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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, 2006
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
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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. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filler. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the 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 30, 2006 (the last business day of
registrant's most recently completed second fiscal quarter) of $8.34 per share
held by non-affiliates of the registrant was $127,467,075. 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 28, 2007, there were 18,679,884 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 17, 2007.
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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.......36
Item 8. Financial Statements and Supplementary Data......................37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................80
Item 9A. Controls and Procedures..........................................80
Item 9B. Other Information................................................80
PART III.
Item 10. Directors, Executive Officers and Corporate Governance...........81
Item 11. Executive Compensation...........................................81
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................81
Item 13. Certain Relationships and Related Transactions, and Director
Independence ....................................................81
Item 14. Principal Accounting Fees and Services...........................81
PART IV.
Item 15. Exhibits and Financial Statement Schedules.......................82
Signatures.......................................................83
-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 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 and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific line of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts.
We sell our products primarily to warehouse distributors and large retail chains
in the United States, Canada and Latin America. We also sell our products in
Europe through our European Segment. Our customers consist of many of the
leading warehouse distributors, such as CARQUEST and NAPA Auto Parts, as well as
many of the leading auto parts retail chains, such as Advance Auto Parts,
AutoZone, CSK Auto, O'Reilly Automotive and Pep Boys. Our customers also include
national program distribution groups, specialty market distributors and original
equipment (OE) 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, low cost replacement parts in the
engine management and temperature control automotive aftermarkets. The key
elements of our strategy are as follows:
o MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT AND
TEMPERATURE CONTROL BUSINESSES. We are one of the leading independent
manufacturers serving North America and other geographic areas in our
core businesses of Engine Management and Temperature Control. We
believe that our success is attributable to our emphasis on product
quality, the breadth and depth of our product lines for both domestic
and imported automobiles, and our reputation for outstanding customer
service, as measured by rapid order turn-around times and high-order
fill rates.
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To maintain our strong competitive position in our markets, we remain
committed to the following:
o providing our customers with broad lines of high quality engine
management and temperature control products, supported by the highest
level of customer service and reliability;
o continuing to maximize our production and distribution efficiencies;
o continuing to improve our cost position; and
o further focusing our engineering development efforts.
o PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND TECHNICAL
SUPPORT. Our goal is to increase sales to existing and new customers by
leveraging our skills in rapidly filling orders, maintaining high levels of
product availability and providing technical support in a cost-effective
manner. In addition, our technically skilled sales force professionals
provide product selection and application support to our customers.
o EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales by
continuing to develop and expand the range of Engine Management and
Temperature Control products that we offer to our customers. We are
committed to investing the resources necessary to maintain and expand our
technical capability to manufacture multiple product lines that incorporate
the latest technologies.
o BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by
marketing our products more broadly to the distribution businesses of OEMs
who sell products to new car dealer service areas.
o IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management places
significant emphasis on improving our financial performance by achieving
operating efficiencies and improving asset utilization, while maintaining
product quality and high customer order fill rates. We 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 the automotive aftermarket 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 OEMs.
During periods of economic decline or weakness, more automobile owners may
choose to repair their current automobiles using replacement parts rather than
purchasing new automobiles, which benefit the automotive aftermarket industry,
including suppliers like us. The automotive aftermarket industry is also
dependent on new car sales, although to a lesser degree than OEMs and their
suppliers, because these sales create the total number of cars available for
repair. Aggressive financing programs by automakers have increased demand for
new cars and trucks, which should benefit the automotive aftermarket
manufacturers in the long term as vehicles age.
The automotive aftermarket industry differs substantially from the OEM supply
business. Unlike the OEM supply business that primarily follows trends in new
car production, the automotive aftermarket industry's performance primarily
tends to follow different trends, such as:
o growth in number of vehicles on the road;
o increase in average vehicle age;
o increase in total miles driven per year;
o new and modified environmental regulations;
o increase in pricing of new cars; and
o new car quality and related warranties.
Traditionally, the parts manufacturers of OEMs and the independent manufacturers
who supply the original equipment (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 may provide future opportunities for us to supply replacement parts
to the dealer service networks of the OEMs, both for warranty and
out-of-warranty repairs.
-5-
FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS
The table below shows our consolidated net sales by operating segment and by
major product group within each segment for the three years ended December 31,
2006. Our three reportable operating segments are Engine Management, Temperature
Control and Europe.
