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, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-4743
STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value $2.00 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of the voting common stock based on the closing price
on the New York Stock Exchange on June 30, 2004 (the last business day of
registrant's most recently completed second fiscal quarter) of $14.73 per share
held by non-affiliates of the registrant was $209,650,956. 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, 2005, there were 19,833,728
outstanding shares of the registrant's common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth
herein, is incorporated herein by reference from the registrant's definitive
proxy statement relating to the annual meeting of stockholders to be held in
2005, which definitive proxy statement shall be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year to which
this Report relates.
STANDARD MOTOR PRODUCTS, INC.
INDEX
PART I. PAGE
Item 1. Business ........................................................ 3
Item 2. Properties ......................................................14
Item 3. Legal Proceedings ...............................................15
Item 4. Submission of Matters to a Vote of Security Holders .............16
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities................16
Item 6. Selected Financial Data .........................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......30
Item 8. Financial Statements and Supplementary Data .....................31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................75
Item 9A. Controls and Procedures .........................................75
Item 9B. Other Information ...............................................78
PART III.
Item 10. Directors and Executive Officers of the Registrant ..............78
Item 11. Executive Compensation ..........................................78
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters .................................78
Item 13. Certain Relationships and Related Transactions .................79
Item 14. Principal Accounting Fees and Services ..........................79
PART IV.
Item 15. Exhibits and Financial Statement Schedules ......................79
Signatures ......................................................80
2
PART I
IN THIS ANNUAL REPORT ON FORM 10-K, "STANDARD MOTOR PRODUCTS," "WE," "US," "OUR"
AND THE "COMPANY" REFER TO STANDARD MOTOR PRODUCTS, INC. AND ITS SUBSIDIARIES,
UNLESS THE CONTEXT REQUIRES OTHERWISE. THIS REPORT CONTAINS HISTORICAL
INFORMATION AND 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 AND 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,
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 SEC. 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. IN ADDITION, HISTORICAL INFORMATION SHOULD NOT BE
CONSIDERED AS AN INDICATOR OF FUTURE PERFORMANCE.
ITEM 1. BUSINESS
OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific line of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts.
We sell our products primarily to warehouse distributors and large retail chains
in the United States, Canada and Latin America. We also sell our products in
Europe through our European Segment. Our customers consist of many of the
leading warehouse distributors, such as CARQUEST and NAPA Auto Parts, as well as
many of the leading auto parts retail chains, such as Advance Auto Parts,
AutoZone, CSK Auto, O'Reilly Automotive and Pep Boys. We distribute parts under
our own brand names, such as Standard, Blue Streak, BWD Automotive, Niehoff,
Hayden and Four Seasons, and through private labels, such as CARQUEST and NAPA
Auto Parts.
BUSINESS STRATEGY
Our goal is to grow revenues and earnings and deliver returns in excess of our
cost of capital by providing high quality, low cost replacement parts in the
engine management and temperature control automotive aftermarkets. The key
elements of our strategy are as follows:
o MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT AND
TEMPERATURE CONTROL BUSINESSES. We are one of the leading independent
manufacturers serving North America and other geographic areas in our core
businesses of Engine Management and Temperature Control. We believe that
our success is attributable to our emphasis on product quality, the
breadth and depth of our product lines for both domestic and imported
automobiles, and our reputation for outstanding customer service, as
measured by rapid order turn-around times and high-order fill rates.
3
To maintain our strong competitive position in our markets, we remain
committed to the following:
o providing our customers with broad lines of high quality
engine management and temperature control products, supported
by the highest level of customer service and reliability;
o continuing to maximize our production and distribution
efficiencies;
o continuing to improve our cost position; and
o focusing further our engineering development efforts.
o PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND TECHNICAL
SUPPORT. Our goal is to increase sales to existing and new customers by
leveraging our skills in rapidly filling orders, maintaining high levels
of product availability and providing technical support in a
cost-effective manner. In addition, our technically-skilled sales force
professionals provide product selection and application support to our
customers.
o EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales by
continuing to develop and expand the range of Engine Management and
Temperature Control products that we offer to our customers. We are
committed to investing the resources necessary to maintain and expand our
technical capability to manufacture multiple product lines that
incorporate the latest technologies developed by original equipment
manufacturers (OEMs) in North America and Europe.
o BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by
marketing our products more broadly to the distribution businesses of OEMs
who sell products to new car dealer service areas.
o IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management places
significant emphasis on improving our financial performance by achieving
operating efficiencies and improving asset utilization, while maintaining
product quality and high customer order fill rates. We have a proven track
record of managing costs and improving operating efficiency through
consolidating redundant functions and realizing cost savings in our
business. We intend to continue to improve our operating efficiency and
cost position by:
o increasing cost-effective vertical integration in key product
lines through internal development;
o focusing on efficient inventory management, including warranty
and overstock return management;
o maintaining and improving our cost effectiveness and
competitive responsiveness to better serve the automotive
aftermarket customer base;
o adopting company-wide programs geared toward manufacturing and
distribution efficiency; and
o initiating company-wide overhead and operating expense cost
reduction programs, such as closing excess facilities.
o CASH UTILIZATION. We intend to apply any excess cash flow from operations
and the management of working capital to reduce our outstanding
indebtedness, pay dividends and repurchase our stock.
4
ACQUISITION OF DANA ENGINE MANAGEMENT GROUP
On June 30, 2003, we completed the acquisition of substantially all of the
assets and assumed substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM"). DEM's customers consist of many
of the leading warehouse distributors, such as NAPA Auto Parts, as well as many
of the leading auto parts retail chains, such as CSK Auto, O'Reilly Automotive
and Pep Boys. Certain of these customers are already our customers to a limited
extent or are our customers in different of our product lines. DEM's products
enjoy strong brand recognition with its many leading automotive product names,
including BWD Automotive and Niehoff, as well as with private labels through
NAPA Auto Parts. In connection with the acquisition, we have reviewed our
operations and implemented integration plans to restructure the operations of
DEM, including closing seven of the nine acquired DEM facilities. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" for further discussion.
On February 3, 2004, we acquired inventory from the Canadian distribution
operation of DEM for approximately $1 million. We have relocated such inventory
into our distribution facility in Mississauga, Canada.
THE AUTOMOTIVE AFTERMARKET
The automotive aftermarket industry is comprised of a large, diverse number of
manufacturers varying in product specialization and size. In addition to
manufacturing, aftermarket companies allocate resources towards an efficient
distribution process and product engineering in order to maintain the
flexibility and responsiveness on which their customers depend. Aftermarket
manufacturers must be efficient producers of small lot sizes and do not have to
provide systems engineering support. Aftermarket manufacturers also must
distribute, with rapid turnaround times, products for a full range of vehicles
on the road. The primary customers of the automotive aftermarket manufacturers
are national and regional warehouse distributors, large retail chains,
automotive repair chains and the dealer service networks of OEMs.
During periods of economic decline or weakness, more automobile owners may
choose to repair their current automobiles using replacement parts rather than
purchasing new automobiles, which benefit the automotive aftermarket industry,
including suppliers like us. The automotive aftermarket industry is also
dependent on new car sales, although to a lesser degree than OEMs and their
suppliers, because these sales create the total number of cars available for
repair. Aggressive financing programs by automakers has increased demand for new
cars and trucks, which should benefit the automotive aftermarket manufacturers
in the long term as vehicles age.
The automotive aftermarket industry differs substantially from the OEM supply
business. Unlike the OEM supply business that primarily follows trends in new
car production, the automotive aftermarket industry's performance primarily
tends to follow different trends, such as:
o growth in number of vehicles on the road;
o increase in average vehicle age;
o increase in total miles driven per year;
o new and modified environmental regulations;
o increase in pricing of new cars; and
o new car quality and related warranties.
Traditionally, the parts manufacturers of OEMs and the independent manufacturers
who supply the original equipment part applications have supplied a majority of
the business to new car dealer networks. However, Ford and General Motors have
recently moved to make their parts manufacturers more independent, which may
provide future opportunities for us to supply replacement parts to the dealer
service networks of the OEMs, both for warranty and out-of-warranty repairs.
5
FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS
The table below shows our consolidated net sales by operating segment and by
major product group within each segment for the three years ended December 31,
2004. Our three reportable operating segments are Engine Management (which
includes DEM as of June 30, 2003), Temperature Control and Europe.
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission
Parts ........................ $ 459,452 55.7% $ 337,134 49.7% $ 232,511 38.9%
Wires and Cables ................. 92,868 11.3% 69,528 10.2% 63,267 10.6%
Fuel System Parts ................ 10,449 1.3% 7,713 1.1% 7,334 1.2%
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ENGINE MANAGEMENT .............. 562,769 68.3% 414,375 61.0% 303,112 50.7%
----------- ----------- ----------- ----------- ----------- -----------
TEMPERATURE CONTROL:
Compressors ...................... 85,403 10.4% 89,676 13.2% 105,301 17.6%
Other Air Conditioning
Parts .......................... 113,223 13.7% 117,720 17.3% 136,973 22.9%
Heating Parts .................... 11,468 1.4% 12,180 1.8% 12,814 2.1%
----------- ----------- ----------- ----------- ----------- -----------
TOTAL TEMPERATURE CONTROL ............ 210,094 25.5% 219,576 32.3% 255,088 42.6%
----------- ----------- ----------- ----------- ----------- -----------
EUROPE:
Engine Management Parts .......... 25,539 3.1% 27,514 4.1% 26,575 4.4%
Temperature Control Parts ........ 15,112 1.8% 12,627 1.9% 9,453 1.6%
----------- ----------- ----------- ----------- ----------- -----------
TOTAL EUROPE ......................... 40,651 4.9% 40,141 6.0% 36,028 6.0%
----------- ----------- ----------- ----------- ----------- -----------
ALL OTHER ............................ 10,769 1.3% 4,691 0.7% 4,209 0.7%
----------- ----------- ----------- ----------- ----------- -----------
TOTAL .......................... $ 824,283 100.0% $ 678,783 100.0% $ 598,437 100.0%
=========== =========== =========== =========== =========== ===========
The following table shows our operating profit and identifiable assets by
operating segment for the three years ended December 31, 2004.
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE
PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS
----------- ------------ ----------- ------------ ----------- ------------
(IN THOUSANDS)
Engine Management ................. $ 24,549 $ 429,631 $ 31,871 $ 448,687 $ 41,844 $ 247,318
Temperature Control ............... (2,114) 125,656 4,702 150,248 10,095 157,343
Europe ............................ (2,034) 30,936 (3,605) 31,188 (10,464) 30,728
All Other ......................... (22,138) 70,346 (17,153) 64,402 (16,407) 55,369
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ........................... $ (1,737) $ 656,569 $ 15,815 $ 694,525 $ 25,068 $ 490,758
=========== =========== =========== =========== =========== ===========
"All Other" consists of items pertaining to our corporate headquarters function,
as well as our Canadian business unit that do not meet the criteria of a
reportable operating segment.
ENGINE MANAGEMENT SEGMENT
BREADTH OF PRODUCTS. In our Engine Management Segment (which includes DEM as of
June 30, 2003), replacement parts for ignition and emission control systems
accounted for approximately 56%, 50% and 39% of our consolidated net sales in
2004, 2003 and 2002, respectively. These parts include distributor caps and
rotors, electronic ignition control modules, voltage regulators, coils,
switches, sensors and EGR valves. We are a basic manufacturer of many of the
ignition parts we market and continue to develop ways of increasing the number
of parts we manufacture, rather than purchasing such parts from third parties.
We believe that our acquisition of the Independence, Kansas DEM facility further
enhances our ability to be a basic manufacturer of ignition and emission control
products.
6
COMPUTER CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped
with computer-controlled engine management systems to control ignition, emission
and fuel injection. The on-board computers monitor inputs from many types of
sensors located throughout the vehicle, and control a myriad of valves, switches
and motors to manage engine and vehicle performance. Electronic ignition systems
enable the engine to improve fuel efficiency and reduce the level of hazardous
fumes in exhaust gases.
In 1992, we entered into a 50/50 joint venture in Canada with Blue Streak
Electronics, Inc. to rebuild automotive engine management computers and mass air
flow sensors. The volume of products produced by the joint venture are sold
primarily to us and has positioned us as a key supplier in the growing
remanufactured electronics markets. The Blue Streak joint venture has further
expanded its product range to include computers used in temperature control,
anti-lock brake systems and air bags, and development of diagnostic repair
tools.
We divide our electronic operations between product design and highly automated
manufacturing operations in Orlando, Florida and assembly operations, which are
performed in assembly plants in Orlando and Hong Kong.
Government emission laws have been implemented throughout the majority of the
United States. The Clean Air Act, as amended in 1990, imposes strict emission
control test standards on existing and new vehicles, and remains the preeminent
legislation in the area of vehicle emissions. As many states have implemented
required inspection/maintenance tests, the Environmental Protection Agency,
through its rulemaking ability, has also encouraged both manufacturers and
drivers to reduce vehicle emissions. As the Clean Air Act was "phased in"
beginning in 1994, automobiles must now comply with emission standards from the
time they were manufactured, and in most states, until the last day they are in
use. This law has, and in the future we expect this law and other new government
emission laws to have, a positive impact on sales of our ignition and emission
controls parts. Vehicles failing these new, more stringent tests have required
repairs utilizing parts sold by us.
Our sales of sensors, valves, solenoids and related parts have increased
steadily as automobile manufacturers equip their cars with more complex engine
management systems.
WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 11%,
10% and 11% of our consolidated net sales in 2004, 2003 and 2002, respectively.
These products include ignition (spark plug) wires, battery cables and a wide
range of electrical wire, terminals, connectors and tools for servicing an
automobile's electrical system.
The largest component of this product line is the sale of ignition wire sets. We
have historically offered a premium brand of ignition wires and battery cables
which capitalize on the market's awareness of the importance of quality.
In 1999, we relocated two of our wire and cable operations, one in Dallas, Texas
and the other in Bradenton, Florida, to a new facility in Reynosa, Mexico. The
Mexican operation focuses on assembly and packaging of the economy wire sets,
while our premium line is manufactured at our facility in Edwardsville, Kansas.
With the acquisition of the DEM business, we acquired the ability to extrude
high voltage wire in Mishawaka, Indiana to be used in our ignition wire sets.
This vertical integration of a critical component offers us the ability to
achieve lower costs and our own controlled source of supply and quality.
7
TEMPERATURE CONTROL SEGMENT
We manufacture, remanufacture and market a full line of replacement parts for
automotive temperature control (air conditioning and heating systems) engine
cooling systems, power window accessories and windshield washer systems,
primarily under the brand names of Four Seasons, Factory Air, Murray, NAPA,
CARQUEST, Hayden, Imperial and Aci. The major product groups sold by our
Temperature Control Segment are new and remanufactured compressors, clutch
assemblies, blower and radiator fan motors, dryers, evaporators, accumulators,
hoses, heater cores, heater valves, fan assemblies, fan clutches, engine oil
coolers, transmission coolers, window lift motors and windshield washer pumps.
Our temperature control products accounted for approximately 26%, 32% and 43% of
our consolidated net sales in 2004, 2003 and 2002, respectively.
A major factor in the Temperature Control Segment's business is the federal
regulation of ozone depleting chlorofluorocarbon refrigerants. United States
legislation phased out the production of domestic R-12 refrigerant (e.g.,
DuPont's Freon) completely by the end of 1995. As the new law became effective,
vehicle air conditioners needing repair or recharge were retrofitted to use the
new R-134a refrigerant. New vehicle manufacturers began to use the new R-134a
refrigerant in 1993. Today all vehicles produced in North America have this
refrigerant, and the vast majority of the U.S. vehicle fleet uses this
refrigerant. Service dealers continue to seek training and certification in this
technology, and our Temperature Control Segment has taken the lead in providing
this training and certification. Additionally, we reengineered our compressor
product offering to be able to operate efficiently utilizing either R-12 or
R-134a refrigerants, and remain a leader in providing retrofit kits for
conversion of R-12 systems.
Our customers are leading warehouse distributors, national program distribution
groups, retail auto parts chains, specialty market distributors and original
equipment service parts organizations supplying replacement parts for domestic
and import passenger cars, trucks and equipment.
EUROPE SEGMENT
In July 1996, we acquired an equity interest in Standard Motor Products (SMP)
Holdings Limited (formerly Intermotor Holdings Limited) located in Nottingham,
England. During 2002, we acquired the remaining equity interest bringing the
Company's ownership percentage to 100%. SMP Holdings Limited manufactures and
distributes a broad line of engine management products primarily to customers in
Europe. Also in 1996, we expanded our presence in Europe by opening a European
distribution center in Strasbourg, France for temperature control products. A
joint venture (Blue Streak Europe) between SMP Holdings Limited and Blue Streak
Electronics was also initiated in 1996, which joint venture supplies rebuilt
engine computers for the European market.
Since 1996, we have made a series of smaller acquisitions supplementing both the
Engine Management and Temperature Control portions of our business. With respect
to the engine management business, in January 1999 we acquired Webcon UK
Limited, an assembler and distributor of fuel system components, which we
subsequently divested in June 2003 incurring an $0.8 million loss. In January
1999, Blue Streak Europe acquired Injection Correction UK LTD, a subsidiary of
Webcon, and in September 2001, acquired TRW Inc.'s electronic control unit
remanufacturing division. In April 1999, we acquired Lemark Auto Accessories, a
supplier of wire sets. In April 2002, the wire business was further expanded by
acquiring Carol Cable Limited, a manufacturer and distributor of wire.
With respect to the temperature control portion of our business, following the
opening of the distribution center in France, in 1997 a joint venture was
entered into with Valeo, SA to remanufacture air conditioner compressors for the
European market. In addition, in January 2000 we acquired Four Seasons UK Ltd.
(formerly Vehicle Air Conditioning Parts Ltd.), a distributor of components for
the repair of air conditioning systems. In July 2000, the Temperature Control
business was further expanded by purchasing Four Seasons Italy SRL (formerly
Automotive Heater Exchange SRL) in Italy. In 2001 we entered into a joint
venture with Pedro Sanz in Madrid, Spain to distribute our products in the
Iberian Peninsula.
8
Our European Segment accounted for approximately 5%, 6% and 6% of our
consolidated net sales in 2004, 2003 and 2002, respectively. Aftermarket margins
are under pressure, while volumes are in a general decline in the ignition and
carburetor product lines. We have responded to the adverse market conditions by
reducing manufacturing costs through consolidating certain facilities and
outsourcing products.
Unlike Engine Management sales, European Temperature Control product sales are
increasing. Through acquisitions and more importantly a growing market, net
sales have increased from $6.1 million in 2000 to $15.1 million in 2004. To
date, the focus has been on product coverage and high customer service levels.
FINANCIAL INFORMATION ABOUT OUR FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We sell our line of products primarily in the United States, with additional
sales in Canada, Europe and Latin America. Our sales are substantially
denominated in U.S. dollars.
The table below shows our consolidated net sales by geographic area for the
three years ended December 31, 2004.
YEAR ENDED
DECEMBER 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
United States ..................... $ 714,955 $ 584,853 $ 512,055
Europe ............................ 40,651 40,141 36,028
Canada ............................ 45,115 38,187 32,188
Other Foreign ..................... 23,562 15,602 18,166
---------- ---------- ----------
Total ......................... $ 824,283 $ 678,783 $ 598,437
========== ========== ==========
The table below shows our long-lived assets by geographical area for the three
years ended December 31, 2004.
YEAR ENDED
DECEMBER 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
United States ..................... $ 174,056 $ 192,574 $ 130,402
Europe ............................ 6,214 8,905 7,599
Canada ............................ 4,144 4,488 4,432
Other Foreign ..................... 785 998 1,273
---------- ---------- ----------
Total ......................... $ 185,199 $ 206,965 $ 143,706
========== ========== ==========
SALES AND DISTRIBUTION
Over the last ten years, there has been a trend toward consolidation in the
distribution chain among warehouse distributors, retailers and auto parts
jobbers. In the traditional distribution channel, where we sell our products to
warehouse distributors, such distributors supply auto parts jobbers, who in turn
sell to professional technicians and to consumers who perform automotive repairs
themselves. In recent years, warehouse distributors have been consolidating with
other distributors, and an increasing number of distributors own their jobbers.
In the retail distribution channel, customers buy directly from us and sell
directly to technicians and "do it yourselfers." Retailers are also
consolidating with other retailers and expanding into the jobber market.
9
As automotive parts grow more complex, consumers are less likely to service
their own vehicles and may become more reliant on dealers and technicians. In
addition to new car sales, automotive dealerships sell OE brand parts and
service vehicles. The products available through the dealers are purchased
through the original equipment service (OES) network. Traditionally, the parts
manufacturers of OEMs have supplied a majority of OES network. However, certain
parts manufacturers have become independent and are no longer affiliated with
OEMs, and because of this, there may be additional opportunities for independent
automotive aftermarket manufacturers like us to supply the OES network.
We believe that our sales force is the premier direct sales force for our
product lines, due to our high concentration of highly-qualified, well-trained
sales people dedicated to geographic territories, which allows us to provide a
level of customer service we believe is unmatched. From the outset, we
thoroughly train our sales people both in the function and application of our
product lines, as well as in proven sales techniques. Customers, therefore,
depend on these sales people as a reliable source for technical information. We
give newly hired sales people extensive instruction at our training facility in
Irving, Texas and have a policy of continuing education that allows our sales
force to stay current on troubleshooting and repair techniques, as well as the
latest automotive parts and systems technology.
We generate demand for our products by directing a significant portion of our
sales effort to our customers' customers (i.e., jobbers and professional
technicians). We also conduct instructional clinics, which teach technicians how
to diagnose and repair complex systems related to our products. To help our
sales people to be teachers and trainers, we focus our recruitment efforts on
candidates who already have strong technical backgrounds as well as sales
experience. We also create demand for our products through the Standard Plus
Club. Our Standard Plus Club, a professional service dealer network, offers
technical and business development support and has a technical service telephone
hotline which provides immediate diagnostic and installation support. This club
is available to technicians and provides training, special discount programs and
on-line diagnostic assistance.
In connection with our sales activities, we offer several types of discounts and
allowances. We believe these discounts and allowances are a common practice
throughout the automotive aftermarket industry, and we intend to continue to
offer such discounts and allowances in response to competitive pressures. For
example, we offer cash discounts for paying invoices in accordance with the
discounted terms of the invoice.
CUSTOMERS
Our customer base is comprised largely of warehouse distributors, other
manufacturers and export customers. In addition to serving our traditional
customer base, we have expanded into the retail market by selling to large
retail chains such as Advance Auto Parts, AutoZone, CSK Auto, O'Reilly
Automotive and Pep Boys. Our retail channel of distribution has grown
significantly from approximately $41 million in consolidated net sales to
retailers in 1993 to approximately $242 million in 2004.
In 1997, we commenced distributing our products through the OES supplier
channel, and sold approximately $3 million in consolidated net sales to OES
suppliers which increased to approximately $63 million in 2004.
Our five largest individual customers accounted for 50% of our 2004 consolidated
net sales. Two individual customers accounted for 17% and 14%, respectively, of
our 2004 consolidated net sales.
