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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSACTION 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
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 392-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, par value $2.00 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting common stock based on the closing price
on the New York Stock Exchange on June 29, 2007 (the last business day of
registrant's most recently completed second fiscal quarter) of $15.03 per share
held by non-affiliates of the registrant was $235,742,018. For purposes of the
foregoing calculation only, all directors and officers have been deemed to be
affiliates, but the registrant disclaims that any of such are affiliates.
As of February 29, 2008, there were 18,507,007 outstanding shares of the
registrant's common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated herein by
reference from the registrant's definitive proxy statement relating to its
annual meeting of stockholders to be held on May 15, 2008.
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STANDARD MOTOR PRODUCTS, INC.
INDEX
PART I. PAGE NO.
Item 1 Business ...................................................... 3
Item 1A Risk Factors....................................................14
Item 1B Unresolved Staff Comments........................................19
Item 2. Properties.......................................................20
Item 3. Legal Proceedings................................................21
Item 4. Submission of Matters to a Vote of Security Holders..............21
PART II.
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities................................................22
Item 6. Selected Financial Data..........................................24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......39
Item 8. Financial Statements and Supplementary Data......................40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...........................88
Item 9A. Controls and Procedures..........................................88
Item 9B. Other Information................................................89
PART III.
Item 10. Directors, Executive Officers and Corporate Governance...........90
Item 11. Executive Compensation...........................................90
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.......................90
Item 13. Certain Relationships and Related Transactions,
and Director Independence .......................................90
Item 14. Principal Accounting Fees and Services...........................90
PART IV.
Item 15. Exhibits, Financial Statement Schedules..........................91
Signatures.......................................................92
-2-
PART I
IN THIS ANNUAL REPORT ON FORM 10-K, "STANDARD MOTOR PRODUCTS," "WE," "US," "OUR"
AND THE "COMPANY" REFER TO STANDARD MOTOR PRODUCTS, INC. AND ITS SUBSIDIARIES,
UNLESS THE CONTEXT REQUIRES OTHERWISE. THIS REPORT CONTAINS 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 LIABILITY AND ENVIRONMENTAL MATTERS (INCLUDING, WITHOUT
LIMITATION, THOSE RELATED TO ASBESTOS-RELATED CONTINGENT 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.
ITEM 1. BUSINESS
OVERVIEW
We are a leading independent manufacturer, distributor and marketer of
replacement parts for motor vehicles in the automotive aftermarket industry,
with an increasing focus on the original equipment and original equipment
service markets. We are organized into two major operating segments, each of
which focuses on a specific line of replacement parts. Our Engine Management
Segment manufactures ignition and emission parts, ignition wires, battery cables
and fuel system parts. Our Temperature Control Segment manufactures and
remanufactures air conditioning compressors, air conditioning and heating parts,
engine cooling system parts, power window accessories, and windshield washer
system parts. We also sell our products in Europe through our European Segment.
We sell our products primarily to warehouse distributors, large retail chains,
original equipment manufacturers and original equipment service part operations
in the United States, Canada and Latin America. Our customers consist of many of
the leading warehouse distributors, such as CARQUEST and NAPA Auto Parts, as
well as many of the leading auto parts retail chains, such as Advance Auto
Parts, AutoZone, CSK Auto, O'Reilly Automotive and Pep Boys. Our customers also
include national program distribution groups, specialty market distributors and
original equipment service parts organizations. We distribute parts under our
own brand names, such as Standard, Blue Streak, BWD, Niehoff, Hayden and Four
Seasons, and through private labels, such as CARQUEST and NAPA Auto Parts.
BUSINESS STRATEGY
Our goal is to grow revenues and earnings and deliver returns in excess of our
cost of capital by providing high quality original equipment and replacement
products to the engine management and temperature control markets. The key
elements of our strategy are as follows:
-3-
o MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT AND
TEMPERATURE CONTROL BUSINESSES. We are one of the leading independent
manufacturers serving North America and other geographic areas in our
core businesses of Engine Management and Temperature Control. We
believe that our success is attributable to our emphasis on product
quality, the breadth and depth of our product lines for both domestic
and imported automobiles, and our reputation for outstanding customer
service, as measured by rapid order turn-around times and high-order
fill rates.
To maintain our strong competitive position in our markets, we remain
committed to the following:
o providing our customers with broad lines of high quality engine
management and temperature control products, supported by the highest
level of customer service and reliability;
o continuing to maximize our production and distribution efficiencies;
o continuing to improve our cost position through increased global
sourcing and increased manufacturing in low cost countries; and
o focusing further on our engineering development efforts.
o PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND TECHNICAL
SUPPORT. Our goal is to increase sales to existing and new customers by
leveraging our skills in rapidly filling orders, maintaining high levels of
product availability and providing technical support in a cost-effective
manner. In addition, our technically skilled sales force professionals
provide product selection and application support to our customers.
o EXPAND OUR PRODUCT LINES. We intend to increase our sales by continuing to
develop internally, or through potential acquisitions, the range of Engine
Management and Temperature Control products that we offer to our customers.
We are committed to investing the resources necessary to maintain and
expand our technical capability to manufacture multiple product lines that
incorporate the latest technologies.
o BROADEN OUR CUSTOMER BASE. Our goal is to increase our customer base by (a)
continuing to leverage our manufacturing capabilities to secure additional
original equipment business with automotive, industrial and heavy duty
vehicle and equipment manufacturers and their service part operations and
(b) supporting the service part operations of vehicle and equipment
manufacturers with value added services and product support for the life of
the part.
o IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management places
significant emphasis on improving our financial performance by achieving
operating efficiencies and improving asset utilization, while maintaining
product quality and high customer order fill rates. We intend to continue
to improve our operating efficiency and cost position by:
o increasing cost-effective vertical integration in key product lines
through internal development;
o focusing on integrated supply chain management;
o maintaining and improving our cost effectiveness and competitive
responsiveness to better serve our customer base, including sourcing
certain products from low cost countries such as those in Asia.
o adopting company-wide programs geared toward manufacturing and
distribution efficiency; and
o focusing on company-wide overhead and operating expense cost reduction
programs, such as closing excess facilities and consolidating
redundant functions.
o CASH UTILIZATION. We intend to apply any excess cash flow from operations
and the management of working capital to reduce our outstanding
indebtedness, pay dividends and repurchase our stock.
-4-
THE AUTOMOTIVE AFTERMARKET
The automotive aftermarket industry is comprised of a large number of diverse
manufacturers varying in product specialization and size. In addition to
manufacturing, aftermarket companies allocate resources towards an efficient
distribution process and product engineering in order to maintain the
flexibility and responsiveness on which their customers depend. Aftermarket
manufacturers must be efficient producers of small lot sizes and do not have to
provide systems engineering support. Aftermarket manufacturers also must
distribute, with rapid turnaround times, products for a full range of vehicles
on the road. The primary customers of the automotive aftermarket manufacturers
are national and regional warehouse distributors, large retail chains,
automotive repair chains and the dealer service networks of Original Equipment
Manufacturers ("OEMs").
During periods of economic decline or weakness, more automobile owners may
choose to repair their current automobiles using replacement parts rather than
purchasing new automobiles, which benefit the automotive aftermarket industry,
including suppliers like us. The automotive aftermarket industry is also
dependent on new car sales, although to a lesser degree than OEMs and their
suppliers, because these sales increase the total number of cars available for
repair. Until recently, aggressive financing programs by automakers have
increased demand for new cars and trucks, which should benefit the automotive
aftermarket manufacturers in the long term as vehicles age and the number of
vehicles in operation increases.
The automotive aftermarket industry differs substantially from the OEM supply
business. Unlike the OEM supply business that primarily follows trends in new
car production, the automotive aftermarket industry's performance primarily
tends to follow different trends, such as:
o growth in number of vehicles on the road;
o increase in average vehicle age;
o increase in total miles driven per year;
o new and modified environmental regulations;
o increase in pricing of new cars; and
o new car quality and related warranties.
Traditionally, the parts manufacturers of OEMs and the independent manufacturers
who supply the original equipment (OE) part applications have supplied a
majority of the business to new car dealer networks. However, certain parts
manufacturers have become more independent and are no longer affiliated with
OEMs, which has provided, and may continue to provide, opportunities for us to
supply replacement parts to the dealer service networks of the OEMs, both for
warranty and out-of-warranty repairs.
-5-
FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS
The table below shows our consolidated net sales by operating segment and by
major product group within each segment for the three years ended December 31,
2007. Our three reportable operating segments are Engine Management, Temperature
Control and Europe.
YEAR ENDED
DECEMBER 31,
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2007 2006 2005
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% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission
Parts ............... $425,758 53.9% $436,238 53.7% $455,125 54.8%
Wires and Cables ........ 101,483 12.8% 106,983 13.2% 91,883 11.1%
-------- ----- -------- ----- -------- -----
TOTAL ENGINE MANAGEMENT ..... 527,241 66.7% 543,221 66.9% 547,008 65.9%
-------- ----- -------- ----- -------- -----
TEMPERATURE CONTROL:
Compressors ............. 94,416 12.0% 96,171 11.8% 101,876 12.3%
Other Climate Control
Parts ................. 113,188 14.3% 114,931 14.2% 127,350 15.3%
-------- ----- -------- ----- -------- -----
TOTAL TEMPERATURE CONTROL ... 207,604 26.3% 211,102 26.0% 229,226 27.6%
-------- ----- -------- ----- -------- -----
EUROPE:
Engine Management Parts . 39,329 5.0% 30,297 3.7% 26,802 3.2%
Temperature Control Parts 2,881 0.3% 16,747 2.1% 16,621 2.0%
-------- ----- -------- ----- -------- -----
TOTAL EUROPE ................ 42,210 5.3% 47,044 5.8% 43,423 5.2%
-------- ----- -------- ----- -------- -----
ALL OTHER ................... 13,130 1.7% 10,657 1.3% 10,756 1.3%
-------- ----- -------- ----- -------- -----
TOTAL ................. $790,185 100.0% $812,024 100.0% $830,413 100.0%
-------- ----- -------- ----- -------- -----
The following table shows our operating profit and identifiable assets by
operating segment for the three years ended December 31, 2007.
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------
2007 2006 2005
---------------------- --------------------- ----------------------
OPERATING OPERATING OPERATING
PROFIT IDENTIFIABLE PROFIT IDENTIFIABLE PROFIT IDENTIFIABLE
(LOSS) ASSETS (LOSS) ASSETS (LOSS) ASSETS
(IN THOUSANDS)
Engine Management .. $ 28,109 $443,465 $ 41,249 $430,158 $ 19,338 $438,116
Temperature Control 10,215 113,440 11,954 109,734 11,936 114,441
Europe ............. 968 36,538 46 26,708 (572) 28,217
All Other .......... (16,900) 84,649 (17,934) 73,492 (16,620) 72,270
-------- -------- -------- -------- -------- --------
Total ........... $ 22,392 $678,092 $ 35,315 $640,092 $ 14,082 $653,044
======== ======== ======== ======== ======== ========
"All Other" consists of items pertaining to our corporate headquarters function
and our Canadian business unit, each of which does not meet the criteria of a
reportable operating segment.
ENGINE MANAGEMENT SEGMENT
BREADTH OF PRODUCTS. We manufacture a full line of engine management replacement
parts including distributor caps and rotors, electronic ignition control
modules, voltage regulators, coils, switches, emission sensors, EGR valves and
many other engine management components under our brand names Standard, BWD,
Niehoff and GP Sorenson and through private labels such as CARQUEST and NAPA. We
are a basic manufacturer of many of the engine management parts we market. In
addition, our strategy includes sourcing certain products from low cost
countries such as those in Asia. In our Engine Management Segment, replacement
parts for ignition and emission control systems accounted for approximately 54%,
54% and 55% of our consolidated net sales in 2007, 2006 and 2005, respectively.
-6-
COMPUTER-CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped
with computer-controlled engine management systems to control ignition, emission
and fuel injection systems. The on-board computers monitor inputs from many
types of sensors located throughout the vehicle, and control a myriad of valves,
injectors, switches and motors to manage engine and vehicle performance.
Electronic ignition systems enable the engine to operate with improved fuel
efficiency and reduced level of hazardous fumes in exhaust gases.
In 1992, we entered into a joint venture in Canada with Blue Streak Electronics,
Inc. to rebuild automotive engine management computers and mass air flow
sensors. This joint venture has further expanded its product range to include
computers used in temperature control, anti-lock brake systems and air bags, and
development of diagnostic repair tools.
We divide our electronic operations between product design and highly automated
manufacturing operations in Orlando, Florida and assembly operations, which are
performed in assembly plants in Orlando and Hong Kong.
Government emission laws have been implemented throughout the majority of the
United States. The Clean Air Act, as amended in 1990, imposes strict emission
control test standards on existing and new vehicles, and remains the preeminent
legislation in the area of vehicle emissions. As many states have implemented
required inspection/maintenance tests, the Environmental Protection Agency,
through its rulemaking ability, has also encouraged both manufacturers and
drivers to reduce vehicle emissions. As the Clean Air Act was "phased in"
beginning in 1994, automobiles must now comply with emission standards from the
time they were manufactured, and in most states, until the last day they are in
use. This law and other government emissions laws have had, and we expect it to
continue to have, a positive impact on sales of our ignition and emission
controls parts since vehicles failing these laws may require repairs utilizing
parts sold by us.
Our sales of sensors, valves, solenoids and related parts have increased
steadily as automobile manufacturers equip their cars with more complex engine
management systems.
WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 13%,
13% and 11% of our consolidated net sales in 2007, 2006 and 2005, respectively.
These products include ignition (spark plug) wires, battery cables and a wide
range of electrical wire, terminals, connectors and tools for servicing an
automobile's electrical system.
The largest component of this product line is the sale of ignition wire sets. We
have historically offered a premium brand of ignition wires and battery cables,
which capitalizes on the market's awareness of the importance of quality. We
extrude high voltage wire in our Mishawaka, Indiana facility which is used in
our ignition wire sets. This vertical integration of this critical component
offers us the ability to achieve lower costs and a controlled source of supply
and quality.
TEMPERATURE CONTROL SEGMENT
We manufacture, remanufacture and market a full line of replacement parts for
automotive temperature control (air conditioning and heating) systems, engine
cooling systems, power window accessories and windshield washer systems,
primarily under our brand names of Four Seasons, Factory Air, Murray, Hayden,
Imperial and ACi and through private labels such as CARQUEST and NAPA. The major
product groups sold by our Temperature Control Segment are new and
remanufactured compressors, clutch assemblies, blower and radiator fan motors,
filter dryers, evaporators, accumulators, hose assemblies, expansion valves,
heater valves, AC service tools and chemicals, fan assemblies, fan clutches,
engine oil coolers, transmission coolers, window lift motors and windshield
washer pumps. Our temperature control products accounted for approximately 26%,
26% and 28% of our consolidated net sales in 2007, 2006 and 2005, respectively.
-7-
Due to increasing offshore competitive price pressure, our Temperature Control
business made several changes within its manufacturing portfolio. We have
outsourced the manufacturing of several major AC product groups to low cost
areas and have implemented plans to consolidate manufacturing facilities. In
addition, we continue to increase production of remanufactured compressors in
Reynosa, Mexico and have entered into several supply agreements for certain
products with vendors in low cost countries such as those in Asia.
Today's vehicles are being produced with smaller, more complex and efficient AC
system designs. These newer systems are less prone to leak resulting in fewer AC
system repairs. Our Temperature Control Segment continues to be a leader in
providing superior training to service dealers who seek the knowledge in which
to perform proper repairs for today's vehicles. We believe that our training
module (HVAC Tips & Techniques) remains one of the most sought-after training
clinics in the industry and among professional service dealers.
EUROPE SEGMENT
In July 1996, we acquired an equity interest in Standard Motor Products (SMP)
Holdings Limited (formerly Intermotor Holdings Limited) located in Nottingham,
England. During 2002, we acquired the remaining equity interest bringing the
Company's ownership percentage to 100%. SMP Holdings Limited manufactures and
distributes a broad line of engine management products primarily to customers in
Europe. Also in 1996, we expanded our presence in Europe by opening a European
distribution center in Strasbourg, France for temperature control products,
which we later divested in the fourth quarter of 2006. A joint venture (Blue
Streak Europe) between SMP Holdings Limited and Blue Streak Electronics was also
initiated in 1996, which joint venture supplies rebuilt engine computers for the
European market.
Since 1996, we have made a series of smaller acquisitions supplementing both the
Engine Management and Temperature Control portions of our business. With respect
to the engine management business, in January 1999 we acquired Webcon UK
Limited, an assembler and distributor of fuel system components, which we
subsequently divested in June 2003. In January 1999, Blue Streak Europe acquired
Injection Correction UK LTD, a subsidiary of Webcon, and in September 2001,
acquired TRW Inc.'s electronic control unit remanufacturing division. In April
1999, we acquired Lemark Auto Accessories, a supplier of wire sets. In April
2002, the wire business was further expanded by acquiring Carol Cable Limited, a
manufacturer and distributor of wire. In April 2006, we acquired substantially
all of the assets of Biazet EI's ignition and coil business in Poland.
Subsequently, we relocated certain of our UK manufacturing operations to our
facility in Poland. In December 2007, we acquired Kerr Nelson Ltd., a
manufacturer and distributor of wire sets.
With respect to the temperature control portion of our business, following the
opening of the distribution center in France, in 1997 a joint venture was
entered into with Valeo SA to remanufacture air conditioner compressors for the
European market. In addition, in January 2000 we acquired Four Seasons UK Ltd.
(formerly Vehicle Air Conditioning Parts Ltd.), a distributor of components for
the repair of air conditioning systems. In July 2000, the Temperature Control
business purchased Four Seasons Italy SRL (formerly Automotive Heater Exchange
SRL) in Italy. In 2001 we entered into a joint venture with Pedro Sanz in
Madrid, Spain to distribute our products in the Iberian Peninsula. In the fourth
quarter of 2006, we sold a majority portion of our European Temperature Control
business, consisting of our equity interests of our operations in Spain and our
business in France (other than our joint venture with Valeo) and Italy. The
proceeds from the divestiture were $3.1 million, and we incurred a loss on
divestiture of $3.2 million in the fourth quarter of 2006.
Our European Segment accounted for approximately 5%, 6% and 5% of our
consolidated net sales in 2007, 2006 and 2005, respectively. Aftermarket margins
are under pressure, while volumes are in a general decline in the ignition line.
We have responded to the adverse market conditions by reducing manufacturing
costs through consolidating certain facilities and outsourcing products.
-8-
FINANCIAL INFORMATION ABOUT OUR FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We sell our line of products primarily in the United States, with additional
sales in Canada, Europe and Latin America. Our sales are substantially
denominated in U.S. dollars.
The table below shows our consolidated net sales by geographic area for the
three years ended December 31, 2007.
YEAR ENDED
DECEMBER 31,
----------------------------------------
2007 2006 2005
-------- -------- --------
(IN THOUSANDS)
United States .................. $663,534 $688,030 $716,358
Canada ......................... 53,901 48,537 46,353
Europe ......................... 42,210 47,044 43,423
Other International ............ 30,540 28,413 24,279
-------- -------- --------
Total ...................... $790,185 $812,024 $830,413
======== ======== ========
The table below shows our long-lived assets by geographical area for the three
years ended December 31, 2007.
YEAR ENDED
DECEMBER 31,
----------------------------------------
2007 2006 2005
-------- -------- --------
(IN THOUSANDS)
United States .................. $136,029 $144,208 $161,451
Europe ......................... 8,883 4,821 4,682
Canada ......................... 3,954 4,014 3,900
Other International ............ 680 778 754
-------- -------- --------
Total ...................... $149,546 $153,821 $170,787
======== ======== ========
SALES AND DISTRIBUTION
In the traditional distribution channel, we sell our products to warehouse
distributors, who supply auto parts jobbers, who in turn sell to professional
technicians and to consumers who perform automotive repairs themselves. In
recent years, warehouse distributors have consolidated with other distributors,
and an increasing number of distributors own their jobbers. In the retail
distribution channel, customers buy directly from us and sell directly to
technicians and "do it yourselfers." Retailers are also consolidating with other
retailers and have expanded into the jobber market, adding additional
competition in the "do it for me" business segment targeting the professional
technician.
As automotive parts grow more complex, consumers are less likely to service
their own vehicles and may become more reliant on dealers and technicians. In
addition to new car sales, automotive dealerships sell OE brand parts and
service vehicles. The products available through the dealers are purchased
through the original equipment service (OES) network. Traditionally, the parts
manufacturers of OEMs have supplied a majority of the OES network. However,
certain parts manufacturers have become independent and are no longer affiliated
with OEMs. In addition, many Tier 1 OEM suppliers are disinterested in providing
service parts after serial production is complete. As a result of these factors,
there are additional opportunities for independent automotive aftermarket
manufacturers like us to supply the OES network.
We believe that our sales force is the premier direct sales force for our
product lines due to our concentration of highly-qualified, well-trained sales
people dedicated to geographic territories. Our sales force allows us to provide
customer service that we believe is unmatched by our competitors. We thoroughly
train our sales people both in the function and application of our product
lines, as well as in proven sales techniques. Customers, therefore, depend on
these sales people as a reliable source for technical information. We give newly
hired sales people extensive instruction at our training facility in Irving,
Texas and have a continuing education program that allows our sales force to
stay current on troubleshooting and repair techniques, as well as the latest
automotive parts and systems technology.
-9-
We generate demand for our products by directing a significant portion of our
sales effort to our customers' customers (i.e., jobbers and professional
technicians). We also conduct instructional clinics, which teach technicians how
to diagnose and repair complex systems related to our products. To help our
sales people to be teachers and trainers, we focus our recruitment efforts on
candidates who already have strong technical backgrounds as well as sales
experience.
In connection with our sales activities, we offer a variety of customer
discounts, allowances and incentives. For example, we offer cash discounts for
paying invoices in accordance with the specified discounted terms of the
invoice, and we offer pricing discounts based on volume and different product
lines purchased from us. We also offer rebates and discounts to customers as
advertising and sales force allowances, and allowances for warranty and
overstock returns are also provided. We believe these discounts, allowances and
incentives are a common practice throughout the automotive aftermarket industry,
and we intend to continue to offer them in response to competitive pressures.
CUSTOMERS
Our customer base is comprised largely of warehouse distributors, large
retailers, OE/OES customers, other manufacturers and export customers. Our
warehouse distributor customers include CARQUEST and NAPA Auto Parts, and
several large independent distributors affiliated with industry marketing group
associations. These associations include The Aftermarket Auto Parts Alliance,
The Automotive Distribution Network, and National Pronto Association. Our retail
customers include Advance Auto Parts, AutoZone, CSK Auto, O'Reilly Automotive
and Pep Boys. In 2007, our consolidated net sales to our major market channels
consisted of $386 million to our traditional customers, $247 million to our
retail customers, $81 million to our OE/OES customers, and $76 million to other
customers.
