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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 1-4743
STANDARD MOTOR PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(718) 392-0200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of the close of business on July 31, 2007, there were 18,966,643 outstanding
shares of the registrant's Common Stock, par value $2.00 per share.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and Retained Earnings
(Unaudited) for the Three Months and Six Months Ended
June 30, 2007 and 2006..............................................3
Consolidated Balance Sheets
as of June 30, 2007 (Unaudited) and December 31, 2006...............4
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2007 and 2006.....................5
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) for the Three Months and Six Months Ended
June 30, 2007.......................................................6
Notes to Consolidated Financial Statements (Unaudited)............. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........29
Item 4. Controls and Procedures............................................29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................30
Item 4. Submissions of Matters to a Vote of Security Holders...............30
Item 6. Exhibits...........................................................31
Signatures....................................................................32
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2007 2006 2007 2006
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ........................................... $ 216,950 $ 229,174 $ 416,765 $ 439,250
Cost of sales ....................................... 160,261 172,468 308,201 329,313
------------ ------------ ------------ ------------
Gross profit ................................. 56,689 56,706 108,564 109,937
Selling, general and administrative expenses ........ 43,324 42,995 86,055 86,783
Restructuring expenses .............................. 559 143 1,237 230
------------ ------------ ------------ ------------
Operating income ............................. 12,806 13,568 21,272 22,924
Other income, net ................................... 779 810 1,046 1,160
Interest expense .................................... 4,795 5,255 9,336 9,708
------------ ------------ ------------ ------------
Earnings from continuing operations
before taxes ............................ 8,790 9,123 12,982 14,376
Provision for income tax ........................... 3,134 3,668 4,390 6,323
------------ ------------ ------------ ------------
Earnings from continuing operations .......... 5,656 5,455 8,592 8,053
Loss from discontinued operation, net of income taxes (279) (289) (628) (1,053)
------------ ------------ ------------ ------------
Net earnings ................................. $ 5,377 $ 5,166 $ 7,964 $ 7,000
============ ============ ============ ============
PER SHARE DATA:
Net earnings per common share - Basic:
Earnings from continuing operations ............ $ 0.30 $ 0.30 $ 0.46 $ 0.44
Discontinued operation ......................... (0.01) (0.02) (0.03) (0.06)
------------ ------------ ------------ ------------
Net earnings per common share - Basic ............... $ 0.29 $ 0.28 $ 0.43 $ 0.38
============ ============ ============ ============
Net earnings per common share - Diluted:
Earnings from continuing operations ............ $ 0.30 $ 0.30 $ 0.46 $ 0.44
Discontinued operation ......................... (0.02) (0.02) (0.04) (0.06)
------------ ------------ ------------ ------------
Net earnings per common share - Diluted ............. $ 0.28 $ 0.28 $ 0.42 $ 0.38
============ ============ ============ ============
Average number of common shares ..................... 18,781,388 18,297,155 18,617,453 18,245,253
============ ============ ============ ============
Average number of common shares and dilutive
common shares .................................. 18,940,962 18,327,895 18,774,430 18,260,708
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
-3-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
2007 2006
--------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 21,567 $ 22,348
Accounts receivable, less allowance for discounts and doubtful
accounts of $10,245 and $9,465 for 2007 and 2006, respectively 248,786 183,664
Inventories ....................................................... 243,773 233,970
Deferred income taxes ............................................. 13,939 14,011
Assets held for sale .............................................. 3,335 --
Prepaid expenses and other current assets ......................... 10,509 7,845
--------- ---------
Total current assets .......................................... 541,909 461,838
Property, plant and equipment, net ....................................... 76,534 80,091
Goodwill ................................................................. 38,488 38,488
Other intangibles, net ................................................... 16,739 17,801
Other assets ............................................................. 38,188 41,874
--------- ---------
Total assets .................................................. $ 711,858 $ 640,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ..................................................... $ 181,552 $ 139,799
Current portion of long-term debt ................................. 454 542
Accounts payable .................................................. 65,112 53,783
Sundry payables and accrued expenses .............................. 21,627 24,510
Accrued customer returns .......................................... 25,869 21,705
Restructuring accrual ............................................. 666 703
Accrued rebates ................................................... 26,139 20,769
Payroll and commissions ........................................... 16,926 16,714
--------- ---------
Total current liabilities .................................. 338,345 278,525
--------- ---------
Long-term debt ........................................................... 97,703 97,979
Post-retirement medical benefits and other accrued liabilities ........... 53,276 51,678
Restructuring accrual .................................................... 226 383
Accrued asbestos liabilities ............................................. 20,290 20,828
--------- ---------
Total liabilities .......................................... 509,840 449,393
--------- ---------
Commitments and contingencies
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 .................................... 59,126 57,429
Retained earnings ................................................. 115,171 112,481
Accumulated other comprehensive income ............................ 5,301 3,541
Treasury stock - at cost (1,649,918 and 2,109,816 shares in
2007 and 2006, respectively) ............................... (18,552) (23,724)
--------- ---------
Total stockholders' equity ............................. 202,018 190,699
--------- ---------
Total liabilities and stockholders' equity ............. $ 711,858 $ 640,092
========= =========
See accompanying notes to consolidated financial statements.
-4-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
----------------------
2007 2006
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................. $ 7,964 $ 7,000
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization ............................................... 7,472 8,011
Increase in allowance for doubtful accounts ................................. 209 426
Increase in inventory reserves .............................................. 2,229 2,532
Loss on disposal of property, plant and equipment ........................... 84 4
Equity income from joint ventures ........................................... (58) (449)
Employee stock ownership plan allocation .................................... 934 596
Stock-based compensation .................................................... 336 544
Decrease in deferred income taxes ........................................... 1,969 4,749
Loss on discontinued operation, net of income tax ........................... 628 1,053
Change in assets and liabilities:
Increase in accounts receivable ............................................. (65,332) (89,402)
(Increase) decrease in inventories .......................................... (12,032) 5,674
Increase in prepaid expenses and other current assets ....................... (1,730) (1,265)
(Increase) decrease in other assets ......................................... (79) 2,321
Increase in accounts payable ................................................ 10,843 13,919
Increase in sundry payables and accrued expenses ............................ 2,487 3,638
Decrease in restructuring accrual ........................................... (194) (860)
Increase in other liabilities ............................................... 4,808 8,467
-------- --------
Net cash used in operating activities ................................... (39,462) (33,042)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and equipment ....................... 29 13
Capital expenditures .......................................................... (6,057) (5,061)
-------- --------
Net cash used in investing activities ................................... (6,028) (5,048)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements ................................ 41,753 43,584
Principal payments and retirement of long-term debt ........................... (364) (284)
Increase (decrease) in overdraft balances ..................................... 486 (6,158)
Proceeds from exercise of employee stock options .............................. 4,175 --
Excess tax benefits related to the exercise of employee stock options ......... 491 --
Dividends paid ................................................................ (3,348) (3,281)
-------- --------
Net cash provided by financing activities ............................... 43,193 33,861
-------- --------
Effect of exchange rate changes on cash ........................................ 1,516 1,347
-------- --------
Net decrease in cash and cash equivalents ...................................... (781) (2,882)
CASH AND CASH EQUIVALENTS at beginning of the period ........................... 22,348 14,046
-------- --------
CASH AND CASH EQUIVALENTS at end of the period ................................. $ 21,567 $ 11,164
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 9,293 $ 9,429
======== ========
Income taxes .................................................................. $ 2,225 $ 2,195
======== ========
Non-cash financing activity:
Reduction of restructuring accrual applied against goodwill ................... -- $ 10,453
======== ========
See accompanying notes to consolidated financial statements.