COMPETITION
We are a leading independent manufacturer of replacement parts for the product
lines in Engine Management and Temperature Control. We compete primarily on the
basis of product quality, product availability, customer service, product
coverage, order turn-around time and order fill rate and price. We believe we
differentiate ourselves from our competitors primarily through:
10
o a value-added, knowledgeable sales force;
o extensive product coverage;
o sophisticated parts cataloguing systems; and
o inventory levels sufficient to meet the rapid delivery requirements
of customers.
In the engine management business, we are one of the leading independent
manufacturers in the United States. Our competitors include AC Delco, Delphi
Corporation, Denso Corporation, Federal-Mogul Corporation, Robert Bosch
Corporation, Visteon Corporation and Wells Manufacturing Corporation, as well as
OE dealers.
Our temperature control business is one of the leading independent producers and
distributors of a full line of temperature control products in North America and
other geographic areas. AC Delco, Delphi Corporation, Denso Corporation, Jordan
Automotive Aftermarket, Inc., Modine Manufacturing Company, Siemens VDO
Automotive, Transpro, Inc., and Visteon Corporation are some of our key
competitors in this market.
The automotive aftermarket is highly competitive, and we face substantial
competition in all markets that we serve. Our success in the marketplace
continues to depend on our ability to offer competitive prices, improved
products and expanded offerings in competition with many other suppliers to the
aftermarket. Some major manufacturers of replacement parts are divisions of
companies that have greater financial, marketing and other resources than we do.
In addition, we face competition from automobile manufacturers who supply
virtually every replacement part sold by us, although these manufacturers
generally supply parts only for cars they produce through OE dealerships.
SEASONALITY
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather.
For example, a cool summer may lessen the demand for our Temperature Control
products, while a hot summer may increase such demand. During the past two
years, cool summers have in fact decreased demand for our Temperature Control
products. As a result of this seasonality and variability in demand of our
Temperature Control products, our working capital requirements peak near the end
of the second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by borrowings from our revolving credit facility.
The seasonality of our business offers significant operational challenges in our
manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our "Spring promotion," in which customers
are offered a choice of a price discount or longer payment terms.
WORKING CAPITAL MANAGEMENT
Automotive aftermarket companies have been under increasing pressure to provide
broad SKU (stock keeping unit) coverage in response to parts and brand
proliferation. Since 1996, we have made significant changes to our inventory
management system to reduce inventory requirements. We launched a new
forecasting system in our Engine Management Segment that permitted a significant
reduction in safety stocks. Our Engine Management Segment also introduced a new
distribution system in the second half of 1999, which permits pack-to-order
systems to be implemented. Such systems permit us to retain slow moving items in
a bulk storage state until an order for a specific brand part is received. This
system reduces the volume of a given part in inventory and reduces the labor
requirements to package and repackage inventory.
11
We face inventory management issues as a result of warranty and overstock
returns. Many of our products carry a warranty ranging from a 90-day limited
warranty to a lifetime limited warranty, which generally covers defects in
materials or workmanship and failure to meet industry published specifications.
In addition to warranty returns, we also permit our customers to return products
to us within customer-specific limits in the event that they have overstocked
their inventories. In particular, the seasonality of our Temperature Control
Segment requires that we increase our inventory during the winter season in
preparation of the summer selling season and customers purchasing such inventory
have the right to make returns.
In order to better control warranty and overstock return levels, beginning in
2000 we tightened the rules for authorized warranty returns, placed further
restrictions on the amounts customers can return and instituted a program so
that our management can better estimate potential future product returns. In
addition, with respect to our air conditioning compressors, which account for
our most significant customer product warranty returns, we established
procedures whereby a warranty will be voided if a customer does not follow a
twelve step warranty return process.
Our profitability and working capital requirements have become more seasonal
with the increased sales mix of temperature control products. Our working
capital requirements peak near the end of the second quarter, as the inventory
build-up of air conditioning products is converted to sales and payments on the
receivables associated with such sales have yet to be received. These increased
working capital requirements are funded by borrowings from our revolving credit
facility.
SUPPLIERS
The principal raw materials purchased by us consist of brass, electronic
components, fabricated copper (primarily in the form of magnet and insulated
cable), steel magnets, laminations, tubes and shafts, stamped steel parts,
cooper wire, ignition wire, stainless steel coils and rods, aluminum coils,
fittings, tubes and rods, cast aluminum parts, lead, steel roller bearings,
rubber molding compound, thermo-set and thermo plastic molding powders.
Additionally, we use components and cores (used parts) in our remanufacturing
processes for computerized electronics and air conditioning compressors.
We purchase many materials in the U.S. and foreign open markets and have a
limited number of supply agreements on key components. A number of prime
suppliers make these materials available. In the case of cores, we obtain them
either from exchanges with customers who return cores when purchasing
remanufactured parts, or through direct purchases from a network of core
brokers. In addition, we acquire certain materials by purchasing products that
are resold into the market, particularly by OEM sources and other domestic and
foreign suppliers.
We believe there is an adequate supply of primary raw materials and cores. In
order to ensure a consistent, high quality, low cost supply of key components
for each product line, we continue to develop our own sources through internal
manufacturing capacity. Recently, prices of steel, aluminum and cooper and other
commodities have risen. These increases did not have a material impact on us, as
we are not dependent on any single commodity, however, there can be no assurance
over the long term that increases in commodity prices will not materially effect
our business or results of operations.
PRODUCTION AND ENGINEERING
We engineer, tool and manufacture many of the components used in the assembly of
our products. We also perform our own plastic and rubber molding operations,
stamping and machining operations, automated electronics assembly and a wide
variety of other processes. In the case of remanufactured components, we conduct
our own teardown, diagnostics and rebuilding for computer modules and air
conditioning compressors. We have found this level of vertical integration to
provide advantages in terms of cost, quality and availability. We intend to
continue selective efforts toward further vertical integration to ensure a
consistent quality and supply of low cost components. We believe that the DEM
acquisition has further expanded our ability to become a "basic" supplier of
certain components.
12
We use the "just-in-time" cellular manufacturing concept as a major program to
lower costs and improve efficiency. The main thrust of "just-in-time" cellular
manufacturing is reducing work-in-process and finished goods inventory, and its
implementation reduces the inefficient operations that burden many manufacturing
processes. In 2000, we launched a program for the installation of a fully
integrated enterprise resource planning (ERP) system. The implementation was
completed in 2003 in our Temperature Control Segment. In addition, as part of
our overall Sarbanes-Oxley compliance efforts, we are evaluating our Engine
Management information system to determine ways to strengthen the controls of
such system.
EMPLOYEES
As of December 31, 2004, we employed approximately 3,000 people in the United
States, and 1,100 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong.
Of these, approximately 2,800 are production employees. We operate primarily in
non-union facilities and have binding labor agreements with the workers at our
two unionized facilities. We have approximately 170 production employees in
Edwardsville, Kansas who are covered by a contract with The International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
("UAW") that expires April 1, 2006. As of December 31, 2004, approximately 160
of our production employees in Long Island City, New York are under a UAW
contract that expires October 1, 2007. We also have a union relationship in
Mexico with an agreement negotiated each year. The current union agreement in
Mexico, which covers approximately 270 employees, expires on January 29, 2006.
We believe that our facilities are in favorable labor markets with ready access
to adequate numbers of skilled and unskilled workers, and we believe our
relations with our union and non-union employees are good.
INSURANCE
We maintain basic liability coverage up to $2 million for automobile liability,
general and product liability and $50 million for umbrella liability coverage.
We also maintain two $10 million environmental policies to cover our existing
U.S. facilities. One of our facilities is currently undergoing minor
environmental remediation. The environmental remediation costs at such facility
are covered by an insurance policy of $3 million, which is subject to a $1.5
million deductible; we have purchased new environmental insurance coverage in
the amount of $2 million relating to such facility. Historically, we have not
experienced casualty losses in any year in excess of our coverage. We have no
reason to expect this experience to change, but there can be no assurances that
liability losses in the future will not exceed our coverage.
AVAILABLE INFORMATION
We are a New York corporation founded in 1919. Our principal executive offices
are located at 37-18 Northern Boulevard, Long Island City, New York 11101, and
our main telephone number at that location is (718) 392-0200. Our Internet
address is WWW.SMPCORP.COM. We provide a link to reports that we have filed with
the SEC. However, for those persons that make a request in writing or by e-mail
(financial@smpcorp.com), we will provide free of charge our Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. These reports and other
information are also available, free of charge, at WWW.SEC.GOV. Alternatively,
you may read and copy any materials that we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
13
ITEM 2. PROPERTIES
We maintain our executive offices and a manufacturing plant in Long Island City,
New York. The table below describes our principal physical properties.
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
- -------- ------- --------------------------- ---- --------
ENGINE MANAGEMENT
Orlando FL Manufacturing (Ignition) 50,640 2007
Mishawaka IN Manufacturing 153,070 Owned
Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned
Independence KS Manufacturing 273,390 Owned
Wilson NC Manufacturing (Ignition) 31,500 2008
Reno NV Distribution (Ignition) 67,000 Owned
Long Island City NY Administration and Manufacturing (Ignition) 294,000 Owned
Long Island City NY Storage (land only) 16,230 2013
Greenville SC Manufacturing (Ignition) 181,525 Owned
Disputanta VA Distribution (Ignition) 411,000 Owned
Fajardo Puerto Rico Manufacturing (Ignition) 113,900 2007
Hong Kong HK Manufacturing (Ignition) 21,350 2005
Reynosa Mexico Manufacturing (Wire) 62,500 2009
TEMPERATURE CONTROL
Corona CA Manufacturing and Distribution 78,200 2008
Lewisville TX Administration and Distribution 415,000 2009
Fort Worth TX Manufacturing and Distribution 204,000 Owned
Grapevine TX Manufacturing 180,000 Owned
Grapevine TX Storage 51,630 2009
Grapevine TX Storage 5,000 2009
St. Thomas Canada Manufacturing 40,000 Owned
EUROPE
Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned
Nottingham England Manufacturing (Ignition) 46,780 Owned
Wellingborough England Manufacturing (Wire) 18,500 2017
Strasbourg France Administration and Distribution 16,150 2005
Massa Italy Administration and Distribution 13,100 2008
14
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
- -------- ------- --------------------------- ---- --------
OTHER
Mississauga Canada Administration and Distribution (Ignition, Wire, 128,400 2016
Temperature Control)
Irving TX Training Center 13,400 2009
SUBLET/AVAILABLE FOR DISPOSITION
Branford CT Vacant 187,000 Owned
Cumming GA Vacated/partially subleased 76,650 2007
Franklin Park IL Vacant 136,600 2006
Nashville TN Vacant 677,000 2021
Nottingham England Manufacturing (Ignition) 10,000 2012
Sunbury at
Thames England Vacated/partially subleased 28,100 2007
The real property we own in Indiana, Kansas, Nevada, South Carolina, Virginia
and Texas is encumbered by a mortgage or deed of trust, as applicable, in favor
of General Electric Capital Corporation, as agent for our secured revolving
credit facility. In addition, the real property we own in Long Island City, New
York is encumbered by a mortgage in favor of Wells Fargo Bank N.A.
ITEM 3. LEGAL PROCEEDINGS
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2001, approximately 100 cases were outstanding for which we were
responsible for any related liabilities. At December 31, 2002, the number of
cases outstanding for which we were responsible for related liabilities
increased to approximately 2,500, which include approximately 1,600 cases filed
in December 2002 in Mississippi. We believe that these Mississippi cases filed
against us in December 2002 were due in large part to potential plaintiffs
accelerating the filing of their claims prior to the effective date of
Mississippi's tort reform statute in January 2003, which statute eliminated the
ability of plaintiffs to file consolidated cases. At December 31, 2004,
approximately 3,700 cases were outstanding for which we were responsible for any
related liabilities. We expect the outstanding cases to increase gradually due
to recent legislation in certain states mandating minimum medical criteria
before a case can be heard. Since inception in September 2001, the amounts paid
for settled claims are approximately $2.3 million. We do not have insurance
coverage for the defense and indemnity costs associated with these claims. See
note 19 of the notes to consolidated financial statements for further
discussion.
On November 30, 2004, the Company was served with a summons and complaint in the
U.S. District Court for the Southern District of New York by The Coalition For A
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. The Company's answer to the
complaint has been delayed pending service on other defendants. Although we
cannot predict the ultimate outcome of this case or estimate the range of any
potential loss that may be incurred in the litigation, we believe that the
lawsuit is without merit, strenuously deny all of the plaintiff's allegations of
wrongdoing and believe we have meritorious defenses to the plaintiff's claims.
We intend to defend vigorously this lawsuit.
15
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades publicly on the New York Stock Exchange under the
trading symbol "SMP." The following table shows the high and low sales prices
per share of our common stock as reported by the New York Stock Exchange and the
dividends declared per share for the periods indicated:
HIGH LOW DIVIDEND
---- --- --------
FISCAL YEAR ENDED DECEMBER 31, 2004
First Quarter $15.85 $12.00 $0.09
Second Quarter 16.80 12.99 0.09
Third Quarter 15.56 13.37 0.09
Fourth Quarter 16.48 14.50 0.09
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter $15.70 $11.10 $0.09
Second Quarter 13.62 10.50 0.09
Third Quarter 11.72 9.25 0.09
Fourth Quarter 12.36 9.10 0.09
The last reported sale price of our common stock on the NYSE on February 28,
2005 was $11.56 per share. As of February 28, 2005, there were 455 holders of
record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our
board of directors and depend on our profitability, financial condition, capital
needs, future prospects, and other factors deemed relevant by our board. Our
current policy is to pay dividends on a quarterly basis. Our credit agreement
permits dividends and distributions by us provided specific conditions are met.
No repurchases of the Company's equity securities were made during 2004.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the last
five years ended December 31, 2004. This selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the notes thereto included elsewhere in this Form 10-K.
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales (1) ............................ $ 824,283 $ 678,783 $ 598,437 $ 591,652 $ 601,392
Gross profit (1) ......................... 194,993 174,772 157,544 139,055 162,701
Goodwill impairment charge (3) ........... 6,429 -- 3,334 -- --
Operating income (loss) .................. (1,737) 15,815 25,068 15,123 30,711
Earnings (loss) from continuing
operations (2) ......................... (8,907) 224 6,091 (2,485) 9,729
Loss from discontinued
operation, net of tax .................. (3,909) (1,742) (18,297) -- --
Cumulative effect of accounting
change, net of tax (3)(4) .............. (1,564) -- (18,350) -- --
Net loss (5) ............................. (14,380) (1,518) (30,556) (2,485) 9,729
PER SHARE DATA:
Earnings (loss) from continuing
operations:
Basic ................................ $ (0.46) $ 0.01 $ 0.51 $ (0.21) $ 0.82
Diluted .............................. (0.46) 0.01 0.51 (0.21) 0.81
Net earnings (loss) per common share:
Basic ................................ (0.74) (0.10) (2.57) (0.21) 0.82
Diluted .............................. (0.74) (0.10) (2.54) (0.21) 0.81
Cash dividends per common
share .................................. 0.36 0.36 0.36 0.36 0.36
OTHER DATA:
Depreciation and amortization ............ $ 19,013 $ 17,092 $ 16,128 $ 18,909 $ 18,922
Capital expenditures ..................... 9,774 8,926 7,598 13,740 16,652
Dividends ................................ 6,955 5,615 4,290 4,236 4,324
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ................ $ 14,934 $ 19,647 $ 9,690 $ 7,496 $ 7,699
Working capital .......................... 194,760 191,333 140,683 121,566 188,091
Total assets ............................. 656,569 694,525 490,758 509,429 549,396
Total debt ............................... 224,186 217,810 176,917 205,925 202,591
Long-term debt (excluding
current portion) ....................... 114,236 114,757 93,191 93,276 150,018
Stockholders' equity ..................... 207,312 226,041 153,881 185,687 194,305
(1) We adopted the guidelines of the Emerging Issues Task Force (EITF)
entitled "Accounting for Certain Sales Incentives" and "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products," on January 1, 2003. These guidelines address when
sales incentives and discounts should be recognized and the accounting for
certain costs incurred by a vendor on behalf of a customer, as well as
where the related revenues and expenses should be classified in the
financial statements. Net sales and gross profit amounts for the periods
prior to 2002 included in this Report have been reclassified to conform to
our 2002 presentation. As a result, certain costs of approximately $30.4
million and $25.4 million have been reclassified for December 31, 2001 and
2000, respectively.
17
(2) We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," on January
1, 2003. The new guidance eliminates the automatic classification of gain
or loss on extinguishment of debt as an extraordinary item of income and
requires that such gain or loss be evaluated for extraordinary
classification under the criteria of Accounting Principles Board ("APB")
No. 30, Reporting Results of Operations. As a result, the extraordinary
loss on the early extinguishment of debt of approximately $2.8 million and
$0.5 million has been reclassified to interest expense for December 31,
2001 and 2000, respectively.
(3) We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. The new guidance replaced the amortization of goodwill
with periodic assessments of the fair value of goodwill. Our initial
impairment test, performed as of January 1, 2002, indicated that the
carrying amounts of some of our reporting units exceeded the corresponding
fair values, which were determined based on the discounted estimated
future cash flows of the reporting units, the Company's weighted average
cost of capital and market multiples. As a result, we recorded an
impairment loss on goodwill as a cumulative effect of accounting change of
$18.3 million during the first quarter of 2002. The impairment loss
related to our European Operation and Temperature Control Segment for
which we recorded a charge of $10.9 million and $7.4 million,
respectively. We completed our annual impairment test of goodwill as of
December 31, 2002 and after consideration to 2002 losses and budgeted 2003
losses, we recorded an impairment loss of $3.3 million associated with the
Engine Management reporting unit of our European Segment. Our annual
impairment test of goodwill as of December 31, 2004, indicated that the
carrying amounts of two of our reporting units exceeded the corresponding
fair values. As a result, we recorded an impairment loss on goodwill of
$6.4 million during the fourth quarter of 2004. The impairment loss
related to our European Operation and Temperature Control Segment for
which we recorded a charge of $1.6 million and $4.8 million, respectively.
We will continue to test for impairment of our goodwill at least annually
in the future.
(4) New customer acquisition costs refer to arrangements pursuant to which we
incur change over costs to induce a new or existing customer to switch
from a competitor's brand. In addition, change over costs include the
costs related to removing the new customer's inventory and replacing it
with Standard Motor Products inventory commonly referred to as a
stocklift. New customer acquisition costs were initially recorded as a
prepaid asset and the related expense was recognized ratably over a
12-month period beginning in the month following the stocklift as an
offset to sales. In the fourth quarter of 2004, we determined that it was
a preferable accounting method to reflect the customer acquisition costs
as a reduction to revenue when incurred. We recorded a cumulative effect
of a change in accounting for new customer acquisition costs totaling $1.6
million, net of tax effects, and recorded the accounting change as if it
had taken effect on October 1, 2004.
(5) We recorded an after tax charge of $3.9 million, $1.7 million and $18.3
million as a loss from discontinued operation to account for legal
expenses and potential costs associated with our asbestos-related
liability for the years ended December 31, 2004, 2003 and 2002,
respectively.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto. This discussion summarizes the
significant factors affecting our results of operations and the financial
condition of our business during each of the fiscal years in the three year
period ended December 31, 2004.
OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific segment of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts. We
sell our products primarily in the United States, Canada and Latin America. We
also sell our products in Europe through our European Segment.
As part of our efforts to grow our business, as well as to achieve increased
production and distribution efficiencies, on June 30, 2003 we completed the
acquisition of substantially all of the assets and assumed substantially all of
the operating liabilities of Dana Corporation's Engine Management Group
(subsequently referred to as "DEM"). Prior to the sale, DEM was a leading
manufacturer of aftermarket parts in the automotive industry focused exclusively
on engine management. Our plan is to restructure and to integrate the DEM
business into our existing Engine Management Business.
Under the terms of the acquisition, we paid Dana Corporation $93.2 million in
cash, issued an unsecured promissory note of $15.1 million, and issued 1,378,760
shares of our common stock valued at $15.1 million. Including transaction costs,
our total purchase price was approximately $130.5 million.
In connection with the acquisition, we have reviewed our operations and
implemented integration plans to restructure the operations of DEM. As part of
the integration and restructuring plans, we closed seven of the nine acquired
DEM facilities, and we estimated total restructuring costs of $33.7 million.
Such amounts were recognized as liabilities assumed in the acquisition and
included in the allocation of the cost to acquire DEM.
Based on our most recent estimates of the total restructuring costs,
approximately $15.7 million relates to work force reductions and employee
termination benefits. This amount primarily represents severance costs relating
to the involuntary termination of DEM employees individually employed throughout
DEM facilities across a broad range of functions, including managerial,
professional, clerical, manufacturing and factory positions. Termination
benefits of $2.1 million and $9.4 million have been paid in 2003 and 2004,
respectively. The restructuring costs also include approximately $18.0 million
associated with exiting certain activities, primarily related to lease and
contract termination costs. Exit costs of $2.9 million were paid in 2004 leaving
the exit reserve balance at $15.1 million as of December 31, 2004.
The DEM acquisition in 2003 was strategic and continues to be our primary focus
in 2005. The critical goals we established for a successful integration were to
maintain the DEM customer base; reduce excess capacity by closing seven of the
acquired facilities in a 12 to 18 month timeframe; and complete the transition
for $30-35 million of cash outlays in restructuring and integration costs during
this same period. The integration has proceeded on schedule, and all DEM
operations including manufacturing, distribution, MIS, finance, sales and
marketing have been transferred to SMP locations. As planned, we have exited
seven of the acquired nine facilities, and this has been accomplished within our
original time frame of twelve to eighteen months. The integration moves have
been completed within budget, and thus far we have maintained all the DEM
customers. Based on our current expectations, we continue to believe that as we
achieve the planned material product cost savings, and our new employees achieve
normal efficiency, we will accomplish our target of $50 - $55 million annual
savings from the DEM acquisition. It is our goal to begin approaching this
number during the second half of 2005.
19
On February 3, 2004, we acquired inventory from the Canadian distribution
operation of DEM for approximately $1.0 million. We have relocated such
inventory into our distribution facility in Mississauga, Canada.
For additional information about our business, strategy and competitive
environment, refer to Item 1, "Business."
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 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.
COMPARISON OF FISCAL YEARS 2004 AND 2003
SALES. On a consolidated basis, net sales for 2004 were $824.3 million, an
increase of $145.5 million, or 21.4%, compared to $678.8 million in 2003. The
increase in net sales was primarily in our Engine Management segment and our
Canadian distribution business. Engine Management net sales increased to $562.8
million (an increase of $148.4 million) or 35.8% in 2004 as compared to 2003.
The acquisition of DEM added approximately $122 million of incremental net sales
in the first half of 2004 with no sales in the comparable period in 2003.
Excluding the impact of the first half DEM net sales, the balance of Engine
Management sales increased $26.4 million or 6.4%. The $8.2 million increase in
sales in our Canadian business was related to the acquisition of the DEM
distribution business in February 2004. Temperature Control net sales decreased
to $210 million (a decrease of $9.5 million) or 4.3% in 2004 as compared to
2003. The decrease in Temperature Control net sales was primarily due to the
very cool and wet weather conditions existing in the spring and early summer.