Our five largest individual customers, including members of a marketing group,
accounted for 50% of our 2007 consolidated net sales. Two individual customers
accounted for 17% and 15%, respectively, of our 2007 consolidated net sales.
COMPETITION
We are a leading independent manufacturer of replacement parts for product lines
in Engine Management and Temperature Control. We compete primarily on the basis
of product quality, product availability, customer service, product coverage,
order turn-around time, order fill rate and price. We believe we differentiate
ourselves from our competitors primarily through:
o a value-added, knowledgeable sales force;
o extensive product coverage;
o sophisticated parts cataloguing systems;
o inventory levels sufficient to meet the rapid delivery requirements of
customers; and
o breadth of manufacturing capabilities.
In the Engine Management business, we are one of the leading independent
manufacturers in the United States. Our competitors include AC Delco, Cardone
Industries, Inc., Delphi Corporation, Denso Corporation, Federal-Mogul
Corporation, Robert Bosch Corporation, Visteon Corporation and Wells
Manufacturing Corporation, as well as OE dealers.
Our Temperature Control business is one of the leading independent manufacturers
and distributors of a full line of temperature control products in North America
and other geographic areas. AC Delco, Delphi Corporation, Denso Corporation,
Sanden International Inc., Proliance International, Inc., Continental/Siemens
VDO Automotive and Visteon Corporation are some of our key competitors in this
market.
-10-
The automotive aftermarket is highly competitive, and we face substantial
competition in all markets that we serve. Our success in the marketplace
continues to depend on our ability to offer competitive prices, improved
products and expanded offerings in competition with many other suppliers to the
aftermarket. Some of our competitors may have greater financial, marketing and
other resources than we do. In addition, we face competition from automobile
manufacturers who supply many of the replacement parts sold by us, although
these manufacturers generally supply parts only for cars they produce through OE
dealerships.
SEASONALITY
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
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 borrowings from our revolving credit facility.
The seasonality of our business offers significant operational challenges in our
manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our "Spring promotion," in which customers
are offered longer payment terms.
WORKING CAPITAL MANAGEMENT
Automotive aftermarket companies have been under increasing pressure to provide
broad SKU (stock keeping unit) coverage due to parts and brand proliferation. In
response to this, we have made, and continue to make, changes to our inventory
management system designed to reduce inventory requirements. We upgraded our
forecasting system in our Engine Management and Temperature Control Segments
that will help us better manage our inventory levels and improve inventory
turns. In 2007, inventory levels increased significantly as we built bridge
inventory levels to meet customer demand during our facility relocation moves.
In addition, during 2007 our accounts receivable balances increased reflecting
an expansion in days outstanding from 119 to 127. We have a pack-to-order
distribution system, which permits us to retain slow moving items in a bulk
storage state until an order for a specific brand part is received. This system
reduces the volume of a given part in inventory and reduces the labor
requirements to package and repackage inventory. We also recently expanded our
management system to improve inventory deployment, enhance our collaboration
with customers on forecasts, and further integrate our supply chain both to
customers and suppliers.
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. 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.
-11-
In order to better control warranty returns, we tightened the rules to reduce
returns arising from installer error or misdiagnosis. For example, 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. In the fourth quarter of 2007, we experienced significant overstock
returns as customers reduced their working capital levels in response to a
difficult economic climate.
Our profitability and working capital requirements are seasonal due to our sales
mix of Temperature Control products. Our working capital requirements peak near
the end of the second quarter, as the inventory build-up of air conditioning
products is converted to sales and payments on the receivables associated with
such sales have yet to be received. These increased working capital requirements
are funded by borrowings from our revolving credit facility.
SUPPLIERS
The principal raw materials purchased by us consist of brass, electronic
components, fabricated copper (primarily in the form of magnet and insulated
cable), steel magnets, laminations, tubes and shafts, stamped steel parts,
copper wire, ignition wire, stainless steel coils and rods, aluminum coils,
fittings, tubes and rods, cast aluminum parts, lead, steel roller bearings,
rubber molding compound, thermo-set and thermo plastic molding powders.
Additionally, we use components and cores (used parts) in our remanufacturing
processes for air conditioning compressors.
We purchase many materials in the U.S. and foreign open markets and have a
limited number of supply agreements on key components. A number of prime
suppliers make these materials available. In the case of cores for air
conditioning compressors, we obtain them either from exchanges with customers
who return cores subsequent to purchasing remanufactured parts or through direct
purchases from a network of core brokers. In addition, we acquire certain
materials by purchasing products that are resold into the market, particularly
by OEM sources and other domestic and foreign suppliers.
We believe there is an adequate supply of primary raw materials and cores. In
order to ensure a consistent, high quality, low cost supply of key components
for each product line, we continue to develop our own sources through internal
manufacturing capacity. Recently, prices of steel, aluminum, copper and other
commodities have risen. These increases did not have a material impact on us, as
we are not dependent on any single commodity, however, there can be no assurance
over the long term that increases in commodity prices will not materially affect
our business or results of operations.
PRODUCTION AND ENGINEERING
We engineer, tool and manufacture many of the components used in the assembly of
our products. We also perform our own plastic and rubber molding operations,
stamping and machining operations, automated electronics assembly and a wide
variety of other processes. In the case of remanufactured components, we conduct
our own teardown, diagnostics and rebuilding for air conditioning compressors.
We have found this level of vertical integration to provide advantages in terms
of cost, quality and availability. We intend to continue selective efforts
toward further vertical integration to ensure a consistent quality and supply of
low cost components. In addition, our strategy includes sourcing an increasing
number of finished goods and component parts from low cost countries such as
those in Asia.
In 2000, we launched a program for the installation of a fully integrated
enterprise resource planning (ERP) system. The implementation of such system was
completed in 2003 at all of our Temperature Control Segment locations. In 2005,
we launched our program to implement such a system in our Engine Management
Segment and we anticipate full implementation in 2009.
-12-
EMPLOYEES
As of December 31, 2007, we employed approximately 3,000 people in the United
States, and 800 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong. Of
these, approximately 1,900 are production employees. We operate primarily in
non-union facilities and have binding labor agreements with the workers at other
unionized facilities. We have approximately 180 production employees in
Edwardsville, Kansas who are covered by a contract with The International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
("UAW") that expires in April 2009. As of December 31, 2007, approximately 110
of our production employees in Long Island City, New York are under a UAW
contract. We also have union relationships in Mexico with agreements negotiated
at various intervals. The current union agreements in Mexico cover approximately
400 employees and expire in January 2009 and December 2009.
In December 2007, we entered into an agreement with the UAW regarding the
shutdown of our manufacturing operations at Long Island City, New York, which
operations we expect to transfer to our other facilities in the second quarter
of 2008.
We believe that our facilities are in favorable labor markets with ready access
to adequate numbers of skilled and unskilled workers, and we believe our
relations with our union and non-union employees are good.
INSURANCE
We maintain basic liability coverage up to $2 million for automobile liability,
general and product liability and $50 million for umbrella liability coverage.
We also maintain environmental insurance of $10 million, covering our existing
U.S. and Canadian facilities. One of our facilities is currently undergoing
testing for potential environmental remediation. The environmental testing and
any remediation costs at such facility are covered by an insurance policy of $3
million, which is subject to a $1.5 million deductible; we have purchased
additional environmental insurance coverage in the amount of $2 million with a
$0.1 million deductible relating to such facility. Historically, we have not
experienced casualty losses in any year in excess of our coverage. However,
there can be no assurances that liability losses in the future will not exceed
our coverage.
AVAILABLE INFORMATION
We are a New York corporation founded in 1919. Our principal executive offices
are located at 37-18 Northern Boulevard, Long Island City, New York 11101, and
our main telephone number at that location is (718) 392-0200. Our Internet
address is WWW.SMPCORP.COM. We provide a link to reports that we have filed with
the SEC. However, for those persons that make a request in writing or by e-mail
(financial@smpcorp.com), we will provide free of charge our Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. These reports and other
information are also available, free of charge, at WWW.SEC.GOV.
-13-
ITEM 1A. RISK FACTORS
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
COMPETE WITH SUPPLIERS OF AUTOMOTIVE AFTERMARKET PRODUCTS, SOME OF WHICH MAY
HAVE SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND OTHER RESOURCES THAN WE DO.
While we believe that our business is well positioned to compete in our two
primary market segments, Engine Management and Temperature Control, the
automotive aftermarket industry is highly competitive, and our success depends
on our ability to compete with suppliers of automotive aftermarket products. In
the Engine Management business, our competitors include AC Delco, Cardone
Industries, Inc., Delphi Corporation, Denso Corporation, Federal-Mogul
Corporation, Robert Bosch Corporation, Visteon Corporation and Wells
Manufacturing Corporation. In the Temperature Control business, we compete with
AC Delco, Delphi Corporation, Denso Corporation, Sanden International Inc.,
Proliance International, Inc., Continental/Siemens VDO Automotive and Visteon
Corporation. In addition, automobile manufacturers supply many of the
replacement parts we sell.
Some of our competitors may have larger customer bases and significantly greater
financial, technical and marketing resources than we do. These factors may allow
our competitors to:
o respond more quickly than we can to new or emerging technologies and
changes in customer requirements by devoting greater resources than we
can to the development, promotion and sale of automotive aftermarket
products and services;
o engage in more extensive research and development;
o sell products at a lower price than we do;
o undertake more extensive marketing campaigns; and
o make more attractive offers to existing and potential customers and
strategic partners.
We cannot assure you that our competitors will not develop products or services
that are equal or superior to our products or that achieve greater market
acceptance than our products or that in the future other companies involved in
the automotive aftermarket industry will not expand their operations into
product lines produced and sold by us. We also cannot assure you that additional
entrants will not enter the automotive aftermarket industry or that companies in
the aftermarket industry will not consolidate. Any of such competitive pressures
could cause us to lose market share or could result in significant price
decreases and could have a material adverse effect upon our business, financial
condition and results of operations.
THERE IS SUBSTANTIAL PRICE COMPETITION IN OUR INDUSTRY, AND OUR SUCCESS AND
PROFITABILITY WILL DEPEND ON OUR ABILITY TO MAINTAIN A COMPETITIVE COST AND
PRICE STRUCTURE.
There is substantial price competition in our industry, and our success and
profitability will depend on our ability to maintain a competitive cost and
price structure. This is the result of a number of industry trends, including
the impact of offshore suppliers in the marketplace, the consolidated purchasing
power of large customers and actions taken by some of our competitors in an
effort to "win over" new business. Recently, we have reduced prices to remain
competitive and may have to do so in the future. Price reductions have impacted
our sales and profit margins and are expected to do so in the future. In
addition, we have commenced facility integration efforts to further reduce
costs. Our future profitability will depend in part upon the success of our
integration plans, and our ability to respond to changes in the product and
distribution channel mix, to continue to improve our manufacturing efficiencies,
to generate cost reductions, including reductions in the cost of components
purchased from outside suppliers, and to maintain a cost structure that will
enable us to offer competitive prices. Our inability to maintain a competitive
cost structure could have a material adverse effect on our business, financial
condition and results of operations.
-14-
WE DEPEND ON A LIMITED NUMBER OF KEY CUSTOMERS, AND THE LOSS OF ANY SUCH
CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Our five largest individual customers, including members of a marketing group,
accounted for 50%, 51% and 52% of our consolidated net sales for 2007, 2006 and
2005, respectively. Two individual customers accounted for 17% and 15%,
respectively, of our 2007 consolidated net sales, 18% and 14%, respectively, of
our 2006 consolidated net sales, and 18% and 15%, respectively, of our 2005
consolidated net sales. The loss of one or more of these customers or, if any of
them significantly reduces their purchases of our products, could have a
materially adverse impact on our business, financial condition and results of
operations.
Also, we do not typically enter into long-term agreements with any of our
customers. Instead, we enter into a number of purchase order commitments with
our customers, based on their current or projected needs. We have in the past,
and may in the future, lose customers or lose a particular product line of a
customer due to the highly competitive conditions in the automotive aftermarket
industry, including pricing pressures. A decision by any significant customer,
whether motivated by competitive conditions, financial difficulties or
otherwise, to materially decrease the amount of products purchased from us, to
change their manner of doing business with us, or to stop doing business with
us, could have a material adverse effect on our business, financial condition
and results of operations.
OUR BUSINESS IS SEASONAL AND IS SUBJECT TO SUBSTANTIAL QUARTERLY FLUCTUATIONS,
WHICH IMPACT OUR QUARTERLY PERFORMANCE AND WORKING CAPITAL REQUIREMENTS.
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year and with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
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.
WE MAY INCUR MATERIAL LOSSES AND SIGNIFICANT COSTS AS A RESULT OF
WARRANTY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
Our products are required to meet rigorous standards imposed by our customers
and our industry. 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 the event that there are material deficiencies or defects in
the design and manufacture of our products and/or installer error, the affected
products may be subject to warranty returns and/or product recalls. Although we
maintain a comprehensive quality control program, we cannot give any assurance
that our products will not suffer from defects or other deficiencies or that we
will not experience material warranty returns or product recalls in the future.
We accrue for warranty returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for warranty returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. We have in
the past incurred, and may in the future incur, material losses and significant
costs as a result of our customers returning products to us as a result of
warranty-related issues in excess of anticipated amounts. Deficiencies or
defects in our products in the future may result in warranty returns and product
recalls in excess of anticipated amounts and may have a material adverse effect
on our business, financial condition and results of operations.
-15-
OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF OVERSTOCK
INVENTORY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
We permit overstock returns of inventory that we allow customers to return to us
and that may be either new or non-defective or non-obsolete but that we believe
we can re-sell. Customers are generally limited to returning overstocked
inventory according to a specified percentage of their annual purchases from us.
In addition, a customer's annual allowance cannot be carried forward to the
upcoming year.
We accrue for overstock returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for overstock returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. In the
fourth quarter of 2007, we experienced significant overstock returns as
customers reduced their working capital levels in response to a difficult
economic climate. To the extent that overstocked returns are materially in
excess of our projections, our business, financial condition and results of
operations may be materially adversely affected.
OVER THE LONG TERM, OUR BUSINESS IS DEPENDENT ON THE AUTOMOTIVE INDUSTRY, AND
OUR FUTURE PERFORMANCE MAY BE MATERIALLY ADVERSELY AFFECTED BY PERSISTENT
DECLINES IN THE AUTOMOTIVE INDUSTRY OR CHANGES IN TECHNOLOGIES AND IMPROVEMENTS
IN THE QUALITY OF NEW VEHICLE PARTS.
Over the long term, our business is dependent upon the sales of automobiles
within the automotive industry, which creates the total number of vehicles
available for repair following the expiration of vehicle warranties. A
persistent decline in automotive sales and production over the long term would
likely affect sales to our aftermarket customers. Changes in automotive
technologies, such as vehicles powered by fuel cells or electricity, could also
negatively affect sales to our aftermarket customers. These factors could result
in less demand for our products thereby resulting in a decline in our results of
operations or a deterioration in our business and financial condition and may
have a material adverse effect on our long-term performance.
In addition, the size of the automobile replacement parts market depends, in
part, upon the growth in number of vehicles on the road, increase in average
vehicle age, increase in total miles driven per year, new and modified
environmental regulations, increase in pricing of new cars and new car quality
and related warranties. The automobile replacement parts market has been
negatively impacted by the fact that the quality of more recent automotive
vehicles and their component parts (and related warranties) has improved,
thereby lengthening the repair cycle. Generally, if parts last longer, there
will be less demand for our products, and the average useful life of automobile
parts has been steadily increasing in recent years due to innovations in
products and technology. These factors could have a material adverse effect on
our business, financial condition and results of operations.
WE MAY BE MATERIALLY ADVERSELY AFFECTED BY ASBESTOS CLAIMS ARISING FROM PRODUCTS
SOLD BY OUR FORMER BRAKE BUSINESS, AS WELL AS BY OTHER PRODUCT LIABILITY CLAIMS.
In 1986, we acquired a brake business, which we subsequently sold in March 1998.
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
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 of such claims.
-16-
Actuarial consultants with experience in assessing asbestos-related liabilities
conducted a study to estimate our potential claim liability as of August 31,
2007. The updated study has estimated an undiscounted liability for settlement
payments, excluding legal costs, ranging from $23.8 million to $55.2 million for
the period through 2050. The change from the prior year study was a $1.7 million
increase for the low end of the range and a $1.3 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. Accordingly, an incremental $2.8 million provision in our
discontinued operation was added to the asbestos accrual increasing the reserve
to approximately $23.8 million. According to the updated study, legal costs,
which are expensed as incurred and reported in earnings (loss) from discontinued
operation in the accompanying consolidated statements of operations, are
estimated to range from $18.7 million to $32.6 million during the same period.
At December 31, 2007, approximately 3,430 cases were outstanding for which we
were responsible for any related liabilities. Since inception in September 2001
through December 31, 2007, the amounts paid for settled claims are approximately
$6.1 million. A substantial increase in the number of new claims or increased
settlement payments or awards of damages could have a material adverse effect on
our business, financial condition and results of operations.
Given the uncertainties associated with projecting asbestos-related matters into
the future and other factors outside our control, we cannot give any assurance
that significant increases in the number of claims filed against us will not
occur, that asbestos-related damages or settlement awards will not exceed the
amount we have in reserve, or that additional provisions will not be required.
Management will continue to monitor the circumstances surrounding these
potential liabilities in determining whether additional reserves and provisions
may be necessary. We plan on performing a similar annual actuarial analysis
during the third quarter of each year for the foreseeable future.
In addition to asbestos-related claims, our product sales entail the risk of
involvement in other product liability actions. We maintain product liability
insurance coverage, but we cannot give any assurance that current or future
policy limits will be sufficient to cover all possible liabilities. Further, we
can give no assurance that adequate product liability insurance will continue to
be available to us in the future or that such insurance may be maintained at a
reasonable cost to us. In the event of a successful product liability claim
against us, a lack or insufficiency of insurance coverage could have a material
adverse effect on our business, financial condition and results of operations.
OUR SUBSTANTIAL INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL HEALTH.
We have a significant amount of indebtedness. As of December 31, 2007, our total
outstanding indebtedness was $255.3 million. We incurred $90 million of
indebtedness in July 1999 from the sale of our convertible debentures. We have
an existing revolving bank credit facility of $275 million with General Electric
Capital Corporation, as agent, and a syndicate of lenders, which we refer to
throughout this Report as our revolving credit facility. As of December 31,
2007, we had $148.7 million of outstanding indebtedness and approximately $80.3
million of availability under this revolving credit facility. Our substantial
indebtedness could:
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our ability to fund future working capital, capital
expenditures, research and development costs and other general
corporate requirements;
o limit our ability to pay future dividends;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o increase the amount of interest expense that we have to pay because
some of our borrowings are at variable rates of interest, which, if
interest rates increase, could result in a higher interest expense;
and
-17-
o limit, along with the financial and other restrictive covenants of our
indebtedness, among other things, our ability to borrow additional
funds.
In addition, we have granted the lenders under our revolving credit facility a
first priority security interest in substantially all of our currently owned and
future acquired personal property, real property and other assets. We have also
pledged shares of stock in our subsidiaries to those lenders. If we default on
any of our indebtedness, or if we are unable to obtain necessary liquidity, our
business could be adversely affected.
WE MAY NOT BE ABLE TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE
OUR INDEBTEDNESS AND FUND OUR FUTURE OPERATIONS.
Our ability either to make payments on or to refinance our indebtedness, or to
fund planned capital expenditures and research and development efforts, will
depend on our ability to generate cash in the future. Our ability to generate
cash is in part subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our revolving credit
facility will be adequate to meet our future liquidity needs for at least the
next few years. Significant assumptions underlie this belief, including, among
other things, that there will be no material adverse developments in our
business, liquidity or capital requirements. If we are unable to service our
indebtedness, we will be forced to adopt an alternative strategy that may
include actions such as:
o reducing capital expenditures;
o reducing research and development efforts;
o selling assets;
o restructuring or refinancing our indebtedness; and
o seeking additional funding.
We cannot assure you that our business will generate sufficient cash flow from
operations, or that future borrowings will be available to us under our
revolving credit facility in amounts sufficient to enable us to pay the
principal and interest on our indebtedness or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness on or before
maturity. We cannot assure you that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all.
OUR BUSINESS IS DEPENDENT ON OUR MAINTAINING SATISFACTORY RELATIONSHIPS WITH
SUPPLIERS, AND THE LOSS OF SEVERAL MAJOR SUPPLIERS OF RAW MATERIALS OR KEY
COMPONENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
Our business depends on our relationships with suppliers of raw materials and
components that we use on our product lines and on our ability to purchase these
raw materials and key components at prices and on terms comparable to
similarly-situated companies. We purchase most materials in the U.S. and foreign
open markets. Although we do not expect that the loss of any one supplier would
have a material adverse effect on us, the loss of several major suppliers would
have a material adverse effect on our business, financial condition and results
of operations.
WE MAY INCUR LIABILITIES UNDER GOVERNMENT REGULATIONS AND POLICIES AND
ENVIRONMENTAL LAWS, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Domestic and foreign political developments and government regulations and
policies directly affect automotive consumer products in the United States and
abroad. Regulations and policies relating to over-the-highway vehicles include
standards established by the United States Department of Transportation for
motor vehicle safety and emissions. The modification of existing laws,
-18-
regulations or policies, or the adoption of new laws, regulations or policies,
could have a material adverse effect on our business, financial condition and
results of operations. Our failure to comply with these laws and regulations
could subject us to civil and criminal penalties.
Our operations and properties are also subject to a wide variety of increasingly
complex and stringent federal, state, local and international laws and
regulations, including those governing the use, storage, handling, generation,
treatment, emission, release, discharge and disposal of materials, substances
and wastes, the remediation of contaminated soil and groundwater and the health
and safety of employees. Such environmental laws, including but not limited to
those under the Comprehensive Environmental Response Compensation & Liability
Act, may impose joint and several liability and may apply to conditions at
properties presently or formerly owned or operated by an entity or its
predecessors, as well as to conditions at properties at which wastes or other
contamination attributable to an entity or its predecessors have been sent or
otherwise come to be located.
The nature of our operations exposes us to the risk of claims with respect to
such matters, and we can give no assurance that violations of such laws have not
occurred or will not occur or that material costs or liabilities will not be
incurred in connection with such claims. One of our facilities is currently
undergoing testing for potential environmental remediation. Based upon the
findings related to the testing, we increased our environmental reserve by $1.8
million in 2007. The testing and any environmental remediation costs at such
facility are covered by an insurance policy of $3 million, which is subject to a
$1.5 million deductible; we have purchased additional environmental insurance
coverage in the amount of $2 million with a $0.1 million deductible relating to
such facility. We also maintain insurance of $10 million to cover our existing
U.S. and Canadian facilities. We can give no assurance that the future cost of
compliance with existing environmental laws and the liability for known
environmental claims pursuant to such environmental laws will give rise to
additional significant expenditures or liabilities that would be material to us.