-5-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 2007
(Unaudited)
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY
STOCK PAR VALUE EARNINGS INCOME STOCK TOTAL
--------- --------- --------- --------- --------- ---------
Balance at March 31, 2007 ............................. $ 40,972 $ 58,460 $ 111,484 $ 3,689 $ (20,751) $ 193,854
Comprehensive income:
Net earnings ...................................... -- -- 5,377 -- -- 5,377
Foreign currency translation
adjustment ...................................... -- -- -- 1,612 -- 1,612
Minimum pension liability
adjustment ...................................... -- -- -- -- -- --
---------
Total comprehensive income ........................ 6,989
Cash dividends paid ................................... -- -- (1,690) -- -- (1,690)
Exercise of employee stock options .................... -- 345 -- -- 2,048 2,393
Stock-based compensation .............................. -- 37 -- -- 151 188
Excess tax benefits related to the exercise
of employee stock options .......................... -- 284 -- -- -- 284
Employee Stock Ownership Plan ......................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2007 .............................. $ 40,972 $ 59,126 $ 115,171 $ 5,301 $ (18,552) $ 202,018
========= ========= ========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2007
(Unaudited)
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY
STOCK PAR VALUE EARNINGS INCOME STOCK TOTAL
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2006 ......................... $ 40,972 $ 57,429 $ 112,481 $ 3,541 $ (23,724) $ 190,699
Comprehensive income:
Net earnings ...................................... -- -- 7,964 -- -- 7,964
Foreign currency translation
adjustment ...................................... -- -- -- 1,761 -- 1,761
Minimum pension liability
adjustment ...................................... -- -- -- (1) -- (1)
---------
Total comprehensive income ........................ 9,724
Impact of adopting new accounting
pronouncement (a) .................................. -- -- (1,926) -- -- (1,926)
Cash dividends paid ................................... -- -- (3,348) -- -- (3,348)
Exercise of employee stock options .................... -- 492 -- -- 3,683 4,175
Stock-based compensation .............................. -- 185 -- -- 151 336
Excess tax benefits related to the exercise
of employee stock options .......................... -- 491 -- -- -- 491
Employee Stock Ownership Plan ......................... -- 529 -- -- 1,338 1,867
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2007 .............................. $ 40,972 $ 59,126 $ 115,171 $ 5,301 $ (18,552) $ 202,018
========= ========= ========= ========= ========= =========
(a) Relates to the impact of adopting the provisions of Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 ("FIN 48").
See accompanying notes to consolidated financial statements.
-6-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as the "Company," "we," "us," or "our") is
engaged in the manufacture and distribution of replacement parts for motor
vehicles in the automotive aftermarket industry.
The accompanying unaudited financial information should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2006.
The unaudited consolidated financial statements include our accounts and all
domestic and international companies in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant inter-company items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the entire year.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a threshold for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of
this Interpretation. FIN 48 also provides guidance on accounting for
derecognition, interest and penalties, and classification and disclosure of
matters related to uncertainty in income taxes. FIN 48 is effective for fiscal
years beginning after December 15, 2006 and, as a result, is effective for our
Company beginning January 1, 2007.
On January 1, 2007, the Company adopted the provisions of FIN 48. The cumulative
effect of adoption was a $1.9 million reduction of retained earnings. At January
1, 2007, the total amount of unrecognized tax benefits was $2.3 million, all of
which would impact the effective tax rate, if recognized.
The Company continues the practice of recognizing interest and penalties
associated with income tax matters as components of the "Provision for income
taxes". The Company's accrual for interest and penalties was $0.4 million upon
adoption of FIN 48 and at June 30, 2007.
The Company is subject to taxation in the US and various state, local and
foreign jurisdictions. The Company remains subject to examination by US Federal,
state, local and foreign tax authorities for tax year 2001 as well as 2003
through 2006. With a few exceptions, the Company is no longer subject to US
Federal, state, local or foreign examinations by tax authorities for the tax
year 2002 and for tax years prior to 2001. The Company does not presently
anticipate that its unrecognized tax benefits will significantly increase or
decrease prior to June 30, 2008; however, actual developments in this area could
differ from those currently expected.
-7-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. This statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. SFAS 157 is effective for the fiscal year beginning after
November 15, 2007, which for the Company is the year ending December 31, 2008.
The Company is assessing the impact, if any, which the adoption of SFAS 157 will
have on our consolidated financial position, results of operations and cash
flows.
NOTE 3. RESTRUCTURING AND INTEGRATION COSTS
RESTRUCTURING COSTS
In connection with our acquisition of substantially all of the assets and the
assumption of substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM") in June 2003, we have a
restructuring accrual of $0.9 million remaining as of June 30, 2007, and most of
this amount we expect to pay in 2007 and 2008. The restructuring accrual relates
to work force reductions, employee termination benefits and contract termination
costs. During the six months ended June 30, 2007, termination benefits of $0.2
million have been charged to the restructuring accrual. As of June 30, 2007, the
reserve balance for workforce reductions was at $0.3 million. The restructuring
accrual also includes costs associated with exiting certain activities,
primarily related to lease and contract termination costs, which will not have
future benefits. As of June 30, 2007, we have an exit reserve balance for other
exit costs of $0.6 million.
Selected information relating to the restructuring costs included in the
allocation of the cost to acquire DEM is as follows (in thousands):
Workforce Other Exit
Reduction Costs Total
----------------- ---------------- -----------------
Restructuring liability at December 31, 2006.............. $ 472 $614 $1,086
Cash payments during first six months of 2007............. (194) -- (194)
----- ---- -----
Restructuring liability as of June 30, 2007............... $ 278 $614 $ 892
===== ==== =====
INTEGRATION EXPENSES
During the second quarter of 2007 and 2006, we incurred integration expenses of
approximately $0.6 million and $0.1 million, respectively. For the six months
ended June 30, 2007 and 2006, we incurred integration expenses of $1.2 million
and $0.2 million, respectively. The 2007 amount primarily relates to the cost of
moving and closing our Puerto Rico production operations, while the 2006 amount
relates to the cost of moving our European production operations.
On October 10, 2006, the Company announced plans to close its Puerto Rico
manufacturing facility related to the Engine Management Segment following the
expiration of the Internal Revenue Code Section 936 benefit and to further our
efforts in streamlining costs. These operations will be moved to other
manufacturing sites of the Company. The facility move and closure is planned to
occur in a phased manner over the next 12 to18 months. In connection with this
closing, the Company will incur one-time termination benefits to be paid to
certain employees at the end of a specified requisite service period. The
Company estimates these termination benefits will amount to approximately $2
-8-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
million which will be recognized as expense ratably over the requisite service
period. The Company also expects to incur approximately $2.4 million of various
expenses to move the production assets, close the Puerto Rico facility, and
relocate some employees. These expenses will be recognized as incurred. During
the second quarter of 2007, we incurred expenses of $0.4 million for one-time
termination benefits and $0.2 million of other exit costs. For the six months
ended June 30, 2007, we incurred expenses of $0.7 million for one-time
termination benefits and $0.5 million of other costs.
Selected information relating to this exit activity is as follows (in
thousands):
Workforce Other Exit
Reduction Costs Total
--------- ----- -----
Exit activity liability at December 31, 2006................ $ 387 $ 35 $ 422
Amounts provided during first six months of 2007............ 740 497 1,237
Cash payments during first six months of 2007............... (65) (532) (597)
------- ---- ------
Exit activity liability at June 30, 2007.................... $ 1,062 $ -- $ 1,062
======= ===== =======
In December 2006, we divested a majority portion of our European Temperature
Control business. The transaction involved the sale of all of our voting stock
of our subsidiaries in Italy and France. The proceeds from the divestiture were
approximately $3.1 million, and the Company incurred a loss on divestiture of
$3.2 million. The major classes of assets and liabilities at the time of sale
were as follows: accounts receivable of $4 million, inventory of $3.9 million,
accounts payable of $1.7 million, and accrued liabilities of $0.8 million. The
European Temperature Control business was previously included in our European
Segment.