20
In addition, in the fourth quarter of 2004, we determined that it was a
preferable accounting method to reflect new customer acquisition costs as a
reduction to revenue when incurred instead of as we initially recorded it as a
prepaid asset and the related expense which was recognized ratably over a
12-month period as an offset to sales. Accordingly, we recorded a cumulative
effect of a change in accounting for new customer acquisition costs totaling
$2.6 million (or $1.6 million, net of tax effects) and recorded the accounting
change as if it had taken effect on October 1, 2004.
GROSS MARGINS. Gross margins as a percentage of consolidated net sales,
decreased to 23.7% in 2004 compared to 25.7% in 2003. The margin decrease was
primarily related to a number of significant one-time related items from the
final DEM integration and lower net sales in our Temperature Control segment.
The Engine Management gross margins were negatively impacted in the fourth
quarter of 2004 primarily related to (1) the underabsorption of factory overhead
expenses of approximately $3 million due to closing manufacturing facilities for
physical inventories and to reduce the "bridge inventories" which had been built
to cover the plant closings, (2) unfavorable physical inventory adjustments of
approximately $3 million primarily related to the scrapping of inventories in
facilities being closed, and (3) an inventory writedown of approximately $5
million related to the inventory turnover for products sourced on the outside at
substantial premiums to our manufactured costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) increased by $25.6 million to $178.9 million in
2004, compared to $153.3 million in 2003. This increase was primarily due to the
$145.5 million sales increase, as discussed above, and an increase of $2.4
million in discount fees associated with the sale of customer receivables (see
note 4 of the notes to our consolidated financial statements). As a percentage
of net sales, selling, general and administrative expenses decreased to 21.7% in
2004 from 22.6% in 2003. We anticipate further savings in 2005 as we have
completed the DEM integration and merged operations.
GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is no longer
amortized, but instead, is subject to an annual review for potential impairment.
Our annual impairment test of goodwill as of December 31, 2004, indicated that
the carrying amounts of two of our reporting units exceeded the corresponding
fair values, which were determined based on the discounted estimated future cash
flows of the reporting units, the companies weighted average cost of capital and
market multiples. As a result, we recorded an impairment loss on goodwill of
$6.4 million during the fourth quarter of 2004. The impairment loss related to
our Temperature Control and European Operation Segment for which we recorded a
charge of $4.8 million and $1.6 million, respectively. We will continue to test
for impairment of our goodwill at least annually in the future.
INTEGRATION EXPENSES. Integration expenses in 2004 were $11.4 million, primarily
related to the DEM integration, compared to $5.7 million in 2003, which
primarily related to expenses associated with the DEM integration and with the
divestiture of a product line within our European segment.
OPERATING INCOME (LOSS). Operating income decreased by $17.5 million to an
operating loss of $1.7 million in 2004, compared to operating income of $15.8
million in 2003. The decrease was primarily due to fourth quarter charges
impacting the Engine Management gross margin, lower Temperature Control sales,
goodwill impairment charge and DEM integration expenses.
OTHER INCOME, NET. Other income, net, increased to $2.9 million in 2004 compared
to an expense of $0.5 million in 2003. The increase was primarily due to
increased earnings from joint ventures and foreign exchange transactions.
21
INTEREST EXPENSE. Interest expense decreased by $0.2 million to $13.7 million in
2004 compared to $13.9 million in 2003.
INCOME TAX PROVISION. The effective tax rate for continuing operations decreased
from 84.3% in 2003 to 29.2% in 2004. The 2003 effective rate was impacted by
various tax jurisdictions we do business in and no tax benefits recorded on
losses in Europe.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation, net of
taxes, in 2004 reflects $3.9 million associated with asbestos-related provisions
and legal expenses as compared to $1.7 million of legal expenses in 2003. As
discussed more fully in note 19 of the notes to the consolidated financial
statements, we are responsible for certain future liabilities relating to
alleged exposure to asbestos containing products.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. As discussed above, we reflect new
customer acquisition costs as a reduction to revenue when incurred. We recorded
a cumulative effect of a change in accounting for new customer acquisition costs
totaling $2.6 million (or $1.6 million, net of tax effects) and recorded the
amount as if the change in accounting principle had taken effect on October 1,
2004. See note 3 of the notes to the consolidated financial statements for a
further discussion.
COMPARISON OF FISCAL YEARS 2003 AND 2002
SALES. On a consolidated basis, net sales for 2003 were $678.8 million, an
increase of $80.4 million, or 13.4%, compared to $598.4 million in 2002.
Excluding DEM net sales of $115.5 million, Engine Management net sales were down
$4.2 million during 2003 compared to 2002. The volume decline was in line with
our forecasts, and would have been mitigated if we had implemented normal price
level increases in 2003, which have been implemented in 2004. The Temperature
Control net sales decrease of $35.5 million was primarily due to the loss of
business with AutoZone and the very cool and wet weather conditions existing in
the spring and early summer.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 25.7% in 2003, from 26.3% in 2002. A combination of lower margins
from DEM and the loss in business in Temperature Control noted above, negatively
effected gross margins during the period. As DEM is integrated, we do expect
gross margins to improve as a result of operating efficiencies achieved in
overhead absorption and material costs reductions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) increased $26.4 million to $153.3 million in
2003, compared to $126.9 million in 2002. Excluding DEM SG&A expenses of $28.9
million, SG&A expenses decreased $2.5 million in 2003 versus 2002. During 2003
we incurred approximately $5.6 million of integration and restructuring expenses
of which $2.8 million related to DEM and the remaining balance relating to our
Temperature Control and European Segments compared to $2.2 million of
restructuring expenses in 2002. Reducing DEM SG&A expenses is a major focus
during the DEM integration and SG&A is expected to significantly decrease.
GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is no longer
amortized, but instead, is subject to an annual review for potential impairment.
We completed our annual impairment test during the fourth quarter of 2003 and
determined that our goodwill was not impaired.
During the first quarter of 2002, we performed our initial impairment test of
goodwill reviewing the fair values of each of our reporting units using the
discounted cash flows method, based on our weighted average cost of capital and
market multiples. The decline in economic and market conditions, higher
integration costs than anticipated and the general softness in the automotive
aftermarket caused a decrease in the fair values of certain of our reporting
units. As a result, we recorded an impairment loss on goodwill as a cumulative
effect of accounting change of $18.3 million, net of tax, or $1.55 per diluted
share during the first quarter of 2002. The impairment loss relates to goodwill
of $10.9 million in our European Segment and $7.4 million in our Temperature
Control Segment. In addition, during the fourth quarter of 2002 we wrote-off
approximately $3.3 million for the impairment of goodwill associated with the
Engine Management reporting unit of our European Segment.
22
OPERATING INCOME. Operating income decreased by $9.3 million to $15.8 million in
2003, compared to $25.1 million in 2002. This decrease was primarily due to the
overall decrease in consolidated net sales, excluding DEM net sales, as
discussed above and the acquisition of DEM.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased $3.7 million
primarily due to unfavorable foreign exchange losses and lower interest and
dividend income.
INTEREST EXPENSE. Interest expense decreased by $0.3 million in 2003, compared
to 2002, due to lower interest rates.
INCOME TAX PROVISION. The effective tax rate for continuing operations was 84%
in 2003 and 57% in 2002. The increase was primarily due to lower earnings in our
domestic operations as compared to 2002 and operating losses in our European
segment for which no income tax benefit has been recorded. Our foreign income
tax relates primarily to our profitable Canadian and Hong Kong operations.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation in 2003
reflects $1.7 million associated with asbestos-related legal expenses. In 2002,
the $18.3 million charge included a reserve for future indemnification and 2002
legal expenses. As discussed more fully in note 17 of the notes to the
consolidated financial statements, we are responsible for certain future
liabilities relating to alleged exposure to asbestos containing products. Based
on the information contained in the September 2002 actuarial study, which
estimated an undiscounted liability for settlement payments ranging from $27.3
million to $58 million, and all other available information considered by us, we
recorded an after tax charge of $16.9 million as a loss from discontinued
operation during the third quarter of 2002 to reflect such liability, excluding
legal costs. We concluded that no amount within the range of settlement payments
was more likely than any other and, therefore, recorded the low end of the range
as the liability associated with future settlement payments through 2052 in our
consolidated financial statements, in accordance with generally accepted
accounting principles.
IMPACT OF INFLATION
Although inflation is a concern, management believes it will be able to continue
to minimize any adverse effect of inflation on earnings through cost reduction
programs, including the sale of manufactured products, and, where competitive
situations permit, selling price increases. Recently, prices of steel and other
commodities have risen. These increases did not have a material impact on our
consolidated results, as we are not dependent on any single commodity, however,
there can be no assurance over the long-term that increases in commodity prices
will materially effect our business or results of operations.
FUTURE RESULTS OF OPERATIONS
We continue to face competitive pressures. In order to sell at competitive
prices while maintaining profit margins, we are continuing to focus on overhead
and cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the year ended December 31, 2004, cash provided by
operations amounted to $3.5 million, compared to $31.5 million in 2003 and $57
million in 2002.
The reduction in 2004 was primarily attributable to lower earnings from
continuing operations and restructuring charges incurred offset by a decrease in
accounts receivable. The decrease in accounts receivable is primarily the result
of certain of our significant customers implementing negotiable draft programs,
whereby cash collections of accounts receivable balances can be made early at
our option, but at a discount to us. The cost of such discounts is recorded as
selling, general and administrative expenses. See note 4 of the notes to our
consolidated financial statements for further discussion.
23
The reduction in 2003 was primarily attributable to lower earnings from
continuing operations, a decrease in accounts payable and a lower decrease in
inventory in 2003, as compared to 2002.
For the year ended December 31, 2004, inventory increased by approximately $5
million. Inventory turnover was 2.5x in 2004, 2.2 x in 2003, and 2.3 x in 2002.
Inventory turnover should improve as DEM is integrated, and inventory
"build-ups" needed to ensure order fulfillment are reduced as DEM is effectively
integrated.
INVESTING ACTIVITIES. Cash used in investing activities was $10.9 million for
the year ended December 31, 2004, compared to $101.9 million in 2003 and $26.9
million in 2002. The decrease is primarily due to the payment for the
acquisition of DEM on June 30, 2003. During 2004, payments for acquisitions
include DEM in Canada and the final cash payment for the DEM acquisition.
The increase during 2003 as compared to 2002 was primarily due to the
acquisition of DEM as discussed more fully in note 2 of the notes to
consolidated financial statements. Assets acquired consist primarily of
property, plant and equipment, receivables and inventory. All acquisitions were
financed with funds provided from our secondary equity offering, revolving
credit facility and seller financing.
In January 2002, we acquired the assets of a temperature control business from
Hartle Industries for $4.8 million. The assets consist primarily of property,
plant and equipment, and inventory. In April 2002, we acquired Carol Cable
Limited, a manufacturer and distributor of wire sets based in the United
Kingdom, for approximately $1.7 million. The assets from this acquisition
consist primarily of property, plant and equipment, and inventory. In addition,
during 2002, the Company paid approximately an additional $2.8 million for the
remaining equity interest in SMP Holdings Limited. In May 2002, we purchased the
aftermarket fuel injector business of Sagem Inc., a subsidiary of Johnson
Controls, for $10.5 million. Sagem Inc. is a basic manufacturer of fuel
injectors and was our primary supplier prior to the acquisition. Assets acquired
from this acquisition consist primarily of property, plant and equipment, and
inventory. The purchase was partially financed by the seller ($5.4 million to be
paid over a two year period), with the remaining funds being provided under our
revolving credit facility.
Capital expenditures for the three most recent fiscal years ended December 31
totaled $9.8 million in 2004, $8.9 million in 2003, and $7.6 million in 2002.
FINANCING ACTIVITIES. Cash provided by financing activities was $1.2 million for
the year ended December 31, 2004 and $75 million in 2003 compared to cash used
in financing activities of $29.5 million in 2002. The decrease is primarily due
to the financing related to the acquisition of DEM on June 30, 2003.
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.
Effective June 30, 2003, in connection with our acquisition of DEM, we amended
and restated our credit agreement to provide for an additional $80 million
commitment. This additional commitment increases the total amount available for
borrowing under our revolving credit facility to $305 million from $225 million,
and extends the term of the credit agreement from 2006 to 2008. Availability
under our revolving credit facility is based on a formula of eligible accounts
receivable, eligible inventory and eligible fixed assets, which includes the
purchased assets of DEM. We expect such availability under the revolving credit
facility to be sufficient to meet our ongoing operating and integration costs.
Our credit agreement also permits dividends and distributions by us provided
specific conditions are met.
24
Direct borrowings under our revolving credit facility bear interest at the prime
rate plus the applicable margin (as defined in the credit agreement) or the
LIBOR rate plus the applicable margin (as defined in the credit agreement), at
our option. Borrowings are collateralized by substantially all of our assets,
including accounts receivable, inventory and fixed assets, and those of our
domestic and Canadian subsidiaries. The terms of our revolving credit facility
provide for, among other provisions, new financial covenants requiring us, on a
consolidated basis, (1) to maintain specified levels of earnings before
interest, taxes, depreciation and amortization (EBITDA) as defined in the
amendments to the credit agreement, at the end of each fiscal quarter through
December 31, 2004, (2) commencing September 30, 2004, to maintain specified
levels of fixed charge coverage at the end of each fiscal quarter (rolling
twelve months) through 2007, and (3) to limit capital expenditure levels for
each fiscal year through 2007. We subsequently received a waiver of compliance
with the EBITDA covenant for the fiscal quarters ending September 30, 2004 and
December 31, 2004.
At December 31, 2004, we were not in compliance with the minimum fixed charge
coverage ratio contained in our revolving credit facility. However, as of March
31, 2005, we received a waiver of compliance of such covenant for the quarter
ended on December 31, 2004. The waiver was part of an amendment to our revolving
credit facility, which provided, among other things, for the following: (1)
borrowings of the Company are no longer collateralized by the assets, including
accounts receivable, inventory and fixed assets, of our Canadian subsidiary; (2)
the specified levels of fixed charge coverage has been modified for 2005 and
thereafter; (3) our Canadian subsidiary was released from its obligations under
a guaranty and security agreement; and (4) the Company's pledge of stock of its
Canadian subsidiary to the lenders was reduced from a 100% to a 65% pledge of
stock.
In addition, in order to facilitate the aggregate financing of the DEM
acquisition, we completed a public equity offering of 5,750,000 shares of our
common stock for net proceeds of approximately $55.7 million and also issued to
Dana Corporation 1,378,760 shares of our common stock valued at approximately
$15.1 million.
In connection with our acquisition of DEM, on June 30, 2003 we also issued to
Dana Corporation an unsecured subordinated promissory note in the aggregate
principal amount of approximately $15.1 million. The promissory note bears an
interest rate of 9% per annum for the first year, with such interest rate
increasing by one-half of a percentage point (0.5%) on each anniversary of the
date of issuance. Accrued and unpaid interest is due quarterly under the
promissory note. The maturity date of the promissory note is December 31, 2008.
The promissory note may be prepaid in whole or in part at any time without
penalty.
On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The
loan is payable in equal monthly installments. The loan bears interest at a
fixed rate of 5.50% maturing in July 2018. The mortgage loan is secured by the
related building and property.
Our profitability and working capital requirements are seasonal due to the sales
mix of temperature control products. Our working capital requirements usually
peak near the end of the second quarter, as the inventory build-up of air
conditioning products is converted to sales and payments on the receivables
associated with such sales begin to be received. Our working capital is further
being impacted by restructuring and integration costs, as well as inventory
build-ups necessary to ensure order fulfillment during the DEM integration.
These increased working capital requirements are funded by borrowings from our
lines of credit. In 2004, we also received the benefit from accelerating
accounts receivable collections from customer draft programs. While this program
is new in 2004, we cannot ensure such programs will remain going forward. We
anticipate that our present sources of funds will continue to be adequate to
meet our near term needs.
25
In October 2003, we entered into a new interest rate swap agreement with a
notional amount of $25 million that is to mature in October 2006. Under this
agreement, we receive a floating rate based on the LIBOR interest rate, and pay
a fixed rate of 2.45% on the notional amount of $25 million.
On July 26, 1999, we issued convertible debentures, payable semi-annually, in
the aggregate principal amount of $90 million. The debentures carry an interest
rate of 6.75%, payable semi-annually. The debentures are convertible into
2,796,120 shares of our common stock, and mature on July 15, 2009. The proceeds
from the sale of the debentures were used to prepay an 8.6% senior note, reduce
short term bank borrowings and repurchase a portion of our common stock.
During 1998 through 2000, the Board of Directors authorized multiple repurchase
programs under which we could repurchase shares of our common stock. During such
years, $26.7 million (in the aggregate) of common stock was repurchased to meet
present and future requirements of our stock option programs and to fund our
Employee Stock Option Plan (ESOP). As of December 31, 2004, we have Board
authorization to repurchase additional shares at a maximum cost of $1.7 million.
During 2004, 2003 and 2002, we did not repurchase any shares of our common
stock.
The following is a summary of our contractual commitments, inclusive of our
acquisition of DEM, as of December 31, 2004:
-------------------------------------------------------------
(IN THOUSANDS) 2005 2006 2007 2008 2009 THEREAFTER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Principal payments of
long term debt .................. $ 534 $ 555 $ 581 $ 553 $ 560 $ 111,987 $ 114,770
Operating leases .................. 7,079 6,421 5,358 4,621 3,720 19,784 46,983
Interest rate swap agreements ..... -- (362) -- -- -- -- (362)
Post employee retirement funding... 1,201 1,278 1,408 1,556 1,720 12,475 19,638
Severance payments related
to integration .................. 3,999 251 -- -- -- -- 4,250
--------- --------- --------- --------- --------- --------- ---------
Total commitments ............. $ 12,813 $ 8,143 $ 7,347 $ 6,730 $ 6,000 $ 144,246 $ 185,279
========= ========= ========= ========= ========= ========= =========
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see note 1 of the notes to our consolidated financial
statements. You should be aware that preparation of our consolidated annual and
quarterly financial statements requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our consolidated financial
statements, and the reported amounts of revenue and expenses during the
reporting periods. We can give no assurance that actual results will not differ
from those estimates.
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 revenues when products are shipped
and title has been transferred to a customer, the sales price is fixed and
determinable, and collection is reasonably assured. We estimate and record
provisions for cash discounts, quantity rebates, sales returns and warranties in
the period the sale is recorded, based upon our prior experience and current
trends. As described below, significant management judgments and estimates must
be made and used in estimating sales returns and allowances relating to revenue
recognized in any accounting period.
26
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost
is generally determined on the first-in, first-out basis. Where appropriate,
standard cost systems are utilized for purposes of determining cost; the
standards are adjusted as necessary to ensure they approximate actual costs.
Estimates of lower of cost or market value of inventory are determined at the
reporting unit level and are based upon the inventory at that location taken as
a whole. These estimates are based upon current economic conditions, historical
sales quantities and patterns and, in some cases, the specific risk of loss on
specifically identified inventories.
We also evaluate inventories on a regular basis to identify inventory on hand
that may be obsolete or in excess of current and future projected market demand.
For inventory deemed to be obsolete, we provide a reserve on the full value of
the inventory. Inventory that is in excess of current and projected use is
reduced by an allowance to a level that approximates our estimate of future
demand.
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The
preparation of financial statements requires our management to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our management must make estimates of potential future product
returns related to current period product revenue. Management analyzes
historical returns, current economic trends, and changes in customer demand when
evaluating the adequacy of the sales returns and other allowances. Significant
management judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any accounting period. At
December 31, 2004, the allowance for sales returns was $23.1 million. Similarly,
our management must make estimates of the uncollectability of our accounts
receivables. Management specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. At December 31,
2004, the allowance for doubtful accounts and for discounts was $9.4 million.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS.
New customer acquisition costs refer to arrangements pursuant to which we incur
change over costs to induce a new customer to switch from a competitor's brand.
In addition, change over costs include the costs related to removing the new
customer's inventory and replacing it with Standard Motor Products inventory
commonly referred to as a stocklift. New customer acquisition costs were
initially recorded as a prepaid asset and the related expense was recognized
ratably over a 12-month period beginning in the month following the stocklift as
an offset to sales. In the fourth quarter of 2004, we determined that it was a
preferable accounting method to reflect the customer acquisition costs as a
reduction to revenue when incurred. We recorded a cumulative effect of a change
in accounting for new customer acquisition costs totaling $2.6 million (or $1.6
million, net of tax effects) and recorded the amount as if the change in
accounting principle had taken effect on October 1, 2004.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income, and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At December 31, 2004, we
had a valuation allowance of $23.1 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.
27
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 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 calculated the
costs of providing retiree benefits under the provisions of SFAS 87, Employers'
Accounting for Pensions, and SFAS 106, Employers' Accounting for Postretirement
Benefits Other than Pensions. The key assumptions used in making these
calculations are disclosed in notes 11 and 12 of the notes to our consolidated
financial statements. The most significant of these assumptions are the discount
rate used to value the future obligation, expected return on plan assets and
health care cost trend rates. We select discount rates commensurate with current
market interest rates on high-quality, fixed rate debt securities. The expected
return on assets is based on our current review of the long-term returns on
assets held by the plans, which is influenced by historical averages. The
medical cost trend rate is based on our actual medical claims and future
projections of medical cost trends.
ASBESTOS RESERVE. We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. A September 2002 actuarial
study estimated a liability for settlement payments ranging from $27.3 million
to $58 million. We concluded that no amount within the range of settlement
payments was more likely than any other and, therefore, recorded the low end of
the range as the liability associated with future settlement payments through
2052 in our consolidated financial statements, in accordance with generally
accepted accounting principles.
In accordance with our accounting policy, we update the actuarial study during
the third quarter of each year. The most recent update to the actuarial study
was performed as of August 31, 2004 using methodologies consistent with the
September 2002 study. The updated study has estimated an undiscounted liability
for settlement payments, excluding legal costs, ranging from $28 to $63 million
for the period through 2049. The change from the prior year study was a $1.5
million increase for the low end of the range and a $7.9 million decrease for
the high end of the range. As a result, in September 2004, an incremental $3
million provision was added to the asbestos accrual increasing the reserve to
approximately $28.2 million. Legal costs are estimated to range from $22 to $27
million during the same period. We plan on performing a similar annual actuarial
analysis during the third quarter of each year for the foreseeable future. Based
on this analysis and all other available information, we will reassess the
recorded liability and, if deemed necessary, record an adjustment to the
reserve, which will be reflected as a loss or gain from discontinued operation.
Legal expenses associated with asbestos-related matters are expensed as incurred
and recorded as a loss from discontinued operation 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.
28
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Medicare Modernization Act") was signed into law. The Medicare
Modernization Act expanded Medicare to include, for the first time, coverage for
prescription drugs. At present, proposed regulations necessary to implement the
Medicare Modernization Act have been issued, including those that would specify
the manner in which actuarial equivalency must be determined, the evidence
required to demonstrate actuarial equivalency, and the documentation
requirements necessary to be entitled to the subsidy. Based on such proposed
regulations, we believe that our prescription drug benefit for our employee
retirees (other than certain union retirees) are expected to meet the actuarial
equivalence test in 2006 and, therefore, we would be eligible to receive a
subsidy from Medicare. However, our net periodic postretirement benefit cost
does not reflect any amount associated with the subsidy because such subsidy is
immaterial in amount.