In addition, future events, such as new information, changes in existing
environmental laws or their interpretation, and more vigorous enforcement
policies of federal, state or local regulatory agencies, may have a material
adverse effect on our business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
-19-
ITEM 2. PROPERTIES
We maintain our executive offices in Long Island City, New York. The table below
describes our principal facilities as of December 31, 2007.
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
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ENGINE MANAGEMENT
Orlando FL Manufacturing (Ignition) 50,640 2017
Mishawaka IN Manufacturing 153,070 Owned
Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned
Independence KS Manufacturing 273,390 Owned
Wilson NC Manufacturing (Ignition) 31,500 Owned
Reno NV Distribution (Ignition) 67,000 Owned
Long Island City NY Administration and Manufacturing (Ignition) 202,000 Owned*
Greenville SC Manufacturing (Ignition) 181,525 Owned
Disputanta VA Distribution (Ignition) 411,000 Owned
Hong Kong HK Manufacturing (Ignition) 21,350 2008
Fajardo Puerto Rico Manufacturing (Ignition) 113,900 2008
Reynosa Mexico Manufacturing (Wire) 62,500 2009
Reynosa Mexico Manufacturing (Wire) 100,000 2014
Reynosa Mexico Manufacturing (Ignition) 110,000 2009
TEMPERATURE CONTROL
Corona CA Manufacturing and Distribution 78,200 2011
Lewisville TX Administration and Distribution 415,000 2016
Grapevine TX Manufacturing 180,000 Owned
St. Thomas Canada Manufacturing 40,000 Owned
Reynosa Mexico Remanufacturing (Compressors) 80,140 2009
EUROPE
Nottingham England Administration and Distribution (Ignition and Wire) 35,520 2022
Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned
Nottingham England Manufacturing (Ignition) 46,780 Owned
Wellingborough England Manufacturing (Wire) 19,380 2016
Bialystok Poland Manufacturing (Ignition) 42,050 2011
OTHER
Mississauga Canada Administration and Distribution (Ignition, Wire,
Temperature Control) 128,400 2016
Irving TX Training Center 13,400 2009
* In December 2007, we entered into an agreement to sell this facility. On March
12, 2008, we closed on the sale of the facility, and we leased back a portion of
the facility.
The real property that we own in Indiana, Kansas, Nevada, North Carolina, South
Carolina, Virginia and Texas and in St. Thomas, Canada is encumbered by a
mortgage or deed of trust, as applicable, in favor of General Electric Capital
Corporation or its affiliated company, as agent for our revolving credit
facility. In addition, the real property we own in England is encumbered by a
lien in favor of the Royal Bank of Scotland.
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ITEM 3. LEGAL PROCEEDINGS
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2007, approximately 3,430 cases were outstanding for which we
were responsible for any related liabilities. We expect the outstanding cases to
increase gradually due to recent legislation in certain states mandating minimum
medical criteria before a case can be heard. Since inception in September 2001
through December 31, 2007, the amounts paid for settled claims are approximately
$6.1 million. In September 2007, we entered into an agreement with an insurance
carrier to provide us with limited insurance coverage for the defense and
indemnity costs associated with certain asbestos-related claims. We have
submitted various asbestos-related claims to the insurance carrier for coverage
under this agreement. See Note 20 of the notes to consolidated financial
statements for further discussion.
In November 2004, the Company was served with a summons and complaint in the
U.S. District Court for the Southern District of New York by The Coalition For A
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. 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
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. 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
None.
-21-
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades publicly on the New York Stock Exchange under the
trading symbol "SMP." The following table shows the high and low sales prices
per share of our common stock as reported by the New York Stock Exchange and the
dividends declared per share for the periods indicated:
HIGH LOW DIVIDEND
---- --- --------
FISCAL YEAR ENDED DECEMBER 31, 2007
First Quarter............................ $18.43 $14.48 $0.09
Second Quarter........................... 19.45 13.89 0.09
Third Quarter............................ 16.70 7.37 0.09
Fourth Quarter........................... 10.25 7.35 0.09
FISCAL YEAR ENDED DECEMBER 31, 2006
First Quarter............................ $11.10 $8.55 $0.09
Second Quarter........................... 9.11 6.75 0.09
Third Quarter............................ 12.64 7.10 0.09
Fourth Quarter........................... 15.70 9.55 0.09
The last reported sale price of our common stock on the NYSE on February 29,
2008 was $7.41 per share. As of February 29, 2008, there were 598 holders of
record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our
board of directors and depend on our profitability, financial condition, capital
needs, future prospects, and other factors deemed relevant by our board. Our
current policy is to pay dividends on a quarterly basis. Our revolving credit
facility permits dividends and distributions by us provided specific conditions
are met. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a further
discussion of our revolving credit facility.
There have been no unregistered offerings of our common stock during the fourth
quarter of 2007 nor any repurchases of our common stock during the fourth
quarter of 2007. For a discussion of our stock repurchases in 2007, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and see Note 12 of the notes to our consolidated financial
statements.
-22-
The following graph compares the five year cumulative total return on the
Company's Common Stock to the total returns on the Standard & Poor's 500 Stock
Index and the S&P 1500 Auto Parts & Equipment Index, which is a combination of
automotive parts and equipment companies within the S&P 400, the S&P 500 and the
S&P 600. The graph shows the change in value of a $100 investment in the
Company's Common Stock and each of the above indices on December 31, 2002 and
the reinvestment of all dividends. The comparisons in this table are required by
the Securities and Exchange Commission and are not intended to forecast or be
indicative of possible future performance of the Company's Common Stock or the
referenced indices.
[GRAPHIC OMITTED]
S&P 1500
Auto Parts
& Equipment
SMP S&P 500 Index
--- ------- -----
2002............................ $100 $100 $100
2003............................ 96 129 147
2004............................ 129 143 148
2005............................ 78 150 119
2006............................ 131 173 124
2007............................ 74 183 151
* SOURCE: STANDARD & POOR'S
-23-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the five
years ended December 31, 2007. This selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the notes
thereto included elsewhere in this Form 10-K.
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $ 790,185 $ 812,024 $ 830,413 $ 824,283 $ 678,783
Gross profit .............................. 202,275 205,221 185,980 194,993 174,772
Goodwill impairment charge (1) .. ......... -- -- -- (6,429) --
Operating income (loss) ................... 22,392 35,315 14,082 (1,737) 15,815
Earnings (loss) from continuing
operations .............................. 5,431 9,163 (1,770) (8,907) 224
Earnings (loss) from
discontinued operation,
net of tax .............................. (3,156) 248 (1,775) (3,909) (1,742)
Cumulative effect of accounting
change, net of tax (2) .................. -- -- -- (1,564) --
Net earnings (loss) (3) ................... 2,275 9,411 (3,545) (14,380) (1,518)
PER SHARE DATA:
Earnings (loss) from continuing operations:
Basic ................................. $ 0.29 $ 0.50 $ (0.09) $ (0.46) $ 0.01
Diluted ............................... 0.29 0.50 (0.09) (0.46) 0.01
Earnings (loss) per common share:
Basic ................................. 0.12 0.51 (0.18) (0.74) (0.10)
Diluted ............................... 0.12 0.51 (0.18) (0.74) (0.10)
Cash dividends per common
share ..................................... 0.36 0.36 0.36 0.36 0.36
OTHER DATA:
Depreciation and amortization ............. $ 15,181 $ 15,486 $ 17,356 $ 19,013 $ 17,092
Capital expenditures ...................... 13,995 10,080 9,957 9,774 8,926
Dividends ................................. 6,683 6,579 7,024 6,955 5,615
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ................. $ 13,261 $ 22,348 $ 14,046 $ 14,934 $ 19,647
Working capital ........................... 183,074 183,313 169,768 194,760 191,333
Total assets .............................. 678,092 640,092 653,044 656,569 694,525
Total debt ................................ 255,311 238,320 248,327 224,186 217,810
Long-term debt (excluding
current portion) ........................ 90,534 97,979 98,549 114,236 114,757
Stockholders' equity ...................... 188,364 190,699 185,707 207,312 226,041
(1) In accordance with the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), goodwill is tested for impairment
at the reporting unit level at least annually, and whenever events or
changes in circumstances indicate that goodwill might be impaired. Our
annual impairment test of goodwill as of December 31, 2004, indicated
that the carrying amounts of two of our reporting units exceeded the
corresponding fair values. As a result, we recorded an impairment loss
on goodwill of $6.4 million during the fourth quarter of 2004. The
impairment loss related to our European Segment and Temperature Control
Segment for which we recorded a charge of $1.6 million and $4.8
million, respectively.
-24-
(2) New customer acquisition costs refer to arrangements pursuant to which
we incur change-over-costs to induce a new or existing customer to
switch from a competitor's brand. In addition, change-over-costs
include the costs related to removing the new customer's inventory and
replacing it with Standard Motor Products inventory commonly referred
to as a stocklift. New customer acquisition costs were initially
recorded as a prepaid asset and the related expense was recognized
ratably over a 12-month period beginning in the month following the
stocklift as an offset to sales. In the fourth quarter of 2004, we
determined that it was a preferable accounting method to reflect the
customer acquisition costs as a reduction to revenue when incurred. We
recorded a cumulative effect of a change in accounting for new customer
acquisition costs totaling $1.6 million, net of tax effects, and
recorded the accounting change as if it had taken effect on October 1,
2004.
(3) We recorded an after tax gain (loss) of $(3.2) million, $0.2 million
and $(1.8) million as earnings (loss) from discontinued operation to
account for legal expenses and potential costs associated with our
asbestos-related liability for the years ended December 31, 2007, 2006
and 2005, respectively. Such costs were also separately disclosed in
the Operating Activity section of the Consolidated Statements of Cash
Flows for those same years.
-25-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto. This discussion summarizes the
significant factors affecting our results of operations and the financial
condition of our business during each of the fiscal years in the three year
period ended December 31, 2007.
OVERVIEW
We are a leading independent manufacturer, distributor and marketer 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, 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.
We place significant emphasis on improving our financial performance by
achieving operating efficiencies and improving asset utilization, while
maintaining product quality and high customer order fill rates. We intend to
continue to improve our operating efficiency and cost position by focusing on
company-wide overhead and operating expense cost reduction programs, such as
closing excess facilities and consolidating redundant functions. In that regard,
during 2007 and 2006, we announced initiatives to close our Puerto Rico
manufacturing facility, integrate operations in Mexico, close our Fort Worth,
Texas production facility and shutdown our manufacturing operations in Long
Island City, New York.
For additional information about our business, strategy and competitive
environment, see Item 1, "Business."
SEASONALITY. Historically, our operating results have fluctuated by quarter,
with the greatest sales occurring in the second and third quarters of the year
and revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
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 typically peak near the end
of the second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by borrowing from our revolving credit facility.
The seasonality of our business offers significant operational challenges in our
manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our "Spring Promotion," in which customers
are offered 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. We accrue for
overstock returns as a percentage of sales, after giving consideration to recent
returns history.
-26-
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. Despite the additional
controls, in the fourth quarter of 2007, we experienced significant overstock
returns as customers reduced their working capital levels in response to a
difficult economic climate. In addition, with respect to our air conditioning
compressors, which are 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 air conditioning 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 discount 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.
COMPARISON OF FISCAL YEARS 2007 AND 2006
SALES. Consolidated net sales for 2007 were $790.2 million, a decrease of $21.8
million or 2.7%, compared to $812 million in 2006, driven by decreases in our
Engine Management, Temperature Control and European Segments of $16 million,
$3.5 million and $4.8 million, respectively. The decrease in Engine Management
sales was mainly due to higher sales deductions consisting primarily of customer
warranty and overstock returns and other rebates and allowances. The net sales
decrease in our Temperature Control Segment was due primarily to lower pricing
and volume erosion caused by low cost foreign imports, partially offset by lower
customer warranty returns. Europe net sales in 2006 included $13.4 million
related to the European Temperature Control business that was divested in
December 2006. Excluding this divested business, Europe sales increased $8.6
million.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased by 0.3 percentage points to 25.6% in 2007 from 25.3% in 2006 mainly
due to margin improvements in our Engine Management and European Segments of 1
percentage point and 0.5 percentage points, respectively, partially offset by a
2 percentage point decrease in our Temperature Control margin. The margins in
Engine Management and Europe benefited mainly from continued improvements in
procurement and lower manufacturing costs. Partially offsetting these savings in
Engine Management were the impact of $15.9 million of higher sales deductions
for the year that negatively impacted gross margin as a percentage of sales. The
European Segment 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 (SG&A) expenses increased by $0.9 million to $169 million or
21.4% of consolidated net sales in 2007, as compared to $168.1 million or 20.7%
of consolidated net sales in 2006. The increase was due to a higher bad debt
provision on certain accounts receivable and slightly higher general and
administrative expenses, partially offset by a reduction in distribution
expenses.
-27-
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring expenses, which include
restructuring and integration expenses, increased to $10.9 million in 2007,
compared to $1.9 million in 2006. The 2007 expense related to charges made for
the closure of our Puerto Rico production operations, the integration of
operations in Mexico, the closure of our Fort Worth, Texas production facility
and severance and related costs in connection with the shutdown of our Long
Island City manufacturing operations. In December 2007, we reached an agreement
with the union representing the hourly employees at our Long Island City
manufacturing facility relating to the shutdown of our manufacturing operations.
As part of the agreement, we agreed to the payment of certain severance payments
upon termination of employment and to the withdrawal from the union's
multi-employer pension plan. The estimated withdrawal liability related to the
multi-employer plan is calculated at $5.6 million paid quarterly over 20 years.
The present value of the liability is estimated at $3.3 million and was recorded
as part of restructuring and integration expenses in 2007. In addition, a $1.8
million increase in our environmental reserve was recorded in 2007 for
remediation related to the planned sale of our Long Island City building.
Restructuring and integration expense in 2006 related mostly to severance costs
related to the move of our European and Puerto Rican production operations and
the divestiture of a production unit of our Temperature Control Segment.
OPERATING INCOME. Operating income was $22.4 million in 2007, compared to $35.3
million in 2006. The decrease of $12.9 million was primarily due to lower
consolidated net sales, as well as higher restructuring and integration
expenses.
OTHER INCOME (EXPENSE), NET. Other income, net was $3.9 million in 2007, which
was $4.3 million higher than other expense, net of $0.4 million in 2006. Other
income, net in 2007 includes a $0.8 million gain on the sale of our Fort Worth,
Texas manufacturing facility, a $1.4 million gain in foreign exchange, and $0.7
million in dividend and interest income. Other income (expense), net in 2006
included a $3.2 million loss incurred on the sale of a majority portion of our
European Temperature Control business. Offsetting the 2006 loss incurred on the
sale of a majority portion of our European Temperature Control business are a
$0.7 million gain in foreign exchange, $0.9 million in joint venture equity
income and $0.5 million in dividend and interest income.
INTEREST EXPENSE. Interest expense of $18 million in 2007 was $1.3 million lower
than interest expense of $19.3 million in 2006. The lower interest expense in
2007 was due primarily to lower borrowing costs and lower average borrowings
during the year.
INCOME TAX PROVISION. The income tax provision was $2.8 million for 2007
compared to $6.5 million in 2006. The $3.7 million decrease was primarily due to
a lower effective rate in 2007, which was 34% compared to 41.5% in 2006. The
2007 rate was lower due to the release of the valuation allowance related to
U.S. capital losses in consideration of the expected capital gain in connection
with our sale of our Long Island City, New York facility. 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 benefited from pre-tax income
in Europe where previously unrecognized losses carried forward offset taxes
otherwise payable. Net deferred tax assets as of December 31, 2007 were $42.8
million and are net of a valuation allowance of $26.8 million and deferred tax
liabilities of $14.9 million. We have concluded that our current level of
valuation allowance of $26.8 million continues to be appropriate, as discussed
in Note 17 of the notes to our consolidated financial statements.
-28-
EARNINGS (LOSS) FROM DISCONTINUED OPERATION. Earnings (loss) from discontinued
operation, net of tax, reflects legal expenses associated with our asbestos
related liability and adjustments thereto based on the information contained in
the August 2007 actuarial study and all other available information considered
by us. We recorded $3.2 million as a loss and $0.2 million as income, both net
of tax, from discontinued operation for 2007 and 2006, respectively. The loss
for 2007 reflects a $2.8 million pre-tax adjustment to increase our indemnity
liability in line with the August 2007 actuarial study, as well as legal fees
incurred in litigation, whereas the income for 2006 reflects a $3.4 million
pre-tax adjustment to reduce our indemnity liability in line with the August
2006 actuarial study, partially offset by legal fees incurred in litigation in
2006. As discussed more fully in Note 20 of the notes to our consolidated
financial statements, we are responsible for certain future liabilities relating
to alleged exposure to asbestos containing products.
COMPARISON OF FISCAL YEARS 2006 AND 2005
SALES. Consolidated net sales for 2006 were $812 million, a decrease of $18.4
million or 2%, compared to $830.4 million in 2005. The net sales decrease was
primarily due to our Temperature Control net sales decreasing by $18.1 million
or 8% due to reduced demand resulting from a cooler summer than the prior year
and competition from low cost foreign imports. Engine Management net sales also
decreased by $3.8 million or 0.7% mainly due to higher than average customer
returns. Partially offsetting the decrease, net sales in Europe increased $3.6
million.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased by 2.9 percentage points to 25.3% in 2006 from 22.4% in 2005 mainly
driven by Engine Management margin improvements of 4.5 percentage points. The
margin increase in our Engine Management Segment reflected a combination of
price increases and improved procurement and manufacturing costs. Temperature
Control and Europe margin percentages remained stable due to improved production
and procurement costs offsetting the effect of inflation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased $1.5 million to $168.1 million or 20.7%
of consolidated net sales in 2006, compared to $166.6 million or 20.1% of
consolidated net sales in 2005. The increase in SG&A expenses was driven mainly
by increases in marketing and general and administrative expenses, partially
offset by a reduction of $3.4 million in draft expenses as we terminated our
accounts receivable draft program in the fourth quarter of 2005 and a reduction
in distribution costs as a result of lower sales. The increase in marketing
expenses is due to an increase in promotion spending and temporary overlapping
costs as we transitioned from an outsourced to an internal returns processing
center. The increase in general administrative expenses was mainly due to our
ongoing efforts to fully integrate our operations into a common enterprise
resource planning system.
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring expenses, which include
restructuring and integration expenses, decreased to $1.9 million for 2006,
compared to $5.3 million in 2005. The 2006 expenses related mostly to severance
costs related to the move of our European and Puerto Rican production operations
and the divestiture of a production unit of our Temperature Control Segment.
Expenses in 2005 were primarily for a non-cash asset impairment charge of $3.3
million in our Temperature Control business related to a strategic decision to
outsource products previously manufactured, while the remainder was mostly
related to the DEM restructuring, which has since been substantially completed.
OPERATING INCOME (EXPENSE), NET. Operating income increased by $21.2 million to
$35.3 million in 2006, compared to $14.1 million in 2005. The increase was
primarily due to higher gross profit from Engine Management's 4.5 point
improvement in gross profit percentage, lower integration expenses and the
elimination of the accounts receivable draft program fees, partially offset by
higher SG&A expenses.
-29-
OTHER INCOME, NET. Other income, net decreased $3 million in 2006 compared to
2005, due to a $3.2 million loss incurred on the sale of a majority portion of
our European Temperature Control business, partially offset by higher foreign
exchange gains. A benefit in 2005 was from a discount of $1.3 million on a debt
reduction not repeated in 2006.
INTEREST EXPENSE. Interest expense increased by $2.2 million for 2006 compared
to 2005 due to higher average borrowings and higher borrowing costs. The
increase in average borrowings is due to the termination of our accounts
receivable draft program in the fourth quarter of 2005, as well as the funding
of the repurchase of our common stock held by Dana for $11.9 million at that
time.
INCOME TAX PROVISION. The income tax provision was $6.5 million for 2006
compared to $1.4 million for 2005. The increase was primarily due to higher
pre-tax earnings and a higher effective rate for 2006 which was 41.5%. We had an
increase in our on-going tax rate primarily due to the January 1, 2006
expiration of Section 936 of the Internal Revenue Code with regard to our Puerto
Rico operations which are taxed at the U.S. statutory rate starting in 2006.
This increase was offset in 2006 by the one-time impact of our Puerto Rico
deferred tax assets becoming recoverable at the higher US tax rate. Our taxes
were also higher as a result of recording a valuation allowance for the capital
loss on disposition of our European Temperature Control business which is not
expected to be recoverable in the future. Net deferred tax assets as of December
31, 2006 were $38.4 million and are net of a valuation allowance of $28 million
and deferred tax liabilities of $15.7 million. The tax expense of $1.4 million
in 2005 on losses of $0.3 million was mostly due to the recording of discrete
items, namely with regards to a reduced statutory rate applicable to opening
deferred tax assets and a larger increase to the tax valuation allowance.
EARNINGS (LOSS) FROM DISCONTINUED OPERATION. Earnings (loss) from discontinued
operation, net of tax, reflects legal expenses associated with our asbestos
related liability and adjustments thereto based on the information contained in
the actuarial study and all other available information considered by us. We
recorded $0.2 million as income and $1.8 million as a loss, both net of tax,
from discontinued operation for 2006 and 2005, respectively. The income for 2006
includes a $3.4 million pre-tax adjustment to reduce our indemnity liability in
line with our most recent actuarial valuation report, partially offset by legal
fees incurred in litigation, whereas the loss for 2005 reflects only legal
expenses. As discussed more fully in Note 20 of 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 2007, cash used by operations amounted to $7.8
million, compared to cash provided by operations of $33.7 million in 2006. The
$41.5 million decrease in operating cash flow is primarily due to an increase in
inventories in order to bridge our requirements while we proceed with our
facility integration efforts, an increase in accounts receivable reflecting an
expansion in days sales outstanding from 119 to 127, and lower net earnings.
During 2006, cash provided by operations amounted to $33.7 million, compared to
cash used by operations of $2.2 million in 2005. The year over year improvement
of $35.9 million is primarily attributable to a lower increase in accounts
receivable of $13.8 million and increased net earnings. The greater increase in
accounts receivable in 2005 was due to the end of the accounts receivable draft
program in 2005 compared to 2004 when our major accounts were under the draft
program. The lower increase in accounts receivable in 2006 reflects a stabilized
situation with no draft program in place. Partially offsetting these
improvements was a slight increase in inventory compared to a decrease of $10
million in 2005, driven by our need to provide a bridge of inventory as we
undergo a rationalization of our production facilities.
INVESTING ACTIVITIES. Cash used in investing activities was $13.4 million in
2007, compared to $6 million in 2006. The increase of $7.4 million was primarily
due to an increase in capital expenditures of $3.9 million in 2007 and the
acquisition in December 2007 of a European wire and cable business for $3.8
million, offset in part by proceeds of $4.2 million from the sale of our Fort
Worth, Texas manufacturing facility. During 2006, we received $3.1 million in
proceeds from the sale of a majority portion of our European Temperature Control
business.