YEAR ENDED
DECEMBER 31,
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2006 2005 2004
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AMOUNT % OF AMOUNT % OF AMOUNT % OF
TOTAL TOTAL TOTAL
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission
Parts ................. $436,238 53.7% $455,125 54.8% $469,901 57.0%
Wires and Cables .......... 106,983 13.2% 91,883 11.1% 92,868 11.3%
TOTAL ENGINE MANAGEMENT ....... 543,221 66.9% 547,008 65.9% 562,769 68.3%
TEMPERATURE CONTROL:
Compressors ............... 96,171 11.8% 101,876 12.3% 85,403 10.4%
Other Climate Control
Parts ................... 114,931 14.2% 127,350 15.3% 124,691 15.1%
TOTAL TEMPERATURE CONTROL ..... 211,102 26.0% 229,226 27.6% 210,094 25.5%
EUROPE:
Engine Management Parts ... 30,297 3.7% 26,802 3.2% 25,539 3.1%
Temperature Control Parts . 16,747 2.1% 16,621 2.0% 15,112 1.8%
TOTAL EUROPE .................. 47,044 5.8% 43,423 5.2% 40,651 4.9%
ALL OTHER ..................... 10,657 1.3% 10,756 1.3% 10,769 1.3%
TOTAL ................... $812,024 100.0% $830,413 100.0% $824,283 100.0%
The following table shows our operating profit and identifiable assets by
operating segment for the three years ended December 31, 2006.
YEAR ENDED
DECEMBER 31,
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2006 2005 2004
------------------------ ------------------------- --------------------------
OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE
PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Engine Management ... $ 41,249 $430,158 $ 19,338 $438,116 $ 24,549 $429,631
Temperature Control . 11,954 109,734 11,936 114,441 (2,114) 125,656
Europe ............. 46 26,708 (572) 28,217 (2,034) 30,936
All Other .......... (17,934) 73,492 (16,620) 72,270 (22,138) 70,346
-------- -------- -------- -------- -------- --------
Total ............ $ 35,315 $640,092 $ 14,082 $653,044 $ (1,737) $656,569
======== ======== ======== ======== ======== ========
"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, 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 and continue to
develop ways of increasing the number of parts we manufacture, rather than
purchasing such parts from third parties. 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%, 55% and 57% of our consolidated net
sales in 2006, 2005 and 2004, 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,
switches and motors to manage engine and vehicle performance. Electronic
ignition systems enable the engine to improve fuel efficiency and reduce the
level of hazardous fumes in exhaust gases.
In 1992, we entered into a 50/50 joint venture in Canada with Blue Streak
Electronics, Inc. to rebuild automotive engine management computers and mass air
flow sensors. The volume of products produced by the joint venture is sold
primarily to us and has positioned us as a key supplier in the growing
remanufactured electronics markets. The Blue Streak joint venture has further
expanded its product range to include computers used in temperature control,
anti-lock brake systems and air bags, and development of diagnostic repair
tools.
We divide our electronic operations between product design and highly automated
manufacturing operations in Orlando, Florida and assembly operations, which are
performed in assembly plants in Orlando and Hong Kong.
Government emission laws have been implemented throughout the majority of the
United States. The Clean Air Act, as amended in 1990, imposes strict emission
control test standards on existing and new vehicles, and remains the preeminent
legislation in the area of vehicle emissions. As many states have implemented
required inspection/maintenance tests, the Environmental Protection Agency,
through its rulemaking ability, has also encouraged both manufacturers and
drivers to reduce vehicle emissions. As the Clean Air Act was "phased in"
beginning in 1994, automobiles must now comply with emission standards from the
time they were manufactured, and in most states, until the last day they are in
use. We expect that this law and other government emissions laws will 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%,
11% and 11% of our consolidated net sales in 2006, 2005 and 2004, 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
have the ability to extrude high voltage wire in Mishawaka, Indiana to be used
in our ignition wire sets. This vertical integration of this critical component
offers us the ability to achieve lower costs and our own 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%,
28% and 26% of our consolidated net sales in 2006, 2005 and 2004, 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 and have
implemented plans to consolidate manufacturing facilities. In addition, we have
started limited 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
designs. 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 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.
With respect to the temperature control portion of our business, following the
opening of the distribution center in France, in 1997 a joint venture was
entered into with Valeo SA to remanufacture air conditioner compressors for the
European market. In addition, in January 2000 we acquired Four Seasons UK Ltd.
(formerly Vehicle Air Conditioning Parts Ltd.), a distributor of components for
the repair of air conditioning systems. In July 2000, the Temperature Control
business was further expanded by purchasing Four Seasons Italy SRL (formerly
Automotive Heater Exchange SRL) in Italy. In 2001 we entered into a joint
venture with Pedro Sanz in Madrid, Spain to distribute our products in the
Iberian Peninsula. 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 businesses in France 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 6%, 5% and 5% of our
consolidated net sales in 2006, 2005 and 2004, respectively. Aftermarket margins
are under pressure, while volumes are in a general decline in the ignition and
carburetor product lines. We have responded to the adverse market conditions by
reducing manufacturing costs through consolidating certain facilities and
outsourcing products. In addition, in the fourth quarter of 2004 we entered into
an agreement to supply Lucas branded engine management products into the United
Kingdom, which arrangement helped to increase our sales in 2005 and 2006.