INVENTORY COSTS
In November 2004, the FASB issued SFAS No. 151, Inventory Costs-An Amendment of
ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
Among other provisions, the new rule requires that items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151 is effective for
fiscal years beginning after June 15, 2005 and is required to be adopted
beginning on January 1, 2006. The Company is currently evaluating the effect
that the adoption of SFAS 151 will have on our consolidated results of
operations and financial condition but do not expect SFAS 151 to have a material
impact.
PRONOUNCEMENTS RELATING TO AMERICAN JOBS CREATION ACT OF 2004
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP 109-1"),
"Application of SFAS No. 109, "Accounting for Income Taxes", to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." It is effective immediately. FSP 109-1 states that the
tax deduction of qualified domestic production activities, which is provided by
the American Jobs Creation Act of 2004 (the "Jobs Act"), will be treated as a
special deduction as described in SFAS No. 109. Consequently, the impact of the
deduction, which is effective January 1, 2005, will be reported in the period in
which the deduction is claimed on the Company's income tax returns. The Company
does not expect FSP 109-1 to have a material effect on its financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-2 ("FSP 109-2"),
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004". FSP 109-2 provides
accounting and disclosure guidance related to the Jobs Act provision for the
limited time 85% dividends received deduction on the repatriation of certain
foreign earnings. Although adoption is effective immediately, FSP 109-2 states
that a company is allowed time beyond the financial reporting period to evaluate
the effect of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings. The Company is evaluating the impact of the repatriation
provisions of the Jobs Act and will complete its review by December 31, 2005. It
is not expected that these provisions will have a material impact on the
Company's financial statements. Accordingly, as provided for in FSP 109-2, the
Company has not adjusted its tax expense or net deferred tax assets to reflect
the repatriation provisions of the Jobs Act.
29
SHARE-BASED PAYMENT
In December 2004, the FASB issued Statement of Financial Accounts Standards No.
123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R is a revision to SFAS No.
123, "Accounting for Stock-Based Compensation" and supercedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS 123R establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. Entities will be required to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service, the
requisite service period (usually the vesting period), in exchange for the
award. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models. If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. SFAS
123R is effective for interim and annual financial statements beginning after
June 15, 2005 and will apply to all outstanding and unvested share-based
payments at the time of adoption. The Company is currently evaluating the impact
SFAS 123R will have on its consolidated financial statements and will adopt such
standard as required.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange
and interest rates. These exposures are actively monitored by management. Our
exposure to foreign exchange rate risk is due to certain costs, revenues and
borrowings being denominated in currencies other than one of our subsidiary's
functional currency. Similarly, we are exposed to market risk as the result of
changes in interest rates which may affect the cost of our financing. It is our
policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
EXCHANGE RATE RISK
We have exchange rate exposure, primarily, with respect to the Canadian dollar
and the British pound. As of December 31, 2004, our financial instruments which
are subject to this exposure are immaterial, therefore the potential immediate
loss to us that would result from a hypothetical 10% change in foreign currency
exchange rates would not be expected to have a material impact on our earnings
or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation
in both of the exchange rates affecting both of the foreign currencies in which
the indebtedness and the financial instruments described above are denominated
and does not take into account the offsetting effect of such a change on our
foreign-currency denominated revenues.
INTEREST RATE RISK
We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in our debt portfolio. To manage a portion of
our exposure to interest rate changes, we enter into interest rate swap
agreements.
In October 2003, we entered into a new interest rate swap agreement with a
notional amount of $25 million that is to mature in October 2006. Under this
agreement, we receive a floating rate based on the LIBOR interest rate, and pay
a fixed rate of 2.45% on the notional amount of $25 million. If, at any time,
the swap is determined to be ineffective, in whole or in part, due to changes in
the interest rate swap agreement, 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.
30
In July 2001, we entered into two interest rate swap agreements to manage our
exposure to interest rate changes. The swaps effectively convert a portion of
our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional amounts. At December 31, 2002, we had two
outstanding interest rate swap agreements (in an aggregate notional amount of
$75 million), one of which matured in January 2003 and the other matured in
January 2004. Under these agreements, we received a floating rate based on the
LIBOR interest rate, and paid a fixed rate of 4.92% on a notional amount of $45
million (matured in January 2004) and 4.37% on a notional amount of $30 million
(matured in January 2003).
At December 31, 2004, we had approximately $224.2 million in loans and financing
outstanding, of which approximately $114.8 million bear interest at fixed
interest rates and approximately $109.4 million bear interest at variable rates
of interest. We invest our excess cash in highly liquid short-term investments.
Our percentage of variable rate debt to total debt was 49% at December 31, 2004
and 2003. Depending upon the level of borrowings under our revolving credit
facility and our excess cash, the effect of a hypothetical, instantaneous and
unfavorable change of 100 basis points in the interest rate may have
approximately $1.2 million negative impact on our earnings or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
Management's Report on Internal Control over Financial Reporting....................................... 32
Report of Independent Registered Public Accounting Firm--Internal Control Over Financial
Reporting (Grant Thornton LLP)................................................................... 35
Report of Independent Registered Public Accounting Firm--Consolidated Financial Statements
(Grant Thornton LLP).............................................................................. 37
Report of Independent Registered Public Accounting Firm--Consolidated Financial Statements (KPMG
LLP).............................................................................................. 38
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002............. 39
Consolidated Balance Sheets as of December 31, 2004 and 2003........................................... 40
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 ............ 41
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,
2004, 2003 and 2002............................................................................... 42
Notes to Consolidated Financial Statements............................................................. 43
31
MANAGEMENT'S REPORT ON INTERNAL CONTOL
OVER FINANCIAL REPORTING
To the Stockholders
Standard Motor Products, Inc.:
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
or 15d-15(f) of the Exchange Act). The Company's internal control system was
designed to provide reasonable assurance to the Company's management and Board
of Directors regarding the preparation and fair presentation of published
financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Because of these inherent limitations, internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and presentation, and may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
A material weakness is a significant deficiency (as defined in PCAOB Auditing
Standard No. 2), or combination of significant deficiencies, that results in
there being more than a remote likelihood that a material misstatement in
financial statements will not be prevented or detected on a timely basis by
employees in the normal course of their work.
Grant Thornton LLP, our independent registered public accounting firm, has
provided us with an unqualified report on our consolidated financial statements
for 2004. However, in connection with the audit procedures for the audit of our
2004 financial statements and internal controls assessment, we were not able to
complete fully our testing of a sufficient amount of key controls in our
processes to satisfy Grant Thornton on their effectiveness. One of the reasons
for our inability to complete such testing was that we did not have adequate
resources to perform such testing by December 31, 2004. Accordingly, in
consultation with Grant Thornton, we have concluded that we are unable to
complete the management assessment of our internal control over financial
reporting as of December 31, 2004 as required under Section 404 of the
Sarbanes-Oxley Act, and Grant Thornton has issued a "disclaimer" opinion,
included herein, indicating that they do not express an opinion as to
management's assessment and as to the effectiveness of our internal control over
financial reporting as of December 31, 2004.
Notwithstanding the above, management is strengthening the Company's internal
control over financial reporting beyond what has existed in prior years. In the
course of performing its assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, management
identified the following material weaknesses in the Company's internal control
over financial reporting:
(1) There were insufficient personnel resources within the accounting
and financial reporting function due to accounting staff (including
senior level employees) turnover occurring in the fourth quarter of
2004.
(2) There were deficiencies identified in the following areas of the
Company's information technology function which, when considered in
the aggregate, constitute a material weakness over financial
reporting:
o The Company's IT system is decentralized with disparate IT
platforms, business solutions and software applications being
utilized.
32
o System maintenance policies and procedures (including an
enhanced disaster recovery plan) require development and
adoption.
o Security of systems used for the entry and maintenance of
accounting records requires additional documentation and
scrutiny to ensure that appropriate access to such systems and
the data contained therein is restricted.
o A policy and procedure to address an overall security
framework, including password usage, intrusion detection,
system security monitoring and back-up recovery must be
written and implemented.
(3) There were deficiencies in the analysis and reconciliation of
general ledger accounts which were indicative of a material weakness
in controls over closing procedures, including the (a) month end cut
off processes, and (b) the accounting and reporting of restructuring
charges.
Since the discovery of the material weaknesses in internal controls described
above, we have taken various actions to remediate our internal control over
financial reporting including, but not limited to, the following:
(1) We have engaged a search firm to assist us in the hiring of
additional senior level accounting staff. We expect to fill such
positions by the second or third quarters of 2005. In addition, in
the first quarter of 2005, we hired a Financial Compliance Manager
to assist us with our Sarbanes-Oxley compliance.
(2) We have re-allocated resources to our accounting and finance
department to strengthen our accounting function. In particular, in
the first quarter of 2005 we have transferred one employee from our
European operations to become our Engine Management Group
Controller, and in the second quarter of 2005 we will be
transferring one employee from our Canadian operations to serve in a
senior level accounting position in our Engine Management division.
In addition, in the fourth quarter of 2004 we have hired an outside
consultant to assist us with our accounting function.
(3) In 2004, we retained an independent third party consulting firm to
assist us in the preparation, documentation and testing of our
compliance with Section 404 of the Sarbanes-Oxley Act of 2002. We
intend to continue to utilize this consulting firm with our
Sarbanes-Oxley compliance efforts in 2005.
(4) As part of our efforts to improve our IT function, we are in the
process of:
o Establishing an enterprise wide information technology
strategy to synthesize the disparate IT platforms and to
develop policies to unify the business solutions and software
applications being employed;
o Establishing a plan for uniform upgrades of workstations and
software, including virus protection and software fixes;
o Establishing a formal policy and procedure to address the
overall security framework, including password usage,
intrusion detection and system security monitoring;
o Improving our security measures to safeguard our data,
including enhancing our disaster recovery plan;
o Improving our policies and procedures for system maintenance
and handling back-up and recovery tapes; and
o Utilizing a consulting firm to assist us with preparing an IT
policy and procedures manual to document all of our updated IT
procedures/standards on a company-wide basis.
33
The continued implementation of the initiatives described above is among our
highest priorities. We have discussed our corrective actions and future plans
with our audit committee and Grant Thornton and, as of the date of this Report,
we believe the actions outlined above should correct the above-listed material
weaknesses in our internal controls. However, we cannot assure you that neither
we nor our independent auditors will in the future identify further material
weaknesses or significant deficiencies in our internal control over financial
reporting that we have not discovered to date.
In making this assessment, the Company's management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Because of the material weakness
described above, management believes that, as of December 31, 2004, the
Company's internal control over the financial reporting was not effective based
on those criteria.
Notwithstanding Grant Thornton's "disclaimer" opinion, Grant Thornton has
indicated its agreement with the above listed weakness in our internal controls
and has advised our audit committee of our board of directors that the internal
control weaknesses do not affect Grant Thornton's unqualified report on our
consolidated financial statements for 2004, which is included in this Report.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
INTERNAL CONTROL OVER REPORTING
To the Board of Directors and Stockholders
Standard Motor Products, Inc.:
We were engaged to audit management's assessment, included in Management's
Report on Internal Control over Financial Reporting (included in Item 8 of this
Form 10-K), that Standard Motor Products, Inc. and subsidiaries (the "Company")
maintained effective internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). The Company's is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment. A material weakness exists as of December 31, 2004,
with regard to insufficient personnel in the accounting and financial reporting
function due to accounting staff (including senior level employees) turnover
occurring in the fourth quarter of 2004, which affects management's ability to
effectively review and analyze elements of the financial statement closing
process and prepare consolidated financial statements in accordance with U.S.
GAAP. In addition, a material weakness exists as of December 31, 2004, in
controls over closing procedures due to a number of year-end audit adjustments.
There were deficiencies in the analysis and reconciliation of general ledger
accounts which were indicative of a material weakness in controls over closing
procedures, including the (a) month end cut off processes, and (b) the
accounting and reporting of restructuring charges. Finally, a material weakness
exists as of December 31, 2004 in regards to information technology. In
particular, information technology is run in a decentralized mode. The Company
needs to establish enterprise wide information technology strategy to synthesize
the disparate IT platforms, develop and enforce policies and unify the business
solutions and software applications being employed. The security of systems used
for the entry and maintenance of accounting records requires additional
documentation and scrutiny to ensure that access to such systems and the data
contained therein is restricted to only those employees whose job duties require
such access. A policy and procedure to address an overall security framework,
including password usage, intrusion detection and system security monitoring
must be written and implemented. The IT system has not been maintained in a
manner that provides assurance that all and only authorized changes have been
properly designed, tested, and used. These material weaknesses were considered
in determining the nature, timing, and extent of audit tests applied in our
audit of the 2004 financial statements, and this report does not affect our
report dated March 31, 2005 on those financial statements.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
35
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Since management was unable to complete its assessment on internal control over
financial reporting as of December 31, 2004, and we were unable to apply other
procedures to satisfy ourselves as to the effectiveness of the Company's
internal control over financial reporting, the scope of our work was not
sufficient to enable us to express, and we do not express, an opinion either on
management's assessment or on the effectiveness of the Company's internal
control over financial reporting.
We have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2004, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended, and our
report dated March 31, 2005, expressed an unqualified opinion on those
consolidated financial statements.
GRANT THORNTON LLP
New York New York
March 31, 2005
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
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 (the "Company") as of December 31, 2004, and the
related consolidated statements of income, cash flows and changes in
stockholders' equity for the year then ended. These financial statements are the
responsibility of the Company's Management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Standard Motor Products, Inc. for the years ended December 31,
2003 and 2002 and as of December 31, 2003 were audited by another independent
registered public accounting firm. The other firm expressed an unqualified
opinion on those financial statements in their report dated March 26, 2004.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides 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, 2004, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
As described in Note 1 to the financial statements for the year ended December
31, 2004, the Company changed its method of accounting for customer acquisition
costs as of October 1, 2004.
We were also engaged to audit, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Since management was unable to complete its assessment on internal control over
financial reporting as of December 31, 2004, and therefore we were unable to
apply other procedures to satisfy ourselves as to the effectiveness of the
Company's internal control over financial reporting, the scope of our work was
not sufficient to enable us to express, and we did not express, an opinion
either on management's assessment or on the effectiveness of the Company's
internal control over financial reporting in our report dated March 31, 2005.
GRANT THORNTON LLP
New York, New York
March 31, 2005
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited the accompanying consolidated balance sheet of Standard Motor
Products, Inc. and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Standard Motor
Products, Inc. and subsidiaries as of December 31, 2003, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2003, in conformity with U.S. generally accepted
accounting principles.
As described in Note 6, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill And Other Intangible Assets as of January 1, 2002.
/s/ KPMG LLP
New York, New York
March 26, 2004
38
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2004 2003 2002
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales ................................................ $ 824,283 $ 678,783 $ 598,437
Cost of sales ............................................ 629,290 504,011 440,893
------------ ------------ ------------
Gross profit .......................................... 194,993 174,772 157,544
Selling, general and administrative expenses ............. 178,852 153,303 126,901
Restructuring expenses ................................... 11,449 5,654 2,241
Goodwill impairment charge ............................... 6,429 -- 3,334
------------ ------------ ------------
Operating income (loss) ............................... (1,737) 15,815 25,068
Other income (expense), net .............................. 2,861 (477) 3,187
Interest expense ......................................... 13,710 13,907 14,244
------------ ------------ ------------
Earnings (loss) from continuing operations before taxes (12,586) 1,431 14,011
Provision (benefit) for income taxes ..................... (3,679) 1,207 7,920
------------ ------------ ------------
Earnings (loss) from continuing operations ............ (8,907) 224 6,091
Loss from discontinued operation, net of tax of $2,606,
$581 and $6,099 ....................................... (3,909) (1,742) (18,297)
------------ ------------ ------------
Loss before cumulative effect of accounting change .... (12,816) (1,518) (12,206)
Cumulative effect of accounting change, net of tax
of $1,043 for 2004 and $2,473 for 2002 ................ (1,564) -- (18,350)
------------ ------------ ------------
Net loss .............................................. $ (14,380) $ (1,518) $ (30,556)
============ ============ ============
Net earnings (loss) per common share - Basic:
Earnings (loss) from continuing operations .......... $ (0.46) $ 0.01 $ 0.51
Discontinued operation .............................. (0.20) (0.11) (1.54)
Cumulative effect of accounting change .............. (0.08) -- (1.54)
------------ ------------ ------------
Net loss per common share - Basic ........................ $ (0.74) $ (0.10) $ (2.57)
============ ============ ============
Net earnings (loss) per common share - Diluted:
Earnings (loss) from continuing operations .......... $ (0.46) $ 0.01 $ 0.51
Discontinued operation .............................. (0.20) (0.11) (1.52)
Cumulative effect of accounting change .............. (0.08) -- (1.53)
------------ ------------ ------------
Net loss per common share - Diluted ...................... $ (0.74) $ (0.10) $ (2.54)
============ ============ ============
Average number of common shares .......................... 19,331,358 15,744,930 11,914,968
============ ============ ============
Average number of common shares and dilutive common shares 19,331,358 15,793,008 12,008,496
============ ============ ============
See accompanying notes to consolidated financial statements.
39
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
2004 2003
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 14,934 $ 19,647
Accounts receivable, less allowances for discounts and doubtful accounts of
$9,354 and $5,009 in 2004 and 2003, respectively ..................... 151,352 174,223
Inventories ............................................................... 258,641 253,754
Deferred income taxes ..................................................... 14,809 13,148
Prepaid expenses and other current assets ................................. 7,480 7,399
--------- ---------
Total current assets ............................................. 447,216 468,171
Property, plant and equipment, net ............................................. 97,425 107,042
Goodwill and other intangibles, net ............................................ 69,911 77,350
Other assets ................................................................... 42,017 41,962
--------- ---------
Total assets ..................................................... $ 656,569 $ 694,525
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ............................................................. $ 109,416 $ 99,699
Current portion of long-term debt ......................................... 534 3,354
Accounts payable .......................................................... 46,487 58,029
Sundry payables and accrued expenses ...................................... 31,241 42,431
Accrued customer returns .................................................. 23,127 24,115
Restructuring accrual ..................................................... 6,999 16,000
Accrued rebates ........................................................... 24,210 18,989
Payroll and commissions ................................................... 10,442 14,221
--------- ---------
Total current liabilities .................................... 252,456 276,838
Long-term debt ................................................................. 114,236 114,757
Postretirement medical benefits and other accrued liabilities .................. 44,111 36,848
Restructuring accrual .......................................................... 12,394 15,615
Accrued asbestos liabilities ................................................... 26,060 24,426
--------- ---------
Total liabilities ............................................ 449,257 468,484
--------- ---------
Commitments and contingencies (Notes 9, 11, 12, 13, 14 and 19)
Stockholders' equity:
Common Stock - par value $2.00 per share:
Authorized 30,000,000 shares, issued 20,486,036 shares ................ 40,972 40,972
Capital in excess of par value ............................................ 57,424 58,086
Retained earnings ......................................................... 120,218 141,553
Accumulated other comprehensive income (loss) ............................. 4,805 4,814
Treasury stock - at cost (1,067,308 and 1,284,428 shares in 2004
and 2003, respectively) ............................................... (16,107) (19,384)
--------- ---------
Total stockholders' equity ................................... 207,312 226,041
--------- ---------
Total liabilities and stockholders' equity ................... $ 656,569 $ 694,525
========= =========
See accompanying notes to consolidated financial statements.
40
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................. $ (14,380) $ (1,518) $ (30,556)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization ........................................ 19,013 17,092 16,128
(Gain) loss on disposal of property, plant and equipment ............. 1,379 1,001 (97)
Equity income from joint ventures .................................... (752) (27) (352)
Employee stock ownership plan allocation ............................. 1,643 938 1,230
Tax benefit related to employee stock options ........................ -- -- 80
(Increase) decrease in deferred income taxes ......................... (6,425) (1,632) 2,550
Cumulative effect of accounting change ............................... 1,564 -- 18,350
Loss from discontinued operation ..................................... 3,909 1,742 18,297
Goodwill impairment charge ........................................... 6,429 -- 3,334
Change in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable, net ................................. 22,237 8,583 1,302
(Increase) decrease in inventories ................................... (3,863) 3,511 7,996
(Increase) decrease in prepaid expenses and other current assets ..... (82) 446 7,485
(Increase) decrease in other assets .................................. 3,662 1,802 (3,705)
Increase (decrease) in accounts payable .............................. (12,376) (9,471) 5,322
Increase(decrease) in sundry payables and accrued expenses ........... (5,969) 7,045 (3,215)
Decrease in restructuring accrual .................................... (12,222) (2,085) --
Increase (decrease) in other liabilities ............................. (301) 4,036 12,806
--------- --------- ---------
Net cash provided by operating activities ........................ 3,466 31,463 56,955
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment ................... 1,734 87 520
Capital expenditures, net of effects from acquisitions .................... (9,774) (8,926) (7,598)
Maturity of investments ................................................... -- 7,200 --
Payments for acquisitions, net of cash acquired ........................... (2,906) (100,249) (19,855)
--------- --------- ---------
Net cash used in investing activities ..................................... (10,946) (101,888) (26,933)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit agreements ............... 9,717 20,081 (31,246)
Principal payments and retirement of long-term debt ....................... (3,341) (4,313) (3,181)
Borrowings under new long-term debt ....................................... -- 10,000 5,419
Proceeds from issuance of common stock, net of issuance costs ............. -- 55,744 --
Increase in overdraft balances ............................................ 834 1,509 3,830
Debt issuance costs ....................................................... -- (2,460) (602)
Proceeds from exercise of employee stock options .......................... 972 91 589
Dividends paid ............................................................ (6,955) (5,615) (4,290)
--------- --------- ---------
Net cash provided by (used in) financing activities .............. 1,227 75,037 (29,481)
--------- --------- ---------
Effect of exchange rate changes on cash ................................... 1,540 5,345 1,653
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...................... (4,713) 9,957 2,194
CASH AND CASH EQUIVALENTS at beginning of year ............................ 19,647 9,690 7,496
--------- --------- ---------
CASH AND CASH EQUIVALENTS at end of year .................................. $ 14,934 $ 19,647 $ 9,690
========= ========= =========
Supplemental disclosure of cash flow information: Cash paid during the year
for:
Interest ......................................................... $ 13,741 $ 13,641 $ 14,362
========= ========= =========
Income taxes ..................................................... $ 2,582 $ 2,815 $ 1,549
========= ========= =========
Non-cash investing and financing activities:
Common stock issued to seller for acquisition ........................ $ -- $ 15,125 $ --
========= ========= =========
Issuance of long-term debt to seller for acquisition ................. $ -- $ 15,125 $ --
========= ========= =========
See accompanying notes to consolidated financial statements.