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Cash used in investing activities was $6 million in 2006, compared to $7.8
million in 2005. The decrease of $1.8 million was primarily due to proceeds from
the sale of a majority portion of our European Temperature Control business in
2006.
FINANCING ACTIVITIES. Cash provided by financing activities was $9.3 million in
2007, compared to cash used in financing activities of $20.2 million in 2006.
The increase is primarily due to higher borrowings, an increase in cash
overdrafts, and proceeds received from the exercise of employee stock options,
partially offset by a $5 million purchase of treasury stock, essentially
completing our share buyback program.
Cash used in financing activities was $20.2 million in 2006, compared to cash
provided by financing activities of $9.7 million in 2005. The change is
primarily due to repayments made on our line of credit in 2006 due to an
improvement in cash provided by operating activities and a decrease in our bank
overdraft balances. The 2005 increase to our line of credit was driven by the
settlement of the note held by Dana and the repurchase of the common stock held
by Dana, which note and common stock were originally issued to Dana in
connection with our acquisition of Dana's engine management business.
In March 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 $80.3 million available for us to borrow pursuant to the formula at
December 31, 2007. At December 31, 2007, the interest rate on our restated
credit agreement was 6.4%, and at December 31, 2006, the interest rate on our
prior credit agreement was 7.8%. Outstanding borrowings under the restated
credit agreement (inclusive of the Canadian term loan described below), which
are classified as current liabilities, were $148.7 million and $133.3 million at
December 31, 2007 and December 31, 2006, 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 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. As of
December 31, 2007, we were not subject to these covenants. 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, $15 million of our 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.
-31-
In March 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 same rate as our restated credit agreement with General Electric
Capital Corporation (described above).
Our European subsidiary has revolving credit facilities which, at December 31,
2007, provide for a line of credit up to $8.8 million. The amount of short-term
bank borrowings outstanding under these facilities was $8 million on December
31, 2007 and $6.5 million on December 31, 2006. The weighted average interest
rate on these borrowings on December 31, 2007 and December 31, 2006 was 6.7% and
6.3 %, respectively.
In June 2003, we borrowed $10 million under a mortgage loan agreement. The loan
was payable in equal monthly installments. The loan had interest at a fixed rate
of 5.50% maturing in July 2018. The mortgage loan was secured by our Long Island
City property. On March 12, 2008, in connection with the closing of the sale of
our Long Island City property the mortgage loan was defeased. For further
information on the sale of the building and the defeasance of the mortgage loan,
see Notes 4, 10 and 22 of the notes to our consolidated financial statements.
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.
In August 2007, our Board of Directors authorized a $3.3 million increase in our
stock repurchase program. The program is in addition to our existing program
authorizing $1.7 million of stock repurchases. During 2007, we repurchased
541,750 shares of our common stock, essentially completing the entire $5 million
repurchase program. No shares of our common stock were repurchased in the
comparable 2006 period.
The following is a summary of our contractual commitments as of December 31,
2007:
-------------------------------------------------------------------------
(IN THOUSANDS) 2008 2009 2010 2011 2012 2013-2022 TOTAL
---------------------------------------------------------------------------------------------------------
Principal payments of
long term debt .......... $ 8,021 $ 90,149 $ 126 $ 119 $ 119 $ 21 $ 98,555
Operating leases ............ 8,464 7,772 5,507 4,511 3,921 14,861 45,036
Post retirement benefits .... 5,764 1,021 1,059 1,076 1,110 11,253 21,283
Severance payments related
to restructuring and
integration ................ 2,219 739 311 311 280 1,975 5,835
-------- -------- -------- -------- -------- -------- --------
Total commitments.. $ 24,468 $ 99,681 $ 7,003 $ 6,017 $ 5,430 $ 28,110 $170,709
======== ======== ======== ======== ======== ======== ========
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CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 of the notes to our consolidated financial
statements. You should be aware that preparation of our consolidated annual and
quarterly financial statements requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our consolidated financial
statements, and the reported amounts of revenue and expenses during the
reporting periods. We can give no assurance that actual results will not differ
from those estimates.
REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement
parts for motor vehicles from both our Engine Management and Temperature Control
Segments. We recognize revenues when products are shipped and title has been
transferred to a customer, the sales price is fixed and determinable, and
collection is reasonably assured. 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 actually 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.
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost
is 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 December 31, 2007, the
allowance for sales returns was $23.1 million. Similarly, management must make
estimates of the uncollectability of our accounts receivables. Management
specifically analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. At December 31, 2007, the allowance for
doubtful accounts and for discounts was $9 million.
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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 December
31, 2007, we had a valuation allowance of $26.8 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.
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.
In accordance with the provisions of SFAS Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No.109" ("FIN
48"), we recognize in our financial statements only those tax positions that
meet the more-likely-than-not-recognition threshold. We establish tax reserves
for uncertain tax positions that do not meet this threshold. Interest and
penalties associated with income tax matters are included in the provision for
income taxes in our consolidated statement 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. With respect to goodwill, we test for impairment at least annually
in the fourth quarter of each year as part of our annual budgeting process.
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. 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.
-34-
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 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 SFAS Staff Position No.106-2 ("FSP
106-2"), "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," we have concluded
that our post-retirement plan is actuarially equivalent to the Medicare Part D
benefit and accordingly we recognize subsidies from the federal government in
the measurement of the accumulated post-retirement benefit obligation pursuant
to the requirements of SFAS 106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions." In September 2005, in accordance with SFAS No.
106, "Employers' Accounting For Post-Retirement Benefits Other Than Pensions",
we recognized a curtailment gain of $3.8 million for our post-retirement plan
related to changes made to our plan, namely reducing the number of participants
eligible for our plan by making all active participants hired after 1995 no
longer eligible.
ENVIRONMENTAL RESERVES. We are subject to various U.S. federal and state and
local environmental laws and regulations and are involved in certain
environmental remediation efforts. We estimate and accrue our liabilities
resulting from such matters based upon a variety of factors including the
assessments of environmental engineers and consultants who provide estimates of
potential liabilities and remediation costs. Such estimates may or may not
include potential recoveries from insurers or other third parties and are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
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 as of August 31, 2007
estimated an undiscounted liability for settlement payments, excluding legal
costs, ranging from $23.8 million to $55.2 million for the period through 2050.
As a result, in 2007 an incremental $2.8 million provision in our discontinued
operation was added to the asbestos accrual increasing the reserve to
approximately $23.8 million as of that date. 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 addition, according to the updated study,
legal costs, which are expensed as incurred and reported in earnings (loss) from
discontinued operation, are estimated to range from $18.7 million to $32.6
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.
OTHER LOSS RESERVES. We have 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.
-35-
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued SFAS 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
FIN 48. 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, was effective for us beginning January
1, 2007.
On January 1, 2007, we 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.
We continue the practice of recognizing interest and penalties associated with
income tax matters as components of the "provision for income taxes." Our
accrual for interest and penalties was $0.4 million upon adoption of FIN 48 and
at December 31, 2007.
We are subject to taxation in the US and various state, local and foreign
jurisdictions. We remain 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, we are 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. We do not presently anticipate that our unrecognized tax benefits will
significantly increase or decrease prior to December 31, 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"). 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 us is the year ending December
31, 2008. In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's
effective date for all non-financial assets and liabilities, except those items
recognized or disclosed at fair value on an annual or more frequently recurring
basis, until years beginning after November 15, 2008. Derivatives measured at
fair value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing
the impact, if any, which the adoption of SFAS 157 will have on our consolidated
financial position, results of operations and cash flows.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS158"). SFAS 158 requires an
employer to recognize the funded status of their defined benefit pension or
postretirement plans on the consolidated balance sheet and to recognize changes
in that funded status in the year in which the changes occur through accumulated
other comprehensive income in stockholders' equity. This statement also requires
an employer to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited exceptions. We adopted
the recognition and related disclosure provisions of SFAS No. 158,
prospectively, on December 31, 2006. The adoption of SFAS 158 resulted in an
increase to total assets of $1.2 million, an increase to total liabilities of
$2.6 million, and a decrease to stockholders' equity of $1.4 million. The
requirement to measure plan assets and benefit obligations as of the date of the
employer's fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008, which for us is the year ending
December 31, 2009. As all of our measurement dates are as of December 31, our
fiscal year-end reporting date, there will be no impact on us as related to the
measurement date provisions of SFAS 158.
-36-
The incremental effect of applying SFAS No. 158 on individual line items in the
consolidated balance sheet at December 31, 2006 was as follows (in thousands):
BEFORE AFTER
APPLICATION OF APPLICATION OF
SFAS NO. 158 ADJUSTMENTS SFAS NO. 158
------------ ----------- ------------
Prepaid expenses and other current
assets (current) ........................... $ 7,861 $ (16) $ 7,845
Other assets (pension, deferred
income taxes - non-current) ................ 40,658 1,216 41,874
-------- --------
Total assets ................................. 638,892 1,200 640,092
--------
Sundry payables and accrued expenses
(pension, current) ......................... 26,313 (1,100) 25,213
Pension and post-retirement medical
benefits (non-current) ..................... 48,347 3,714 52,061
--------
Total liabilities ............................ 446,779 2,614 449,393
Accumulated other comprehensive income (loss) 4,955 (1,414) 3,541
--------
Total liabilities and stockholders' equity ... $638,892 $ 1,200 $640,092
========
FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"), including an amendment
of FASB Statement No. 115. SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value. The Statement's
objective is to improve financial reporting by allowing entities to mitigate
volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge
accounting provisions. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
new Statement establishes presentation and disclosure requirements to help
financial statement users understand the effect of the entity's election on its
earnings, but does not eliminate disclosure requirements of other accounting
standards. SFAS 159 is effective as of the beginning of the first fiscal year
that begins after November 15, 2007, and is effective for us as of January 1,
2008. We do not anticipate any financial statement impact upon adoption of SFAS
159.
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"). SFAS 141R establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for the fiscal year beginning after December 15, 2008, which for us is
the fiscal year beginning January 1, 2009. We are assessing the impact, if any,
which the adoption of SFAS 141R will have on our consolidated financial
position, results of operations and cash flows.
-37-
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51" ("SFAS 160"). SFAS
160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, which for us is the fiscal year beginning January 1, 2009. We are
assessing the impact, if any, which the adoption of SFAS 160 will have on our
consolidated financial position, results of operations and cash flows.
-38-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange
and interest rates. These exposures are actively monitored by management. Our
exposure to foreign exchange rate risk is due to certain costs, revenues and
borrowings being denominated in currencies other than one of our subsidiary's
functional currency. Similarly, we are exposed to market risk as the result of
changes in interest rates which may affect the cost of our financing. It is our
policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
EXCHANGE RATE RISK
We have exchange rate exposure primarily with respect to the Canadian dollar,
the British pound, the Euro, and the Hong Kong dollar. As of December 31, 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 the exchange
rates affecting the foreign currencies in which monetary assets and liabilities
are denominated and does not take into account the offsetting effect of such a
change on our foreign-currency denominated revenues.
INTEREST RATE RISK
We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in our debt portfolio. To manage a portion of
our exposure to interest rate changes, we have in the past entered into interest
rate swap agreements.
In October 2003, we entered into an interest rate swap agreement with a notional
amount of $25 million that matured in October 2006. If, at any time, the swap
was determined to be ineffective, in whole or in part, due to changes in the
interest rate swap agreement, the fair value of the portion of the interest rate
swap determined to be ineffective would have been recognized as gain or loss in
the statement of operations for the applicable period. The hedge was effective
throughout the time of the swap.
At December 31, 2007, we had approximately $255.3 million in loans and financing
outstanding, of which approximately $97.9 million bear interest at fixed
interest rates and approximately $157.4 million bear interest at variable rates
of interest. We invest our excess cash in highly liquid short-term investments.
Our percentage of variable rate debt to total debt was 61.7% and 58.7% at
December 31, 2007 and 2006, respectively. Depending upon the level of borrowings
under our revolving credit facility and our excess cash, the effect of a
hypothetical, instantaneous and unfavorable change of 100 basis points in the
interest rate may have approximately $1.7 million negative impact on our
earnings or cash flows.
-39-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
Management's Report on Internal Control over Financial Reporting..............41
Report of Independent Registered Public Accounting Firm--Internal
Control Over Financial Reporting.........................................42
Report of Independent Registered Public Accounting Firm--
Consolidated Financial Statements........................................43
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005.........................................44
Consolidated Balance Sheets as of December 31, 2007 and 2006..................45
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005 ........................................46
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2007, 2006 and 2005.....................47
Notes to Consolidated Financial Statements....................................48
-40-
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Stockholders
Standard Motor Products, Inc.:
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of
the Exchange Act). Our internal control system was designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Because of these inherent limitations, internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and presentation, and may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
We assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2007. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on our
assessment using those criteria, we concluded that, as of December 31, 2007, our
internal control over financial reporting is effective.
Our independent registered public accounting firm, Grant Thornton LLP, has
audited our consolidated financial statements for 2007 and has issued an
attestation report concurring with management's assessment of our internal
control over financial reporting. Grant Thornton's report appears on the
following pages of this "Item 8. Financial Statements and Supplementary Data."
-41-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
INTERNAL CONTROL OVER REPORTING
Board of Directors and Stockholders
Standard Motor Products, Inc.
We have audited Standard Motor Products, Inc. and Subsidiaries' (a New York
corporation) internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Standard Motor Products, Inc. and Subsidiaries' management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on Standard
Motor Products, Inc. and Subsidiaries' internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Standard Motor Products, Inc. and Subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control--Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Standard Motor Products, Inc. and Subsidiaries as of December 31, 2007 and 2006,
and the related consolidated statements of operations, changes in comprehensive
income and stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2007, and our report dated March 13, 2008
expressed an unqualified opinion on those consolidated financial statements and
includes explanatory paragraphs relating to the application of FASB
Interpretation No. 48 effective January 1, 2007, and the application of
Statement of Financial Accounting Standards No. 123 (R) as of January 1, 2006
and No. 158 as of December 31, 2006.
/s/ GRANT THORNTON LLP
New York, New York
March 13, 2008
-42-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Stockholders
Standard Motor Products, Inc.
We have audited the accompanying consolidated balance sheets of Standard Motor
Products, Inc. and Subsidiaries (a New York corporation) as of December 31, 2007
and 2006, and the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2007. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Standard Motor
Products, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for share-based compensation effective January
1, 2006 in connection with the adoption of Statement of Financial Statement
Standards No. 123 (revised 2004), "Share-Based Payment."
As discussed in Notes 14 and 15 to the consolidated financial statements, the
Company changed its method of accounting for defined benefit pension and other
postretirement plans, effective as of December 31, 2006, in connection with the
adoption of Statement of Financial Statement Standards No. 158, "Employers'
Accounting for Defined Pension and Other Post Retirement Plans."
As discussed in Note 17 to the consolidated financial statements, the Company
adopted the provisions of FASB Interpretation No. 48 "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement 109" effective January 1,
2007.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Standard Motor
Products, Inc. and Subsidiaries' internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 13, 2008 expressed an unqualified
opinion thereon.
/s/ GRANT THORNTON LLP
New York, New York
March 13, 2008
-43-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
2007 2006 2005
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
Net sales ........................................ $ 790,185 $ 812,024 $ 830,413
Cost of sales .................................... 587,910 606,803 644,433
------------ ------------ ------------
Gross profit .................................. 202,275 205,221 185,980
Selling, general and administrative expenses ..... 168,950 168,050 166,556
Restructuring and integration expenses ........... 10,933 1,856 5,342
------------ ------------ ------------
Operating income .............................. 22,392 35,315 14,082
Other income (expense), net ...................... 3,881 (383) 2,648
Interest expense ................................. 18,044 19,275 17,077
------------ ------------ ------------
Earnings (loss) from continuing operations
before taxes ............................... 8,229 15,657 (347)
Provision for income taxes ....................... 2,798 6,494 1,423
------------ ------------ ------------
Earnings (loss) from continuing operations ....... 5,431 9,163 (1,770)
Earnings (loss) from discontinued operation,
net of income tax of $2,101, $809 and $1,118 (3,156) 248 (1,775)
------------ ------------ ------------
Net earnings (loss) ........................... $ 2,275 $ 9,411 $ (3,545)
============ ============ ============
Net earnings (loss) per common share - Basic:
Earnings (loss) from continuing operations .. $ 0.29 $ 0.50 $ (0.09)
Discontinued operation ...................... (0.17) 0.01 (0.09)
------------ ------------ ------------
Net earnings (loss) per common share - Basic ..... $ 0.12 $ 0.51 $ (0.18)
============ ============ ============
Net earnings (loss) per common share - Diluted:
Earnings (loss) from continuing operations .. $ 0.29 $ 0.50 $ (0.09)
Discontinued operation ...................... (0.17) 0.01 (0.09)
------------ ------------ ------------
Net earnings (loss) per common share - Diluted ... $ 0.12 $ 0.51 $ (0.18)
============ ============ ============
Average number of common shares .................. 18,530,548 18,283,707 19,507,818
============ ============ ============
Average number of common shares and
dilutive common shares ......................... 18,586,532 18,325,175 19,507,818
============ ============ ============
See accompanying notes to consolidated financial statements.
-44-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2007 2006
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 13,261 $ 22,348
Accounts receivable, less allowances for
discounts and doubtful accounts
of $8,964 and $9,465 in 2007 and 2006,
respectively .......................................... 204,445 183,664
Inventories ............................................. 252,277 233,970
Deferred income taxes ................................... 17,003 14,011
Assets held for sale .................................... 5,373 --
Prepaid expenses and other current assets ............... 10,748 7,845
--------- ---------
Total current assets ........................... 503,107 461,838
Property, plant and equipment, net ........................... 71,775 80,091
Goodwill, net ................................................ 41,566 38,488
Other intangibles, net ....................................... 16,325 17,801
Other assets ................................................. 45,319 41,874
--------- ---------
Total assets ................................... $ 678,092 $ 640,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ........................................... $ 156,756 $ 139,799
Current portion of long-term debt ....................... 8,021 542
Accounts payable ........................................ 64,384 53,783
Sundry payables and accrued expenses .................... 29,242 25,213
Accrued customer returns ................................ 23,149 21,705
Accrued rebates ......................................... 21,494 20,769
Payroll and commissions ................................. 16,987 16,714
--------- ---------
Total current liabilities .................. 320,033 278,525
Long-term debt ............................................... 90,534 97,979
Post-retirement medical benefits and other
accrued liabilities ...................................... 56,510 52,061
Accrued asbestos liabilities ................................. 22,651 20,828
--------- ---------
Total liabilities .......................... 489,728 449,393
--------- ---------
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 .......................... 59,220 57,429
Retained earnings ....................................... 106,147 112,481
Accumulated other comprehensive income .................. 5,546 3,541
Treasury stock - at cost (2,189,079 and 2,109,816
shares in 2007 and 2006, respectively) .............. (23,521) (23,724)
--------- ---------
Total stockholders' equity ................. 188,364 190,699
--------- ---------
Total liabilities and stockholders' equity . $ 678,092 $ 640,092
========= =========
See accompanying notes to consolidated financial statements.
-45-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) .................................................. $ 2,275 $ 9,411 $ (3,545)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization ................................... 15,181 15,486 17,356
Increase to allowance for doubtful accounts ..................... 709 405 655
Increase to inventory reserves .................................. 6,623 6,128 5,286
(Gain) loss on disposal of property, plant and equipment ........ (794) 71 2,940
Loss on impairment of assets .................................... 317 -- --
Loss on divestiture of European Temperature Control division .... -- 3,209 --
Gain on retirement of debt ...................................... -- -- (1,258)
Equity income from joint ventures ............................... (116) (915) (955)
Employee stock ownership plan allocation ........................ 1,867 1,190 1,341
Stock-based compensation ........................................ 485 848 --
Decrease (increase) in deferred income taxes .................... (3,200) 328 (4,760)
Increase (decrease) in tax valuation allowance .................. (1,167) 1,875 3,074
Loss (earnings) on discontinued operations, net of tax .......... 3,156 (248) 1,775
Change in assets and liabilities:
(Increase) in accounts receivable ............................... (19,866) (11,758) (25,597)
(Increase) in inventories ....................................... (24,150) (701) 10,058
(Increase) in prepaid expenses and other current assets ......... (2,887) (43) (491)
(Increase) decrease in other assets ............................. (1,952) 313 1,237
Increase in accounts payable .................................... 9,861 7,693 2,760
Increase (decrease) in sundry payables and accrued expenses ..... 5,908 2,173 (6,697)
(Decrease) in restructuring accrual ............................. (228) (1,095) (5,516)
Increase (decrease) in other liabilities ........................ 182 (681) 99
-------- -------- --------
Net cash (used in) provided by operating activities ......... (7,796) 33,689 (2,238)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment .............. 4,321 995 2,164
Capital expenditures ................................................. (13,995) (10,080) (9,957)
Proceeds from the divestiture of European Temperature Control division -- 3,119 --
Acquisition of European wire and cable business ...................... (3,759) -- --
-------- -------- --------
Net cash used in investing activities ....................... (13,433) (5,966) (7,793)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit agreements .......... 16,544 (9,082) 39,820
Principal payments and retirement of long-term debt .................. (629) (570) (14,655)
Increase (decrease) increase in overdraft balances ................... 449 (4,716) 3,288
Repurchase of shares held by Dana Corporation ........................ -- -- (11,899)
Proceeds from exercise of employee stock options ..................... 4,185 738 169
Excess tax benefits related to the exercise of employee stock options 454 -- --
Purchase of treasury stock ........................................... (4,997) -- --
Dividends paid ....................................................... (6,683) (6,579) (7,024)
-------- -------- --------
Net cash provided by (used in) financing activities ......... 9,323 (20,209) 9,699
-------- -------- --------
Effect of exchange rate changes on cash .............................. 2,819 788 (556)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................. (9,087) 8,302 (888)
CASH AND CASH EQUIVALENTS at beginning of year ....................... 22,348 14,046 14,934
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year ............................. $ 13,261 $ 22,348 $ 14,046
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .................................................... $ 18,228 $ 19,224 $ 17,227
======== ======== ========
Income taxes ................................................ $ 4,236 $ 2,976 $ 3,456
======== ======== ========
Non-cash investing and financing activities:
Reduction of restructuring accrual applied against goodwill ..... $ -- $ 10,606 $ 1,243
======== ======== ========
See accompanying notes to consolidated financial statements.