NOTE 4. INVENTORIES
June 30, December 31,
2007 2006
-------- --------
(in thousands)
Finished goods, net .......................... $168,670 $169,183
Work in process, net ......................... 5,273 4,654
Raw materials, net ........................... 69,830 60,133
-------- --------
Total inventories, net ................... $243,773 $233,970
======== ========
-9-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 5. CREDIT FACILITIES AND LONG-TERM DEBT
Total debt consists of (in thousands):
June 30, December
2007 31, 2006
-------- --------
CURRENT
Revolving credit facilities (1) .................... $181,552 $139,799
Current portion of mortgage loan ................... 454 542
-------- --------
182,006 140,341
-------- --------
LONG-TERM DEBT
6.75% convertible subordinated debentures .......... 90,000 90,000
Mortgage loan ...................................... 8,157 8,416
Other .............................................. -- 105
Less: current portion of long-term debt ............ 454 542
-------- --------
97,703 97,979
-------- --------
Total debt ..................................... $279,709 $238,320
======== ========
----------------
(1) Consists of the revolving credit facility, the Canadian term loan and the
European revolving credit facility.
Maturities of long-term debt during the five years ending December 31, 2007
through 2011 are $0.5 million, $0.6 million, $90.6 million, $0.6 million and
$0.7 million, respectively.
The Company had deferred financing costs of $2.9 million and $3.2 million as of
December 31, 2006 and June 30, 2007, 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 in the amount of
$1 million in 2007, $0.8 million in 2008, $0.6 million in 2009, $0.4 million in
2010 and $0.7 million for the period 2011-2018.
REVOLVING CREDIT FACILITY
On March 20, 2007, we entered into a Second Amended and Restated Credit
Agreement with General Electric Capital Corporation, as agent, and a syndicate
of lenders for a secured revolving credit facility. This restated credit
agreement replaces our prior credit facility with General Electric Capital
Corporation, which prior credit facility provided for a $305 million credit
facility and which was to expire in 2008. The restated credit agreement provides
for a line of credit of up to $275 million (inclusive of the Canadian term loan
described below) and expires in 2012. The restated credit agreement also
provides a $50 million accordion feature, which would allow us to expand the
facility. Direct borrowings under the restated credit agreement bear interest at
the LIBOR rate plus the applicable margin (as defined), or floating at the index
rate plus the applicable margin, at our option. The interest rate may vary
depending upon our borrowing availability. The restated credit agreement is
guaranteed by our same subsidiaries and secured by our same assets as the prior
$305 million credit facility.
Borrowings under the restated credit agreement are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of certain of our subsidiaries. After taking into
account outstanding borrowings under the restated credit agreement, there was an
additional $94.3 million available for us to borrow pursuant to the formula at
June 30, 2007. At December 31, 2006, the interest rate on the Company's prior
credit facility was 7.8%, and at June 30, 2007, the interest rate on our
restated credit agreement was 6.6%. Outstanding borrowings under the restated
credit agreement (inclusive of the Canadian term loan described below), which
are classified as current liabilities, were $133.3 million and $173.5 million at
December 31, 2006 and June 30, 2007, respectively.
-10-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
At any time our borrowing availability in the aggregate is less than $30 million
and until such time that we have maintained an average borrowing availability in
the aggregate of $30 million or greater for a continuous period of ninety (90)
days, the terms of our restated credit agreement provide for, among other
provisions, financial covenants requiring us, on a consolidated basis, (1) to
maintain specified levels of fixed charge coverage at the end of each fiscal
quarter (rolling twelve months), and (2) to limit capital expenditure levels.
Availability under our restated credit agreement is based on a formula of
eligible accounts receivable, eligible inventory and eligible fixed assets. In
addition, the restated credit agreement provides that, beginning on January 15,
2008 and on a quarterly basis thereafter, an increasing amount of the Company's
borrowing availability shall be reserved for the repayment, repurchase or
redemption, as the case may be, of the aggregate outstanding amount of our
convertible debentures. Our restated credit agreement also permits dividends and
distributions by us provided specific conditions are met.
CANADIAN TERM LOAN
On March 20, 2007, we amended our credit agreement with GE Canada Finance
Holding Company, for itself and as agent for the lenders. This credit agreement
amends our existing $7 million credit agreement which was to expire in 2008. The
amended credit agreement provides for a line of credit of up to $12 million, of
which $7 million is currently outstanding and which amount is part of the $275
million available for borrowing under our restated credit agreement with General
Electric Capital Corporation (described above). The amended credit agreement is
guaranteed and secured by us and certain of our wholly-owned subsidiaries and
expires in 2012. Direct borrowings under the amended credit agreement bear
interest at the Canadian Bankers Acceptance rate plus the US revolver applicable
margin (as defined), or floating at the index rate plus the applicable margin,
at our option.
REVOLVING CREDIT FACILITY--EUROPE
Our European subsidiary has a revolving credit facility which, at June 30, 2007,
provides for a line of credit up to $7.4 million. The amount of short-term bank
borrowings outstanding under this facility was $6.5 million on December 31, 2006
and $8 million on June 30, 2007. The weighted average interest rate on these
borrowings on December 31, 2006 and June 30, 2007 was 6.3% and 6.2%,
respectively. At June 30, 2007, there was an additional $0.8 million available
for our European subsidiary to borrow.
SUBORDINATED DEBENTURES
In July 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 in July 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.
-11-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
MORTGAGE LOAN AGREEMENT
In June 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.
NOTE 6. COMPREHENSIVE INCOME
Comprehensive income, net of income tax expense is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
------- ------- ------- -------
Net earnings as reported .............. $ 5,377 $ 5,166 $ 7,964 $ 7,000
Foreign currency translation adjustment 1,612 1,525 1,761 1,688
Minimum pension liability adjustment .. -- (92) (1) (85)
Unrealized loss on interest rate swap
agreements, net of tax ............ -- (80) -- (152)
------- ------- ------- -------
Total comprehensive income ............ $ 6,989 $ 6,519 $ 9,724 $ 8,451
======= ======= ======= =======
NOTE 7. STOCK-BASED COMPENSATION PLANS
We have five stock-based compensation plans. Under the 1994 Omnibus Stock Option
Plan, as amended, which terminated as of May 25, 2004, we were authorized to
issue options to purchase 1,500,000 shares. 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 were authorized to issue options to purchase
500,000 shares. 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 were authorized to issue options to purchase 50,000 shares
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. Under the 2006
Omnibus Incentive Plan, we are authorized to issue equity awards of up to
700,000 shares. Equity awards forfeited under the previous stock option plans
and incentive plan are eligible to be granted again under the 2006 Omnibus
Incentive Plan with respect to the equity awards so forfeited.
The Company follows the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("Statement") No. 123
(revised 2004), Share-Based Payment ("FAS 123R"), which requires that a company
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. That cost is
recognized in the statement of operations over the period during which an
employee is required to provide service in exchange for the award.
On January 1, 2006, we adopted SFAS 123R using the modified prospective
transition method. Under this transition method, the financial statement amounts
for the periods before 2006 have not been restated to reflect the fair value
method of expensing the stock-based compensation. The compensation expense
recognized on or after January 1, 2006 includes the compensation cost based on
the grant-date fair value estimated in accordance with: (a) SFAS 123 for all
stock-based compensation that was granted prior to, but vested on or after,
January 1, 2006 and (b) SFAS 123R for all stock-based compensation that was
granted on or after January 1, 2006.