41
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2004, 2003 AND 2002
ACCUMULATED
OTHER
CAPITAL IN COMPREHENSIVE
COMMON EXCESS OF RETAINED INCOME TREASURY
STOCK PAR VALUE EARNINGS (LOSS) STOCK TOTAL
----- --------- -------- ------ ----- -----
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2001 ............... $ 26,649 $ 1,877 $183,532 $ (3,722) $(22,649) $185,687
Comprehensive Loss:
Net loss .............................. (30,556) (30,556)
Foreign currency translation adjustment 1,295 1,295
Unrealized gain on interest rate swap
agreements, net of tax of $205 ...... 617 617
Minimum pension liability adjustment .. (771) (771)
--------
Total comprehensive loss .............. (29,415)
Cash dividends paid ........................ (4,290) (4,290)
Exercise of employee stock options ......... (291) 880 589
Tax benefits applicable to the exercise of
employee stock options ................. 80 80
Employee Stock Ownership Plan .............. 98 1,132 1,230
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2002 ............... 26,649 1,764 148,686 (2,581) (20,637) 153,881
Comprehensive Loss:
Net loss ............................... (1,518) (1,518)
Foreign currency translation adjustment 6,162 6,162
Unrealized gain on interest rate swap
agreements, net of tax of $439 ........ 1,317 1,317
Minimum pension liability adjustment .. (84) (84)
--------
Total comprehensive loss .............. 5,877
Cash dividends paid ........................ (5,615) (5,615)
Issuance of common stock related to ........ 14,323 56,546 70,869
acquisition
Exercise of employee stock options ......... (30) 121 91
Employee Stock Ownership Plan .............. (194) 1,132 938
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2003 ............... 40,972 58,086 141,553 4,814 (19,384) 226,041
Comprehensive Loss:
Net loss ............................... (14,380) (14,380)
Foreign currency translation adjustment 2,242 2,242
Unrealized gain on interest rate swap
agreements, net of tax of $127 ...... 383 383
Minimum pension liability adjustment ... (2,634) (2,634)
--------
Total comprehensive loss ............... (14,389)
Cash dividends paid ........................ (6,955) (6,955)
Exercise of employee stock options ......... (645) 1,617 972
Employee Stock Ownership Plan .............. (17) 1,660 1,643
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2004 ............... $ 40,972 $ 57,424 $120,218 $ 4,805 $(16,107) $207,312
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
42
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these notes
to consolidated financial statements as "we," "us" or "our") is engaged in the
manufacture and distribution of replacement parts for motor vehicles in the
automotive aftermarket industry. The consolidated financial statements include
our accounts and all subsidiaries in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant intercompany items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have
made a number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Some of the more
significant estimates include allowances for doubtful accounts, realizability of
inventory, goodwill and other intangible assets, depreciation and amortization
of long-lived assets, product liability, pensions and other postretirement
benefits, asbestos and litigation matters, deferred tax asset valuation
allowance and sales return allowances. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Where appropriate, certain amounts in 2003 and 2002 have been
reclassified to conform with the 2004 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
The Company does not generally require collateral for its trade
accounts receivable. Accounts receivable have been reduced by an allowance for
amounts that may become uncollectible in the future. These allowances are
established based on a combination of write-off history, aging analysis, and
specific account evaluations. When a receivable balance is known to be
uncollectible, it is written off against the allowance for doubtful accounts.
Cash discounts are provided based on an overall average experience rate applied
to qualifying accounts receivable balances. The Company previously presented the
reserve for accounts receivable balances over 90 days past due as a reduction to
the gross receivable balance instead of as part of the allowance for doubtful
accounts.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market. Inventories are reduced by an allowance
for excess and obsolete inventories, based on the Company's review of on-hand
inventories.
43
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes derivatives as either an asset or liability
measured at its fair value. For derivatives that have been formally designated
as a cash flow hedge (interest rate swap agreements), the effective portion of
changes in the fair value of the derivatives are recorded in "accumulated other
comprehensive income (loss)." Amounts in "accumulated other comprehensive income
(loss)" are reclassified into earnings in the "interest expense" caption when
interest expense on the underlying borrowings are recognized.
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at cost and are depreciated using the
straight-line method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE
-----------------------------------------
Buildings and improvements......................... 10 to 33-1/2 years
Machinery and equipment............................ 7 to 12 years
Tools, dies and auxiliary equipment................ 3 to 8 years
Furniture and fixtures............................. 3 to 12 years
Leasehold improvements............................. Shorter of life of asset or lease term
Major renewals and improvements of property, plant and equipment are
capitalized, and repairs and maintenance costs are expensed as incurred.
GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted for as
purchases. We adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") in January 2002. Goodwill
and certain other intangible assets having indefinite lives, which were
previously amortized on a straight-line basis over the periods benefited, are no
longer being amortized to earnings, but instead are subject to periodic testing
for impairment. Intangible assets determined to have definite lives are
amortized over their remaining useful lives.
Goodwill of a reporting unit is tested for impairment on an annual
basis or between annual tests if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying amount. To
the extent the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, we are required to perform a second step, as this is an
indication that the reporting unit goodwill may be impaired. In this step, we
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment
whenever events such as product discontinuance, plant closures, product
dispositions or other changes in circumstances indicate that the carrying amount
may not be recoverable. In reviewing for impairment, we compare the carrying
value of such assets with finite lives to the estimated undiscounted future cash
flows expected from the use of the assets and their eventual disposition. When
the estimated undiscounted future cash flows are less than their carrying
amount, an impairment loss is recognized equal to the difference between the
assets fair value and their carrying value.
44
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to the adoption of SFAS No. 142, goodwill was assessed for
recoverability by determining whether the amortization of the goodwill balance
over its remaining life could be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill and other
intangible asset impairment, if any, was measured based on projected discounted
future operating cash flows using a discount rate reflecting our average cost of
funds.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which
we incur change over costs to induce a new or existing customer to switch from a
competitor's brand. In addition, change over costs include the costs related to
removing the new customer's inventory and replacing it with Standard Motor
Products inventory commonly referred to as a stocklift. New customer acquisition
costs were initially recorded as a prepaid asset and the related expense was
recognized ratably over a 12-month period beginning in the month following the
stocklift as an offset to sales. In the fourth quarter of 2004, we determined
that it was a preferable accounting method to reflect the customer acquisition
costs as a reduction to revenue when incurred. We recorded a cumulative effect
of a change in accounting for new customer acquisition costs totaling $1.6
million, net of tax effects, and recorded the accounting change as if it had
taken effect on October 1, 2004. Accordingly, the effect of the change is
recorded in the 2004 quarterly data presented in note 3.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year-end
exchange rates and revenues and expenses are translated at average exchange
rates during the year. The resulting translation adjustments are recorded as a
separate component of accumulated other comprehensive income (loss) and remains
there until the underlying foreign operation is liquidated or substantially
disposed of. Where the U.S. dollar is the functional currency, transaction gains
or losses arising from the remeasurement of financial statements are recorded in
the statement of operations under the caption "other income (expense)."
REVENUE RECOGNITION
We recognize revenues when products are shipped and title has been
transferred to a customer, the sales price is fixed and determinable, and
collection is reasonably assured. We estimate and record provisions for cash
discounts, quantity rebates, sales returns and warranties in the period the sale
is recorded, based upon our prior experience and current trends.
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Selling, general and administration expenses includes shipping costs
and advertising, which is expensed as incurred.
DEFERRED FINANCING COSTS
We have incurred costs in obtaining financing. These costs of $9.7
million have been capitalized in other assets and are being amortized over the
life of the related financing arrangements through 2009. At December 31, 2004
and 2003, total accumulated amortization was $5 million and $3.6 million,
respectively.
45
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net postretirement benefit liability and related expense
under our benefit plans are determined on an actuarial basis. Benefits are
determined primarily based upon employees' length of service.
INCOME TAXES
Income taxes are calculated using the asset and liability method in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities, as measured by the current enacted tax rates. The Company
establishes valuation allowances against deferred tax assets when it is more
likely than not that some portion or all of those deferred assets will not be
realized. The valuation allowance is intended in part to provide for the
uncertainty regarding the ultimate utilization of the Company's U.S. net
operating loss carry forwards, U.S. capital loss carryovers, U.S. foreign tax
credit carryovers, and foreign net operating loss carry forwards. Deferred tax
expense (benefit) is the result of changes in the deferred tax asset and
liability.
REPORTING OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes (a) net income, (b) the cumulative
effect of translating balance sheets of foreign subsidiaries to U.S. dollars,
(c) the effect of adjusting interest rate swaps to market, and (d) the
recognition of minimum pension liabilities. The last three are not included in
the income statement and are reflected as adjustments to shareholder's equity.
NET EARNINGS PER COMMON SHARE
We present two calculations of earnings per common share. "Basic"
earnings per common share equals net income divided by weighted average common
shares outstanding during the period. "Diluted" earnings per common share equals
net income divided by the sum of weighted average common shares outstanding
during the period plus potentially dilutive common shares. Potentially dilutive
common shares that are anti-dilutive are excluded from net earnings per common
share. The following is a reconciliation of the shares used in calculating basic
and dilutive net earnings per common share.
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Weighted average common shares ................... 19,331 15,745 11,915
Effect of potentially dilutive common shares ..... -- 48 93
Weighted average common equivalent shares
outstanding assuming dilution ................. 19,331 15,793 12,008
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.
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Stock options ........................ 1,192 844 574
Convertible debentures ............... 2,796 2,796 2,796
46
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK-BASED COMPENSATION PLANS
Under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), we account for stock-based
compensation using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Stock options granted during the years ended December 31, 2004, 2003 and 2002
were exercisable at prices equal to the fair market value of our common stock on
the dates the options were granted; therefore, no compensation cost has been
recognized for the stock options granted.
If we accounted for stock-based compensation using the fair value
method of SFAS 123, as amended by Statement No. 148, the effect on net income
(loss) and basic and diluted earnings (loss) per share would have been as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net loss, as reported .................... $ (14,380) $ (1,518) $ (30,556)
Less: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects .............. (452) (137) (235)
---------- --------- ----------
Pro forma net loss ....................... $ (14,832) $ (1,655) $ (30,791)
---------- --------- ----------
Loss per share:
Basic - as reported ................. $ (0.74) $ (0.10) $ (2.57)
Basic - pro forma ................... (0.77) $ (0.11) $ (2.59)
Diluted - as reported ............... $ (0.74) $ (0.10) $ (2.54)
Diluted - pro forma ................. (0.77) $ (0.11) $ (2.56)
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:
2004 2003 2002
---- ---- ----
Expected option life ................. 3.9 years 3.9 years 3.9 years
Expected stock volatility ............ 38.6% 38.9% 38.7%
Expected dividend yield .............. 2.7 % 2.6% 2.6%
Risk-free interest rate .............. 3.6% 2.4% 1.8%
Fair value of option ................. $ 3.46 $ 3.36 $ 4.07
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
("SFAS 123R"). SFAS 123R requires companies to expense the value of employee
stock options and similar awards. SFAS 123R is effective for interim and annual
financial statements beginning after June 15, 2005 and will apply to all
outstanding and unvested share-based payments at the time of adoption. The
Company is currently evaluating the impact SFAS 123R will have on its
consolidated financial statements and will adopt such standard as required.
ASBESTOS LITIGATION
In evaluating our potential asbestos-related liability, it is the
accounting policy of the Company to update in the third quarter of each year an
actuarial study that was performed by a leading actuarial firm with expertise in
assessing asbestos-related liabilities. The most recent study has estimated an
undiscounted liability for settlement payments, excluding legal costs, ranging
from $28 to $63 million for the period through 2049. 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 2049 in our consolidated financial
statements, in accordance with generally accepted accounting principles. Legal
costs, which are expensed as incurred, are estimated to range from $22 to $27
million during the same period.
47
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. We place our cash investments with high quality financial
institutions and limit the amount of credit exposure to any one institution.
With respect to accounts receivable, such receivables are primarily from
warehouse distributors and major retailers in the automotive aftermarket
industry located in the United States. We perform ongoing credit evaluations of
our customers' financial conditions. Our five largest individual customers,
including members of a marketing group, accounted for 50%, 43% and 43% of
consolidated net sales in 2004, 2003 and 2002, respectively. Within our five
largest customers, the largest customer accounted for 17%, 12% and 14% of
consolidated net sales in 2004, 2003 and 2002, respectively. Although we are
directly affected by developments in the vehicle parts industry, management does
not believe significant credit risk exists. We place our cash investments with a
relatively small number of high quality financial institutions. Substantially
all of the cash and cash equivalents, including foreign cash balances, at
December 31, 2004 and 2003 were uninsured. Foreign cash balances at December 31,
2004 and 2003 were $10.1 million and $9.7 million, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare Modernization Act") was signed into
law. The Medicare Modernization Act expanded Medicare to include, for the first
time, coverage for prescription drugs. At present, proposed regulations
necessary to implement the Medicare Modernization Act have been issued,
including those that would specify the manner in which actuarial equivalency
must be determined, the evidence required to demonstrate actuarial equivalency,
and the documentation requirements necessary to be entitled to the subsidy.
Based on such proposed regulations, we believe that our prescription drug
benefit for our employee retirees (other than certain union retirees) are
expected to meet the actuarial equivalence test in 2006 and, therefore, we would
be eligible to receive a subsidy from Medicare. However, our net periodic
postretirement benefit cost does not reflect any amount associated with the
subsidy because such subsidy is immaterial in amount.
INVENTORY COSTS
In November 2004, the FASB issued SFAS No. 151, Inventory Costs-An
Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends the guidance in
ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted beginning on January 1, 2006. The Company is currently evaluating
the effect that the adoption of SFAS 151 will have on our consolidated results
of operations and financial condition but do not expect SFAS 151 to have a
material impact.
48
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRONOUNCEMENTS RELATING TO AMERICAN JOBS CREATION ACT OF 2004
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP
109-1"), "Application of SFAS No. 109, "Accounting for Income Taxes", to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." It is effective immediately. FSP 109-1 states that the
tax deduction of qualified domestic production activities, which is provided by
the American Jobs Creation Act of 2004 (the "Jobs Act"), will be treated as a
special deduction as described in SFAS No. 109. Consequently, the impact of the
deduction, which is effective January 1, 2005, will be reported in the period in
which the deduction is claimed on the Company's income tax returns. The Company
does not expect FSP 109-1 to have a material effect on its financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-2 ("FSP
109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004". FSP 109-2
provides accounting and disclosure guidance related to the Jobs Act provision
for the limited time 85% dividends received deduction on the repatriation of
certain foreign earnings. Although adoption is effective immediately, FSP 109-2
states that a company is allowed time beyond the financial reporting period to
evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation
of foreign earnings. The Company is evaluating the impact of the repatriation
provisions of the Jobs Act and will complete its review by December 31, 2005. It
is not expected that these provisions will have a material impact on the
Company's financial statements. Accordingly, as provided for in FSP 109-2, the
Company has not adjusted its tax expense or net deferred tax assets to reflect
the repatriation provisions of the Jobs Act.
SHARE-BASED PAYMENT
In December 2004, the FASB issued Statement of Financial Accounts
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R is a revision
to SFAS No. 123, "Accounting for Stock-Based Compensation" and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, primarily focusing on
the accounting for transactions in which an entity obtains employee services in
share-based payment transactions. Entities will be required to measure the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions). That
cost will be recognized over the period during which an employee is required to
provide service, the requisite service period (usually the vesting period), in
exchange for the award. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models. If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. SFAS 123R is effective for interim and annual financial statements
beginning after June 15, 2005 and will apply to all outstanding and unvested
share-based payments at the time of adoption. The Company is currently
evaluating the impact SFAS 123R will have on its consolidated financial
statements and will adopt such standard as required.
2. ACQUISITIONS AND RESTRUCTURING COSTS
ACQUISITION OF DANA'S EMG BUSINESS
On June 30, 2003, we completed the acquisition of substantially all of
the assets and assumed substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM"). Prior to the sale, DEM was a
leading manufacturer of aftermarket parts in the automotive industry focused
exclusively on engine management.
49
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the acquisition, we paid Dana Corporation $93.2
million in cash (includes $1.9 million paid in 2004 for final payment), issued
an unsecured promissory note of $15.1 million (as discussed more fully in note 9
of notes to our consolidated financial statements), and issued 1,378,760 shares
of our common stock valued at $15.1 million using an average market price of
$10.97 per share. The average market price was based on the average closing
price for a range of trading days preceding the closing date of the acquisition.
Our final purchase price was approximately $130.5 million, which included $7.1
million of transaction costs.
In connection with the acquisition of DEM, we completed a public equity
offering of 5,750,000 shares of our common stock for net proceeds of
approximately $55.7 million. The net proceeds from this equity offering were
used to repay a portion of our outstanding indebtedness under our revolving
credit facility with General Electric Capital Corporation.
Effective June 30, 2003, we also amended and restated our credit
agreement with General Electric Capital Corporation, which increased the amount
available under our revolving credit facility by $80 million, to $305 million,
as discussed more fully in note 9 of notes to our consolidated financial
statements. We then financed the cash portion of the acquisition purchase price
and the costs associated with the acquisition by borrowing from our revolving
credit facility.
The purchase price of the acquisition is summarized as follows (in thousands):
Value of common stock issued.......................... $15,125
Unsecured promissory note............................. 15,125
Cash consideration.................................... 93,172
--------------
Total consideration............................. 123,422
Transaction costs..................................... 7,077
--------------
Total purchase price.................................. $ 130,499
==============
The acquisition purchase price was based upon the final book value of
the acquired assets of DEM less the book value of the assumed liabilities of DEM
as of the close of business on the closing date, subject to a maximum purchase
price of $125 million (not including transaction costs).
The following table summarizes the components of the net assets
acquired based upon the final purchase accounting (in thousands):
Accounts receivable................................................ $ 65,162
Inventories........................................................ 81,693
Property, plant and equipment...................................... 17,165
Goodwill........................................................... 39,847
Intangible assets:
Customer relationships (estimated useful life of 10 years).... 10,000
Trademarks and tradenames (indefinite life)................... 6,100
Other assets....................................................... 128
---------
Total assets acquired.............................................. $220,095
---------
Accounts payable................................................... $ 30,247
Sundry payables and accrued expenses............................... 32,152
Accrued customer returns........................................... 7,013
Payroll and commissions............................................ 3,984
Other liabilities.................................................. 16,200
---------
Total liabilities assumed.......................................... 89,596
---------
Net assets acquired................................................ $130,499
=========
50
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The acquisition was accounted for as a purchase transaction in
accordance with SFAS 141, and accordingly, the assets and liabilities acquired
were recorded at their fair value at the date of the acquisition, and the
results of operations of DEM is included in our results beginning on the June
30, 2003 acquisition date.
The excess of the purchase price over the estimated fair values of the
net assets acquired was recorded as goodwill. Certain adjustments were made to
goodwill subsequent to the acquisition date and are described in note 7 of notes
to our consolidated financial statements. Goodwill of $39.8 million resulting
from this acquisition has been assigned to our Engine Management reporting unit.
Goodwill associated with this acquisition will be deductible for tax purposes.
The following table represents our unaudited pro forma consolidated
statement of operations for the years ended December 31, 2003 and 2002, as if
the acquisition of DEM had been completed at January 1, 2003 and 2002,
respectively. The pro forma information is presented for comparative purposes
only and does not purport to be indicative of what would have occurred had the
acquisition actually been made at such date, nor is it necessarily indicative of
future operating results.
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
---- ----
(IN THOUSANDS)
Net sales .......................................... $ 822,515 $ 822,401
Loss from continuing operations .................... $ (2,246) $ (36,231)
Loss before cumulative effect of accounting change . $ (3,988) $ (54,528)
Net loss ........................................... $ (3,988) $ (72,878)
Net loss per common share:
Net loss - Basic ................................... $ (0.21) $ (3.82)
Net loss - Diluted ................................. $ (0.21) $ (3.82)
RESTRUCTURING COSTS
In connection with the acquisition, we have reviewed our operations and
implemented integration plans to restructure the operations of DEM. We announced
in a press release on July 8, 2003 that we will close seven DEM facilities. As
part of the integration and restructuring plans, we accrued an initial
restructuring liability of approximately $34.7 million at June 30, 2003
(subsequently reduced to $33.7 million during 2003). Such amounts were
recognized as liabilities assumed in the acquisition and included in the
allocation of the cost to acquire DEM. Accordingly, such amounts resulted in
additional goodwill being recorded in connection with the acquisition.
Of the total restructuring accrual, approximately $15.7 million related
to work force reductions and represented employee termination benefits. The
accrual amount primarily provides for severance costs relating to the
involuntary termination of employees, individually employed throughout DEM's
facilities across a broad range of functions, including managerial,
professional, clerical, manufacturing and factory positions. During the years
ended December 31, 2004 and 2003, termination benefits of $9.4 million and $2.1
million, respectively, have been charged to the restructuring accrual. As of
December 31, 2004, the reserve balance was at $4.2 million. We expect to pay
$2.8 in 2005 for workforce reductions.
The restructuring accrual also includes approximately $18 million
associated with exiting certain activities, primarily related to lease and
contract termination costs, which will not have future benefits. Specifically,
our plans are to consolidate certain of DEM operations into our existing plants.
At December 31, 2004, seven facilities have ceased operating activities for
which we have lease commitments through 2021. Exit costs of $2.9 million were
paid in 2004 leaving the exit reserve balance at $15.1 million as of December
31, 2004.
51
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Selected information relating to the restructuring costs included in
the allocation of the cost to acquire DEM is as follows (in thousands):
OTHER
WORKFORCE EXIT
REDUCTION COSTS TOTAL
--------- ----- -----
Restructuring liability at December 31, 2003 .. $13,615 $18,000 $31,615
Cash payments during 2004 ..................... 9,365 2,857 12,222
------- ------- -------
Restructuring liability as of December 31, 2004 $ 4,250 $15,143 $19,393
======= ======= =======
OTHER ACQUISITIONS
In January 2002, we acquired the assets of a Temperature Control
business from Hartle Industries for $4.8 million. The assets acquired consist
primarily of property, plant and equipment, and inventory.
In April 2002, we acquired Carol Cable Limited, a manufacturer and
distributor of wire sets based in England, for $1.7 million. The assets acquired
consist primarily of property, plant and equipment, and inventory. In addition,
during 2002 we acquired the remaining equity interest in SMP Holdings Limited.
In May 2002, we purchased the aftermarket fuel injector business of
Sagem Inc., a subsidiary of Johnson Controls, for $10.5 million. Sagem Inc. is a
basic manufacturer of fuel injectors, and was the primary supplier to us prior
to our acquisition. The assets acquired consist primarily of property, plant and
equipment, and inventory. The purchase was partially financed by the seller and
an aggregate of $5.4 million was paid over a two-year period, with the remaining
funds being provided under our revolving credit facility.
On February 3, 2004, we acquired inventory from the Canadian
distribution operation of Dana Corporation's Engine Management Group for
approximately $1 million. We have relocated such inventory into our distribution
facility in Mississauga, Canada.
Our 2002 and 2004 acquisitions did not have a material effect on our
consolidated financial statements.