-46-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2007, 2006 AND 2005
CAPITAL ACCUMULATED OTHER
IN EXCESS COMPREHENSIVE
COMMON OF PAR RETAINED INCOME TREASURY
STOCK VALUE EARNINGS (LOSS) STOCK TOTAL
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2004 ................ $ 40,972 $ 57,424 $ 120,218 $ 4,805 $ (16,107) $ 207,312
Comprehensive Loss:
Net loss .............................. (3,545) (3,545)
Foreign currency translation adjustment (940) (940)
Unrealized gain on interest rate swap
agreements, net of tax of $108 ...... 26 26
Minimum pension liability adjustment .. 267 267
---------
Total comprehensive loss .............. (4,192)
Cash dividends paid ......................... (7,024) (7,024)
Exercise of employee stock options .......... (71) 240 169
Employee Stock Ownership Plan ............... (387) 1,728 1,341
Repurchase of shares
held by Dana Corporation .............. (11,899) (11,899)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2005 ................ 40,972 56,966 109,649 4,158 (26,038) 185,707
Comprehensive Loss:
Net loss .............................. 9,411 9,411
Foreign currency translation adjustment 1,300 1,300
Unrealized gain on interest rate swap
agreements, net of tax of $ (198).
(298) (298)
Adoption of FASB Statement No.158, net
of income taxes of $1,906 ............. (1,414) (1,414)
Additional minimum pension
liability adjustment................... (205) (205)
---------
Total comprehensive loss .............. 8,794
Cash dividends paid ......................... (6,579) (6,579)
Exercise of employee stock options .......... (49) 787 738
Stock based compensation .................... 653 195 848
Employee Stock Ownership Plan ............... (141) 1,332 1,191
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2006 ................ 40,972 57,429 112,481 3,541 (23,724) 190,699
Comprehensive Income:
Net income ............................ 2,275 2,275
Foreign currency translation adjustment 3,196 3,196
Minimum pension liability adjustment .. (1,191) (1,191)
---------
Total comprehensive income ............ 4,280
Impact of adopting provisions of FIN 48 ..... (1,926) (1,926)
Cash dividends paid ......................... (6,683) (6,683)
Purchase of treasury stock .................. (4,997) (4,997)
Exercise of employee stock options .......... 494 3,691 4,185
Stock based compensation .................... 314 171 485
Excess tax benefits related to exercise
of employee stock options ............. 454 454
Employee Stock Ownership Plan ............... 529 1,338 1,867
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2007 ................ $ 40,972 $ 59,220 $ 106,147 $ 5,546 $ (23,521) $ 188,364
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
-47-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as "we," "us," "our" or the "Company") is
engaged in the manufacture and distribution of replacement parts for motor
vehicles in the automotive aftermarket industry. The consolidated financial
statements include our accounts and all subsidiaries in which we have more than
a 50% equity ownership. Our investments in unconsolidated affiliates are
accounted for on the equity method. All significant inter-company items have
been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have made a
number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Some of the more
significant estimates include allowances for doubtful accounts, realizability of
inventory, goodwill and other intangible assets, depreciation and amortization
of long-lived assets, product liability, pensions and other post-retirement
benefits, asbestos and litigation matters, deferred tax asset valuation
allowance and sales return allowances. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
We do not generally require collateral for our trade accounts receivable.
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. These allowances are established based on a
combination of write-off history, aging analysis, and specific account
evaluations. When a receivable balance is known to be uncollectible, it is
written off against the allowance for doubtful accounts. Cash discounts are
provided based on an overall average experience rate applied to qualifying
accounts receivable balances.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market. Inventories are reduced by an allowance
for excess and obsolete inventories, based on our review of on-hand inventories.
We provided for an inventory reserve of $36.7 million and $35.4 million as of
December 31, 2007 and 2006, respectively.
We use 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 either in outright purchases from
used parts brokers, 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 when it is actually received from the customer.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We recognize derivatives as either an asset or liability measured at its fair
value. For derivatives that have been formally designated as a cash flow hedge
(interest rate swap agreements), the effective portion of changes in the fair
value of the derivatives are recorded in "accumulated other comprehensive income
(loss)." Amounts in "accumulated other comprehensive income (loss)" are
reclassified into earnings in the "interest expense" caption when interest
expense on the underlying borrowings is recognized.
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at cost and are depreciated using the straight-line
method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE
--------------------------
Buildings and improvements..................... 25 to 33-1/2 years
Building refurbishments........................ 10 years
Machinery and equipment........................ 7 to 12 years
Tools, dies and auxiliary equipment............ 3 to 8 years
Furniture and fixtures......................... 3 to 12 years
Leasehold improvements......................... Shorter of life of asset
or lease term
Major renewals and improvements of property, plant and equipment are
capitalized, and repairs and maintenance costs are expensed as incurred.
GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations. Goodwill and certain other
intangible assets having indefinite lives are not amortized to earnings, but
instead are subject to periodic testing for impairment. Intangible assets
determined to have definite lives are amortized over their remaining useful
lives.
Goodwill of a reporting unit is tested for impairment on an annual basis or
between annual tests if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying amount. To the
extent the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, we are required to perform a second step, as this is an
indication that the reporting unit goodwill may be impaired. In this step, we
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB Statement
No. 141, "Business Combinations" ("SFAS 141"). The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, we compare the carrying value of such
assets with finite lives to the estimated undiscounted future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair
value and their carrying value.
-49-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 our inventory commonly referred to as
a stocklift. New customer acquisition costs are recorded as a reduction to
revenue when incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year-end exchange
rates, and revenues and expenses are translated at average exchange rates during
the year. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income (loss) and remains there
until the underlying foreign operation is liquidated or substantially disposed
of. Where the U.S. dollar is the functional currency, transaction gains or
losses arising from the remeasurement of financial statements are recorded in
the statement of operations under the caption "other income (expense)."
REVENUE RECOGNITION
We recognize revenues when products are shipped and title has been transferred
to a customer, the sales price is fixed and determinable, and collection is
reasonably assured. 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 actually 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.
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Selling, general and administration expenses includes shipping costs and
advertising, which is expensed as incurred. Shipping and handling charges, as
well as freight to customers, are included in distribution expenses as part of
selling, general and administration expenses.
DEFERRED FINANCING COSTS
We have incurred costs in obtaining financing. These costs of $10.7 million as
of December 31, 2007 and $9.9 million as of December 31, 2006 were capitalized
in other assets and are being amortized over the life of the related financing
arrangements through 2018. As of December 31, 2007 and 2006, total accumulated
amortization was $8 million and $7 million, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net post-retirement benefit liability and related expense under our
benefit plans are determined on an actuarial basis. Benefits are determined
primarily based upon employees' length of service.
-50-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income taxes are calculated using the asset and liability method in accordance
with the provisions of FASB Statement No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are determined based on the estimated future
tax effects of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, as measured by the current
enacted tax rates. We establish valuation allowances against deferred tax assets
when it is more likely than not that some portion or all of those deferred
assets will not be realized. The valuation allowance is intended in part to
provide for the uncertainty regarding the ultimate utilization of our U.S.
foreign tax credit carryovers, and foreign net operating loss carry forwards.
Deferred tax expense (benefit) is the result of changes in the deferred tax
asset and liability.
In accordance with the provisions of SFAS Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No.109" ("FIN
48"), we recognize in our financial statements only those tax positions that
meet the more-likely-than-not-recognition threshold. We establish tax reserves
for uncertain tax positions that do not meet this threshold. Interest and
penalties associated with income tax matters are included in the provision for
income taxes in our consolidated statement of operations.
REPORTING OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes (a) net income, (b) the cumulative effect
of translating balance sheets of foreign subsidiaries to U.S. dollars, (c) the
effect of adjusting interest rate swaps to market, and (d) the recognition of
the unfunded status of pension and post-retirement benefit plans as well as
minimum pension liabilities. The last three are not included in the income
statement and are reflected as adjustments to stockholders' equity.
NET EARNINGS PER COMMON SHARE
We present two calculations of earnings per common share. "Basic" earnings per
common share equals net income divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share equals net
income divided by the sum of weighted average common shares outstanding during
the period plus potentially dilutive common shares. Potentially dilutive common
shares that are anti-dilutive are excluded from net earnings per common share.
The following is a reconciliation of the shares used in calculating basic and
dilutive net earnings per common share.
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
Weighted average common shares ................... 18,531 18,284 19,508
Effect of potentially dilutive common shares ..... 56 41 --
------ ------- ------
Weighted average common equivalent shares
outstanding assuming dilution ................. 18,587 18,325 19,508
====== ====== ======
The average shares listed below were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for the
periods presented.
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
Stock options and restricted shares ........... 687 991 1,249
===== ===== =====
Convertible debentures ........................ 2,796 2,796 2,796
===== ===== =====
-51-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL RESERVES
We are subject to various U.S. federal and state and local environmental laws
and regulations and are involved in certain environmental remediation efforts.
We estimate and accrue our liabilities resulting from such matters based upon a
variety of factors including the assessments of environmental engineers and
consultants who provide estimates of potential liabilities and remediation
costs. Such estimates may or may not include potential recoveries from insurers
or other third parties and are not discounted to reflect the time value of money
due to the uncertainty in estimating the timing of the expenditures, which may
extend over several years.
ASBESTOS LITIGATION
In evaluating our potential asbestos-related liability, it is our accounting
policy to use an actuarial study that is prepared by a leading actuarial firm
with expertise in assessing asbestos-related liabilities. We evaluate the
estimate of the range of undiscounted liability to determine which amount to
accrue. If there is no amount within the range of settlement payments that is
more likely than any other, we record the low end of the range as the liability
associated with future settlement payments. Legal costs are expensed as
incurred.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash investments and accounts receivable.
We place our cash investments with high quality financial institutions and limit
the amount of credit exposure to any one institution. Although we are directly
affected by developments in the vehicle parts industry, management does not
believe significant credit risk exists. With respect to accounts receivable,
such receivables are primarily from warehouse distributors and major retailers
in the automotive aftermarket industry located in the United States. We perform
ongoing credit evaluations of our customers' financial conditions. Our five
largest individual customers, including members of a marketing group, accounted
for 50%, 51% and 52% of consolidated net sales in 2007, 2006 and 2005,
respectively. Two individual customers accounted for 17% and 15%, respectively,
of consolidated net sales in 2007, 18% and 14%, respectively, of consolidated
net sales in 2006, and 18% and 15%, respectively, of consolidated net sales in
2005. Substantially all of the cash and cash equivalents, including foreign cash
balances, at December 31, 2007 and 2006 were uninsured. Foreign cash balances at
December 31, 2007 and 2006 were $5.3 million and $11.7 million, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued SFAS 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
FIN 48. 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, was effective for us beginning January
1, 2007.
-52-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 1, 2007, we 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.
We continue the practice of recognizing interest and penalties associated with
income tax matters as components of the "provision for income taxes." Our
accrual for interest and penalties was $0.4 million upon adoption of FIN 48 and
at December 31, 2007.
We are subject to taxation in the US and various state, local and foreign
jurisdictions. We remain 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, we are 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. We do not presently anticipate that our unrecognized tax benefits will
significantly increase or decrease prior to September 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"). 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 us is the year ending December
31, 2008. In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's
effective date for all non-financial assets and liabilities, except those items
recognized or disclosed at fair value on an annual or more frequently recurring
basis, until years beginning after November 15, 2008. Derivatives measured at
fair value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing
the impact, if any, which the adoption of SFAS 157 will have on our consolidated
financial position, results of operations and cash flows.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS158"). SFAS 158 requires an
employer to recognize the funded status of their defined benefit pension or
postretirement plans on the consolidated balance sheet and to recognize changes
in that funded status in the year in which the changes occur through accumulated
other comprehensive income in stockholders' equity. This statement also requires
an employer to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited exceptions. We adopted
the recognition and related disclosure provisions of SFAS No. 158,
prospectively, on December 31, 2006. The adoption of SFAS 158 resulted in an
increase to total assets of $1.2 million, an increase to total liabilities of
$2.6 million, and a decrease to stockholders' equity of $1.4 million. The
requirement to measure plan assets and benefit obligations as of the date of the
employer's fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008, which for us is the year ending
December 31, 2009. As all of our measurement dates are as of December 31, our
fiscal year-end reporting date, there will be no impact on us as related to the
measurement date provisions of SFAS 158.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The incremental effect of applying SFAS No. 158 on individual line items in the
consolidated balance sheet at December 31, 2006 was as follows (in thousands):
BEFORE AFTER
APPLICATION OF APPLICATION OF
SFAS NO. 158 ADJUSTMENTS SFAS NO. 158
------------ ----------- ------------
Prepaid expenses and other current
assets (current) ......................... $ 7,861 $ (16) $ 7,845
Other assets (pension, deferred income
taxes - non-current) ..................... 40,658 1,216 41,874
--------
Total assets ................................. 638,892 1,200 640,092
--------
Sundry payables and accrued expenses
(pension, current) ....................... 26,313 (1,100) 25,213
Pension and post-retirement medical benefits
(non-current) ............................ 48,347 3,714 52,061
--------
Total liabilities ............................ 446,779 2,614 449,393
Accumulated other comprehensive
income (loss) ............................ 4,955 (1,414) 3,541
--------
Total liabilities and stockholders'
equity ................................... $638,892 $ 1,200 $640,092
=========
FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB SFAS
No. 115" ("SFAS 159"). SFAS 159 permits an entity to measure certain financial
assets and financial liabilities at fair value. The statement's objective is to
improve financial reporting by allowing entities to mitigate volatility in
reported earnings caused by the measurement of related assets and liabilities
using different attributes, without having to apply complex hedge accounting
provisions. Entities that elect the fair value option will report unrealized
gains and losses in earnings at each subsequent reporting date. The new
statement establishes presentation and disclosure requirements to help financial
statement users understand the effect of the entity's election on its earnings,
but does not eliminate disclosure requirements of other accounting standards.
SFAS 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007, and is effective for us as of January 1, 2008. We do
not anticipate any financial statement impact upon adoption of SFAS 159.
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"). SFAS 141R establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for the fiscal year beginning after December 15, 2008, which for us is
the fiscal year beginning January 1, 2009. We are assessing the impact, if any,
which the adoption of SFAS 141R will have on our consolidated financial
position, results of operations and cash flows.
-54-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, which for us is the fiscal year beginning January 1, 2009. We are
assessing the impact, if any, which the adoption of SFAS 160 will have on our
consolidated financial position, results of operations and cash flows.
2. 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 December 31, 2007, and
most of this amount we expect to pay in 2008. The restructuring accrual relates
to work force reductions, employee termination benefits and contract termination
costs. During each of 2007 and 2006, termination benefits of $0.2 million have
been charged to the restructuring accrual as related workforce reduction. As of
December 31, 2007 and 2006, the reserve balance for workforce reductions was at
$0.2 million and $0.5 million, respectively. 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
December 31, 2007 and 2006, 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 for the years ended December 31, 2007 and
2006 is as follows (in thousands):
Workforce Other Exit
Reduction Costs Total
--------- ----- -----
Restructuring liability at December 31, 2005 .. $ 809 $ 11,825 $ 12,634
Cash payments during 2006 ..................... (184) (758) (942)
Adjustments during 2006 ....................... (153) (10,453) (10,606)
-------- -------- --------
Restructuring liability as of December 31, 2006 $ 472 $ 614 $ 1,086
Cash payments during 2007 ..................... (228) -- (228)
-------- -------- --------
Restructuring liability as of December 31, 2007 $ 244 $ 614 $ 858
-------- -------- --------
INTEGRATION EXPENSES
During 2007 and 2006, we incurred integration expenses of $10.9 million and $1.9
million, respectively. Integration expenses incurred for 2007 were $5.8 million
for one-time termination benefits and $5.1 million for other exit costs. The
2007 amount relates primarily to the cost of moving and closing our Puerto Rico
production operations, the integration of operations in Mexico, the closure of
our Fort Worth, Texas production facility, the closure of our Long Island City,
New York production facility and the cost of moving our European production
operations. The 2006 amount relates primarily to the cost of moving our European
production operations and the costs incurred relating to the divestiture of a
production unit of our Temperature Control Segment.
-55-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 2006, we announced plans to close our Puerto Rico manufacturing
facility related to the Engine Management Segment. These operations will be
moved to other manufacturing sites. In connection with this closing, we will
incur one-time termination benefits to be paid to certain employees at the end
of a specified requisite service period. We estimate these termination benefits
will amount to approximately $2 million which will be recognized as expense
ratably over the requisite service period. We also expect 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 over the next year.
In July 2007, we sold our Fort Worth, Texas manufacturing facility. As a result
of the sale, we incurred one-time termination benefits paid to certain
employees. These termination benefits amounted to approximately $0.4 million and
were recognized over the requisite service period. In addition, we incurred
approximately $0.8 million in various expenses to move the production assets and
close the facility. These expenses were recognized as incurred.
In December 2007, we entered into an agreement with the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America and
its Local 365 ("UAW") regarding the shut down of our manufacturing operations at
Long Island City, New York, which operations will be transferred to other
facilities. The relocation and closure of such manufacturing operations is
expected to be completed by the second quarter of 2008. In connection with the
shutdown of the manufacturing operations at Long Island City, we expect to incur
approximately $6.1 million to $ 6.6 million in total costs associated with the
exit or disposal activity, consisting of severance, equipment removal, capital
expenditures, environmental clean-up costs and other cash costs. During 2007, we
recorded a charge of $2.3 million for costs associated with the shutdown
activities, which included severance costs of $0.5 million and environmental
clean-up costs of $1.8 million. In addition, we will incur a withdrawal
liability from a multi-employer pension plan. The pension plan withdrawal
liability is related to trust asset under-performance in a multi-employer plan
that covers our UAW employees at the Long Island City facility and is payable in
a lump sum or over a period which is not to exceed 20 years. During 2007, we
recorded a charge of $3.3 million, which is our best estimate of the withdrawal
liability based upon information received from a third party actuary.
Selected information relating to the closure of our Puerto Rico manufacturing
facility, integration of operations in Mexico, the closure of our Fort Worth,
Texas production facility, the closure of our Long Island City, New York
production facility and the cost of moving our European production operations is
as follows (in thousands):
Workforce Other Exit
Reduction Costs Total
--------- ----- -----
Exit activity liability at December 31, 2005 $ 408 $ 467 $ 875
Amounts provided for during 2006 ........... 1,359 497 1,856
Cash payments during 2006 .................. (1,020) (710) (1,730)
-------- -------- --------
Exit activity liability at December 31, 2006 747 254 1,001
Amounts provided for during 2007 ........... 5,822 5,111 10,933
Cash payments during 2007 .................. (978) (2,858) (3,836)
-------- -------- --------
Exit activity liability at December 31, 2007 $ 5,591 $ 2,507 $ 8,098
-------- -------- --------
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 we 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.
-56-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SALE OF FORT WORTH, TEXAS FACILITY
In July 2007, we sold our Fort Worth, Texas manufacturing facility for $4.2
million, with a pre-tax gain of $0.8 million. The pre-tax gain is included in
Other Income, Net in the consolidated statements of operations. The proceeds
from the sale were used to pay down debt under our revolving credit facility.
4. SALE OF LONG ISLAND CITY, NEW YORK PROPERTY
In December 2007, we entered into a Purchase and Sale Agreement to sell our
property located at 37-18 Northern Blvd., Long Island City, New York. The
purchase price for the property is $40.6 million. We intend to use the proceeds
from the sale to reduce debt. We expect the closing to occur in the first
quarter of 2008. In connection with the sale of the Long Island City property,
we intend to enter into a Lease Agreement with the purchaser whereby we would
lease space at the property. The initial term of the lease is ten years and
contains four 5-year renewal options. During approximately the first twelve
months of the lease term, we will make initial annual rent payments of
approximately $2.6 million. Thereafter, we expect to reduce our leased space to
1.5 floors, and the annual rent payments will decrease to approximately $1.1
million. See Note 22 for further information on the closing of the sale and
leaseback of the Long Island City property.
As of December 31, 2007, in accordance with the requirements of FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), we have reported the net book value of the property of $5.4 million as
assets held for sale on our consolidated balance sheet. Revenue recognition
related to the sale has not occurred as of December 31, 2007 as the Purchase and
Sale Agreement entered into in December 2007 contains several pre-closing
conditions. The earnings process will not be complete until all consideration
has exchanged hands, the permanent financing has been secured and all conditions
precedent to closing in the agreement have been performed, all of which are
expected to occur at closing. Upon the closing of the transaction, the sale will
be recorded as a sale and leaseback transaction. As our retention rights to the
property will be more than minor but less than substantially all, a portion of
the gain will be deferred upon closing of the sale. Upon closing, we currently
anticipate that the total gain from the sale of the property will be in the
range of $28 - $32 million. The portion of the gain to be recognized upon
closing will be in the range of $18 - $22 million, with the balance of the gain
deferred and recognized over the initial term of the lease of ten years.
In addition, in connection with the closing, we will defease our existing
mortgage loan on the property. As of December 31, 2007, the mortgage loan was
$7.9 million. We expect to incur fees and expenses in the defeasance of
approximately $1 million, and deferred finance costs currently capitalized of
$0.4 million will be expensed upon the defeasance. See Notes 10 and 22 for
further information on the closing of the defeasance of the mortgage.
5. SALES OF RECEIVABLES
Prior to November 18, 2005, we entered into agreements to sell undivided
interests in certain of our receivables to factoring companies, which in turn
have the right to sell an undivided interest to a financial institution or other
third parties. We entered these agreements at our discretion when we determined
that the cost of factoring was less than the cost of servicing our receivables
with existing debt. Pursuant to these agreements, we sold $240.7 million of
receivables during 2005, and none in 2006 and 2007. We retained no rights or
interest, and had no obligations, with respect to the sold receivables. We do
not service the receivables after the sale.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The sale of receivables was accounted for as a sale in accordance with FASB
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." The sold receivables were removed from the
balance sheet at the time of sale. The costs incurred in relation to the sale of
receivables were $3.4 million in 2005 and are recorded in selling, general and
administrative expense.
6. INVENTORIES
DECEMBER 31,
--------------------------
2007 2006
---- ----
(IN THOUSANDS)
Finished goods, net .......................... $182,914 $169,183
Work in process, net ......................... 5,850 4,654
Raw materials, net ........................... 63,513 60,133
-------- --------
Total inventories, net ................... $252,277 $233,970
======== ========
7. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
2007 2006
---- ----
(IN THOUSANDS)
Land, buildings and improvements ................. $ 43,313 $ 71,147
Machinery and equipment .......................... 136,107 133,022
Tools, dies and auxiliary equipment .............. 25,944 24,270
Furniture and fixtures ........................... 29,857 29,255
Leasehold improvements ........................... 8,554 7,595
Construction in progress ......................... 9,397 5,732
-------- ---------
253,172 271,021
Less accumulated depreciation .................... 181,397 190,930
-------- ---------
Total property, plant and equipment, net ......... $ 71,775 $ 80,091
======== ========
Depreciation expense was $12.9 million, $13.4 million and $15.5 million for
2007, 2006 and 2005, respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
We test for impairment of our remaining goodwill at least annually. Under FASB
Statement No. 142, "Goodwill and Other Intangible Assets," we completed our
annual impairment test of goodwill as of December 31, 2007 and 2006,
respectively, and determined that our goodwill was not impaired.