-12-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
STOCK OPTION GRANTS
There were no stock options granted in the six months ended June 30, 2007 and
2006. We have recognized compensation expense for prior years' grants which vest
after January 1, 2006 based on the grant-date fair value, estimated in
accordance with SFAS 123 which was used in our prior pro forma disclosure. The
expense for the six months ended June 30, 2007 and 2006 reflects our estimate of
expected forfeitures which we determine to be immaterial, based on history and
remaining time until vesting of the remaining options.
The stock options granted prior to 2006 have been vesting gradually at annual
intervals. In our prior period SFAS 123 pro forma disclosures, our policy was to
calculate the compensation expense related to the stock-based compensation
granted to employees and directors on a straight-line basis over the full
vesting period of the grants.
The following is a summary of the changes in outstanding stock options for the
six months ended June 30, 2007:
Weighted Weighted Average
Average Remaining
Exercise Contractual
Shares Price Term (years)
-------- --------- -----------------
Outstanding at beginning
of year............................... 990,898 $13.61 5.1
Exercised............................... 327,461 $12.75 --
Expired................................. 39,999 $24.84 --
Forfeited............................... 8,668 $13.37 5.7
-------------------------------------------------- --------- -------------
Outstanding at end of
Quarter............................... 614,770 $13.34 5.4
-------------------------------------------------- --------- -------------
Options exercisable at end
of quarter............................ 614,770 $13.34 5.4
--------------------------------------------------------------------------
At June 30, 2007, the aggregate intrinsic value of outstanding and exercisable
stock options was $1.1 million. At December 31, 2006, the aggregate intrinsic
value of outstanding stock options was $1.9 million, of which $1.4 million
relates to options that were exercisable.
The following is a summary of the changes in non-vested stock options for the
six months ended June 30, 2007:
Weighted
Average Grant
SHARES Date Fair VALUE
Non-vested shares at January 1,
2007................................... 129,750 $ 2.72
Forfeitures....................................... 1,125 $ 2.72
Vested............................................ 128,625 $ 2.72
-------
Non-vested shares at June 30, 2007................ --
=======
Stock option-based compensation expense was $85,200 and $372,300 ($53,100 and
$236,000 net of tax) for the six months ended June 30, 2007 and 2006,
respectively. As of June 30, 2007, we have no unrecognized compensation cost
related to stock options. Stock options to purchase 327,461 shares of common
stock were exercised during the six months ended June 30, 2007, and no stock
options were exercised during the same period in 2006.
-13-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
RESTRICTED AND PERFORMANCE STOCK GRANTS
Under our 2006 Omnibus Incentive Plan, the Company is authorized to issue, among
other things, shares of restricted and performance-based stock to eligible
employees and directors. Prior to the time a restricted share becomes fully
vested or a performance share is issued, the awardee cannot transfer, pledge,
hypothecate or encumber such shares. Prior to the time a restricted share is
fully vested, the awardee has all other rights of a stockholder, including the
right to vote (but not receive dividends during the vesting period). Prior to
the time a performance share is issued, the awardee shall have no rights as a
stockholder. Restricted shares become fully vested upon the third and first
anniversary of the date of grant for employees and directors, respectively.
Performance-based shares are subject to a three year measuring period and the
achievement of Company performance targets and, depending upon the achievement
of such performance targets, then may become vested on the third anniversary of
the date of grant. Management believes it is probable that the performance
targets will be achieved.
All shares and rights are subject to forfeiture if certain employment conditions
are not met. Under the plan, 700,000 shares are authorized to be issued. For the
six months ended June 30, 2007 and 2006, 5,000 and 87,325 restricted and
performance-based shares were granted, respectively. The Company recorded
compensation expense related to restricted shares and performance-based shares
of $123,400 ($76,900 net of tax) and $38,200 ($24,300 net of tax) for the six
months ended June 30, 2007 and 2006, respectively. The unamortized compensation
expense related to the Company's restricted and performance-based shares was
$441,300 at June 30, 2007 and is expected to be recognized as they vest over a
weighted average period of 1.8 and 0.8 years for employees and directors,
respectively. In determining the grant date fair value, we refer to the stock
price on the date of grant, as quoted on the New York Stock Exchange, reduced by
the present value of dividends expected to be paid on shares issued and
outstanding during the requisite service period, discounted at a risk-free
interest rate. The risk-free interest rate is based on the U.S. Treasury rates
at the date of grant with maturity dates approximately equal to the restriction
or vesting period at the grant date. The fair value of the shares at the date of
grant is amortized to expense ratably over the restriction period. Forfeitures
are estimated at 2% for employees and 0% for executives and directors,
respectively, based on evaluations of historical and expected future turnover.
The Company's restricted and performance-based share activity was as follows for
the six months ended June 30, 2007:
Weighted
Average Grant
Date Fair Value
Shares Per Share
------------ --------------------
Balance at January 1, 2007
................................ 93,775 $ 7.21
Granted ................................. 5,000 $15.40
Vested .................................. 5,500 $ 7.49
Forfeited ............................... 3,225 $ 7.10
------
Balance at June 30, 2007.................... 90,050 $ 7.66
======
The weighted-average grant date fair value of restricted and performance based
shares granted during the six months ended June 30, 2007 and 2006 was $77,000
(or $15.40 per share) and $606,600 (or $6.95 per share), respectively.
-14-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 8. EARNINGS PER SHARE
The following are reconciliations of the earnings available to common
stockholders and the shares used in calculating basic and dilutive net earnings
per common share (in thousands, except share amounts):
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Earnings from continuing operations ...... $ 5,656 $ 5,455 $ 8,592 $ 8,053
Loss from discontinued operation ......... (279) (289) (628) (1,053)
------------ ------------ ------------ ------------
Net earnings available to
common stockholders .................. $ 5,377 $ 5,166 $ 7,964 $ 7,000
============ ============ ============ ============
Weighted average common shares outstanding
- basic .............................. 18,781,388 18,297,155 18,617,453 18,245,253
Dilutive effect of restricted stock ...... 64,898 30,740 65,477 15,455
Dilutive effect of stock options ......... 94,676 -- 91,500 --
------------ ------------ ------------ ------------
Weighted average common shares
outstanding - diluted ................ 18,940,962 18,327,895 18,774,430 18,260,708
============ ============ ============ ============
The 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.
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
--------- --------- --------- ---------
Stock options .............. 6,000 1,108,811 6,000 1,108,811
Convertible debentures ..... 2,796,120 2,796,120 2,796,120 2,796,120
NOTE 9. EMPLOYEE BENEFITS
In 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 their fiduciary
duties. During the first quarter of 2007, we committed 119,000 shares to be
released leaving 63,000 shares remaining in the trust.
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. In March 2007 and
2006, contributions of $83,000 and $69,000 were made related to calendar years
2006 and 2005, respectively.
-15-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
In October 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.
Our UK pension plan is comprised of a defined benefit plan and a defined
contribution plan. Effective April 1, 2001, the defined benefit plan was closed
to new entrants and existing active members ceased accruing any further
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. Eligibility of employees who can participate in this
program is limited to employees hired before 1996.
In December 2003, the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (the "Medicare Reform Act") was signed into law. The Medicare Reform
Act expanded Medicare to include, for the first time, coverage for prescription
drugs. In connection with the Medicare Reform Act, the FASB issued FASB Staff
Position ("FSP") No. FAS 106-2, which provides guidance on accounting for the
effects of the new Medicare prescription drug legislation for employers whose
prescription drug benefits are actuarially equivalent to the drug benefit under
Medicare Part D and are therefore entitled to receive subsidies from the federal
government beginning in 2006. On January 21, 2005, the Centers for Medicare and
Medicaid Services released final regulations implementing major provisions of
the Medicare Reform Act. The regulations address key concepts, such as defining
a plan, as well as the actuarial equivalence test for purposes of obtaining a
government subsidy. Pursuant to the guidance in FSP No. FAS 106-2, we have
assessed the financial impact of the regulations and concluded that our
post-retirement benefit plan will be qualified for the direct subsidies and,
consequently, our accumulated post-retirement benefit obligation decreased by
$6.8 million.