3. CHANGE IN ACCOUNTING PRINCIPLE
ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which
we incur change over costs to induce a new or existing customer to switch from a
competitor's brand. In addition, change over costs include the costs related to
removing the new customer's inventory and replacing it with Standard Motor
Products inventory commonly referred to as a stocklift. New customer acquisition
costs were initially recorded as a prepaid asset and the related expense was
recognized ratably over a 12-month period beginning in the month following the
stocklift as an offset to sales. In the fourth quarter of 2004, we determined
that it was a preferable accounting method to reflect the customer acquisition
costs as a reduction to revenue when incurred. In accordance with Accounting
Principles Board Opinion ("APB") 20, "Accounting Changes" and FAS 3, the change
in accounting for new customer acquisition costs effective as of October 1, 2004
is reflected in the following unaudited quarterly 2004 results as if the change
had occurred on January 1, 2004 with the quarterly results for the first, second
and third quarters of 2004 restated as if the new policy had been in effect
throughout 2004 (in thousands, except per share data):
52
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
(RESTATED) (RESTATED) (RESTATED)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
2004
Net sales, as reported ................ $ 204,781 $ 235,049 $ 203,487 $ 180,966
Cumulative effect at January 1, 2004 .. (2,605) -- -- --
Effect of change in accounting for
new customer acquisition costs,
net of tax effects .................. 148 83 (220) --
New sales, as adjusted ................ 202,324 235,132 203,267 180,966
Net loss, as reported ................. (970) 6,692 (676) (19,426)
Cumulative effect at January 1, 2004,
net of tax effects .................. (1,564) -- -- --
Effect of change in accounting for
new customer acquisition costs,
net of tax effects .................. 89 50 (132) --
Net loss, as adjusted ................. (2,445) 6,742 (808) (19,426)
Basic net loss per share, as reported . (0.05) 0.35 (0.03) (1.00)
Cumulative effect at January 1, 2004,
net of tax effects .................. (0.08) -- -- --
Effect of change in accounting for
new customer acquisition costs,
net of tax effects .................. -- -- (0.01) --
Basic net loss per share, as adjusted . (0.13) 0.35 (0.04) (1.00)
Diluted net loss per share, as reported (0.05) 0.34 (0.03) (1.00)
Cumulative effect at January 1, 2004,
net of tax effects .................. (0.08) -- -- --
Effect of change in accounting for
new customer acquisition costs,
net of tax effects .................. -- -- (0.01) --
Diluted net loss per share, as adjusted (0.13) 0.34 (0.04) (1.00)
4. SALES OF RECEIVABLES
In 2004, the Company entered into agreements to sell undivided
interests in certain of its receivables to factoring companies, which in turn
have the right to sell an undivided interest to a financial institution or other
third parties. We enter these agreements at our discretion when we determine
that the cost of factoring is less than the cost of servicing our receivables
with existing debt. Pursuant to these agreements, we sold $194.4 million of
receivables during 2004. We retained no rights or interest, and have no
obligations, with respect to the sold receivables. We do not service the
receivables after the sale.
The sale of receivables was accounted for as a sale in accordance with
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The sold receivables were removed from the
balance sheet at the time of sale. These costs were $2.4 million in 2004 and are
recorded in selling, general and administrative expense.
53
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INVENTORIES
DECEMBER 31,
------------------------
2004 2003
---- ----
(IN THOUSANDS)
Finished goods, net................................$ 192,017 $191,340
Work in process, net............................... 4,691 7,913
Raw materials, net................................. 61,933 54,501
--------- --------
Total inventories, net.........................$ 258,641 $253,754
========= =========
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
2004 2003
---- ----
(IN THOUSANDS)
Land, buildings and improvements............................$ 72,284 $ 71,900
Machinery and equipment..................................... 142,134 137,770
Tools, dies and auxiliary equipment......................... 21,563 20,068
Furniture and fixtures...................................... 28,093 27,743
Leasehold improvements...................................... 7,333 7,285
Construction in progress.................................... 5,308 4,280
-------- --------
276,715 269,046
Less accumulated depreciation and amortization.............. 179,290 162,004
-------- --------
Total property, plant and equipment, net.................... $97,425 $107,042
======== ========
Depreciation and amortization expense was $19 million and $17.1 million
for 2004 and 2003, respectively. This includes $2.2 million and $1.7 million for
amortization of intangible assets for 2004 and 2003, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. The new guidance replaced the amortization of goodwill with
periodic assessments of the fair value of goodwill. Our initial impairment test,
performed as of January 1, 2002, indicated that the carrying amounts of some of
our reporting units exceeded the corresponding fair values, which were
determined based on the discounted estimated future cash flows of the reporting
units, the Companies weighted average cost of capital and market multiples. As a
result, we recorded an impairment loss on goodwill as a cumulative effect of
accounting change of $18.3 million, net of tax, during the first quarter of
2002. The impairment loss related to our European Operation and Temperature
Control Segment for which we recorded a charge of $10.9 million and $7.4
million, respectively. We completed our annual impairment test of goodwill as of
December 31, 2002 and after consideration to 2002 losses and budgeted 2003
losses, we recorded an impairment loss of our remaining goodwill associated with
the Engine Management reporting unit of our European Segment for which we
recorded a charge of $3.3 million during the fourth quarter of 2002.
We completed our annual impairment test of goodwill as of December 31,
2003 and determined that our goodwill was not impaired.
Our annual impairment test of goodwill as of December 31, 2004,
indicated that the carrying amounts of two of our reporting units exceeded the
corresponding fair values, which were determined based on the discounted
estimated future cash flows of the reporting units, the Company's weighted
average cost of capital and market multiples. As a result, we recorded an
impairment loss in the fourth quarter of 2004 of our remaining goodwill in our
Temperature Control and European Operation Segment of $4.8 million and $1.6
million, respectively. We will continue to test for impairment of our remaining
goodwill at least annually in the future.
54
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The changes in the carrying value of goodwill for our segments during
the year-ended December 31, 2004 are as follows (in thousands):
ENGINE TEMPERATURE
MANAGEMENT CONTROL EUROPE TOTAL
---------- ------- ------ -----
Balance as of December 31, 2003 $ 65,650 $ 4,822 $ 1,371 $ 71,843
Purchase accounting adjustments (15,313) -- -- (15,313)
Impairment loss ............... -- (4,822) (1,607) (6,429)
Foreign currency adjustment ... -- -- 236 236
Balance as of December 31, 2004 $ 50,337 $ -- $ -- $ 50,337
In connection with the acquisition of DEM and the completion of
purchase price allocations in June 2004 (see note 2 of notes to our consolidated
financial statements), goodwill has been adjusted by $14.1 million for
intangible assets (see Acquired Intangible Assets below) based on the fair
market valuation performed during the second quarter of 2004. Additionally, a
purchase accounting adjustment relating to the acquired inventory of $0.8
million was recorded during the second quarter of 2004. During the third quarter
of 2004, an additional $2 million was reclassified to intangible assets from
goodwill.
OTHER INTANGIBLE ASSETS
Other intangibles assets include computer software. The Company
previously recorded this as part of property, plant and equipment, but
reclassified it in the fourth quarter of 2004 to intangible assets. Computer
software, net of amortization, was $4 million and $5.5 million as of December
31, 2004 and 2003, respectively. Computer software is amortized over its
estimated useful life of 3 to 10 years.
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets associated with the acquisition
of DEM, as of December 31, 2004, consist of (in thousands):
ACCUMULATED
GROSS AMORTIZATION NET
----- ------------ ---
Customer relationships ............... $10,000 $ 556 $ 9,444
Trademarks and tradenames ............ 6,100 -- 6,100
------- ------- -------
$16,100 $ 556 $15,544
======= ======= =======
Of the total purchase price, $16.1 million was allocated to intangible
assets consisting of customer relationships and trademarks and tradenames; $10
million was assigned to customer relationships and will be amortized on a
straight-line basis over the estimated useful life of 10 years; and the
remaining $6.1 million of acquired intangible assets was assigned to trademarks
and tradenames which is not subject to amortization as they were determined to
have indefinite useful lives.
Estimated amortization expense for the next five years is $1.1 million in
each year during 2005 through 2009.
55
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. OTHER ASSETS
DECEMBER 31,
------------------------
2004 2003
---- ----
(IN THOUSANDS)
Unamortized customer supply agreements ........... $ -- $ 946
Equity in joint ventures ......................... 1,938 2,322
Deferred income taxes, net (Note 16) ............. 24,153 19,389
Deferred financing costs, net .................... 5,211 6,641
Other ............................................ 10,715 12,664
------- -------
Total other assets, net ..................... $42,017 $41,962
======= =======
Included in the above caption "Other" is a preferred stock investment
of $1.5 million in a customer, which is carried at cost. Net sales to this
customer amounted to $65.3 million, $53 million and $60 million in 2004, 2003
and 2002, respectively.
9. CREDIT FACILITIES AND LONG-TERM DEBT
Effective April 27, 2001, we entered into an agreement with General
Electric Capital Corporation, as agent, and a syndicate of lenders for a secured
revolving credit facility. The term of the credit agreement was for a period of
five years and provided for a line of credit up to $225 million.
Effective June 30, 2003, in connection with our acquisition of DEM, we
amended and restated our credit agreement to provide for an additional $80
million commitment. This additional commitment increases the total amount
available for borrowing under the revolving credit facility to $305 million from
$225 million, and extends the term of the credit agreement from 2006 to 2008.
Availability under our revolving credit facility is based on a formula of
eligible accounts receivable, eligible inventory and eligible fixed assets,
which includes the purchased assets of DEM. After taking into effect outstanding
borrowings under the revolving credit facility, there was an addition $82.9
million available for us to borrow pursuant to the formula at December 31, 2004.
Our credit agreement also permits dividends and distributions by us provided
specific conditions are met.
At December 31, 2004 and 2003, the interest rate on the Company's
revolving credit facility was 4.4% and 3.6%, respectively. Direct borrowings
under our revolving credit facility bear interest at the prime rate plus the
applicable margin (as defined) or the LIBOR rate plus the applicable margin (as
defined), at our option. Outstanding borrowings under the revolving credit
facility, classified as current liabilities, was $103.6 million and $95.9
million at December 31, 2004 and 2003, respectively. The Company maintains cash
management systems in compliance with its credit agreements. Such systems
require the establishment of lock boxes linked to blocked accounts whereby cash
receipts are channeled to various banks to insure pay-down of debt. Agreements
also classify such accounts and the cash therein as additional security for
loans and other obligations to the credit providers. Borrowings are
collateralized by substantially all of our assets, including accounts
receivable, inventory and fixed assets, and those of our domestic and Canadian
subsidiaries. The terms of our revolving credit facility provide for, among
other provisions, financial covenants requiring us, on a consolidated basis, (1)
to maintain specified levels of earnings before interest, taxes, depreciation
and amortization (EBITDA), as defined in the credit agreement, at the end of
each fiscal quarter through December 31, 2004, (2) commencing September 30,
2004, to maintain specified levels of fixed charge coverage at the end of each
fiscal quarter (rolling twelve months) through 2007, and (3) to limit capital
expenditure levels for each fiscal year through 2007. We subsequently received a
waiver of compliance with the EBITDA covenant for the fiscal quarters ending
September 30, 2004 and December 31, 2004. At December 31, 2004, we were not in
56
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
compliance with the minimum fixed charge coverage ratio contained in our
revolving credit facility. However, as of March 31, 2005, we received a waiver
of compliance of such covenant for the quarter ended December 31, 2004. The
waiver was part of an amendment to our revolving credit facility, which
provided, among other things, for the following: (1) borrowings of the Company
are no longer collateralized by the assets, including accounts receivable,
inventory and fixed assets, of our Canadian subsidiary; (2) the specified levels
of fixed charge coverage has been modified for 2005 and thereafter; (3) our
Canadian subsidiary was released from its obligations under a guaranty and
security agreement; and (4) the Company's pledge of stock of its Canadian
subsidiary to the lenders was reduced from a 100% to a 65% pledge of stock.
In addition, a foreign subsidiary of the Company has a revolving credit
facility. The amount of short-term bank borrowings outstanding under this
facility was $5.8 and $3.8 million at December 31, 2004 and 2003, respectively.
The weighted average interest rates on these borrowings at December 31, 2004 and
2003 were 6.9% and 6.3%, respectively.
On July 26, 1999, we completed a public offering of convertible
subordinated debentures amounting to $90 million. The convertible debentures
carry an interest rate of 6.75%, payable semi-annually, and will mature on July
15, 2009. The convertible debentures are convertible into 2,796,120 shares of
our common stock at the option of the holder. We may, at our option, redeem some
or all of the convertible 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 in the agreement, occurs at the
Company, we will be required to make an offer to purchase the convertible
debentures at a purchase price equal to 101% of their aggregate principal
amount, plus accrued interest. The convertible debentures are subordinated in
right of payment to all of the Company's existing and future senior
indebtedness.
In connection with our acquisition of DEM, we issued to Dana
Corporation an unsecured subordinated promissory note in the aggregate principal
amount of approximately $15.1 million. The promissory note bears an interest
rate of 9% per annum for the first year, with such interest rate increasing by
one-half of a percentage point (0.5%) on each anniversary of the date of
issuance. Accrued and unpaid interest is due quarterly under the promissory
note. The maturity date of the promissory note is five and a half years from the
date of issuance. The promissory note may be prepaid in whole or in part at any
time without penalty.
On June 27, 2003, we borrowed $10 million under a mortgage loan
agreement. The loan is payable in monthly installments. The loan bears interest
at a fixed rate of 5.50% maturing in July 2018. The mortgage loan is secured by
a building and related property.
Long-term debt consists of (in thousands):
DECEMBER 31,
-----------------------
2004 2003
---- ----
6.75% convertible subordinated debentures ............ $ 90,000 $ 90,000
Unsecured promissory note ............................ 15,125 15,125
Mortgage loan ........................................ 9,381 9,824
Other ................................................ 264 3,162
-------- --------
114,770 118,111
Less current portion ................................. 534 3,354
-------- --------
Total non-current portion of long-term debt ..... $114,236 $114,757
======== ========
Maturities of long-term debt during the five years ending December 31,
2005 through 2009 are $0.5 million, $0.6 million, $0.6 million, $0.6 million and
$15.7 million, respectively.
57
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had deferred financing cost of $5.2 million and $6.6
million as of December 31, 2004 and 2003, respectively. These costs related to
the Company's revolving credit facility, the convertible subordinated debentures
and a mortgage loan agreement, and these costs are being amortized over three to
eight years.
10. INTEREST RATE SWAP AGREEMENTS
We do not enter into financial instruments for trading or speculative
purposes. The principal financial instruments used for cash flow hedging
purposes are interest rate swaps. We enter into interest rate swap agreements to
manage our exposure to interest rate charges. The swaps effectively convert a
portion of our variable rate debt under the revolving credit facility to a fixed
rate, without exchanging the notional principal amounts.
In October 2003, we entered into a new interest rate swap agreement
with a notional amount of $25 million that is to mature in October 2006. Under
this agreement, we receive a floating rate based on the LIBOR interest rate, and
pay a fixed rate of 2.45% on the notional amount of $25 million. We have
recorded an asset of $362,000 to recognize the fair value of interest
derivatives, and we have also recorded a tax liability of $91,000 associated
therewith. The net offset is recorded in accumulated other comprehensive income
..
In July 2001, we entered into two interest rate swap agreements with an
aggregate notional principal amount of $75 million, one of which matured in
January 2003 and the other matured in January 2004. Under these agreements, we
received a floating rate based on the LIBOR interest rate, and paid a fixed rate
of 4.92% on a notional amount of $45 million (matured in January 2004) and 4.37%
on a notional amount of $30 million (matured in January 2003).
If, at any time, the swaps are determined to be ineffective, in whole
or in part, due to changes in the interest rate swap or underlying debt
agreements, the fair value of the portion of the interest rate swap determined
to be ineffective will be recognized as gain or loss in the statement of
operations in the "interest expense" caption for the applicable period. It is
not expected that any gain or loss will be reported in the statement of
operations during the year ending December 31, 2005 nor has any been recorded in
2004, 2003 or 2002.
11. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par
value, and our 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, our Board
of Directors established a new series of preferred shares designated as Series A
Participating Preferred Stock. The number of shares constituting the Series A
Preferred Stock is 30,000. The Series A Preferred Stock is designed to
participate in dividends, ranks senior to our common stock as to dividends and
liquidation rights and has voting rights. Each share of the Series A Preferred
Stock shall entitle the holder to one thousand votes on all matters submitted to
a vote of the stockholders of the Company. No such shares were outstanding at
December 31, 2004.
On January 17, 1996, our Board of Directors adopted a Shareholder
Rights Plan ("Rights Plan"). Under the Rights Plan, the Board declared a
dividend of one Preferred Share Purchase Right ("Right") for each of our
outstanding common shares. The dividend was payable on March 1, 1996 to the
shareholders of record as of February 15, 1996. The Rights are attached to and
automatically trade with the outstanding shares of our common stock.
58
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Rights will become exercisable only in the event that any person or
group of affiliated persons becomes a holder of 20% or more of our outstanding
common shares, or commences a tender or exchange offer which, if consummated,
would result in that person or group of affiliated persons owning at least 20%
of our outstanding common shares. Once the rights become exercisable, they
entitle all other shareholders to purchase, by payment of an $80.00 exercise
price, one one-thousandth of a share of Series A Participating Preferred Stock,
subject to adjustment, with a value of twice the exercise price. In addition, at
any time after a 20% position is acquired and prior to the acquisition of a 50%
position, our Board of Directors may require, in whole or in part, each
outstanding Right (other than Rights held by the acquiring person or group of
affiliated persons) to be exchanged for one share of common stock or one
one-thousandth of a share of Series A Preferred Stock. The Rights may be
redeemed at a price of $0.001 per Right at any time prior to their expiration on
February 28, 2006.
During the years 1998 through 2000, our Board of Directors authorized
multiple repurchase programs under which we could repurchase shares of our
common stock. During such years, $26.7 million (in aggregate) of common stock
has been repurchased to meet present and future requirements of our stock option
programs and to fund our ESOP. As of December 31, 2004, we have Board
authorization to repurchase additional shares at a maximum cost of $1.7 million.
During 2004, 2003 and 2002, we did not repurchase any shares of our common
stock.
Accumulated other comprehensive income (loss) is comprised of the
following (in thousands):
DECEMBER 31,
----------------------
2004 2003
---- ----
Foreign currency translation adjustments .................. $ 8,022 $ 5,780
Unrealized loss on interest rate swap agreement, net of tax 272 (111)
Minimum pension liability, net of tax ..................... (3,489) (855)
------- -------
Total accumulated other comprehensive income (loss) .. $ 4,805 $ 4,814
======= =======
12. STOCK-BASED COMPENSATION PLANS
We have principally four fixed stock-based compensation plans. Under
the 1994 Omnibus Stock Option Plan, as amended, which terminated as of May 25,
2004, we are authorized to issue 1,500,000 stock options. The options become
exercisable over a three to five year period and expire at the end of five years
following the date they become exercisable. Under the 2004 Omnibus Stock Plan,
which terminates as of May 20, 2014, we are authorized to issue 500,000 stock
options. The options become exercisable over a three to five year period and
expire at the end of ten years following the date of grant. Under the 1996
Independent Directors' Stock Option Plan and the 2004 Independent Directors'
Stock Option Plan, we are authorized to issue 50,000 stock options under each
plan. The options become exercisable one year after the date of grant and expire
at the end of ten years following the date of grant. Options forfeited under the
stock option plans are eligible to be granted again with respect to the options
so forfeited. At December 31, 2004, an aggregate 1,192,745 shares of authorized
but unissued common stock were reserved for issuance under our stock option
plans. A summary of the status of our stock option plans follow:
59
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2004 2003 2002
--------------------- ------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
(SHARES IN THOUSANDS)
Outstanding at beginning
of year ............... 1,163 $ 16.33 910 $ 17.14 1,011 $ 16.76
Granted .................. 251 14.21 346 14.69 10 14.43
Exercised ................ (101) 8.77 (3) 9.79 (54) 9.74
Forfeited ................ (121) 19.33 (90) 18.29 (57) 16.91
----- ---------- ----- ---------- ----- ----------
Outstanding at end of year 1,192 $ 16.20 1,163 $ 16.33 910 $ 17.14
===== ========== ===== ========== ===== ==========
Options exercisable at end
of year ............... 729 800 748
----- ----- -----
STOCK OPTIONS OUTSTANDING
SHARES WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/04 LIFE (YEARS) EXERCISE PRICE
--------------- ----------- ------------ --------------
(SHARES IN
THOUSANDS)
$ 9.29 - $11.29 225 2.8 $10.54
$12.10 - $16.94 627 6.7 $14.54
$21.50 - $24.84 340 1.1 $22.98
STOCK OPTIONS EXERCISABLE
RANGE OF SHARES EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/04 EXERCISE PRICE
--------------- ----------- --------------
(SHARES IN
THOUSANDS)
$ 9.29 - $11.29 225 $10.54
$12.10 - $16.94 164 $14.12
$21.50 - $24.84 340 $22.98
13. RETIREMENT BENEFIT PLANS
We had a defined benefit pension plan covering certain former employees
of our former Brake business. During 2002, a partial settlement of the plan
occurred in conjunction with the purchase of non-participating annuity contracts
for plan members. The final settlement under the plan will occur when the
remaining assets under the plan are distributed. All pension benefit obligations
have been satisfied and the projected benefit obligation under the plan is $0.
60
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (in thousands):
DECEMBER 31,
----------------------
2004 2003
---- ----
Benefit obligation at beginning of year ................ $-- $--
Interest cost .......................................... -- --
Actuarial loss ......................................... -- --
Settlement ............................................. -- --
Benefits paid .......................................... $-- --
----- -----
Benefit obligation at end of year ...................... $-- $--
===== =====
Fair value of plan assets at beginning of year ......... $ 721 $ 746
Settlement ............................................. -- --
Actual return on plan assets ........................... (21) (25)
Benefits paid .......................................... (106) --
----- -----
Fair value of plan assets at end of year ............... $ 594 $ 721
----- -----
Funded status .......................................... $ 594 $ 721
Unrecognized net actuarial loss ........................ 92 81
----- -----
Prepaid benefit cost ................................... $ 686 $ 802
===== =====
Weighted average assumptions are as follows (in thousands):
DECEMBER 31,
------------------------
2004 2003 2002
---- ---- ----
Discount rates .................................... N/A N/A 6.50%
Expected long-term rate of return on assets ....... N/A N/A 8.00%
Components of net periodic (benefit) cost follow (in thousands):
DECEMBER 31,
-------------------------------
2004 2003 2002
---- ---- ----
Interest cost ............................ $-- $-- $ 368
Return on assets ......................... -- (8) (530)
Settlement ............................... -- -- 228
Recognized actuarial (gain) loss ......... 116 8 (5)
Net periodic (benefit) cost .............. $ 116 $-- $ 61
In addition, we participate in several multi-employer plans which
provide defined benefits to substantially all unionized workers. The
Multi-employer Pension Plan Amendments Act of 1980 imposes certain liabilities
upon employers associated with multi-employer plans. We have not received
information from the plans' administrators to determine our share, if any, of
unfunded vested benefits.
61
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
We and certain of our subsidiaries also maintain various defined
contribution plans, which include profit sharing and provide retirement benefits
for other eligible employees. The provisions for retirement expense in
connection with the plans are as follows (in thousands):
DEFINED
MULTI- CONTRIBUTION AND
EMPLOYER PLANS OTHER PLANS
-------------- -----------
Year ended December 31,
2004 ............................... $ 454 $3,980
2003 ............................... 325 3,518
2002 ............................... 306 2,553
We have an Employee Stock Ownership Plan and Trust ("ESOP") for
employees who are not covered by a collective bargaining agreement. Employees
were granted 110,000 shares, 75,000 shares and 75,000 shares during 2004, 2003
and 2002, respectively, under the terms of the ESOP. These shares were issued
directly from treasury stock.