-58-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The changes in the carrying value of goodwill for our segments during the two
years ended December 31, 2007 are as follows (in thousands):
ENGINE
MANAGEMENT EUROPE TOTAL
---------- ------ -----
Balance as of December 31, 2005 ............. $ 49,094 $ -- $ 49,094
Purchase accounting adjustments ............. (10,606) -- (10,606)
-------- -------- --------
Balance as of December 31, 2006 ............. 38,488 -- 38,488
Acquisition of UK wire and cable business ... -- 3,078 3,078
-------- -------- --------
Balance as of December 31, 2007 ............. $ 38,488 $ 3,078 $ 41,566
======== ======== ========
During 2007, our European affiliate acquired the wire and cable business of a
third party in the United Kingdom for a purchase price of $3.7 million. Net
assets acquired were $0.6 million, and the excess purchase price over net assets
of $3.1 million has been reported as goodwill in our consolidated balance sheet.
We have retained a third party valuation firm to value the net assets acquired
and any revision in the purchase price allocation is expected to be completed
during 2008.
During 2006, goodwill was reduced $10.6 million. The reduction in goodwill in
2006 relates to an adjustment of purchase price related to the acquisition of
DEM resulting from a reduction in the restructuring cost estimate that had been
established in the original purchase accounting upon acquisition.
OTHER INTANGIBLE ASSETS
Other intangibles assets include computer software. Computer software, net of
amortization, was $4.1 million and $4.5 million as of December 31, 2007 and
2006, respectively. Computer software is amortized over its estimated useful
life of 3 to 10 years. Amortization expense for computer software was $1.2
million, $1 million and $0.8 million for the years ended December 31, 2007, 2006
and 2005, respectively.
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets associated with the acquisition of DEM,
as of December 31, 2007 and 2006 consist of (in thousands):
DECEMBER 31,
-----------------------
2007 2006
---- ----
Gross customer relationships ................... $10,000 $10,000
Trademarks and trade names ..................... 6,100 6,100
------- -------
16,100 16,100
Less accumulated amortization(1) ............... 3,889 2,778
------- -------
Net ........................................ $12,211 $13,322
======= =======
(1) Applies to the gross customer relationships.
Of the total purchase price, $16.1 million was allocated to intangible assets
consisting of customer relationships and trademarks and trade names; $10 million
was assigned to customer relationships and will be amortized on a straight-line
basis over the estimated useful life of 10 years; and the remaining $6.1 million
of acquired intangible assets was assigned to trademarks and trade names which
is not subject to amortization as they were determined to have indefinite useful
lives. Amortization expense for acquired intangible assets was $1.1 million per
year for each of the years ended December 31, 2007, 2006 and 2005.
-59-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization expense for the next five years is estimated to be $1.1 million per
year during 2008 through 2012.
9. OTHER ASSETS
DECEMBER 31,
------------------------
2007 2006
---- ----
(IN THOUSANDS)
Equity in joint ventures ......................... $ 2,310 $ 2,483
Deferred income taxes, net (Note 17) ............. 25,809 24,434
Deferred financing costs, net .................... 2,373 2,897
Other ............................................ 14,827 12,060
------- -------
Total other assets, net ..................... $45,319 $41,874
======= =======
Included in the above caption "Other" is a preferred stock investment of $1.5
million in a customer, which is carried at cost. Net sales to this customer
amounted to $35.4 million, $37.4 million and $47.8 million in 2007, 2006 and
2005, respectively. Also included in "Other" are $4 million of long term
accounts receivables from customers and $8.2 million of assets held in a
nonqualified defined contribution pension plan.
As of December 31, 2007, we have equity ownership investments in several joint
ventures located in Europe, Canada, and Israel. Our ownership interests in these
joint ventures are accounted for on the equity method. The two largest of our
joint ventures are Blue Streak Electronics, Ltd. ("BSE") located in Canada and
Testar Ltd. ("Testar") located in Israel. The investments and equity income in
our other joint ventures are not material. The following is a brief description
of each of the two largest of our joint ventures:
BLUE STREAK ELECTRONICS, LTD.
Since established in 1992, we have maintained a 50% ownership interest in this
joint venture. The joint venture remanufactures on-board computers for the
automobile aftermarket. The headquarters and manufacturing facility of BSE are
located in Canada. BSE has a fiscal year end of December 31.
TESTAR, LTD.
Since established in 1995, we have maintained a 50% ownership interest in this
joint venture. The headquarters and manufacturing facility of Testar are located
in Israel. The joint venture produces software products for use in on-board
computers for the automobile aftermarket. Testar has a fiscal year end of
December 31.
-60-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is summarized selected financial information from our joint
ventures (in thousands):
AS OF DECEMBER 31,
AGGREGATED FINANCIAL INFORMATION 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 11,399 $ 10,445 $ 10,720
Non-current assets ............................... 3,270 2,928 2,928
Current liabilities .............................. 8,358 6,197 6,583
Non-current liabilities .......................... 44 1,635 2,067
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 11,574 $ 14,256 $ 14,846
Costs and expenses ............................... 11,263 12,256 13,016
--------- --------- ---------
Net earnings ..................................... $ 311 $ 2,000 $ 1,830
========= ========= =========
AS OF DECEMBER 31,
BLUE STREAK ELECTRONICS, LTD. 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 6,151 $ 5,223 $ 5,687
Non-current assets ............................... 2,834 2,661 2,645
Current liabilities .............................. 4,523 3,855 4,372
Non-current liabilities .......................... -- -- --
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 7,076 $ 7,563 $ 8,541
Costs and expenses ............................... 7,371 6,875 7,573
--------- --------- ---------
Net earnings (loss) .............................. $ (295) $ 688 $ 968
========= ========= =========
AS OF DECEMBER 31,
TESTAR, LTD. 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 50 $ 213 $ 1,078
Non-current assets ............................... 3 7 11
Current liabilities .............................. 144 69 113
Non-current liabilities .......................... -- 42 22
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 170 $ 520 $ 1,389
Costs and expenses ............................... 177 454 496
--------- --------- ---------
Net earnings (loss) .............................. $ (7) $ 66 $ 893
========= ========= =========
-61-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31,
ALL OTHER 2007 2006 2005
----------------------------------------------------------------------------------------
Current assets ................................... $ 5,198 $ 5,009 $ 3,955
Non-current assets ............................... 433 260 272
Current liabilities .............................. 3,691 2,273 2,098
Non-current liabilities .......................... 44 1,593 2,045
FOR THE YEAR ENDED DECEMBER 31,
2007 2006 2005
-----------------------------------
Net sales ........................................ $ 4,328 $ 6,173 $ 4,916
Costs and expenses ............................... 3,715 4,927 4,947
--------- --------- ---------
Net earnings (loss) .............................. $ 613 $ 1,246 $ (31)
========= ========= =========
10. CREDIT FACILITIES AND LONG-TERM DEBT
Total debt consists of (in thousands):
DECEMBER 31,
-------------------------
2007 2006
--------- ---------
Current
Revolving credit facilities (1) .................. $ 156,756 $ 139,799
Current portion of mortgage loan (2) ............. 7,891 542
Other ............................................ 130 --
--------- ---------
164,777 140,341
--------- ---------
Long-term Debt
6.75% convertible subordinated debentures ........ 90,000 90,000
Mortgage loan (2) ................................ 7,891 8,416
Other ............................................ 664 105
Less current portion of long-term debt ........... (8,021) (542)
--------- ---------
90,534 97,979
--------- ---------
Total debt ................................... $ 255,311 $ 238,320
========= ==========
(1) Consists of the revolving credit facility, the Canadian term loan and the
European revolving credit facilities.
(2) The mortgage loan was secured by the Long Island City, New York property.
On March 12, 2008, in connection with the sale of the property, we defeased
the mortgage loan. See Note 4 and Note 22.
Maturities of long-term debt during the five years ending December 31, 2008
through 2012 are $8 million, $90.1 million, $0.1 million, $0.1 million and $0.1
million, respectively.
We had deferred financing cost of $2.7 million and $2.9 million as of December
31, 2007 and 2006, respectively. These costs related to our revolving credit
facility, the convertible subordinated debentures and a mortgage loan agreement,
and these costs are being amortized in the amount of $1.1 million in 2008, $0.6
million in 2009, $0.4 million in 2010 and $0.5 million for the period 2011-2018.
-62-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVOLVING CREDIT FACILITY
In March 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 $80.3 million available for us to borrow pursuant to the formula at
December 31, 2007. At December 31, 2007, the interest rate on our restated
credit agreement was 6.4%, and at December 31, 2006, the interest rate on our
prior credit agreement was 7.8%. Outstanding borrowings under the restated
credit agreement (inclusive of the Canadian term loan described below), which
are classified as current liabilities, were $148.7 million and $133.3 million at
December 31, 2007 and December 31, 2006, 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 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. As of
December 31, 2007, we were not subject to these covenants. 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, $15 million 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
In March 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 same rate as our restated credit agreement with General Electric
Capital Corporation (described above).
-63-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVOLVING CREDIT FACILITIES--EUROPE
Our European subsidiary has revolving credit facilities which, at December 31,
2007, provide for a line of credit up to $8.8 million. The amount of short-term
bank borrowings outstanding under these facilities was $8 million on December
31, 2007 and $6.5 million on December 31, 2006. The weighted average interest
rate on these borrowings on December 31, 2007 and December 31, 2006 was 6.7% and
6.3%, respectively.
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 on July 15, 2009.
The convertible debentures are convertible into 2,796,120 shares of our common
stock at the option of the holder. We may, at our option, redeem some or all of
the convertible debentures at any time on or after July 15, 2004, for a
redemption price equal to the issuance price plus accrued interest. In addition,
if a change in control, as defined in the agreement, occurs at the Company, we
will be required to make an offer to purchase the convertible debentures at a
purchase price equal to 101% of their aggregate principal amount, plus accrued
interest. The convertible debentures are subordinated in right of payment to all
of the Company's existing and future senior indebtedness.
MORTGAGE LOAN AGREEMENT
In June 2003, we borrowed $10 million under a mortgage loan agreement. The loan
was payable in monthly installments. The loan had interest at a fixed rate of
5.5% maturing in July 2018. The mortgage loan was secured by the Long Island
City, New York property. As previously mentioned, in connection with the sale of
the property, we defeased the mortgage loan. We incurred fees and expenses in
the defeasance of approximately $1 million, and deferred finance costs currently
capitalized of $0.4 million will be expensed upon the defeasance. See Note 4 and
Note 22.
11. INTEREST RATE SWAP AGREEMENTS
We do not enter into financial instruments for trading or speculative purposes.
The principal financial instruments we have used in the past for cash flow
hedging purposes are interest rate swaps. We have entered into interest rate
swap agreements to manage our exposure to interest rate changes. The swaps
effectively convert a portion of our variable rate debt under the revolving
credit facility to a fixed rate, without exchanging the notional principal
amounts.
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. The net offset was recorded in
accumulated other comprehensive income. Following the maturity of the swap
agreement, none of these amounts remain outstanding as of December 31, 2006.
If, at any time, the swaps were determined to be ineffective, in whole or in
part, due to changes in the interest rate swap or underlying debt agreements,
the fair value of the portion of the interest rate swap determined to be
ineffective would have been recognized as gain or loss in the statement of
operations in the "interest expense" caption for the applicable period. There
has not been any gain or loss reported in the statement of operations during the
years ending December 31, 2006 and 2005.
-64-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par value, and
our Board of Directors is vested with the authority to establish and designate
any series of preferred, to fix the number of shares therein and the variations
in relative rights as between each series. In December 1995, our Board of
Directors established a new series of preferred shares designated as Series A
Participating Preferred Stock. The number of shares constituting the Series A
Preferred Stock is 30,000. The Series A Preferred Stock is designed to
participate in dividends, ranks senior to our common stock as to dividends and
liquidation rights and has voting rights. Each share of the Series A Preferred
Stock shall entitle the holder to one thousand votes on all matters submitted to
a vote of the stockholders of the Company. No such shares were outstanding at
December 31, 2007 and 2006.
As of December 31, 2006, we had Board authorization to repurchase additional
shares of our common stock up to a maximum cost of $1.7 million. In August 2007,
our Board of Directors authorized a $3.3 million increase in our stock
repurchase program. In 2007, we repurchased approximately $5 million of our
common stock pursuant to these authorizations. During 2006, we did not
repurchase any shares of our common stock.
Accumulated other comprehensive income is comprised of the following (in
thousands):
DECEMBER 31,
----------------------
2007 2006
---- ----
Foreign currency translation adjustments ........... $ 11,579 $ 8,383
Minimum pension liability .......................... (6,033) (4,842)
-------- --------
Total accumulated other comprehensive income ....... $ 5,546 $ 3,541
======== ========
In January 1996, our Board of Directors adopted a Shareholder Rights Plan. Under
the Rights Plan, the Board declared a dividend of one Preferred Share Purchase
Right for each of our outstanding common shares. The dividend was payable on
March 1, 1996 to the stockholders of record as of February 15, 1996. The Rights
were attached to and automatically traded with the outstanding shares of our
common stock. The Rights were exercisable only upon the occurrence of certain
events. In February 2006, the Rights Plan expired according to its stated terms.
13. STOCK-BASED COMPENSATION PLANS
We have five stock-based compensation plans. Under the 1994 Omnibus Stock Option
Plan, as amended, which terminated in May 2004, we were authorized to issue
options to purchase 1,500,000 shares of common stock. 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. At December 31, 2007, there were
options to purchase an aggregate of 240,363 shares of common stock.
Under the 1996 Independent Directors' Stock Option Plan, which terminated in May
2006, we were authorized to issue options to purchase 50,000 shares of common
stock. The options became exercisable one year after the date of grant and
expired at the end of ten years following the date of grant. At December 31,
2007, there were options to purchase an aggregate of 24,200 shares of common
stock.
Under the 2004 Omnibus Stock Option Plan, which terminates in May 2014, we were
authorized to issue options to purchase 500,000 shares of common stock. The
options become exercisable over a three to five year period and expire at the
end of ten years following the date of grant. At December 31, 2007, there were
options to purchase an aggregate of 327,057 shares of common stock.
Under the 2004 Independent Directors' Stock Option Plan, we were authorized to
issue options to purchase 50,000 shares of common stock. The options become
exercisable one year after the date of grant and expire at the end of ten years
following the date of grant. At December 31, 2007, there were options to
purchase an aggregate of 16,000 shares of common stock.
-65-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the 2006 Omnibus Incentive Plan, which terminates in May 2016, we are
authorized to issue, among other things, shares of restricted and performance
based stock to eligible employees and directors of up to 700,000 shares of
common stock. Stock options forfeited under the previous stock option plans and
equity awards under the incentive plan are eligible to be granted again under
the 2006 Omnibus Incentive Plan with respect to stock options and equity awards
so forfeited.
At December 31, 2007, under all of our option plans there were options to
purchase an aggregate of 607,620 shares of common stock, with no shares of
common stock available for future grants. At December 31, 2007, under our 2006
Omnibus Incentive Plan, there were an aggregate of (a) 193,200 shares of
restricted and performance-based stock granted, net of forfeitures, and (b)
501,100 shares of common stock available for future grants.
Effective January 1, 2006, we adopted FASB Statement No. 123R, "Share-Based
Payment" ("SFAS 123R"), which prescribes the accounting for equity instruments
exchanged for employee and director services. Under SFAS 123R, stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the grant, and is recognized as an expense over the service period
applicable to the grantee. The service period is the period of time that the
grantee must provide services to us before the stock-based compensation is fully
vested.
Prior to January 1, 2006, we accounted for stock-based compensation to employees
and directors in accordance with the intrinsic value method under APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the intrinsic value method, no compensation expense was recognized in our
financial statements for the stock-based compensation, because the stock-based
compensation that we granted was incentive stock options and all of the stock
options granted had exercise prices equivalent to the fair market value of our
common stock on the grant date. We also followed the disclosure requirements of
SFAS 123, "Accounting for Stock-Based Compensation," as amended, "Accounting for
Stock-Based Compensation--Transition and Disclosure."
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. Stock-based compensation expense was $342,500 ($224,800, net of
tax) or $0.01 per basic and diluted share and $848,000 ($516,100, net of tax) or
$0.03 per basic and diluted share for the years ended December 31, 2007 and
2006, respectively.
-66-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had we determined compensation cost based on the fair value at the grant date
for our pre-2006 stock option grants, our pro forma net loss and pro forma net
loss per common share would have been as follows (in thousands, except per share
data):
Year Ended
December 31 2005
----------------
Net loss as reported ........................................... $ (3,545)
Less: Stock-based employee compensation expense
determined under fair value method for all awards, net
of related tax effects ......................................... 678
---------
Pro forma net loss .......................................... $ (4,223)
=========
Loss per share:
Basic - as reported ........................................ $ (0.18)
---------
Basic - pro forma .......................................... $ (0.22)
---------
Diluted - as reported ...................................... $ (0.18)
---------
Diluted - pro forma ........................................ $ (0.22)
=========
STOCK OPTION GRANTS
There were no stock options granted in the years ended December 31, 2007 and
2006 and options to purchase 280,500 shares of common stock were granted in the
year ended December 31, 2005. Accordingly, 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. Further, the current year's expense 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.
Prior to 2006, we provided pro forma net income and pro forma net income per
common share disclosures for stock option grants based on the fair value of the
options at the grant date. For purposes of presenting pro forma information, the
fair value of options granted was computed using the Black Scholes option
pricing model with the following assumptions applicable to each remaining
unvested annual grant:
Year of Grant: 2005
------------- ----
Expected option life.................... 3.9 years
Expected stock volatility............... 39.1%
Expected dividend yield................. 3.4%
Risk-free rate.......................... 4.0%
Fair value of option.................... $2.72
The expected term of the options is based on evaluations of historical and
expected future employee exercise behavior. The risk-free interest rate was
based on the US Treasury rates at the date of grant with maturity dates
approximately equal to the expected life at the grant date. Volatility was based
on historical volatility of our common stock.
-67-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the changes in outstanding stock options for the
year ended December 31, 2007:
Weighted Weighted Average
Average Remaining
Exercise Contractual
Shares Price Term (Years)
----------- ----------- ----------------
Outstanding at December 31, 2004................ 1,191,745 $ 16.20 4.3
Granted......................................... 280,500 $ 11.06 9.4
Expired......................................... (171,161) $ 21.33 0
Exercised....................................... (5,000) $ 10.79 0
Forfeited, Other................................ (46,858) $ 14.70 5.4
-------------------------------------------------- ----------- ----------- ----------------
Outstanding at December 31, 2005................ 1,249,226 $ 14.42 6.2
Expired......................................... (180,665) $ 20.43 0
Exercised....................................... (70,038) $ 10.55 0
Forfeited, Other................................ (7,625) $ 12.76 5.8
-------------------------------------------------- ----------- ----------- ----------------
Outstanding at December 31, 2006................ 990,898 $ 13.61 5.1
Expired......................................... (39,999) $ 24.84 0
Exercised....................................... (328,211) $ 12.75 0
Forfeited, Other................................ (15,068) $ 13.53 5.5
-------------------------------------------------- ----------- ----------- ----------------
Outstanding at December 31, 2007................ 607,620 $ 13.34 4.8
-------------------------------------------------- ----------- ----------- ----------------
Options exercisable at December 31, 2007........ 607,620 $ 13.34 4.8
-------------------------------------------------- ----------- ----------- ----------------
There was no aggregate intrinsic value of all outstanding stock options as of
December 31, 2007. All outstanding stock options as of December 31, 2007 are
exercisable. The total intrinsic value of options exercised was $1.3 million and
$0.3 million during the years ended December 31, 2007 and 2006, respectively.
There was no intrinsic value for options exercised in 2005.
The following is a summary of the changes in non-vested stock options for the
year ended December 31, 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 December 31, 2007 ............. --
========
Stock option-based compensation expense in 2007 was $85,200 ($55,800, net of
tax), all for unvested options. Stock option-based compensation expense in 2006
was $547,400 ($333,100, net of tax), including $264,700 for unvested options. As
of December 31, 2007, we have no remaining unrecognized compensation cost and as
of December 31, 2006, we had $88,200 of unrecognized compensation cost related
to non-vested stock options granted, which was recognized over a
weighted-average period of four months in 2007.
-68-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTRICTED STOCK AND PERFORMANCE SHARE GRANTS
Under our 2006 Omnibus Incentive Plan, we are authorized to issue shares of
restricted and performance-based stock to eligible employees and issue shares of
restricted stock to independent directors. Prior to the time a restricted share
becomes fully vested or a performance share is issued, the awardees cannot
transfer, pledge, hypothecate or encumber such shares. Prior to the time a
restricted share is fully vested, the awardees have 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 awardees
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 performance targets and, depending upon
the achievement of such performance targets, they may become vested on the third
anniversary of the date of grant.
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
year ended December 31, 2007, 111,850 restricted and performance-based shares
were granted (81,600 restricted shares and 30,250 performance-based shares), and
for the year ended December 31, 2006, 95,225 restricted and performance-based
shares were granted (67,725 restricted shares and 27,500 performance-based
shares). In determining the grant date fair value, the stock price on the date
of grant, as quoted on the New York Stock Exchange, was reduced by the present
value of dividends expected to be paid on the 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. For the years ended
December 31, 2007 and 2006, forfeitures are estimated at 2% for employees and 0%
for executives and directors, respectively, based on evaluation of historical
and expected future turnover.
As related to restricted and performance stock shares, we recorded compensation
expense related to restricted shares and performance-based shares of $257,300
($169,000, net of tax) and $164,200 ($99,900, net of tax) for the year ended
December 31, 2007 and 2006, respectively. The unamortized compensation expense
related to our restricted and performance-based shares was $821,900 and $506,200
at December 31, 2007 and 2006, respectively and is expected to be recognized
over a weighted average period of 1.8 and 0.8 years for employees and directors,
respectively, as of December 31, 2007 and over a weighted average period of 2.3
and 0.3 years for employees and directors, respectively, as of December 31,
2006.
-69-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's restricted and performance-based share activity was as follows for
the year ended December 31, 2007:
Weighted
Average Grant
Date Fair Value
Shares Per Share
------ ---------
Balance at January 1, 2006 ..................... -- --
Granted ..................................... 95,225 $ 7.21
Vested ...................................... (200) $ 7.84
Forfeited ................................... (1,250) $ 6.90
------- --------
Balance at January 1, 2007...................... 93,775 $ 7.21
Granted ..................................... 111,850 $ 7.28
Vested ...................................... (5,500) $ 7.49
Forfeited ................................... (6,925) $ 7.01
------- --------
Balance at December 31, 2007 ................... 193,200 $ 7.25
The weighted-average grant date fair value of restricted and performance-based
shares outstanding as of December 31, 2007 and 2006 was $1.4 million (or $7.25
per share) and $0.7 million (or $7.21 per share), respectively. No restricted or
performance-based shares were authorized, granted, outstanding or vested during
the year ended December 31, 2005.