As a result of the reduced eligibility and Medicare subsidy explained above, we
are benefiting from a reduction to our post-retirement benefit costs through
negative amortization of prior service costs.
The components of net periodic benefit cost for the three months ended June 30
of our North America and UK defined benefit plans are as follows (in thousands):
Pension Postretirement
Benefits Benefits
-------------- --------------
2007 2006 2007 2006
----- ----- ----- -----
Service cost ................................... $ 98 $ 99 $ 203 $ 202
Interest cost .................................. 114 100 541 478
Amortization of prior service cost (credit) .... 28 28 (713) (712)
Amortization of unrecognized loss .............. -- -- 1 4
Actuarial net (gain) loss ...................... (28) (16) 288 305
----- ----- ----- -----
Net periodic benefit cost ...................... $ 212 $ 211 $ 320 $ 277
===== ===== ===== =====
-16-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
The components of net periodic benefit cost for the six months ended June 30 of
our North America and UK defined benefit plans are as follows (in thousands):
Pension Postretirement
Benefits Benefits
------------------ -----------------
2007 2006 2007 2006
------- ------- ------- -------
Service cost .............................. $ 196 $ 198 $ 406 $ 404
Interest cost ............................. 228 200 1,082 955
Amortization of prior service cost (credit) 56 56 (1,426) (1,425)
Amortization of unrecognized loss ......... -- -- 2 8
Actuarial net (gain) loss ................. (56) (32) 576 611
------- ------- ------- -------
Net periodic benefit cost ................. $ 424 $ 422 $ 640 $ 553
======= ======= ======= =======
NOTE 10. INDUSTRY SEGMENTS
The following tables show our net sales and operating income by our operating
segments (in thousands):
Three Months Ended June 30,
------------------------------------------------
2007 2006
--------------------- ---------------------
Operating Operating
Net Income Net Income
Sales (Loss) Sales (Loss)
-------- -------- -------- --------
Engine Management ........ $138,096 $ 12,833 $139,825 $ 11,296
Temperature Control ...... 63,612 3,667 72,304 6,165
Europe ................... 11,196 595 13,542 352
All Other ................ 4,046 (4,289) 3,503 (4,245)
-------- -------- -------- --------
Consolidated ............. $216,950 $ 12,806 $229,174 $ 13,568
======== ======== ======== ========
Six Months Ended June 30,
------------------------------------------------
2007 2006
--------------------- ---------------------
Operating Operating
Net Income Net Income
Sales (Loss) Sales (Loss)
-------- -------- -------- --------
Engine Management ........ $275,526 $ 23,930 $288,710 $ 23,492
Temperature Control ...... 114,138 5,626 121,372 7,599
Europe ................... 21,689 1,379 23,378 392
All Other ................ 5,412 (9,663) 5,790 (8,559)
-------- -------- -------- --------
Consolidated ............. $416,765 $ 21,272 $439,250 $ 22,924
======== ======== ======== ========
NOTE 11. COMMITMENTS AND CONTINGENCIES
ASBESTOS. 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, 2006 and June 30, 2007,
approximately 3,270 cases and 3,395 cases, respectively, were outstanding for
which we were responsible for any related liabilities. We expect the outstanding
cases to increase gradually due to legislation in certain states mandating
minimum medical criteria before a case can be heard. Since inception in
September 2001 through June 30, 2007, the amounts paid for settled claims are
approximately $5.6 million. We do not have insurance coverage for the defense
and indemnity costs associated with these claims.
-17-
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. As is our accounting policy, we engage actuarial consultants with
experience in assessing asbestos-related liabilities 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 into the future; (3) an analysis of our currently pending
claims; and (4) an analysis of our settlements to date in order to develop
average settlement values. The most recent actuarial study was performed as of
August 31, 2006. 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 $22.1 million to $53.9 million for
the period through 2050. The change from the prior year study was a $3.2 million
decrease for the low end of the range and a $2.6 million increase for the high
end of the range. Based on the information contained in the actuarial study and
all other available information considered by us, 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 2050 in our consolidated financial
statements, in accordance with generally accepted accounting principles.
Accordingly, a $3.4 million benefit was recorded to our discontinued operation
in September 2006, and we adjusted our accrued asbestos liability to
approximately $22.1 million. Legal costs, which are expensed as incurred and
reported in loss from discontinued operation, are estimated to range from $11.6
million to $21.6 million during the same period.
We plan to perform an annual actuarial evaluation during the third quarter of
each year for the foreseeable future. Given the uncertainties associated with
projecting such matters into the future 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.
ANTITRUST LITIGATION. 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. In August 2005, we
filed a motion to dismiss the complaint, following which the plaintiff filed an
amended complaint dropping, among other things, all claims under the Sherman
Act. The remaining claims allege violations of the Robinson-Patman Act. Motions
to dismiss those claims were filed by us in February 2006. Plaintiff filed
opposition to our motions, and we subsequently filed replies in June 2006. Oral
arguments were originally scheduled for September 2006, however the court has
adjourned these proceedings until a later date to be determined. Subsequently,
the judge initially assigned to the case recused himself, and a new judge has
been assigned before whom further preliminary proceedings have been held.
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, 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.
-18-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
OTHER LITIGATION. 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.
WARRANTIES. 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 June 30, 2007
and 2006, we have accrued $14.7 million and $15.4 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 the three months ended June 30,
2007 and 2006 were $13.9 million and $14.4 million, respectively, and $26.4
million and $27.5 million for the six months ended June 30, 2007 and 2006,
respectively.
The following table provides the changes in our product warranties (in
thousands):
---------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2007 2006 2007 2006
-------- -------- -------- --------
Balance, beginning of period ............. $ 11,904 $ 13,050 $ 11,704 $ 12,701
Liabilities accrued for current year sales 13,860 14,394 26,398 27,537
Settlements of warranty claims ........... (11,049) (12,053) (23,387) (24,847)
-------- -------- -------- --------
Balance, end of period ................... $ 14,715 $ 15,391 $ 14,715 $ 15,391
======== ======== ======== ========
NOTE 12. SUBSEQUENT EVENT
On July 31, 2007, the Company sold its Fort Worth, Texas manufacturing facility
for $4.5 million, with a pre-tax gain of $0.8 million to be reflected in the
third quarter of 2007. The proceeds from the sale were used to pay down debt
under our revolving credit facility. The Company intends to move the operations
conducted at this facility to other manufacturing sites of the Company within
the next three months. In connection with this closing, the Company will incur
one-time termination benefits to be paid to certain employees at the end of a
specified requisite service period which is expected to be a three month period.
The Company estimates these termination benefits will amount to approximately
$0.4 million which will be recognized as expense over the requisite service
period. The Company also expects to incur approximately $0.5 million in various
expenses to move the production assets and close the facility. These expenses
will be recognized as incurred. No related expenses have been incurred or
recognized during the six months ended June 30, 2007.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
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;
CHANGES IN THE PRODUCT MIX AND DISTRIBUTION CHANNEL MIX; 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 AND
ENVIRONMENTAL LIABILITY MATTERS (INCLUDING, WITHOUT LIMITATION, THOSE RELATED TO
ASBESTOS-RELATED CONTINGENT LIABILITIES OR ENVIRONMENTAL REMEDIATION
LIABILITIES); AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH AS THOSE DESCRIBED
UNDER RISK FACTORS, 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. 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. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, INCLUDED ELSEWHERE IN THIS REPORT.