In fiscal 2000, we created an employee benefits trust to which we
contributed 750,000 shares of treasury stock. We are authorized to instruct the
trustees to distribute such shares toward the satisfaction of our future
obligations under employee benefit plans. The shares held in trust are not
considered outstanding for purposes of calculating earnings per share until they
are committed to be released. The trustees will vote the shares in accordance
with its fiduciary duties. During 2004, we committed 110,000 shares to be
released leaving 415,000 shares remaining in the trust. The provision for
expense in connection with the ESOP was approximately $1.6 million in 2004, $0.9
million in 2003 and $1.2 million in 2002.
In August 1994, we established an unfunded Supplemental Executive
Retirement Plan (SERP) for key employees. Under the plan, these employees may
elect to defer a portion of their compensation and, in addition, we may at our
discretion make contributions to the plan on behalf of the employees. Such
contributions were $79,000, $99,000 and $46,000 in 2004, 2003 and 2002,
respectively.
On October 1, 2001, we adopted a second unfunded SERP. The SERP is a
defined benefit plan pursuant to which we will pay supplemental pension benefits
to certain key employees upon retirement based upon the employees' years of
service and compensation. We use a January 1 measurement date for this plan.
DECEMBER 31,
------------------------
2004 2003
---- ----
(IN THOUSANDS)
Benefit obligation at beginning of year .......... $ 4,253 $ 2,275
Service cost ..................................... 356 351
Interest cost .................................... 232 220
Actuarial loss ................................... (242) 1,407
------- -------
Benefit obligation at end of year ................ $ 4,599 $ 4,253
======= =======
Funded status .................................... (4,599) $(4,253)
Unrecognized prior service cost .................. 911 1,022
Additional minimum pension liability ............. (1,455) (1,877)
Unrecognized net actuarial loss .................. 1,430 1,800
------- -------
Accrued benefit cost ............................. $(3,713) $(3,308)
======= =======
62
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
--------------------
2004 2003
Service cost ....................................... $355 $351
Interest cost ...................................... 232 220
Amortization of prior service cost ................. 111 110
Amortization of unrecognized loss .................. 128 146
---- ----
Net periodic benefit cost .......................... $826 $827
==== ====
Actuarial assumptions used to determine costs and benefit obligations
are as follows:
DECEMBER 31,
----------------------
2004 2003
---- ----
Discount rates ........................... 5.75% 6.00%
Salary increase .......................... 4% 4%
The following table represents a reconciliation of the beginning and
ending benefit obligation and the funded status of our UK defined benefit plan:
DECEMBER 31,
------------------------
2004 2003
---- ----
(IN THOUSANDS)
Benefit obligation at beginning of year .......... $ 3,224 $ 2,796
Service cost ..................................... -- --
Interest cost .................................... 171 154
Actuarial loss ................................... 75 103
Benefits paid .................................... (58) (87)
------- -------
Benefit obligation at end of year ................ $ 3,412 $ 2,966
======= =======
Funded status .................................... (1,059) $(1,028)
Unrecognized prior service cost .................. -- --
Additional minimum pension liability ............. (1,884) (758)
Unrecognized net actuarial loss .................. -- --
------- -------
Accrued benefit cost ............................. $(2,943) $(1,786)
======= =======
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
---------------------
2004 2003
---- ----
Service cost ....................................... $-- $--
Interest cost ...................................... 171 154
Amortization of transition obligation .............. -- --
Amortization of prior service cost ................. -- --
Amortization of net actuarial loss ................. -- --
Recognized actuarial (gain) loss ................... (150) (115)
------ ------
Net periodic benefit cost .......................... $ 21 $ 39
====== ======
63
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Actuarial assumptions used to determine costs and benefit obligations
are as follows:
DECEMBER 31,
----------------------
2004 2003
---- ----
Discount rates ................................... 5.23% 5.34%
Current medical cost trend ....................... 2.97% 2.94%
Current dental cost trend ........................ 2.97% 2.94%
Ultimate medical cost trend ...................... 2.97% 2.94%
Year end rate declines to ultimate ............... -- --
The following benefit payments, which reflect expected future service,
as appropriate, are expected to be paid (in thousands):
PENSION
BENEFITS
--------
2005............................................. 96
2006............................................. 116
2007............................................. 135
2008............................................. 154
2009............................................. 173
Years 2010 - 2014 ............................... 1,156
14. POSTRETIREMENT MEDICAL BENEFITS
We provide certain medical and dental care benefits to eligible retired
employees. Our current policy is to fund the cost of the health care plans on a
pay-as-you-go basis.
The following table represents a reconciliation of the beginning and
ending benefit obligation and the funded status of the plan (in thousands):
DECEMBER 31,
------------
2004 2003
---- ----
Benefit obligation at beginning of year ........ $ 32,193 $ 27,100
Service cost ................................... 3,486 2,618
Interest cost .................................. 2,389 1,705
Actuarial loss ................................. 9,928 1,761
Benefits paid .................................. (1,036) (1,093)
-------- --------
Benefit obligation at end of year .............. $ 46,960 $ 32,091
-------- --------
Funded status .................................. $(46,960) $(32,091)
Unrecognized transition obligation ............. 401 407
Unrecognized prior service costs ............... 542 666
Unrecognized net actuarial loss ................ 11,903 2,627
-------- --------
Accrued benefit cost ........................... $(34,114) $(28,391)
-------- --------
64
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of net periodic benefit cost following (in thousands):
DECEMBER 31
-----------
2004 2003 2002
---- ---- ----
Service cost .............................. $ 3,486 $ 2,618 $ 1,812
Interest cost ............................. 2,389 1,705 1,563
Amortization of transition obligation ..... 42 38 32
Amortization of prior service cost ........ 124 124 124
Amortization of net actuarial loss ........ 5 -- --
Recognized actuarial (gain) loss .......... 663 41 (53)
------- ------- -------
Net periodic benefit cost ................. $ 6,709 $ 4,526 $ 3,478
Actuarial assumptions used to determine costs and benefit obligations
are as follows:
DECEMBER 31,
------------
2004 2003 2002
---- ---- ----
Discount rate .................................. 5.75% 6.0%-6.5% 6.5%
Current medical cost trend rate ................ 10% 12% 12%
Current dental cost trend ...................... 5% 5% 5%
Ultimate medical cost trend rate ............... 5% 5% 5%
Year trend rate declines to ultimate ........... 2009 2005 2005
We expect to pay benefits of approximately $1.1 million to our unfunded
postretirement benefit plan in 2005. Our measurement date for this plan is
December 31.
The following benefit payments which reflect expected future service,
as appropriate, are expected to be paid (in thousands):
PENSION BENEFITS
-------------------
2005................................. $ 1,105
2006................................. 1,162
2007................................. 1,273
2008................................. 1,402
2009................................. 1,547
Years 2010 - 2014.................... 11,319
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 2004
(in thousands):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- ----------------
Effect on total of service and interest cost components.... 699 (558)
Effect on post retirement benefit obligation............... 4,396 (3,548)
In December 2003, the Medicare Modernization Act was signed into law.
The Medicare Modernization Act expanded Medicare to include, for the first time,
coverage for prescription drugs. At present, proposed regulations necessary to
implement the Medicare Modernization Act have been issued, including those that
would specify the manner in which actuarial equivalency must be determined, the
evidence required to demonstrate actuarial equivalency, and the documentation
requirements necessary to be entitled to the subsidy. Based on such proposed
regulations, we believe that our prescription drug benefit for our employee
retirees (other than certain union retirees) are expected to meet the actuarial
equivalence test in 2006 and, therefore, we would be eligible to receive a
subsidy from Medicare. However, our net periodic postretirement benefit cost
does not reflect any amount associated with the subsidy because such subsidy is
immaterial in amount.
65
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. OTHER INCOME (EXPENSE), NET
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Interest and dividend income ........................... $ 752 $ 446 $ 1,338
Income from joint ventures ............................. 753 27 352
Gain (loss) on disposal of property, plant and equipment -- (301) 97
Gain (loss) on foreign exchange ........................ 731 (1,357) 108
Other income - net ..................................... 625 708 1,292
------- ------- -------
Total other income (expense), net ................... $ 2,861 $ (477) $ 3,187
======= ======= =======
16. INCOME TAXES
The income tax provision (benefit) consists of the following (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
---- ---- ----
Current:
Domestic ............................. $(2,476) $ 804 $ 2,422
Foreign .............................. 4,022 2,035 2,948
Total Current ........................... 1,546 2,839 5,370
Deferred:
Domestic ............................. (4,558) (1,617) 3,350
Foreign .............................. (667) (15) (800)
Total Deferred .......................... (5,225) (1,632) 2,550
Total income tax provision (benefit) .... $(3,679) $ 1,207 $ 7,920
We have not provided for U.S. income taxes on the undistributed
earnings of our foreign subsidiaries that are deferred from U.S. income taxation
and that we intend to be permanently reinvested. The Company has provided for
U.S. income tax regarding those undistributed earnings of our foreign
subsidiaries subject to current taxation under Subpart F of the Internal Revenue
Code. Cumulative undistributed earnings of foreign subsidiaries on which no U.S.
income tax has been provided were $28.8 million at the end of 2004, $43.2
million at the end of 2003 and $37.7 million at the end of 2002.
Earnings (loss) before income taxes for foreign operations (excluding
Puerto Rico) amounted to approximately $6.8 million, $1.5 million and ($4.6)
million in 2004, 2003 and 2002, respectively. U.S. income taxes on the earnings
of the Puerto Rican subsidiary are largely eligible for tax credits against such
U.S. income taxes (phased out effective at the end of 2005) and are partially
exempt from Puerto Rican income taxes under a tax exemption grant expiring in
2016.
66
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliations between the United States federal income tax rate and
our effective income tax rate as a percentage of earnings from continuing
operations before income taxes are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
---- ---- ----
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 2.9 (7.2) 4.1
Non-deductible items, net ........................................ (1.4) 59.9 3.4
Income (benefit) taxes attributable to foreign income ............ (8.7) (111.0) (2.4)
Change in valuation allowance .................................... 1.4 107.6 16.4
---- ------ ----
Effective tax rate ............................................... 29.2% 84.3% 56.5%
==== ====== ====
The following is a summary of the components of the net deferred tax
assets and liabilities recognized in the accompanying consolidated balance
sheets (in thousands):
DECEMBER 31,
-----------------------
2004 2003
---- ----
Deferred tax assets:
Inventories ....................................... $ 5,548 $ 7,060
Allowance for customer returns .................... 6,963 6,453
Postretirement benefits ........................... 13,133 10,989
Allowance for doubtful accounts ................... 3,594 1,173
Accrued salaries and benefits ..................... 3,235 3,430
Net operating loss and tax credit carry forwards .. 21,688 17,988
Goodwill .......................................... 3,499 2,581
Accrued asbestos liabilities ...................... 11,141 10,430
Other ............................................. 5,823 5,583
-------- --------
74,624 65,687
-------- --------
Valuation allowance ............................... (23,057) (23,239)
-------- --------
Total ........................................... $ 51,567 $ 42,448
======== ========
Deferred tax liabilities:
Depreciation ...................................... $ 8,703 $ 8,747
Promotional costs ................................. 578 395
Goodwill .......................................... 1,603 688
Other ............................................. 1,721 81
--------- --------
Total ........................................... 12,605 9,911
--------- --------
Net deferred tax assets ......................... $ 38,962 $ 32,537
========= ========
The current net deferred tax assets are $14.8 million and $13.1 million
for 2004 and 2003, respectively. The non-current net deferred tax assets are
$24.2 million and $19.4 million for 2004 and 2003, respectively.
During 2004, we performed an assessment regarding the realization of
the net deferred tax assets, which includes projecting future taxable income,
and have decreased the valuation allowance by $0.2 million. The valuation
allowance is intended in part to provide for the uncertainty regarding the
ultimate utilization of the Company's U.S. net operating loss carry forwards,
U.S. capital loss carryovers, U.S. foreign tax credit carryovers, and foreign
net operating loss carry forwards.
67
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
With regard to the remaining net deferred tax assets, we have
determined that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the related benefits.
However, if we are unable to generate sufficient taxable income in the future
through our operations, increases in the valuation allowance may be required.
At December 31, 2004, we have approximately $39.7 million of domestic
and foreign net operating loss carry forwards, of which $28.7 million will
expire between 2021 and 2024, with the remainder (foreign) having an indefinite
carry forward period. We also have foreign tax credit carry forwards of
approximately $1.1 million that will expire between 2010 and 2012. We also have
alternative minimum tax credit carry forwards of approximately $6 million for
which there is no expiration date.
17. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of Statement of Financial Accounting Standards
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), we have three reportable operating segments, which
are the major product areas of the automotive aftermarket in which we compete.
Engine Management consists primarily of ignition and emission parts, wire and
cable, and fuel system parts. Temperature Control consists primarily of
compressors, other air conditioning parts and heater parts. The third reportable
operating segment is Europe, which consists of both Engine Management and
Temperature Control reporting units.
The accounting policies of each segment are the same as those described
in the summary of significant accounting policies (see note 1 of notes to our
consolidated financial statements). The following tables contain financial
information for each reportable segment (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
----- ----- ----
Net sales:
Engine Management ............... $ 562,769 $ 414,375 $ 303,112
Temperature Control ............. 210,094 219,576 255,088
Europe .......................... 40,651 40,141 36,028
Other ........................... 10,769 4,691 4,209
---------------------------------------
Total ........................... $ 824,283 $ 678,783 $ 598,437
=======================================
Depreciation and amortization:
Engine Management ............... $ 10,921 $ 9,362 $ 8,660
Temperature Control ............. 5,640 5,688 5,484
Europe .......................... 1,444 1,046 902
Other ........................... 1,008 996 1,082
---------------------------------------
Total ........................... $ 19,013 $ 17,092 $ 16,128
=======================================
Operating profit (loss):
Engine Management ............... $ 24,549 $ 31,871 $ 41,844
Temperature Control ............. (2,114) 4,702 10,095
Europe .......................... (2,034) (3,605) (10,464)
Other ........................... (22,138) (17,153) (16,407)
---------------------------------------
Total ........................... $ (1,737) $ 15,815 $ 25,068
=======================================
68
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
----- ----- ----
Investment in equity affiliates:
Engine Management ............ $ -- $ -- $ --
Temperature Control .......... -- -- --
Europe ....................... (322) 42 185
Other ........................ 2,260 2,280 2,017
------------------------------------------
Total ....................... $ 1,938 $ 2,322 $ 2,202
==========================================
Capital expenditures:
Engine Management ............ $ 7,513 $ 5,473 $ 3,465
Temperature Control .......... 1,383 2,438 2,066
Europe ....................... 793 1,015 1,831
Other ........................ 85 -- 236
------------------------------------------
Total ....................... $ 9,774 $ 8,926 $ 7,598
==========================================
Total assets:
Engine Management ............ $ 429,631 448,687 $ 247,318
Temperature Control .......... 125,656 150,248 157,343
Europe ....................... 30,936 31,188 30,728
Other ........................ 70,346 64,402 55,369
------------------------------------------
Total ....................... $ 656,569 $ 694,525 $ 490,758
==========================================
Reconciliation of segment operating profit (loss) to net income (loss):
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
----- ----- ----
Operating profit (loss) ........................ $ (1,737) $ 15,815 $ 25,068
Interest income (expense) ..................... 2,861 (477) 3,187
Interest expense .............................. 13,710 13,907 14,244
----------------------------------
Earnings from continuing operations before taxes (12,586) 1,431 14,011
Income tax expense (benefit) .................. (3,679) 1,207 7,920
----------------------------------
Earnings from continuing operations ............ (8,907) 224 6,091
Discontinued operation, net of tax ............ (3,909) (1,742) (18,297)
Cumulative effect of account change, net of tax (1,564) -- (18,350)
----------------------------------
Net earnings (loss) ............................ $(14,380) $ (1,518) $(30,556)
==================================
Our five largest individual customers, including members of one
marketing group accounted for 50% of consolidated net sales in 2004, with 36%
and 14% of these net sales being generated from our Engine Management and
Temperature Control segments, respectively. Our five largest individual
customers, including members of one marketing group accounted for 43% of
consolidated net sales in 2003, with 29% and 14% of these net sales being
generated from our Engine Management and Temperature Control segments,
respectively. Our five largest individual customers, including members of one
marketing group accounted for 43% of consolidated net sales in 2002, with 22%
and 21% of these net sales being generated from our Engine Management and
Temperature Control segments, respectively.
69
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Adjustments consist of items pertaining to our corporate
headquarters function, as well as our Canadian business unit that does not meet
the criteria of a reportable operating segment under SFAS 131.
REVENUE
YEAR ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
United States ............... $714,955 $584,853 $512,055
Europe ...................... 40,651 40,141 36,028
Canada ...................... 45,115 38,187 32,188
Other Foreign ............... 23,562 15,602 18,166
-------- -------- --------
Total ....................... $824,283 $678,783 $598,437
======== ======== ========
LONG LIVED ASSETS
YEAR ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
United States ............... $174,056 $192,574 $130,402
Europe ...................... 6,214 8,905 7,599
Canada ...................... 4,144 4,488 4,432
Other Foreign ............... 785 998 1,273
-------- -------- --------
Total ....................... $185,199 $206,965 $143,706
======== ======== ========
Revenues are attributed to countries based upon the location of the customer.
18. 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.
TRADE ACCOUNTS RECEIVABLE
The carrying amount of trade receivables approximate fair value because
of their short outstanding terms.
TRADE ACCOUNTS PAYABLE
The carrying amount of trade payables approximate fair value because of
their short outstanding terms.
SHORT TERM BORROWINGS
The carrying value of these borrowings equals fair market value because
their interest rate reflect current market rates.
70
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted
market prices or current rates offered to us for debt of the same remaining
maturities.
INTEREST RATE SWAPS
The fair value of our financial instruments are based on market quotes
and represents the net amount required to terminate the position, taking into
consideration market rates and counterparty credit risk.
The estimated fair values of our financial instruments are as follows
(in thousands):
CARRYING AMOUNT FAIR VALUE
--------------- ----------
DECEMBER 31, 2004
Cash and cash equivalents .............. $ 14,934 $ 14,934
Trade accounts receivable .............. 151,352 151,352
Trade accounts payable ................. 46,487 46,487
Short term borrowings .................. 109,416 109,416
Long-term debt ......................... 114,770 113,554
Interest rate swaps .................... 362 362
DECEMBER 31, 2003
Cash and cash equivalents .............. $ 19,647 $ 19,647
Trade accounts receivable .............. 174,223 174,223
Trade accounts payable ................. 58,029 58,029
Short term borrowings .................. 99,699 99,699
Long-term debt ......................... 118,111 116,570
Interest rate swaps .................... (148) (148)
19. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three-years ended December 31, 2004 was as follows
(in thousands):
REAL
TOTAL ESTATE OTHER
----- ------ -----
2004 ..................... $11,858 $ 7,686 $ 4,172
2003 ..................... 12,286 9,143 3,143
2002 ..................... 8,434 6,282 2,152
At December 31, 2004, we are obligated to make minimum rental payments
through 2021, under operating leases, which are as follows (in thousands):
2005.................................................... $9,697
2006.................................................... 8,249
2007.................................................... 6,914
2008.................................................... 4,756
2009.................................................... 3,735
Thereafter.............................................. 19,784
--------
Total............................................... $ 53,135
========
71
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
We also have lease and sub-lease agreements in place for various
properties under our control. We expect to receive operating lease payments from
lessees during the five years ending December 31, 2005 through 2009 of $0.6
million, $0.6 million, $0.6 million, $0.5 million, and $0.3 million,
respectively.
We generally warrant our products against certain manufacturing and
other defects. These product warranties are provided for specific periods of
time of the product depending on the nature of the product. As of December 31,
2004 and 2003, we have accrued $13.2 million and $14 million, respectively, for
estimated product warranty claims included in accrued customer returns. The
accrued product warranty costs are based primarily on historical experience of
actual warranty claims. Warranty expense for each of the years 2004, 2003 and
2002 were $47.8 million, $46.6 million and $46.7 million, respectively.
The following table provides the changes in our product warranties (in
thousands):
DECEMBER 31,
----------------------------
2004 2003
---- ----
Balance, beginning of period................................. $13,987 $10,360
Assumed liabilities from acquisition of DEM ................ -- 3,600
Liabilities accrued for current year sales................... 47,811 46,592
Settlements of warranty claims............................... (48,604) (46,565)
------- -------
Balance, end of period....................................... $13,194 $13,987
======= =======
At December 31, 2004, we had outstanding letters of credit aggregating
approximately $3.9 million. The contract amount of the letters of credit is a
reasonable estimate of their value as the value for each is fixed over the life
of the commitment.
We entered into Change in Control arrangements with two key officers.
In the event of a Change of Control (as defined in the agreement), each
executive will receive severance payments (as defined in the agreement) and
certain other benefits.
In 1986, we acquired a brake business, which we subsequently sold in
March 1998 and which is accounted for as a discontinued operation. When we
originally acquired this brake business, we assumed future liabilities relating
to any alleged exposure to asbestos-containing products manufactured by the
seller of the acquired brake business. In accordance with the related purchase
agreement, we agreed to assume the liabilities for all new claims filed on or
after September 1, 2001. Our ultimate exposure will depend upon the number of
claims filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense thereof. At December 31, 2001, approximately 100 cases
were outstanding for which we were responsible for any related liabilities. At
December 31, 2002, the number of cases outstanding for which we were responsible
for related liabilities increased to approximately 2,500, which include
approximately 1,600 cases filed in December 2002 in Mississippi. We believe that
these Mississippi cases filed against us in December 2002 were due in large part
to potential plaintiffs accelerating the filing of their claims prior to the
effective date of Mississippi's tort reform statue in January 2003, which
statute eliminated the ability of plaintiffs to file consolidated cases. At
December 31, 2004, approximately 3,700 cases were outstanding for which we were
responsible for any related liabilities. We expect the outstanding cases to
increase gradually due to recent legislation in certain states mandating minimum
medical criteria before a case can be heard. Since inception in September 2001,
the amounts paid for settled claims are $2.3 million. We do not have insurance
coverage for the defense and indemnity costs associated with these claims.
72
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In evaluating our potential asbestos-related liability, we have
considered various factors including, among other things, an actuarial study
performed by a leading actuarial firm with expertise in assessing
asbestos-related liabilities, our settlement amounts and whether there are any
co-defendants, the jurisdiction in which lawsuits are filed, and the status and
results of settlement discussions. Actuarial consultants with experience in
assessing asbestos-related liabilities completed a study in September 2002 to
estimate our potential claim liability. The methodology used to project
asbestos-related liabilities and costs in the study considered: (1) historical
data available from publicly available studies; (2) an analysis of our recent
claims history to estimate likely filing rates for the remainder of 2002 through
2052; (3) an analysis of our currently pending claims; and (4) an analysis of
our settlements to date in order to develop average settlement values. Based
upon all the information considered by the actuarial firm, the actuarial study
estimated an undiscounted liability for settlement payments, excluding legal
costs, ranging from $27.3 million to $58 million for the period through 2052.
