
matters are expensed as incurred and recorded as a loss from discontinued
operations in the statement of operations.
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability and litigation. Establishing loss
reserves for these matters requires the use of estimates and judgment of risk
exposure and ultimate liability. We estimate losses using consistent and
appropriate methods; however, changes to our assumptions could materially affect
our recorded liabilities for loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 143, Accounting for Asset Retirement Obligations ("Statement No. 143"),
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Statement No. 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset. Statement No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, we will recognize a gain or
loss on settlement. Effective January 1, 2003, the Company adopted Statement No.
143, which did not have a material effect on our consolidated financial
statements.
RESCISSION OF FASB STATEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement
No. 145 eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board ("APB") No. 30, Reporting Results of Operations
("APB No. 30"). Statement No. 145 also requires sales-leaseback accounting for
lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections to
existing pronouncements. Effective January 1, 2003, the Company adopted
Statement No. 145, which did not have a material effect on our consolidated
financial statements, however, Statement No. 145 will require prior periods to
be reclassified for any loss on extinguishment of debt not meeting the criteria
of APB No. 30.
-21-
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associates
with Exit or Disposal Activities ("Statement No. 146"). Statement No. 146, which
is effective prospectively for exit or disposal activities initiated after
December 31, 2002, applies to costs associated with an exit activity, including
restructurings, or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Statement No. 146
requires that exit or disposal costs are recorded as an operating expense when
the liability is incurred and can be measured at fair value. Commitment to an
exit plan or a plan of disposal by itself will not meet the requirement for
recognizing a liability and the related expense under Statement No. 146. The
adoption of Statement No. 146 did not have a material effect on our consolidated
financial statements.
ACCOUNTING FOR AND DISCLOSURES OF GUARANTEES
In November 2002, the FASB issued interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("Interpretation No. 45"). Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. Interpretation No.
45 also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair market value of the obligations
it assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 did not have a material effect on our consolidated financial statements. See
Note 14 of Notes to Consolidated Financial Statements for discussion of product
warranty claims.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123
("Statement No. 148"). Statement No. 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, Statement No. 148 amends the
disclosure requirements of Statement No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002.
Effective January 1, 2003, the Company adopted Statement No. 148 and have
provided the disclosures required under Statement No. 148 in Note 10 of Notes to
Consolidated Financial Statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("Interpretation No.
46"). Interpretation No. 46 addresses the consolidation by business enterprises
of variable interest entities as defined in Interpretation No. 46.
Interpretation No. 46 applies immediately to variable interests in variable
interest entities obtained after January 31, 2003. For public enterprises with a
variable interest in a variable interest entity created before February 1, 2003,
Interpretation No. 46 applies to that enterprises no later than the beginning of
the first interim or annual reporting period beginning after June 15, 2003.
Interpretation No. 46 requires certain disclosures in financial statements
issued after January 31, 2003. We currently have no contractual relationship or
other business relationship with a variable interest entity and therefore the
adoption of Interpretation No. 46 did not have a material effect on our
consolidated financial statements. However, if we enter into any arrangement
with a variable interest entity in the future, we will evaluate the impact of
Interpretation No. 46 on our consolidated financial statements and related
disclosures.
-22-
ITEM 3. 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 has exchange rate exposure primarily with respect to the
Canadian Dollar and the British Pound. 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.
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 8 of Notes to Consolidated Financial
Statements. The Company invests its excess cash in highly liquid short-term
investments. The Company's percentage of variable rate debt to total debt is 46%
at December 31, 2002 and 55% at March 31, 2003.
Other than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on
their evaluation, our principal executive officer and principal
financial officer concluded that the Company's disclosure controls
and procedures are effective.
(b) There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in
our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation
referenced in paragraph (a) above.
-23-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 28, 2000, a former significant customer of ours which is currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court filed claims against
a number of its former suppliers, including us. The claim against us alleged
$0.5 million of preferential payments in the 90 days prior to the related
Chapter 11 bankruptcy petition. The claim pertaining to the preferential
payments was settled for an immaterial amount during the second quarter of 2002.
In addition, this former customer seeks $9.4 million from us for a variety of
claims including antitrust, breach of contract, breach of warranty and
conversion. These latter claims arise out of allegations that this customer was
entitled to various discounts, rebates and credits after it filed for
bankruptcy. We have purchased insurance with respect to the actions. On August
22, 2002, the court dismissed the antitrust claims. We believe that these
remaining matters will not have a material adverse effect on our business,
financial condition or results of operations.
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2001, approximately 100 cases were outstanding for which we were
responsible for any related liabilities. At December 31, 2002, the number of
cases outstanding for which we were responsible for related liabilities
increased to approximately 2,500, which include approximately 1,600 cases filed
in December 2002 in Mississippi. We believe that these Mississippi cases filed
against us in December 2002 were due in large part to potential plaintiffs
accelerating the filing of their claims prior to the effective date of
Mississippi's tort reform statute in January 2003, which statute eliminated the
ability of plaintiffs to file consolidated cases. At March 31, 2003,
approximately 2,700 cases were outstanding for which we were responsible for any
related liabilities. To date, the amounts paid for settled claims have been
immaterial. We do not have insurance coverage for the defense and indemnity
costs associated with these claims. We recorded a liability associated with
future settlements through 2052 and recorded an after tax charge of $16.9
million as a loss from a discontinued operation during the third quarter of 2002
to reflect such liability.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
-24-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT(S)
DESCRIPTION
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On February 10, 2003, we filed a current report on form 8-K reporting
under Item 5 Other Events, that Standard Motor Products, Inc. announced
that it had signed a definitive agreement to acquire substantially all
of the assets and to assume substantially all of the operating
liabilities of Dana Corporation's Engine Management Group.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
(Registrant)
(Date): May 15, 2003 /S/ JAMES J. BURKE
------------------
Vice President Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-25-
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Lawrence I. Sills, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Standard Motor
Products, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/ LAWRENCE I. SILLS
---------------------
Lawrence I. Sills
Chief Executive Officer
-26-
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, James J. Burke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Standard Motor
Products, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/ JAMES J. BURKE
------------------
James J. Burke
Chief Financial Officer
-27-