BUSINESS OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific segment of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts. We
sell our products primarily in the United States, Canada and Latin America. We
also sell our products in Europe through our European Segment.
As part of our efforts to grow our business, as well as to achieve increased
production and distribution efficiencies, in June 2003 we acquired substantially
all of the assets and assumed substantially all of the operating liabilities of
Dana Corporation's Engine Management Group ("DEM") for $130.5 million. In
connection with our acquisition of DEM, we have a restructuring accrual of $0.9
million as of June 30, 2007, and most of this amount we expect to pay in 2007
and 2008.
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
and customer inventories. 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.
-20-
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 have traditionally
offered a pre-season selling program, known as our "Spring Promotion," in which
customers are offered 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 (which are
generally limited to a specified percentage of their annual purchases from us)
in the event that they have overstocked their inventories. The Company accrues
for overstock returns as a percentage of sales, after giving consideration to
recent returns history. In addition, 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, 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 provide acceptable proof that complete AC system repair was
performed.
DISCOUNTS, ALLOWANCES AND INCENTIVES. In connection with our sales activities,
we offer a variety of usual customer discounts, allowances and incentives.
First, we offer cash discounts for paying invoices in accordance with the
specified discounted terms of the invoice. Second, we offer pricing discounts
based on volume and different product lines purchased from us. These discounts
are principally in the form of "off-invoice" discounts and are immediately
deducted from sales at the time of sale. For those customers that choose to
receive a payment on a quarterly basis instead of "off-invoice," we accrue for
such payments as the related sales are made and reduce sales accordingly.
Finally, rebates and discounts are provided to customers as advertising and
sales force allowances, and allowances for warranty and overstock returns are
also provided. 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. We account for these discounts and
allowances as a reduction to revenues, and record them when sales are recorded.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2007 TO THE THREE MONTHS ENDED
JUNE 30, 2006
SALES. Consolidated net sales for the three months ended June 30, 2007 were $217
million, a decrease of $12.2 million, or 5.3%, compared to $229.2 million in the
same period of 2006, mainly due to net sales decreases in our Temperature
Control Segment of $8.7 million or 12%, in our European Segment of $2.3 million
or 17.3%, and in our Engine Management Segment of $1.7 million or 1.2%. The
decrease in Temperature Control sales was primarily due to lower pricing, volume
erosion to low cost foreign imports, and lower customer demand for air
conditioning compressors due to an unusually cool and damp summer. Our European
Segment experienced lower net sales in local currency terms, partially offset by
the favorable foreign currency impact of the Euro and British pound. Net sales
for the three months ended June 30, 2006 included $4.9 million related to the
European Temperature Control business that was divested in December 2006.
Excluding this divested business, Europe sales increased 19.2% in local currency
terms. The decrease in Engine Management sales was mainly due to the expiration
of an OE contract in December 2006.
-21-
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased to 26.1% in the second quarter of 2007 compared to 24.7% in the second
quarter of 2006 mainly due to margin improvements in our Engine Management and
European segments of 2 percentage points and 2.8 percentage points,
respectively, partially offset by a 2 percentage point decrease in the
Temperature Control margin. In the second quarter of 2007, the margins in Engine
Management and Europe benefited mainly from continued improvements in
procurement and manufacturing costs. The Europe margin also benefited from the
divestiture of its Temperature Control business which carried lower margins. The
Temperature Control margin was primarily affected by selective price decreases
to match offshore price competition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) was $43.3 million in the second quarter of 2007
and in line with the second quarter of 2006 which was $43 million.
RESTRUCTURING EXPENSES. Restructuring expenses, which include restructuring and
integration expenses, increased to $0.6 million in the second quarter of 2007,
compared to $0.1 million in the second quarter of 2006. The 2007 expenses
related mostly to charges made for the closure of our Puerto Rico production
operations, which is currently in process. The restructuring expense for the
second quarter of 2006 related mostly to severance costs related to the move of
our European production operations.
OPERATING INCOME. Operating income was $12.8 million in the second quarter of
2007, compared to $13.6 million in the second quarter of 2006. The decrease of
$0.8 million was primarily due to lower consolidated net sales, partially offset
by the improved margins, and higher SG&A and integration expenses.
OTHER INCOME, NET. Other income, net of $0.8 million in the second quarter 2007
was in line with the same period in 2006.
INTEREST EXPENSE. Interest expense decreased by $0.5 million in the second
quarter 2007 compared to the same period in 2006 mainly due to lower borrowing
costs and lower average borrowings during the period.
INCOME TAX PROVISION. The income tax provision was $3.1 million in the second
quarter of 2007 and $3.7 million in the second quarter of 2006. The decrease of
$0.6 million was primarily due to a lower effective tax rate for the second
quarter of 2007, which was 35.7% compared to 40.2% in the second quarter of
2006. The estimated tax rate of 2007 is benefiting from pre-tax income in Europe
where previously unrecognized losses carried forward are offsetting taxes
otherwise payable.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation, net of tax,
reflects legal expenses associated with our asbestos related liability. We
recorded $0.3 million as a loss from discontinued operation for the second
quarter of 2007, which was in line with the second quarter of 2006. As discussed
more fully in note 11 in the notes to our consolidated financial statements, we
are responsible for certain future liabilities relating to alleged exposure to
asbestos containing products
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2007 TO THE SIX MONTHS ENDED
JUNE 30, 2006
SALES. Consolidated net sales for the six months ended June 30, 2007 were $416.8
million, a decrease of $22.5 million, or 5.1%, compared to $439.3 million in the
same period in 2006, driven by a decrease in sales in our Engine Management,
Temperature Control and European Segments of $13.2 million, $7.2 million and
$1.7 million, respectively. The decrease in Engine Management sales was mainly
due to substantial pre-season orders placed in the first half of 2006 and the
expiration of an OE contract at the end of 2006. The decrease in Temperature
Control sales was primarily due to lower pricing, volume erosion to low cost
foreign imports, and lower customer demand for air conditioning compressors due
to an unusually cool and damp summer. Our European Segment experienced lower net
sales in local currency terms, partially offset by the favorable foreign
currency impact of the Euro and British pound. Net sales for the six months
ended June 30, 2006 included $8.1 million related to the European Temperature
Control business that was divested in December 2006. Excluding this divested
business, Europe sales increased 28.6% in local currency terms.
-22-
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased to 26% for the six months ended June 30, 2007 compared to 25% in the
same period in 2006 mainly due to margin improvements in our Engine Management
and European segments of 1.8 percentage points and 3 percentage points,
respectively, partially offset by a 1.8 percentage point decrease in the
Temperature Control margin. For the six months ended June 30, 2007, the margins
in Engine Management and Europe benefited mainly from continued improvements in
procurement and manufacturing costs. The Europe margin also benefited from the
divestiture of its Temperature Control business which carried lower margins. The
decrease in Temperature Control margin was primarily affected by selective price
decreases to match offshore price competition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) decreased by $0.7 million to $86.1 million for
the six months ended June 30, 2007, as compared to $86.8 million in the same
period in 2006. The decrease was due to a reduction in selling and distribution
expenses, offset by higher general and administrative expenses.
RESTRUCTURING EXPENSES. Restructuring expenses, which include restructuring and
integration expenses, increased to $1.2 million for the six months ended June
30, 2007, compared to $0.2 million in the same period in 2006. The 2007 expenses
related mostly to charges made for the closure of our Puerto Rico production
operations, which is currently in process. The restructuring expense for the six
months ended June 30, 2006 related mostly to severance costs related to the move
of our European production operations.
OPERATING INCOME. Operating income was $21.3 million for the six months ended
June 30, 2007, compared to $22.9 million in the same period in 2006. The
decrease of $1.6 million was due to lower consolidated net sales, partially
offset by the improved margins, and higher integration expenses.