Accordingly, based on the information contained in the actuarial study and all
other available information considered by us, we recorded an after tax charge of
$16.9 million as a loss from discontinued operation during the third quarter of
2002 to reflect such liability, excluding legal costs. We concluded that no
amount within the range of settlement payments was more likely than any other
and, therefore, recorded the low end of the range as the liability associated
with future settlement payments through 2052 in our consolidated financial
statements, in accordance with generally accepted accounting principles.
As is our accounting policy, we update the actuarial study during the
third quarter of each year. The most recent update to the actuarial study was
performed as of August 31, 2004 using methodologies consistent with the
September 2002 study. The updated study has estimated an undiscounted liability
for settlement payments, excluding legal costs, ranging from $28 to $63 million
for the period through 2049. The change from the prior year study was a $1.5
million increase for the low end of the range and a $7.9 million decrease for
the high end of the range. As a result, in September 2004, an incremental $3
million provision was added to the asbestos accrual increasing the reserve to
approximately $28.2 million. Legal costs, which are expensed as incurred, are
estimated to range from $22 to $27 million during the same period.
We plan on performing a similar annual actuarial analysis during the
third quarter of each year for the foreseeable future. Given the uncertainties
associated with projecting such matters into the future, the short period of
time that we have been responsible for defending these claims, and other factors
outside our control, we can give no assurance that additional provisions will
not be required. Management will continue to monitor the circumstances
surrounding these potential liabilities in determining whether additional
provisions may be necessary. At the present time, however, we do not believe
that any additional provisions would be reasonably likely to have a material
adverse effect on our liquidity or consolidated financial position.
On November 30, 2004, we were served with a summons and complaint in
the U.S. District Court for the Southern District of New York by The Coalition
For A Level Playing Field, which is an organization comprised of a large number
of auto parts retailers. The complaint alleges antitrust violations by the
Company and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. The Company's answer to the
complaint has been delayed pending service on other defendants. Although we
cannot predict the ultimate outcome of this case or estimate the range of any
potential loss that may be incurred in the litigation, we believe that the
lawsuit is without merit, strenuously deny all of the plaintiff's allegations of
wrongdoing and believe we have meritorious defenses to the plaintiff's claims.
We intend to defend vigorously this lawsuit.
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.
73
20. QUARTERLY FINANCIAL DATA UNIT (UNAUDITED)
DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
QUARTER ENDED 2004 2004 2004 2004
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales .......................................... $ 180,966 $ 203,487 $ 235,049 $ 204,781
--------- --------- --------- ---------
Gross profit ....................................... 29,223 52,542 62,268 50,960
--------- --------- --------- ---------
Earnings (loss) from continuing operations ......... (17,245) 1,340 7,543 (545)
--------- --------- --------- ---------
Loss from discontinued operation, net of taxes ..... (617) (2,016) (851) (425)
--------- --------- --------- ---------
Cumulative effect on accounting change, net of taxes (1,564) -- -- --
--------- --------- --------- ---------
Net earnings (loss) ................................ $ (19,426) $ (676) $ 6,692 $ (970)
--------- --------- --------- ---------
Net earnings (loss) from continuing
operations per common share:
Basic ......................................... $ (0.89) $ 0.07 $ 0.39 $ (0.03)
Diluted ....................................... $ (0.89) $ 0.07 $ 0.38 $ (0.03)
--------- --------- --------- ---------
Net earnings (loss) per common share:
Basic ......................................... $ (1.00) $ (0.03) $ 0.35 $ (0.05)
Diluted ....................................... $ (1.00) $ (0.03) $ 0.34 $ (0.05)
--------- --------- --------- ---------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
Quarter Ended 2003 2003 2003 2003
-------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............................................. $ 162,454 $214,479 $ 166,125 $ 135,725
--------- -------- --------- ---------
Gross profit.......................................... 38,125 58,288 43,819 34,540
--------- -------- --------- ---------
Earnings (loss) from continuing operations............ (5,511) 2,042 4,300 (607)
--------- -------- --------- ---------
Loss from discontinued operation, net of (370) (591) (433) (348)
Taxes..............................................
Net earnings (loss)................................... $(5,881) $ 1,451 $ 3,867 $ (955)
--------- -------- --------- ---------
Net earnings (loss) from continuing
operations per common share:
Basic............................................ $ (0.29) $ 0.11 $ 0.34 $ (0.05)
Diluted.......................................... $ (0.29) $ 0.11 $ 0.34 $ (0.05)
--------- -------- --------- ---------
Net earnings (loss) per common share:
Basic............................................ $ (0.31) $ 0.08 $ 0.31 $ (0.08)
Diluted.......................................... $ (0.31) $ 0.08 $ 0.31 $ (0.08)
--------- -------- --------- ---------
In the fourth quarter of 2004, we determined that it was a preferable
accounting method to reflect new customer acquisition costs as a reduction to
revenue when incurred. Accordingly, we recorded a cumulative effect of a change
in accounting for new customer acquisition costs totaling $2.6 million (or $1.6
million, net of tax effects) and recorded the accounting change as if it had
taken effect on October 1, 2004. In addition, in the fourth quarter of 2004,
Engine Management gross margins were negatively impacted primarily due to
one-time charges related to inefficiencies and reducing inventories. In
addition, in the fourth quarter of 2004, we recorded an impairment loss on
goodwill of $6.4 million, which impairment loss related to our Temperature
Control and European Operation Segment for which we recorded a charge of $4.8
million and $1.6 million, respectively.
The fourth quarter of 2003 reflects unfavorable adjustments including
approximately $2.9 million of integration and restructuring costs related to DEM
and our Temperature Control Segment; and a $2 million additional inventory
obsolescence provision for Temperature Control inventory due to reduced sales
volume.
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Exchange Act, within 90 days of the
filing date of this Report. This evaluation also included consideration of our
internal controls and procedures for the preparation of our financial statements
as required under Section 404 of the Sarbanes-Oxley Act.
Grant Thornton LLP, our independent registered public accounting firm, has
provided us with an unqualified report on our consolidated financial statements
for 2004. However, in the course of conducting its assessment of our internal
controls and its audit of our financial statements for our year ended December
31, 2004, Grant Thornton advised management and the audit committee of our board
of directors that it had identified the following material weaknesses in our
internal controls:
(1) There were insufficient personnel resources within the accounting
and financial reporting function due to accounting staff (including
senior level employees) turnover occurring in the fourth quarter of
2004.
(2) There were deficiencies identified in the following areas of the
Company's information technology function which, when considered in
the aggregate, constitute a material weakness over financial
reporting:
o The Company's IT system is decentralized with disparate IT
platforms, business solutions and software applications being
utilized.
o System maintenance policies and procedures (including an
enhanced disaster recovery plan) require development and
adoption.
o Security of systems used for the entry and maintenance of
accounting records requires additional documentation and
scrutiny to ensure that appropriate access to such systems and
the data contained therein is restricted.
o A policy and procedure to address an overall security
framework, including password usage, intrusion detection,
system security monitoring and back-up recovery must be
written and implemented.
(3) There were deficiencies in the analysis and reconciliation of
general ledger accounts which were indicative of a material weakness
in controls over closing procedures, including the (a) month end cut
off processes, and (b) the accounting and reporting of restructuring
charges.
While these material weaknesses did not have an effect on our reported results,
they nevertheless constituted deficiencies in our disclosure controls. In light
of these material weaknesses and the requirements enacted by the Sarbanes-Oxley
Act of 2002 and the related rules and regulations adopted by the SEC, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2004, our disclosure controls and procedures needed improvement and were not
effective at a reasonable assurance level. Despite those deficiencies in our
disclosure controls, management believes that there were no material
inaccuracies or omissions of material facts in this Report.
75
Since the discovery of the material weaknesses in internal controls described
above, management is strengthening the Company's internal control over financial
reporting beyond what has existed in prior years, and we have taken various
actions to improve our disclosure controls and procedures and to remediate our
internal control over financial reporting including, but not limited to, the
following:
(1) We have engaged a search firm to assist us in the hiring of
additional senior level accounting staff. We expect to fill such
positions by the second or third quarters of 2005. In addition, in
the first quarter of 2005, we hired a Financial Compliance Manager
to assist us with our Sarbanes-Oxley compliance.
(2) We have re-allocated resources to our accounting and finance
department to strengthen our accounting function. In particular, in
the first quarter of 2005 we have transferred one employee from our
European operations to become our Engine Management Group
Controller, and in the second quarter of 2005 we will be
transferring one employee from our Canadian operations to serve in a
senior level accounting position in our Engine Management division.
In addition, in the fourth quarter of 2004 we have hired an outside
consultant to assist us with our accounting function.
(3) In 2004, we retained an independent third party consulting firm to
assist us in the preparation, documentation and testing of our
compliance with Section 404 of the Sarbanes-Oxley Act of 2002. We
intend to continue to utilize this consulting firm with our
Sarbanes-Oxley compliance efforts in 2005.
(4) As part of our efforts to improve our IT function, we are in the
process of:
o Establishing an enterprise wide information technology
strategy to synthesize the disparate IT platforms and to
develop policies to unify the business solutions and software
applications being employed;
o Establishing a plan for uniform upgrades of workstations and
software, including virus protection and software fixes;
o Establishing a formal policy and procedure to address the
overall security framework, including password usage,
intrusion detection and system security monitoring;
o Improving our security measures to safeguard our data,
including enhancing our disaster recovery plan;
o Improving our policies and procedures for system maintenance
and handling back-up and recovery tapes; and
o Utilizing a consulting firm to assist us with preparing an IT
policy and procedures manual to document all of our updated IT
procedures/standards on a company-wide basis.
The continued implementation of the initiatives described above is among our
highest priorities. We have discussed our corrective actions and future plans
with our audit committee and Grant Thornton and, as of the date of this Report,
we believe the actions outlined above should correct the above-listed material
weaknesses in our internal controls. However, in designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and are subject
to certain limitations, including the exercise of judgment by individuals, the
inability to identify unlikely future events, and the inability to eliminate
misconduct completely. As a result, there can be no assurance that our
disclosure controls and procedures will prevent all errors or fraud or ensure
that all material information will be made known to management in a timely
manner. In addition, we cannot assure you that neither we nor our independent
auditors will in the future identify further material weaknesses or significant
deficiencies in our internal control over financial reporting that we have not
discovered to date.
76
When in certain of the Company's prior filings under the Exchange Act officers
of the Company provided conclusions regarding the effectiveness of our
disclosure controls and procedures, they believed that their conclusions were
accurate. However, after receiving and assessing the formal advice regarding our
internal control over financial reporting that our independent auditors provided
in the course of the audit of our financial statements for the year ended
December 31, 2004, our Chief Executive Officer and Chief Financial Officer have
reached the conclusions set forth above.
We believe that the material weaknesses in our internal controls identified
during our Sarbanes-Oxley testing review and described above do not materially
affect the fairness or accuracy of the presentation of our financial condition
and results of operation in our historical financial statements as set forth in
this Report or in our reports previously filed with the SEC under the Exchange
Act.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
During the quarter ended December 31, 2004 and subsequent to that date, we made
and continue to make changes in the Company's internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting, including the
following:
(1) Changes in our accounting personnel by (a) hiring a new Engine
Management Group Controller and a Financial Compliance Manager, and
(b) launching a search for additional senior level accounting staff.
(2) Increased employee training and subscribed to an accounting research
service in an effort to keep more current with accounting
pronouncements and financial reporting matters.
(3) Increased responsibilities of a consulting firm with the requisite
experience and expertise to assist us in the implementation and
compliance with Section 404 of the Sarbanes-Oxley Act.
(4) Improved the documentation of our significant accounting and IT
policies.
We continue to review, document and test our internal control over financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business. These
efforts will lead to various changes in our internal control over financial
reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act, as part of this Report we
have furnished a Management's Report on Internal Control Over Financial
Reporting, in which we state that we were unable to complete fully the required
assessment of internal control over financial reporting as of December 31, 2004,
and Grant Thornton has issued a "disclaimer" opinion indicating that they do not
express an opinion as to management's assessment and as to the effectiveness of
the Company's internal control over financial reporting, as of December 31,
2004. Notwithstanding Grant Thornton's "disclaimer" opinion, Grant Thornton has
indicated its agreement with the above listed weaknesses in our internal
controls. Grant Thornton has also advised our audit committee of our board of
directors that the internal control weaknesses do not affect Grant Thornton's
unqualified report on our consolidated financial statements for 2004 included in
this Report. Please refer to Item 8, "Financial Statements and Supplementary
Data" for a further discussion.
The certifications of the Company's Chief Executive Officer and Chief Financial
Officer attached as Exhibits 31.1 and 31.2 to this Report include, in paragraph
4 of such certifications, information concerning the Company's disclosure
controls and procedures and internal control over financial reporting. These
officers believe these certifications to be accurate, despite our inability to
have completed fully the assessment required by Section 404 of the
Sarbanes-Oxley Act, because we did have procedures in place during 2004 to
detect errors in our systems. Such certifications should be read in conjunction
with the information contained in this Item 9A for a more complete understanding
of the matters covered by such certifications.
77
ITEM 9B. OTHER INFORMATION
AMENDMENT TO CREDIT AGREEMENT
On March 31, 2005, the Company and certain of its wholly owned
subsidiaries entered into a amendment of its Amended and Restated Credit
Agreement dated as of February 7, 2003, as further amended (the "Credit
Agreement"), with General Electric Capital Corporation, as agent for the
lenders, Bank of America, N.A., for itself and as syndicate agent, and GMAC
Commercial Finance LLC, for itself and as documentation agent.
The amendment provides for the following: (1) borrowings of the Company
are no longer collateralized by the assets, including accounts receivable,
inventory and fixed assets, of our Canadian subsidiary; (2) the specified levels
of fixed charge coverage has been modified for 2005 and thereafter; (3) our
Canadian subsidiary was released from its obligations under a guaranty and
security agreement; (4) the Company's pledge of stock of its Canadian subsidiary
to the lenders was reduced from a 100% to a 65% pledge of stock; and (5) a
waiver of compliance with the minimum fixed charge coverage ratio for the
quarter ended on December 31, 2004.
The description set forth above is qualified by the Waiver and Amendment
No. 4 to the Amended and Restated Credit Agreement filed herewith as exhibit
10.15.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
information in our Definitive Proxy Statement to be filed with the SEC in
connection with our 2005 Annual Meeting of Stockholders (the "2005 Proxy
Statement") set forth under the captions "Election of Directors," "Corporate
Governance" and "Information with respect to Section 16(a) Beneficial Ownership
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information in our 2005 Proxy Statement set forth under captions "Management
Information-Executive Compensation" and "Corporate Governance-Directors
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the
information in our 2005 Proxy Statement set forth under the captions
"Information with Respect to Section 16(a) Beneficial Ownership Compliance,"
"Equity Compensation Plan Information" and "Security Ownership of Certain
Beneficial Owners and Management."
78
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information in our 2005 Proxy Statement set forth under the captions
"Information with Respect to Section 16(a) Beneficial Ownership Compliance" and
"Certain Relationships and Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the
information in our 2005 Proxy Statement set forth under the captions "Audit and
Non-Audit Fees."
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) The Index to Consolidated Financial Statements of the
Registrant Financial Statements under Item 8 of this Report is
incorporated herein by reference as the list of Financial
Statements required as part of this Report.
(2) The following financial schedule and related report for the
years 2004, 2003 and 2002 is submitted herewith:
Report of Independent Registered Public Accounting Firm on
Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
not applicable or the information is included in the financial
statements or notes thereto.
(3) Exhibits.
The exhibit list in the Exhibit Index is incorporated by
reference as the list of exhibits required as part of this
Report.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(REGISTRANT)
/s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
/s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and Chief Financial Officer
New York, New York
March 31, 2005
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lawrence I. Sills and James J. Burke, jointly and
severally, as his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
rectifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 31, 2005 /s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
March 31, 2005 /s/ James J. Burke
------------------
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 31, 2005 /s/ Robert G. Gerrity
---------------------
Robert G. Gerrity, Director
March 31, 2005 /s/ John L. Kelsey
---------------------
John L. Kelsey
80
March 31, 2005 /s/ Kenneth A. Lehman
---------------------
Kenneth A. Lehman, Director
March 31, 2005 /s/ Arthur S. Sills
-------------------
Arthur S. Sills, Director
March 31, 2005 /s/ Frederick A. Sturdivant
---------------------------
Frederick A. Sturdivant, Director
March 31, 2005 /s/ William H. Turner
---------------------
William H. Turner, Director
March 31, 2005 /s/ Richard S. Ward
-------------------
Richard S. Ward, Director
81
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
2.1 Asset Purchase Agreement, dated as of February 7, 2003, by and among Dana
Corporation, Automotive Controls Corp., BWD Automotive Corporation, Pacer
Industries, Inc., Ristance Corporation, Engine Controls Distribution
Services, Inc., as Sellers, and Standard Motor Products, Inc., as Buyer
(incorporated by reference to the Company's Current Report on Form 8-K,
filed on February 10, 2003).
3.1 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.
3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as an
Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
3.3 Certificate of Amendment of the Certificate of Incorporation, dated
February 15, 1996, filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996.
4.1 Form of Subordinated Debenture Indenture (including form of convertible
debenture) (incorporated by reference to Exhibit 4.1 to the Company's
Amendment No. 2 to its Registration Statement on Form S-3 (Registration
No. 333-79177), filed on July 20, 1999).
4.2 Rights Agreement, dated as of February 15, 1996, between Standard Motor
Products, Inc. and Registrar & Transfer Co., as rights agent (incorporated
by reference to the Company's Registration Statement on Form 8-A (File No.
001-04743), filed on April 11, 1996).
4.3 Form of Share Ownership Agreement by and between Standard Motor Products,
Inc. and Dana Corporation (incorporated by reference to the Company's
Current Report on Form 8-K filed on February 10, 2003).
10.1 Employee Stock Ownership Plan and Trust, dated January 1, 1989
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989).
10.2 Supplemental Executive Retirement Plan, dated August 15, 1994
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
10.3 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc.
(incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-58655), filed on April 17, 1995).
10.4 1996 Independent Outside Directors Stock Option Plan of Standard Motors
Products, Inc. (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended (incorporated by reference to the Company's Registration Statement
on Form S-8 (Registration No. 33-51565), filed on May 1, 1998).
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STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.6 Credit Agreement, dated April 27, 2001, among Standard Motor Products,
Inc. and subsidiaries, as Borrowers and GE Capital Corp. as Agent and
Lender, GMAC Commercial Credit LLC, on Lender and Syndication Agent and
Bank of America, N.A., as Lender and Documentation Agent (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001).
10.7 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended and restated, (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 333-59524), filed on
April 25, 2001).
10.8 Supplemental Compensation Plan effective October 1, 2001 (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.9 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and John Gethin (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
10.10 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and James Burke (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
10.11 Amended and Restated Credit Agreement, dated as of February 7, 2003, among
Standard Motor Products, Inc., as Borrower and General Electric Capital
Corp. and Bank of America, as Lenders (incorporated by reference to the
Company's Current Report on Form 8-K filed on February 10, 2003).
10.12 Amendment No. 1 to Amended and Restated Credit Agreement, dated June 27,
2003, among Standard Motor Products, Inc., as Borrower and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003).
10.13 Amendment No. 2 to Amended and Restated Credit Agreement, dated March 11,
2004, among Standard Motor Products, Inc., as Borrower, and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Quarterly Report in Form 10-Q for the quarter
ended March 31, 2004).
10.14 Amendment No. 3 to Amended and Restated Credit Agreement, dated August 11,
2004, among Standard Motor Products, Inc., as Borrower, and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Quarterly Report in Form 10-Q for the quarter
ended September 30, 2004).
10.15 Waiver and Amendment No. 4 to Amended and Restated Credit Agreement, dated
as of March 31, 2005, among Standard Motor Products, Inc., as Borrower,
and General Electric Capital Corp. and Bank of America, as Lenders.
18 Letter from Grant Thornton LLP re Change in Accounting Principles.
83
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
21 List of Subsidiaries of Standard Motor Products, Inc.
23 Consent of Independent Auditors - KPMG LLP.
24 Power of Attorney (see signature page to Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
84
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2004, 2003 and 2002
Additions
---------
Balance at Charged to
beginning costs and Balance at
Description of Year Expenses Other Deductions End of Year
----------- ------- -------- ------ ---------- -----------
YEAR ENDED DECEMBER 31, 2004:
Allowance for doubtful accounts $ 3,009,000 $ 404,000 $ 5,163,000(1) $ 1,154,000 $ 7,422,000
Allowance for discounts 2,000,000 12,319,000 -- 12,387,000 1,932,000
----------- ----------- ----------- ----------- -----------
$ 5,009,000 $12,723,000 $ 5,163,000 $13,541,000 $ 9,354,000
=========== =========== =========== =========== ===========
Allowance for sales returns $24,115,000 $86,452,000 $ 194,000(2) $87,634,000 $23,127,000
=========== =========== =========== =========== ===========
Allowance for inventory valuation $41,803,000 $ 1,487,000 $ 430,000(2) $ 4,082,000 $39,638,000
=========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2003:
Allowance for doubtful accounts $ 3,568,000 $ 813,000 $ 330,000(2) $ 1,702,000 $ 3,009,000
Allowance for discounts 1,314,000 9,615,000 800,000(2) 9,729,000 2,000,000
----------- ----------- ----------- ----------- -----------
$ 4,882,000 $10,428,000 $ 1,130,000 $11,431,000 $ 5,009,000
=========== =========== =========== =========== ===========
Allowance for sales returns $16,341,000 $83,087,000 $ 7,013,000 $82,326,000 $24,115,000
=========== =========== =========== =========== ===========
Allowance for inventory valuation $14,291,000 $ 5,613,000 $27,442,000 $ 5,543,000 $41,803,000
=========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2002:
Allowance for doubtful accounts $ 2,917,000 $ 489,000 $ 162,000(2) $ -- $ 3,568,000
Allowance for discounts 1,445,000 8,611,000 -- 8,742,000 1,314,000
----------- ----------- ----------- ----------- -----------
$ 4,362,000 $ 9,100,000 $ 162,000 $ 8,742,000 $ 4,882,000
=========== =========== =========== =========== ===========
Allowance for sales returns $18,167,000 $73,030,000 $ -- $74,856,000 $16,341,000
=========== =========== =========== =========== ===========
Allowance for inventory valuation $13,895,000 $ 1,265,000 $ -- $ 869,000 $14,291,000
=========== =========== =========== =========== ===========
(1) The Company previously presented the reserve for accounts receivable
balances over 90 days past due as a reduction to the gross
receivable balance instead of as part of the allowance for doubtful
accounts. In the fourth quarter of 2004, the Company decided to
record the $5,163,000 of accounts receivable over 90 days past
due as part of gross accounts receivable instead of as an offset to
the allowance for doubtful accounts. There was no impact on the net
accounts receivable recorded on the consolidated balance sheets.
(2) Allowances acquired through acquisitions.
85