14. RETIREMENT BENEFIT PLANS
We adopted the provisions of SFAS No. 158 on December 31, 2006. The adoption
related to the defined benefit unfunded Supplemental Executive Retirement Plan
and UK pension plan resulted in a decrease to total assets of $0.1 million, a
decrease to total liabilities $0.5 million, and an increase to stockholders'
equity of $0.4 million. The requirement to measure plan assets and benefit
obligations as of the date of the employer's fiscal year-end statement of
financial position is effective for fiscal years ending after December 15, 2008,
which for us is the year ending December 31, 2009. As all of our measurement
dates are as of December 31, our fiscal year-end reporting date, there will be
no impact on us as related to the measurement date provisions of SFAS 158.
We participate in several multi-employer plans which provide defined benefits to
substantially all unionized workers. The Multi-Employer Pension Plan Amendments
Act of 1980 imposes certain liabilities upon employers associated with
multi-employer plans. Contributions to the plans are determined in accordance
with the provisions of a negotiated labor contract. Except as described below,
we have not received information from the plans' administrators to determine our
share, if any, of unfunded vested benefits.
In December 2007, we entered into an agreement with the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America and
its Local 365 regarding the shut down of our manufacturing operations at Long
Island City, New York, which operations will be transferred to other facilities.
As part of the agreement, effective January 5, 2008, we agreed to withdrawn from
the multi-employer pension plan covering our UAW employees at the Long Island
City facility. As a result, we will incur a withdrawal liability. The pension
plan withdrawal liability is related to trust asset under-performance and is
payable in a lump sum or over a period which is not to exceed 20 years. During
2007, we recorded a charge of $3.3 million, which is our best estimate of the
withdrawal liability based upon information received from a third party actuary.
-70-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, we and certain of our subsidiaries maintain various defined
contribution plans, which include profit sharing and provide retirement benefits
for other eligible employees. The provisions for retirement expense in
connection with the plans are as follows (in thousands):
DEFINED
MULTI- CONTRIBUTION AND
EMPLOYER PLANS OTHER PLANS
-------------- -----------
Year ended December 31,
2007.................................. $ 438 $ 3,927
2006.................................. 445 3,804
2005.................................. 434 3,759
We also have an Employee Stock Ownership Plan and Trust (ESOP) for employees who
are not covered by a collective bargaining agreement. Employees were granted an
aggregate of 119,023 shares, 118,500 shares, and 114,500 shares during 2007,
2006 and 2005, respectively, under the terms of the ESOP. These shares were
issued directly from treasury stock.
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 its fiduciary
duties. During 2007, we committed 119,023 shares to be released leaving 62,977
shares remaining in the trust. The provision for expense in connection with the
ESOP was approximately $1.9 million in 2007, $1.2 million in 2006, and $1.3
million in 2005.
In August 1994, we established an unfunded Supplemental Executive Retirement
Plan (SERP) for key employees. Under the plan, these employees may elect to
defer a portion of their compensation and, in addition, we may at our discretion
make contributions to the plan on behalf of the employees. Such contributions
were $113,000 in 2007, $83,000 in 2006, and $69,000 in 2005.
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.
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of the SERP defined benefit plan (in
thousands):
DECEMBER 31,
--------------------
2007 2006
------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 5,642 $ 5,495
Service cost ......................................... 426 393
Interest cost ........................................ 353 284
Actuarial loss (gain) ................................ 491 (530)
------- -------
Benefit obligation at end of year .................... $ 6,912 $ 5,642
======= =======
FUNDED STATUS ........................................ (6,912) (5,642)
Unrecognized prior service cost ...................... 580 690
Additional minimum pension liability ................. (871) (1,029)
Unrecognized net actuarial loss ...................... 1,246 912
------- -------
Net amount recognized (accrued benefit cost) ......... $(5,957) $(5,069)
======= =======
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
------------------------------
2007 2006 2005
------ ------ ------
Service cost ............................... $ 426 $ 393 $ 394
Interest cost .............................. 353 284 255
Amortization of prior service cost ......... 110 111 110
Amortization of unrecognized loss .......... 158 117 118
------ ------ ------
Net periodic benefit cost .................. $1,047 $ 905 $ 877
====== ====== ======
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
-----------------------------------
2007 2006 2005
---- ---- -------
Discount rates .................... 5.75% 5.75% 5.50%
Salary increase ................... 4% 4% 4%
The following SERP benefit payments are expected to be paid (in thousands):
BENEFITS
---------
2008............................................ $ 4,761
2009............................................ --
2010............................................ --
2011............................................ --
2012............................................ --
Years 2013 - 2017............................... 4,736
The estimated net loss and prior service cost for the plan that is expected to
be amortized from accumulated other comprehensive income into pension costs
during 2008 are $0.1 million and $0.1 million, respectively.
We maintain a UK pension plan which 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.
-72-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of our UK defined benefit plan:
DECEMBER 31,
---------------------
2007 2006
---- ----
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 3,310 $ 2,886
Service cost ......................................... -- --
Interest cost ........................................ 173 168
Actuarial (gain) loss ................................ (227) --
Benefits paid ........................................ (105) (125)
Translation adjustment ............................... 49 381
------- -------
Benefit obligation at end of year .................... $ 3,200 $ 3,310
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year........ 3,288 2,678
Employer contributions ............................... 95 94
Actual return on plan assets ......................... 135 288
Benefits paid ........................................ (105) (125)
Translation adjustment ............................... 49 353
------- -------
Fair value of plan assets at end of year ............. $ 3,462 $ 3,288
------- -------
FUNDED (UNFUNDED) STATUS ............................. 262 (22)
Unrecognized prior service cost ...................... -- 22
Unrecognized net actuarial loss ...................... 1,797 1,974
------- -------
Net amount recognized ................................ $ 2,059 $ 1,974
======= =======
Amounts recognized in the consolidated balance sheet consist of (in thousands):
DECEMBER 31,
----------------------
2007 2006
---- ----
Current liabilities ............................... $ -- $ --
Non-current assets (liabilities) .................. 262 (22)
Accumulated other comprehensive loss .............. 1,797 1,996
------- -------
Net amount recognized ............................. $ 2,059 $ 1,974
======= =======
Amounts recognized in accumulated other comprehensive loss consist of (in
thousands):
DECEMBER 31,
----------------------
2007 2006
------ ------
Net actuarial (gain) loss ...................... $1,797 $1,974
Prior service cost (credit) .................... -- 22
------ ------
Net amount recognized .......................... $1,797 $1,996
====== ======
-73-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information for the UK pension plan with accumulated benefit obligation in
excess of plan assets (in thousands):
DECEMBER 31,
---------------------
2007 2006
------ ------
Projected benefit obligation ..................... $3,200 $3,310
Accumulated benefit obligation ................... $3,200 $3,310
Fair value of plan assets ........................ $3,462 $3,288
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
------------------------------
2007 2006 2005
----- ----- -----
Service cost ............................... $ -- $ -- $ --
Interest cost .............................. 173 168 157
Amortization of net actuarial loss ......... 113 -- --
Expected return on plan assets ............. (225) (196) (145)
----- ----- -----
Net periodic benefit cost .................. $ 61 $ (28) $ 12
===== ===== =====
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
-----------------------------------------
2007 2006 2005
------- ------- -------
Discount rates .............. 5.90% 5.23% 5.23%
Inflation ................... 3.30% 3.00% 3.00%
The UK pension plan's weighted-average asset allocation by asset category is as
follows:
DECEMBER 31,
-----------------
2007 2006
---- ----
Equity securities ............................ 72% 70%
Bonds ........................................ 13% 14%
Property ..................................... 15% 16%
Cash ......................................... 0% 0%
---- ----
100% 100%
==== ====
The return on plan assets for 2007 was approximately 4.3%. The return on plan
assets for 2006 was approximately 9.8%.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
PENSION
BENEFITS
-----------
2008.......................................................... $ 109
2009.......................................................... 129
2010.......................................................... 149
2011.......................................................... 169
2012.......................................................... 189
Years 2013 - 2017............................................. $1,143
-74-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for retirement expense in connection with the UK defined
contribution plan is as follows (in thousands):
DEFINED
CONTRIBUTION PLAN
-----------------
Year ended December 31,
2007................................................... $ 377
2006................................................... 289
2005................................................... 305
15. POST-RETIREMENT MEDICAL BENEFITS
We provide certain medical and dental care benefits to eligible retired
employees. Our current policy is to fund the cost of the health care plans on a
pay-as-you-go basis.
Effective September 1, 2005, we restricted the eligibility requirements of
employees who can participate in this program, whereby all active participants
hired after 1995 are no longer eligible. In addition, in accordance with FASB
Statement No. 106, "Employers' Accounting for Post-Retirement Benefits Other
Than Pensions" ("SFAS 106"), we recognized a curtailment gain of $3.8 million
for our post-retirement plan related to changes made to our plan which included
the above eligibility restriction. The curtailment accounting required us to
recognize pro-rata portion of the unrecognized prior service cost as a result of
the changes.
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 No.106-2 ("FSP 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. In January 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 106-2, we concluded that our
post-retirement benefit plan qualifies for the direct subsidies and,
consequently, our accumulated post-retirement benefit obligation has been
reduced by $6.5 million.
As a result of the reduced eligibility and Medicare subsidy explained above, we
benefited in 2006 from a reduction to our post-retirement benefit costs through
negative amortization of prior service costs.
We adopted the provisions of SFAS No. 158 on December 31, 2006. The adoption
related to post-retirement medical benefit plans resulted in an increase to
total assets of $1.3 million, an increase to total liabilities $3.1 million, and
a decrease to stockholders' equity of $1.9 million. The requirement to measure
plan assets and benefit obligations as of the date of the employer's fiscal
year-end statement of financial position is effective for fiscal years beginning
after December 15, 2008, which for us is the year ending December 31, 2009. As
all of our measurement dates are as of December 31, our fiscal year-end
reporting date, there will be no impact on us as related to the measurement date
provisions of SFAS 158.
-75-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of the plan (in thousands):
DECEMBER 31,
-----------------------
2007 2006
-------- --------
Benefit obligation at beginning of year .......... $ 38,192 $ 35,302
Service cost ..................................... 818 807
Interest cost .................................... 2,231 2,050
Amendments ....................................... -- --
Actuarial loss ................................... 763 953
Benefits paid .................................... (895) (920)
-------- --------
Benefit obligation at end of year ................ $ 41,109 $ 38,192
-------- --------
Funded status .................................... $(41,109) $(38,192)
Unrecognized transition obligation ............... -- --
Unrecognized prior service costs ................. -- --
Unrecognized net actuarial loss .................. -- --
-------- --------
Accrued benefit cost ............................. $(41,109) $(38,192)
======== ========
Components of net periodic benefit cost following (in thousands):
DECEMBER 31
-------------------------------
2007 2006 2005
------- ------- -------
Service cost ............................... $ 818 $ 807 $ 2,924
Interest cost .............................. 2,231 2,050 2,330
Amortization of transition obligation ...... 5 4 30
Amortization of prior service cost ......... (2,871) (2,868) (1,190)
Amortization of net actuarial loss ......... -- -- 6
Recognized actuarial loss .................. 1,310 1,481 1,056
------- ------- -------
Net periodic benefit cost .................. $ 1,493 $ 1,474 $ 5,156
SFAS 106 curtailment gain .................. -- -- (3,842)
------- ------- -------
Total benefit cost .................... $ 1,493 $ 1,474 $ 1,314
======= ======= =======
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
------------------------
2007 2006 2005
---- ---- ----
Discount rate .................................... 5.75% 5.75% 5.50%
Current medical cost trend rate .................. 9% - 10% 9% 9%
Current dental cost trend ........................ 5% 5% 5%
Ultimate medical cost trend rate ................. 5% 5% 5%
Year trend rate declines to ultimate ............. 2012 2011 2010
Our measurement date for this plan is December 31.
-76-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following benefit payments which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
NET
POST-RETIREMENT
BENEFITS
-------------------------
2008........................ $ 894
2009........................ 892
2010........................ 910
2011........................ 907
2012........................ 921
Years 2013 - 2017........... $ 5,374
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for 2007 (in
thousands):
1-PERCENTAGE-
1-PERCENTAGE- POINT
POINT INCREASE DECREASE
-------------- --------
Effect on total of service and
interest cost components ...................... $ 589 $ (475)
Effect on post retirement benefit
obligation .................................... $ 7,245 $(5,875)
The estimated net loss and prior service cost (credit) for the plan that is
expected to be amortized from accumulated other comprehensive income into
post-retirement medical benefits cost during 2008 are $1.2 million and ($2.9)
million, respectively.
16. OTHER INCOME (EXPENSE), NET
YEAR ENDED DECEMBER 31,
------------------------------
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
Interest and dividend income ................................. $ 687 $ 498 $ 311
Gain on early retirement of debt ............................. -- -- 1,258
Income from joint ventures ................................... 116 915 956
Loss on divestiture of European Temperature Control operations -- (3,209) --
Gain (loss) on disposal of property, plant and equipment ..... 794 (71) 160
Gain (loss) on foreign exchange .............................. 1,421 646 (768)
Other income - net ........................................... 863 838 731
------- ------- -------
Total other income (expense), net ........................ $ 3,881 $ (383) $ 2,648
======= ======= =======
-77-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
2007 2006 2005
---- ---- ----
Current:
Domestic ........................... $ 1,473 $ 968 $ 233
Foreign ........................... 3,720 2,135 2,137
------- ------- -------
Total Current ........................ 5,193 3,103 2,370
Deferred:
Domestic .......................... (2,500) 3,416 (1,074)
Foreign ........................... 105 (25) 127
------- ------- -------
Total Deferred ....................... (2,395) 3,391 (947)
------- ------- -------
Total income tax provision ........... $ 2,798 $ 6,494 $ 1,423
======= ======= =======
We have not provided for U.S. income taxes on the undistributed earnings of our
foreign subsidiaries that are deferred from U.S. income taxation and that we
intend to be permanently reinvested. The Company has provided for U.S. income
tax regarding those undistributed earnings of our foreign subsidiaries subject
to current taxation under Subpart F of the Internal Revenue Code. Cumulative
undistributed earnings of foreign subsidiaries on which no U.S. income tax has
been provided were $44.1 million at the end of 2007, $35.9 million at the end of
2006 and $36.1 million at the end of 2005.
Earnings before income taxes for foreign operations (excluding Puerto Rico)
amounted to approximately $9.3 million, $6.6 million and $6.8 million in 2007,
2006 and 2005, respectively. Prior to 2006, U.S. income taxes on the earnings of
the Puerto Rican subsidiary were largely eligible for tax credits against such
U.S. income taxes. During 2006, such earnings became fully subject to U.S.
income taxes. Such earnings are partially exempt from Puerto Rican income taxes
under a tax exemption grant expiring in 2016.
Reconciliations between taxes at the United States federal income tax rate and
taxes at our effective income tax rate on earnings from continuing operations
before income taxes are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2007 2006 2005
---- ---- ----
U.S. federal income tax rate of 35% .............................. $ 2,880 $ 5,480 $ (121)
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal income tax benefit (93) 33 (121)
State tax credits ............................................. 3 8 (535)
Non-deductible items, net ..................................... 809 246 241
Impact on deferred tax assets, Puerto Rico .................... -- (1,146) --
Income (benefit) taxes attributable to foreign income ......... 366 (2) (1,115)
Change in valuation allowance ................................. (1,167) 1,875 3,074
------- ------- -------
Provision (benefit) for income
taxes ....................................................... $ 2,798 $ 6,494 $ 1,423
======= ======= =======
-78-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the components of the net deferred tax assets and
liabilities recognized in the accompanying consolidated balance sheets (in
thousands):
DECEMBER 31,
--------------------
2007 2006
-------- --------
Deferred tax assets:
Inventories .................................................. $ 11,071 $ 9,922
Allowance for customer returns ............................... 8,675 7,285
Post-retirement benefits ..................................... 15,016 13,261
Allowance for doubtful accounts .............................. 3,808 3,495
Accrued salaries and benefits ................................ 13,392 9,672
Net operating loss, capital loss and tax credit carry forwards 14,351 21,136
Goodwill ..................................................... 543 1,512
Accrued asbestos liabilities ................................. 9,501 8,691
Other ........................................................ 8,174 7,194
-------- --------
84,531 82,168
-------- --------
Valuation allowance .......................................... (26,840) (28,006)
-------- --------
Total ........................................................ $ 57,691 $ 54,162
======== ========
Deferred tax liabilities:
Depreciation ................................................. $ 3,594 $ 4,743
Promotional costs ............................................ 560 482
Goodwill ..................................................... 672 514
Restructuring costs .......................................... 8,851 8,620
Other ........................................................ 1,202 1,358
-------- --------
Total ........................................................ 14,879 15,717
-------- --------
Net deferred tax assets ......................................... $ 42,812 $ 38,445
======== ========
The current net deferred tax assets are $17 million and $14 million for 2007 and
2006, respectively. The non-current net deferred tax assets are $25.8 million
and $24.4 million for 2007 and 2006, respectively. The tax valuation allowance
was allocated to the current deferred tax assets in the amounts of $10.7 million
and $10.3 million in 2007 and 2006, respectively. The long term tax deferred
assets had a valuation allowance of $16.2 million and $17.7 million in 2007 and
2006, respectively.
We performed an assessment regarding the realization of the net deferred tax
assets, which includes projecting future taxable income, and have decreased the
valuation allowance by $1.2 million. The decrease in the valuation allowance
specifically applied to the projected realization of the capital loss
carryforward in the U.S. resulting from the sale of the Long Island City
building expected to occur during 2008. The valuation allowance is intended to
provide, in part, for the uncertainty regarding the ultimate utilization of our
state tax credit carryovers, U.S. foreign tax credit carryovers, foreign net
operating loss carry forwards, and certain long lived deferred tax assets
stemming mainly from accrued asbestos liabilities and post-retirement benefit
obligations. At December 31, 2007, approximately $150 million of U.S. taxable
income will need to be generated to realize the entire deferred tax asset, with
the exception of certain credit carryforwards. We believe it is more likely than
not that we will only generate approximately $99 million of U.S. taxable income
within the next 5 years. Therefore, we have a reserve of $22.4 million against
the U.S. deferred tax assets at December 31, 2007. In addition, if we are unable
to generate sufficient taxable income in the future through our operations,
increases in the valuation allowance may be required.
-79-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2007, we have approximately $17.5 million of domestic and
foreign net operating loss carry forwards, of which $5.9 million will expire in
2025, with the remainder (foreign) having an indefinite carryforward period. We
also have foreign tax credit carryforwards of approximately $1.1 million that
will expire between 2010 and 2012, a capital loss carryforward of approximately
$0.6 million that will expire in 2011 and an alternative minimum tax credit
carryforward of approximately $6.5 million, which has no expiration date.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
Balance at January 1, 2007......................................... $ 400
Increase based on tax positions taken in the current year.......... 2,100
Decrease based on tax positions taken in the current year.......... (200)
-------
Balance at December 31, 2007....................................... $ 2,300
=======
The amount of unrecognized tax benefits at December 31, 2007, includes $2
million of unrecognized tax benefits which, if ultimately recognized, will
reduce our annual effective tax rate.
We are subject to taxation in the U.S. and various state, local and foreign
jurisdictions. We remain subject to examination by U.S. Federal, state, local
and foreign tax authorities for tax year 2001 as well as 2003 through 2006. With
a few exceptions, we are no longer subject to U.S. Federal, state, local or
foreign examinations by tax authorities for the tax year 2002 and for tax years
prior to 2001. We do not presently anticipate that our unrecognized tax benefits
will significantly increase or decrease prior to December 31, 2008; however,
actual developments in this area could differ from those currently expected.
We recognize interest and penalties associated with income tax matters as
components of the "provision for income taxes." Our accrual for interest and
penalties was $0.4 million upon adoption of FIN 48 and at December 31, 2007.
18. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of FASB Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"), we have three reportable
operating segments, which are the major product areas of the automotive
aftermarket in which we compete. Engine Management consists primarily of
ignition and emission parts, wire and cable, and fuel system parts. Temperature
Control consists primarily of compressors, other air conditioning parts and
heater parts. The third reportable operating segment is Europe, which consists
of both Engine Management and Temperature Control reporting units.
-80-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). The following tables
contain financial information for each reportable segment (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2007 2006 2005
--------- --------- ---------
Net sales:
Engine Management .................. $ 527,241 $ 543,221 $ 547,008
Temperature Control ................ 207,604 211,102 229,226
Europe ............................. 42,210 47,044 43,423
Other .............................. 13,130 10,657 10,756
--------- --------- ---------
Total ............................ $ 790,185 $ 812,024 $ 830,413
========= ========= =========
Depreciation and amortization:
Engine Management .................. $ 9,474 $ 9,893 $ 9,992
Temperature Control ................ 2,936 3,457 4,717
Europe ............................. 1,019 816 1,415
Other .............................. 1,752 1,320 1,232
--------- --------- ---------
Total ............................ $ 15,181 $ 15,486 $ 17,356
========= ========= =========
Operating profit (loss):
Engine Management .................. $ 28,109 $ 41,249 $ 19,338
Temperature Control ................ 10,215 11,954 11,936
Europe ............................. 968 46 (572)
Other .............................. (16,900) (17,934) (16,620)
--------- --------- ---------
Total ............................ $ 22,392 $ 35,315 $ 14,082
========= ========= =========
Investment in equity affiliates:
Engine Management .................. $ -- $ -- $ --
Temperature Control ................ -- -- --
Europe ............................. 145 201 (202)
Other .............................. 2,165 2,282 2,216
--------- --------- ---------
Total ............................ $ 2,310 $ 2,483 $ 2,014
========= ========= =========
Capital expenditures:
Engine Management .................. $ 10,622 $ 7,481 $ 7,511
Temperature Control ................ 1,542 1,339 1,813
Europe ............................. 1,792 1,215 623
Other .............................. 39 45 10
--------- --------- ---------
Total .............................. $ 13,995 $ 10,080 $ 9,957
========= ========= =========
Total assets:
Engine Management .................. $ 443,465 $ 430,158 $ 438,116
Temperature Control ................ 113,440 109,734 114,441
Europe ............................. 36,538 26,708 28,217
Other .............................. 84,649 73,492 72,270
--------- --------- ---------
Total ............................ $ 678,092 $ 640,092 $ 653,044
========= ========= =========
-81-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of segment operating profit (loss) to net earnings (loss):
YEAR ENDED DECEMBER 31,
--------------------------------
2007 2006 2005
-------- -------- --------
Operating profit .......................... $ 22,392 $ 35,315 $ 14,082
Other income (expense) .................... 3,881 (383) 2,648
Interest expense .......................... 18,044 19,275 17,077
-------- -------- --------
Earnings (loss) from continuing operations
before taxes ........................... 8,229 15,657 (347)
Income tax expense ........................ 2,798 6,494 1,423
-------- -------- --------
Earnings (loss) from continuing operations . 5,431 9,163 (1,770)
Discontinued operation, net of tax ....... (3,156) 248 (1,775)
-------- -------- --------
Net earnings (loss) ........................ $ 2,275 $ 9,411 $ (3,545)
======== ======== ========
Our five largest individual customers, including members of a marketing group,
accounted for 50%, 51% and 52% of consolidated net sales in 2007, 2006 and 2005,
respectively. These net sales were generated from our Engine Management and
Temperature Control Segments.