OTHER INCOME, NET. Other income, net was $1 million for the six months ended
June 30, 2007, in line with the same period in 2006, which was $1.2 million.
INTEREST EXPENSE. Interest expense decreased by $0.4 million for the six months
ended June 30, 2007 compared to the same period in 2006 mainly due to lower
average borrowings during the period.
INCOME TAX PROVISION. The income tax provision was $4.4 million for the six
months ended June 30, 2007 compared to $6.3 million for the same period in 2006.
The $1.9 million decrease was primarily due to a lower effective rate for the
six months ended June 30, 2007, which was 33.8% compared to 44% in the same
period in 2006. The 2006 rate was higher due to the adverse impact of discrete
items attributable to changes in state tax rates, while the 2007 estimated tax
rate is benefiting from pre-tax income in Europe where previously unrecognized
losses carried forward are offsetting taxes otherwise payable.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation, net of tax,
reflects legal expenses associated with our asbestos related liability. We
recorded $0.6 million and $1.1 million as a loss from discontinued operation for
the six months ended June 30, 2007 and 2006, respectively. The decrease of $0.5
million is mainly due to one-time tax costs associated with the liquidation of
the residual assets of the pension plan of the discontinued operation segment in
2006. As discussed more fully in note 11 in the notes to our consolidated
financial statements, we are responsible for certain future liabilities relating
to alleged exposure to asbestos containing products.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the first six months of 2007, cash used in
operations amounted to $39.5 million, compared to cash used in operations of $33
million in the same period of 2006. The $6.5 million increase in cash used in
operations is primarily attributable to an increase in inventories and a
decrease in liabilities, partially offset by a reduction in accounts receivable.
-23-
INVESTING ACTIVITIES. Cash used in investing activities was $6 million in the
first six months of 2007, compared to $5 million in the same period of 2006. The
increase was due to higher capital expenditures.
FINANCING ACTIVITIES. Cash provided by financing activities was $43.2 million in
the first six months of 2007, compared to cash provided by financing activities
of $33.9 million in the same period of 2006. The increase is primarily due to an
increase in cash overdrafts and proceeds received from the exercise of employee
stock options.
On March 20, 2007, we entered into a Second Amended and Restated Credit
Agreement with General Electric Capital Corporation, as agent, and a syndicate
of lenders for a secured revolving credit facility. This restated credit
agreement replaces our prior credit facility with General Electric Capital
Corporation, which prior credit facility provided for a $305 million credit
facility and which was to expire in 2008. The restated credit agreement provides
for a line of credit of up to $275 million (inclusive of the Canadian term loan
described below) and expires in 2012. The restated credit agreement also
provides a $50 million accordion feature, which would allow us to expand the
facility. Direct borrowings under the restated credit agreement bear interest at
the LIBOR rate plus the applicable margin (as defined), or floating at the index
rate plus the applicable margin, at our option. The interest rate may vary
depending upon our borrowing availability. The restated credit agreement is
guaranteed by our same subsidiaries and secured by our same assets as the prior
$305 million credit facility.
Borrowings under the restated credit agreement are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of certain of our subsidiaries. After taking into
account outstanding borrowings under the restated credit agreement, there was an
additional $94.3 million available for us to borrow pursuant to the formula at
June 30, 2007. At December 31, 2006, the interest rate on the Company's prior
credit facility was 7.8%, and at June 30, 2007, the interest rate on our
restated credit agreement was 6.6%. Outstanding borrowings under the restated
credit agreement (inclusive of the Canadian term loan described below), which
are classified as current liabilities, were $133.3 million and $173.5 million at
December 31, 2006 and June 30, 2007, respectively.
At any time our borrowing availability in the aggregate is less than $30 million
and until such time that we have maintained an average borrowing availability in
the aggregate of $30 million or greater for a continuous period of ninety (90)
days, the terms of our restated credit agreement provide for, among other
provisions, financial covenants requiring us, on a consolidated basis, (1) to
maintain specified levels of fixed charge coverage at the end of each fiscal
quarter (rolling twelve months), and (2) to limit capital expenditure levels.
Availability under our restated credit agreement is based on a formula of
eligible accounts receivable, eligible inventory and eligible fixed assets. In
addition, the restated credit agreement provides that, beginning on January 15,
2008 and on a quarterly basis thereafter, an increasing amount of the Company's
borrowing availability shall be reserved for the repayment, repurchase or
redemption, as the case may be, of the aggregate outstanding amount of our
convertible debentures. Our restated credit agreement also permits dividends and
distributions by us provided specific conditions are met.
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. These increased working capital
requirements are funded by borrowings from our lines of credit. We anticipate
that our present sources of funds will continue to be adequate to meet our near
term needs.
On March 20, 2007, we amended our credit agreement with GE Canada Finance
Holding Company, for itself and as agent for the lenders. This credit agreement
amends our existing $7 million credit agreement which was to expire in 2008. The
amended credit agreement provides for a line of credit of up to $12 million, of
which $7 million is currently outstanding and which amount is part of the $275
million available for borrowing under our restated credit agreement with General
Electric Capital Corporation (described above). The amended credit agreement is
guaranteed and secured by us and certain of our wholly-owned subsidiaries and
expires in 2012. Direct borrowings under the amended credit agreement bear
interest at the Canadian Bankers Acceptance rate plus the US revolver applicable
margin (as defined), or floating at the index rate plus the applicable margin,
at our option.
-24-
In June 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.
In October 2003, we entered into an interest rate swap agreement with a notional
amount of $25 million that matured in October 2006. Under this agreement, we
received a floating rate based on the LIBOR interest rate, and paid a fixed rate
of 2.45% on the notional amount of $25 million. We have not entered into a new
swap agreement to replace this agreement.
In July 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.
As of June 30, 2007, we have Board authorization to repurchase additional shares
at a maximum cost of $1.7 million. During 2006 and the first six months of 2007,
we did not repurchase any shares of our common stock.
The following is a summary of our contractual commitments as of December 31,
2006.
(IN THOUSANDS) .............. 2007 2008 2009 2010 2011 2012-2016 TOTAL
-------- -------- -------- -------- -------- -------- --------
Principal payments of long
term debt ............... $ 542 $ 570 $ 90,586 $ 620 $ 655 $ 5,548 $ 98,521
Operating leases ............ 6,657 5,614 4,446 2,059 1,913 8,582 29,271
Postretirement .............. 1,095 1,549 1,669 1,800 1,912 12,203 20,228
benefits
Severance payments related
to integration .......... 89 383 -- -- -- -- 472
-------- -------- -------- -------- -------- -------- --------
Total commitments.. $ 8,383 $ 8,116 $ 96,701 $ 4,479 $ 4,480 $ 26,333 $148,492
======== ======== ======== ======== ======== ======== ========
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 in our Annual Report on Form 10-K for the year ended December 31,
2006. You should be aware that preparation of our consolidated quarterly
financial statements in this Report 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. For some of our sales of remanufactured
products, we also charge our customers a deposit for the return of a used core
component which we can use in our future remanufacturing activities. Such
deposit is not recognized as revenue but rather carried as a core liability. The
liability is extinguished when a core is eventually returned to us. 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.
-25-
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.
We utilize cores (used parts) in our remanufacturing processes for air
conditioning compressors. The production of air conditioning compressors
involves the rebuilding of used cores, which we acquire generally either in
outright purchases or from returns pursuant to an exchange program with
customers. Under such exchange programs, we reduce our inventory, through a
charge to cost of sales, when we sell a finished good compressor, and put back
to inventory at standard cost through a credit to cost of sales the used core
exchanged at the time it is eventually received from the customer.
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
Management must make estimates of potential future product returns related to
current period product revenue. Management analyzes historical returns, current
economic trends, and changes in customer demand when evaluating the adequacy of
the sales returns and other allowances. Significant management judgments and
estimates must be made and used in connection with establishing the sales
returns and other allowances in any accounting period. At June 30, 2007, the
allowance for sales returns was $25.9 million. Similarly, management must make
estimates of the uncollectability of our accounts receivable. Management
specifically analyzes accounts receivable and 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 June 30, 2007, the allowance for doubtful accounts and for
discounts was $10.2 million.
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 are recorded as a reduction to revenue when
incurred.
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 expense 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 it is more likely than not that the
deferred tax assets will not be recovered, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase or
decrease this allowance in a period, we must include an expense or recovery,
respectively, within the tax provision in the statement of operations.
Significant management judgment is required in determining the adequacy of our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. At June 30,
2007, we had a valuation allowance of $28 million, due to uncertainties related
to our ability to utilize some of our deferred tax assets. The assessment of the
adequacy of our 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.
-26-
In the event that actual results differ from these estimates, or we adjust these
estimates in future periods for current trends or expected changes in our
estimating assumptions, we may need to modify the level of 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: (a) significant underperformance relative to
expected historical or projected future operating results; (b) significant
changes in the manner of our use of the acquired assets or the strategy for our
overall business; and (c) 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.
In the event our planning assumptions were modified resulting in impairment to
our assets, we would be required to include an expense in our statement of
operations, which could materially impact our business, financial condition and
results of operations.
RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS. Each year, we calculate the
costs of providing retiree benefits under the provisions of SFAS 87, Employers'
Accounting for Pensions, and SFAS 106, Employers' Accounting for Post-retirement
Benefits Other than Pensions. The key assumptions used in making these
calculations are disclosed in notes 13 and 14 of the notes to our consolidated
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2006. The most significant of these assumptions are the eligibility
criteria of participants, 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. Under FSP
No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," the Company has
concluded that its post-retirement plan is actuarially equivalent to the
Medicare Part D benefit and accordingly recognizes subsidies from the federal
government in the measurement of the accumulated post-retirement benefit
obligation under SFAS 106, "Employers' Accounting for Post-Retirement Benefits
Other Than Pensions".
ASBESTOS RESERVE. We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. In accordance with our
accounting policy, our most recent actuarial study estimated a liability for
settlement payments, excluding legal costs, ranging from $22.1 million to $53.9
million. Based on the information contained in the actuarial study and all other
available information considered by us, 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 2050 in our consolidated financial statements, in
accordance with generally accepted accounting principles. Legal costs, which are
expensed as incurred and reported in loss from discontinued operation, are
estimated to range from $11.6 million to $21.6 million during the same period.
We plan to perform an 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 continue to 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.
-27-
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability and litigation. Establishing loss
reserves for these matters requires the use of estimates and judgment of risk
exposure and ultimate liability. We estimate losses using consistent and
appropriate methods; however, changes to our assumptions could materially affect
our recorded liabilities for loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a threshold for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of
this Interpretation. FIN 48 also provides guidance on accounting for
derecognition, interest and penalties, and classification and disclosure of
matters related to uncertainty in income taxes. FIN 48 is effective for fiscal
years beginning after December 15, 2006 and, as a result, is effective for our
Company beginning January 1, 2007.
On January 1, 2007, the Company adopted the provisions of FIN 48. The cumulative
effect of adoption was a $1.9 million reduction of retained earnings. At January
1, 2007, the total amount of unrecognized tax benefits was $2.3 million, all of
which would impact the effective tax rate, if recognized.
The Company continues the practice of recognizing interest and penalties
associated with income tax matters as components of the "Provision for income
taxes". The Company's accrual for interest and penalties was $0.4 million upon
adoption of FIN 48 and at June 30, 2007.
The Company is subject to taxation in the US and various state, local and
foreign jurisdictions. The Company remains subject to examination by US Federal,
state, local and foreign tax authorities for tax year 2001 as well as 2003
through 2006. With a few exceptions, the Company is no longer subject to US
Federal, state, local or foreign examinations by tax authorities for the tax
year 2002 and for tax years prior to 2001. The Company does not presently
anticipate that its unrecognized tax benefits will significantly increase or
decrease prior to June 30, 2008; however, actual developments in this area could
differ from those currently expected.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. This statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. SFAS 157 is effective for the fiscal year beginning after
November 15, 2007, which for the Company is the year ending December 31, 2008.
The Company is assessing the impact, if any, which the adoption of SFAS 157 will
have on our consolidated financial position, results of operations and cash
flows.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange
and interest rates. These exposures are actively monitored by management. 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.
We have exchange rate exposure, primarily, with respect to the Canadian dollar,
the British pound, the Euro, the Japanese yen and the Hong Kong dollar. As of
December 31, 2006 and June 30, 2007, our monetary assets and liabilities 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.
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 have in the past entered into interest
rate swap agreements. We invest our excess cash in highly liquid short-term
investments. Our percentage of variable rate debt to total debt was 58.7% at
December 31, 2006 and 64.9% at June 30, 2007.
Other than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K
for the year ended December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
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) and Rule 15d-15(e) promulgated under the Exchange Act, as
of the end of the period covered by this Report. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this Report.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
During the quarter ended June 30, 2007, we have not made any 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. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation. 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, 2006 and June 30, 2007
approximately 3,270 cases and 3,395 cases, respectively, were outstanding for
which we were responsible for any related liabilities. We expect the outstanding
cases to increase gradually due to legislation in certain states mandating
minimum medical criteria before a case can be heard. Since inception in
September 2001 through June 30, 2007, the amounts paid for settled claims are
approximately $5.6 million. We do not have insurance coverage for the defense
and indemnity costs associated with these claims.
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. In August 2005, we filed a
motion to dismiss the complaint, following which the plaintiff filed an amended
compliant dropping, among other things, all claims under the Sherman Act. The
remaining claims allege violations of the Robinson-Patman Act. Motions to
dismiss those claims were filed by us in February 2006. Plaintiff filed
opposition to our motions, and we subsequently filed replies in June 2006. Oral
arguments were originally scheduled for September 2006, however the court has
adjourned these proceedings until a later date to be determined. Subsequently,
the judge initially assigned to the case recused himself, and a new judge has
been assigned before whom further preliminary proceedings have been held.
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, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Our 2007 Annual Meeting of Stockholders was held on May 17, 2007.
(b) The following persons were elected as our directors:
Robert M. Gerrity
Lawrence I. Sills
Arthur S. Sills
Peter J. Sills
Frederick D. Sturdivant
William H. Turner
Richard S. Ward
Roger M. Widmann
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(c) The following matters were voted upon at the Annual Meeting:
(1) Election of Directors:
VOTES FOR VOTES WITHHELD
Robert M. Gerrity 14,799,573 1,209,953
Arthur S. Sills 14,460,064 1,549,462
Lawrence I. Sills 14,465,715 1,543,811
Peter J. Sills 14,228,304 1,781,222
Frederick D. Sturdivant 13,874,730 2,134,796
William H. Turner 14,709,122 1,300,404
Richard S. Ward 14,798,918 1,210,608
Roger M. Widmann 14,799,573 1,209,953
(2) Ratification of Appointment of Grant Thornton LLP as the Company's
Registered Public Accounting Firm:
VOTES FOR VOTES AGAINST VOTES ABSTAINED
15,994,376 8,595 6,555
ITEM 6. EXHIBITS
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
(Registrant)
Date: August 9, 2007 /S/ JAMES J. BURKE
------------------
James J. Burke
Vice President Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/S/ LUC GREGOIRE
----------------
Luc Gregoire
Corporate Controller and
Chief Accounting Officer
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STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
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.
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