Other Adjustments consist of items pertaining to our corporate headquarters
function, as well as our Canadian business unit that does not meet the criteria
of a reportable operating segment under SFAS 131.
REVENUE
YEAR ENDED DECEMBER 31,
------------------------------------------
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
United States ............... $663,534 $688,030 $716,358
Canada ...................... 53,901 48,537 46,353
Europe ...................... 42,210 47,044 43,423
Other Foreign ............... 30,540 28,413 24,279
-------- -------- --------
Total .................... $790,185 $812,024 $830,413
======== ======== ========
LONG LIVED ASSETS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2007 2006 2005
---- ---- ----
(IN THOUSANDS)
United States ............... $136,029 $144,208 $161,451
Europe ...................... 8,883 4,821 4,682
Canada ...................... 3,954 4,014 3,900
Other Foreign ............... 680 778 754
-------- -------- --------
Total ..................... $149,546 $153,821 $170,787
======== ======== ========
Revenues are attributed to countries based upon the location of the customer.
Long lived assets are attributed to countries based upon the location of the
assets.
-82-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments.
TRADE ACCOUNTS RECEIVABLE
The carrying amount of trade receivables approximates fair value because of
their short outstanding terms.
TRADE ACCOUNTS PAYABLE
The carrying amount of trade payables approximates fair value because of their
short outstanding terms.
SHORT TERM BORROWINGS
The carrying value of these borrowings equals fair market value because their
interest rate reflects current market rates.
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted market prices
or current rates offered to us for debt of the same remaining maturities.
The estimated fair values of our financial instruments are as follows (in
thousands):
CARRYING AMOUNT FAIR VALUE
--------------- ----------
DECEMBER 31, 2007
Cash and cash equivalents.................. $ 13,261 $ 13,261
Trade accounts receivable.................. 204,445 204,445
Trade accounts payable..................... 64,384 64,384
Short term borrowings...................... 156,756 156,756
Long-term debt............................. 98,555 94,730
DECEMBER 31, 2006
Cash and cash equivalents.................. $ 22,348 $22,348
Trade accounts receivable.................. 183,664 183,664
Trade accounts payable..................... 53,783 53,783
Short term borrowings...................... 139,799 139,799
Long-term debt............................. 98,521 94,584
-83-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20.......COMMITMENTS AND CONTINGENCIES
Total rent expense for the three years ended December 31, 2007 was as follows
(in thousands):
TOTAL REAL ESTATE OTHER
----- ----------- -----
2007........................................ $8,948 $ 5,996 $2,952
2006........................................ 8,438 5,983 2,455
2005........................................ 9,928 6,970 2,958
At December 31, 2007, we are obligated to make minimum rental payments through
2022, under operating leases, which are as follows (in thousands):
2008................................................... $ 8,464
2009................................................... 7,772
2010................................................... 5,507
2011................................................... 4,511
2012................................................... 3,921
Thereafter............................................. 14,861
-------
Total.............................................. $45,036
=======
At December 31, 2007, we also had lease agreements in place for the Long Island
City, New York property. At such time, we expected to receive operating lease
payments from lessees during the five years ending December 31, 2008 through
2012 of $0.6 million, $0.4 million, $0.2 million, $0 and $0, respectively. In
connection with the sale of the Long Island City, New York property, the related
rental income from these lessees was assigned to the purchaser at the closing on
March 12, 2008. For information regarding the sale and leaseback of the Long
Island City, New York property, see Note 22.
We generally warrant our products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time of
the product depending on the nature of the product. As of December 31, 2007 and
2006, we have accrued $11.3 million and $11.7 million, respectively, for
estimated product warranty claims included in accrued customer returns. The
accrued product warranty costs are based primarily on historical experience of
actual warranty claims. Warranty expense for each of the years 2007, 2006 and
2005 were $47.2 million, $49.3 million and $50.3 million, respectively.
The following table provides the changes in our product warranties (in
thousands):
DECEMBER 31,
----------------------
2007 2006
-------- --------
Balance, beginning of period ....................... $ 11,704 $ 12,701
Liabilities accrued for current year sales ......... 47,191 49,259
Settlements of warranty claims ..................... (47,578) (50,256)
-------- --------
Balance, end of period ............................. $ 11,317 $ 11,704
======== ========
LETTERS OF CREDIT. At December 31, 2007, we had outstanding letters of credit
with certain vendors aggregating approximately $0.8 million. The contract amount
of the letters of credit is a reasonable estimate of their value as the value
for each is fixed over the life of the commitment.
-84-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CHANGE OF CONTROL ARRANGEMENTS. We entered into change in control arrangements
with two key officers. In the event of a change of control (as defined in the
agreement), each executive will receive severance payments and certain other
benefits as provided in their respective agreement.
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, 2007, approximately 3,430 cases
were outstanding for which we were responsible for any related liabilities. We
expect the outstanding cases to increase gradually due to recent legislation in
certain states mandating minimum medical criteria before a case can be heard.
Since inception in September 2001 through December 31, 2007, the amounts paid
for settled claims are approximately $6.1 million. In September of 2007, we
entered into an agreement with an insurance carrier to provide us with limited
insurance coverage for the defense and indemnity costs associated with certain
asbestos-related claims. We have submitted various asbestos-related claims to
the insurance carrier for coverage under this agreement.
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, 2007. The updated
study has estimated an undiscounted liability for settlement payments, excluding
legal costs, ranging from $23.8 million to $55.2 million for the period through
2050. The change from the prior year study was a $1.7 million increase for the
low end of the range and a $1.3 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.
Accordingly, an incremental $2.8 million provision in our discontinued operation
was added to the asbestos accrual increasing the reserve to approximately $23.8
million. According to the updated study, legal costs, which are expensed as
incurred and reported in earnings (loss) from discontinued operation in the
accompanying statement of operations, are estimated to range from $18.7 million
to $32.6 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. We
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.
-85-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ANTITRUST LITIGATION. In November 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 us 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
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.
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.
21. QUARTERLY FINANCIAL DATA UNIT (UNAUDITED)
2007:
QUARTER ENDED DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2007 2007 2007 2007
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ...................................................... $ 167,251 $ 206,169 $ 216,950 $ 199,815
--------- --------- --------- ---------
Gross profit ................................................... 39,069 54,642 56,689 51,875
--------- --------- --------- ---------
Earnings (loss) from continuing operations ..................... (7,943) 4,782 5,656 2,936
--------- --------- --------- ---------
Earnings (loss) from discontinued operation,
net of taxes ............................................... (380) (2,148) (279) (349)
--------- --------- --------- ---------
Net earnings (loss) ............................................ $ (8,323) $ 2,634 $ 5,377 $ 2,587
--------- --------- --------- ---------
Net earnings (loss) from continuing operations per common share:
Basic ..................................................... $ (0.43) $ 0.26 $ 0.30 $ 0.16
Diluted ................................................... $ (0.43) $ 0.26 $ 0.30 $ 0.16
--------- --------- --------- ---------
Net earnings (loss) per common share:
Basic ..................................................... $ (0.45) $ 0.14 $ 0.29 $ 0.14
Diluted ................................................... $ (0.45) $ 0.14 $ 0.28 $ 0.14
--------- --------- --------- ---------
-86-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2006:
QUARTER ENDED DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2006 2006 2006 2006
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ....................................................... $ 169,019 $ 203,755 $ 229,174 $ 210,076
--------- --------- --------- ---------
Gross profit .................................................... 45,952 49,332 56,706 53,231
--------- --------- --------- ---------
Earnings (loss) from continuing operations ...................... (1,473) 2,583 5,455 2,598
--------- --------- --------- ---------
Earnings (loss) from discontinued operation,
net of taxes ............................................... (355) 1,656 (289) (764)
--------- --------- --------- ---------
Net earnings (loss) ............................................. $ (1,828) $ 4,239 $ 5,166 $ 1,834
--------- --------- --------- ---------
Net earnings (loss) from continuing operations per common share:
Basic ...................................................... $ (0.08) $ 0.14 $ 0.30 $ 0.14
Diluted .................................................... $ (0.08) $ 0.14 $ 0.30 $ 0.14
--------- --------- --------- ---------
Net earnings (loss) per common share:
Basic ...................................................... $ (0.10) $ 0.23 $ 0.28 $ 0.10
Diluted .................................................... $ (0.10) $ 0.23 $ 0.28 $ 0.10
--------- --------- --------- ---------
22. SUBSEQUENT EVENT
On March 12, 2008, we completed the sale of our Long Island City, New York
property pursuant to the terms of the Purchase and Sale Agreement entered into
in December 2007. The purchase price for the property was $40.6 million, and we
used the proceeds to reduce debt under our revolving credit facility.
In connection with the closing, on March 12, 2008, we entered into a lease
agreement to lease space at the property. The initial term of the lease is ten
years and the lease contains four 5-year renewal options. During the first
twelve months of the lease we will make initial annual rental payments of
approximately $2.6 million. Thereafter, as we reduce our leased space to
approximately 1.5 floors, our annual rent payments will decrease to
approximately $1.1 million. The lease agreement provides that our rent payments
will increase 3% per year for the first twenty years of the lease; provided that
in years 11 and 16, the rent payment increase will be 10% and 5%, respectively.
In connection with the above transactions, we will record a gain from the sale
of the property of between $18-$22 million. The remainder of the gain will
be deferred and amortized to reduce rental expense during each of the ten years
of the initial lease term by approximately $1 million per year.
In addition, in connection with the sale, on March 12, 2008, we defeased the
mortgage loan relating to the property. The amount defeased was approximately
$7.9 million. We expect to incur one-time charges of approximately $1.4 million
related to defeasing the mortgage loan and the write-off of associated deferred
financing costs.
-87-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
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. This evaluation also included
consideration of our internal controls and procedures for the preparation of our
financial statements as required under Section 404 of the Sarbanes-Oxley Act.
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) Management's Report on Internal Control Over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act, as part of this Report we
have furnished a report regarding our internal control over financial report as
of December 31, 2007. The report is under the caption "Management's Report on
Internal Control Over Financial Reporting" in "Item 8. Financial Statements and
Supplementary Data," which report is incorporated herein by reference.
(c) Attestation Report of Independent Registered Public Accounting Firm.
Grant Thornton, our independent registered public accounting firm, has issued an
opinion as to the effectiveness of the Company's internal control over financial
reporting as of December 31, 2007. The opinion is under the caption "Report of
Independent Registered Public Accounting Firm-Internal Control Over Financial
Reporting" in "Item 8. Financial Statements and Supplementary Data" for this
attestation report, which is incorporated herein by reference.
(d) Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2007 and subsequent to that date, we have
not made changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our 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.
-88-
ITEM 9B. OTHER INFORMATION
Sale/Leaseback of Long Island City, New York Property
On March 12, 2008, we consummated the sale of our Long Island City, New York
property. We sold the property to 37-18 Northern Boulevard LLC, the successor to
EX II Northern Boulevard Acquisition LLC, pursuant to the terms of that certain
Purchase and Sale Agreement, dated as of December 21, 2007. The purchase price
for the property was $40.6 million, and we used the net proceeds to reduce debt
under our revolving credit facility.
In connection with the closing of the sale of our Long Island City, New York
property, on March 12, 2008 we entered into a Lease Agreement with 37-18
Northern Boulevard LLC, as lessor. The initial term of the lease is ten years
and contains four 5-year renewal options. During approximately the first twelve
months of the lease term, we will make initial annual rent payments of
approximately $2.6 million. Thereafter, as we reduce our leased space to
approximately 1.5 floors, our annual rent payments will decrease to
approximately $1.1 million. The lease agreement provides that our rent payments
will increase 3% per year for the first twenty years of the lease; provided that
in years 11 and 16, the rent payment increase will be 10% and 5%, respectively.
The lease also provides for a build-out allowance of approximately $2.1 million,
which we will use to make improvements to our leased space.
In connection with the above transactions, we will record a gain from the sale
of the property of between $18-$22 million during the first quarter of 2008.
The remainder of the gain will be deferred and amortized to reduce rental
expense during each of the ten years of the initial lease term by approximately
$1 million per year.
The description set forth above is qualified by the Purchase and Sale Agreement
and the Lease Agreement filed herewith as exhibits 10.22 and 10.23.
Defeasance of Mortgage on Long Island City, New York Property
In connection with the closing of the sale of our Long Island City, New York
property, on March 12, 2008 we defeased the mortgage loan relating to the Long
Island City, New York property. At closing, the outstanding amount defeased was
approximately $7.9 million. We expect to incur one-time charges of approximately
$1.4 million in the first quarter of 2008 related to defeasing the mortgage loan
and writing off associated deferred financing costs.
-89-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the
information in our Definitive Proxy Statement to be filed with the SEC in
connection with our 2008 Annual Meeting of Stockholders (the "2008 Proxy
Statement") set forth under the captions "Election of Directors," "Management
Information," "Corporate Governance" and "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information in our 2008 Proxy Statement set forth under captions "Corporate
Governance," "Executive Compensation and Related Information" and "Compensation
and Management Development Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the
information in our 2008 Proxy Statement set forth under the captions "Executive
Compensation and Related Information" and "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information in our 2008 Proxy Statement set forth under the captions "Corporate
Governance" and "Executive Compensation and Related Information."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the
information in our 2008 Proxy Statement set forth under the captions "Audit and
Non-Audit Fees."
-90-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The Index to Consolidated Financial Statements of the Registrant
under Item 8 of this Report is incorporated herein by reference
as the list of Financial Statements required as part of this
Report.
(2) The following financial schedule and related report for the
years 2007, 2006 and 2005 is submitted herewith:
Report of Independent Registered Public Accounting Firm on
Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
not applicable or the information is included in the financial
statements or notes thereto.
(3) Exhibits.
The exhibit list in the Exhibit Index is incorporated by
reference as the list of exhibits required as part of this
Report.
-91-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
(REGISTRANT)
/s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer
and Director
/s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and
Chief Financial Officer
New York, New York
March 14, 2008
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lawrence I. Sills and James J. Burke, jointly and
severally, as his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 14, 2008 /s/ Lawrence I. Sills
----------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
March 14, 2008 /s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
-92-
March 14, 2008 /s/ Robert M. Gerrity
----------------------
Robert M. Gerrity, Director
March 14, 2008 /s/ Pamela Forbes Lieberman
----------------------------
Pamela Forbes Lieberman, Director
March 14, 2008 /s/ Arthur S. Sills
--------------------
Arthur S. Sills, Director
March 14, 2008 /s/ Peter J. Sills
-------------------
Peter J. Sills, Director
March 14, 2008 /s/ Frederick D. Sturdivant
----------------------------
Frederick D. Sturdivant, Director
March 14, 2008 /s/ William H. Turner
----------------------
William H. Turner, Director
March 14, 2008 /s/ Richard S. Ward
----------------------------
Richard S. Ward, Director
March 14, 2008 /s/ Roger M. Widmann
-----------------------------
Roger M. Widmann, Director
-93-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
2.1 Asset Purchase Agreement, dated as of February 7, 2003, by and among
Dana Corporation, Automotive Controls Corp., BWD Automotive
Corporation, Pacer Industries, Inc., Ristance Corporation, Engine
Controls Distribution Services, Inc., as Sellers, and Standard Motor
Products, Inc., as Buyer (incorporated by reference to the Company's
Current Report on Form 8-K, filed on February 10, 2003).
3.1 Restated By-Laws, dated May 23, 1996, filed as an Exhibit of the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as
an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
3.3 Certificate of Amendment of the Certificate of Incorporation, dated
February 15, 1996, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
4.1 Form of Subordinated Debenture Indenture (including form of
convertible debenture) (incorporated by reference to Exhibit 4.1 to
the Company's Amendment No. 2 to its Registration Statement on Form
S-3 (Registration No. 333-79177), filed on July 20, 1999).
10.1 Employee Stock Ownership Plan and Trust, dated January 1, 1989
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989).
10.2 Supplemental Executive Retirement Plan, dated August 15, 1994
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.3 1996 Independent Outside Directors Stock Option Plan of Standard
Motors Products, Inc. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.4 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended (incorporated by reference to the Company's Registration
Statement on Form S-8 (Registration No. 33-51565), filed on May 1,
1998).
10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended and restated, (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 333-59524), filed
on April 25, 2001).
10.6 Supplemental Compensation Plan effective October 1, 2001 (incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001).
10.7 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and John Gethin (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
-94-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.8 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and James Burke (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
10.9 Amended and Restated Credit Agreement, dated as of February 7, 2003,
among Standard Motor Products, Inc., as Borrower and General Electric
Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Current Report on Form 8-K filed on
February 10, 2003).
10.10 Amendment No. 1 to Amended and Restated Credit Agreement, dated June
27, 2003, among Standard Motor Products, Inc., as Borrower and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003).
10.11 Amendment No. 2 to Amended and Restated Credit Agreement, dated March
11, 2004, among Standard Motor Products, Inc., as Borrower, and
General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Quarterly Report in Form
10-Q for the quarter ended March 31, 2004).
10.12 Amendment No. 3 to Amended and Restated Credit Agreement, dated August
11, 2004, among Standard Motor Products, Inc., as Borrower, and
General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Quarterly Report in Form
10-Q for the quarter ended September 30, 2004).
10.13 Waiver and Amendment No. 4 to Amended and Restated Credit Agreement,
dated as of March 31, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Annual Report in
Form 10-K for the year ended December 31, 2004).
10.14 Waiver and Amendment No. 5 to Amended and Restated Credit Agreement,
dated as of May 9, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Quarterly Report
in Form 10-Q for the quarter ended March 31, 2005).
10.15 Waiver and Amendment No. 6 to Amended and Restated Credit Agreement,
dated as of November 4, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Quarterly Report
in Form 10-Q for the quarter ended September 30, 2005).
10.16 Consent and Amendment No. 7 to Amended and Restated Credit Agreement,
dated as of December 29, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Current Report on
Form 8-K filed on January 3, 2006).
-95-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.17 Credit Agreement, dated as of December 29, 2005, among SMP Motor
Products, Ltd., as Borrower, (incorporated by reference to the
Company's Current Report on Form 8-K filed on January 3, 2006).
10.18 Repurchase and Prepayment Agreement, dated as of December 29, 2005,
between Standard Motor Products, Inc., and Dana Corporation
(incorporated by reference to the Company's Current Report on Form 8-K
filed on January 3, 2006).
10.19 Amendment to the Standard Motor Products, Inc. Supplemental
Compensation Plan, effective December 1, 2006 (incorporated by
reference to the Company's Annual Report on Form 10 K for the year
ended December 31, 2006).
10.20 Retention Bonus and Insurance Agreement, dated December 26, 2006,
between Standard Motor Products, Inc. and John Gethin (incorporated by
reference to the Company's Annual Report on Form 10 K for the year
ended December 31, 2006).
10.21 Retention Bonus and Insurance Agreement dated December 26, 2006,
between Standard Motor Products, Inc. and James Burke (incorporated by
reference to the Company's Annual Report on Form 10 K for the year
ended December 31, 2006).
10.22 Purchase and Sale Agreement, dated December 21, 2007, between Standard
Motors Products, Inc. and EXII Northern Boulevard Acquisition LLC.
10.23 Lease Agreement, dated March 12, 2008, between Standard Motors
Products, Inc. and 37-18 Northern Boulevard LLC.
10.24 Standard Motor Products, Inc. Special Incentive Plan (incorporated by
reference to our Current Report on Form 8-K filed January 28, 2008).
21 List of Subsidiaries of Standard Motor Products, Inc.
23 Consent of Independent Registered Public Accounting Firm.
24 Power of Attorney (see signature page to Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Stockholders and Board of Directors
Standard Motor Products, Inc.
We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial statements
of Standard Motor Products, Inc and Subsidiaries referred to in our report dated
March 13, 2008, which is included in the annual report to security holders on
Form 10-K. Our report on the consolidated financial statements includes
explanatory paragraphs relating to the application of FASB Interpretation No. 48
effective January 1, 2007, and the application of Statement of Financial
Accounting Standards No. 123 (R) as of January 1, 2006 and No. 158 as of
December 31, 2006. Our audits of the basic financial statements included the
financial statement schedule listed in the index appearing under Item 15(a)(2),
which is the responsibility of the Company's management. In our opinion, this
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ GRANT THORNTON LLP
New York, New York
March 13, 2008
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2007, 2006 and 2005
Additions
Balance at Charged to
beginning costs and Balance at
Description of year expenses Other Deductions end of year
----------- ------- -------- ------ ---------- -----------
Year ended December 31, 2007:
Allowance for doubtful accounts $ 7,311,000 $ 709,000 $ (1,030,000) (1) $ 370,000 $ 6,620,000
Allowance for discounts 2,154,000 11,463,000 -- 11,273,000 2,344,000
--------------- ---------------- --------------- -------------- ---------------
$ 9,465,000 $ 12,172,000 $ (1,030,000) (1) $ 11,643,000 $ 8,964,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 21,705,000 $ 88,889,000 $ -- $ 87,445,000 $ 23,149,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 35,438,000 $ 6,623,000 $ -- $ 5,314,000 $ 36,747,000
=============== ================ =============== =============== ===============
Year ended December 31, 2006:
Allowance for doubtful accounts $ 7,527,000 $ 405,000 $ (382,000) (2) $ 239,000 $ 7,311,000
Allowance for discounts 2,047,000 11,491,000 -- 11,384,000 2,154,000
--------------- ---------------- --------------- -------------- ---------------
$ 9,574,000 $ 11,896,000 $ (382,000) (2) $ 11,623,000 $ 9,465,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 22,346,000 $ 82,259,000 $ (95,000) (2) $ 82,805,000 $ 21,705,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 39,061,000 $ 6,128,000 $ (846,000) (2) $ 8,905,000 $ 35,438,000
=============== ================ =============== =============== ===============
Year ended December 31, 2005:
Allowance for doubtful accounts $ 7,422,000 $ 655,000 $ -- $ 550,000 $ 7,527,000
Allowance for discounts 1,932,000 11,708,000 -- 11,593,000 2,047,000
--------------- ---------------- --------------- --------------- ---------------
$ 9,354,000 $ 12,363,000 $ -- $ 12,143,000 $ 9,574,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 23,127,000 $ 83,872,000 $ -- $ 84,653,000 $ 22,346,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 39,638,000 $ 5,286,000 $ -- $ 5,863,000 $ 39,061,000
=============== ================ =============== =============== ===============
(1) Reclass to non-current for receivables with extended terms.
(2) Allowances for divested companies.
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