-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, 2006.
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
2006 2005 2004
------------------- ---------------- ------------------
(IN THOUSANDS)
United States............................... $ 688,030 $ 716,358 $ 714,955
Canada...................................... 48,537 46,353 45,115
Europe...................................... 47,044 43,423 40,651
Other International......................... 28,413 24,279 23,562
------------------- ---------------- ------------------
Total................................... $ 812,024 $ 830,413 $ 824,283
=================== ================ ==================
The table below shows our long-lived assets by geographical area for the three
years ended December 31, 2006.
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------
2006 2005 2004
------------------ --------------- ------------------
(IN THOUSANDS)
United States............................... $ 144,208 $161,451 $174,056
Europe...................................... 4,821 4,682 6,214
Canada...................................... 4,014 3,900 4,144
Other International......................... 778 754 785
------------------ --------------- ------------------
Total................................... $ 153,821 $ 170,787 $185,199
================== =============== ==================
SALES AND DISTRIBUTION
Over the last ten years, there has been a trend toward consolidation in the
distribution chain among warehouse distributors, retailers and auto parts
jobbers. In the traditional distribution channel, where we sell our products to
warehouse distributors, such distributors supply auto parts jobbers, who in turn
sell to professional technicians and to consumers who perform automotive repairs
themselves. In recent years, warehouse distributors have been consolidating with
other distributors, and an increasing number of distributors own their jobbers.
In the retail distribution channel, customers buy directly from us and sell
directly to technicians and "do it yourselfers." Retailers are also
consolidating with other retailers and expanding into the jobber market, thereby
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 OES network. However, certain
parts manufacturers have become independent and are no longer affiliated with
OEMs. As a result of this, 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, which allows us to provide customer
service we believe is unmatched by our competitors. From the outset, we
thoroughly train our sales people both in the function and application of our
product lines, as well as in proven sales techniques. Customers, therefore,
depend on these sales people as a reliable source for technical information. We
-9-
give newly hired sales people extensive instruction at our training facility in
Irving, Texas and have a policy of continuing education that allows our sales
force to stay current on troubleshooting and repair techniques, as well as the
latest automotive parts and systems technology.
We generate demand for our products by directing a significant portion of our
sales effort to our customers' customers (i.e., jobbers and professional
technicians). We also conduct instructional clinics, which teach technicians how
to diagnose and repair complex systems related to our products. To help our
sales people to be teachers and trainers, we focus our recruitment efforts on
candidates who already have strong technical backgrounds as well as sales
experience. We also create demand for our products through the Standard Plus
Club. Our Standard Plus Club, a professional service dealer network, offers
technical and business development support and has a technical service telephone
hotline which provides immediate diagnostic and installation support. This club
is available to technicians and provides training, special discount programs and
on-line diagnostic assistance.
In connection with our sales activities, we offer 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, OES customers, other manufacturers and export customers. Our
warehouse distributor customers include CARQUEST and NAPA Auto Parts, and our
retail customers include Advance Auto Parts, AutoZone, CSK Auto, O'Reilly
Automotive and Pep Boys. In 2006, our consolidated net sales to our major market
channels consisted of $411 million to our traditional customers, $262 million to
our retail customers, $59 million to our OES customers and $80 million to other
customers.
Our five largest individual customers, including members of a marketing group,
accounted for 51% of our 2006 consolidated net sales. Two individual customers
accounted for 18% and 14%, respectively, of our 2006 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; and
o inventory levels sufficient to meet the rapid delivery requirements of
customers.
In the Engine Management business, we are one of the leading independent
manufacturers in the United States. Our competitors include AC Delco, Cardone
Industries, Inc., Delphi Corporation, Denso Corporation, Federal-Mogul
Corporation, Robert Bosch Corporation, Visteon Corporation and Wells
Manufacturing Corporation, as well as OE dealers.
-10-
Our Temperature Control business is one of the leading independent producers and
distributors of a full line of temperature control products in North America and
other geographic areas. AC Delco, Delphi Corporation, Denso Corporation, Jordan
Automotive Aftermarket, Inc., Proliance International, Inc., Siemens VDO
Automotive and Visteon Corporation are some of our key competitors in this
market.
The automotive aftermarket is highly competitive, and we face substantial
competition in all markets that we serve. Our success in the marketplace
continues to depend on our ability to offer competitive prices, improved
products and expanded offerings in competition with many other suppliers to the
aftermarket. Some of our competitors may have greater financial, marketing and
other resources than we do. In addition, we face competition from automobile
manufacturers who supply virtually every replacement part sold by us, although
these manufacturers generally supply parts only for cars they produce through OE
dealerships.
SEASONALITY
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
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 in response 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
implemented a forecasting system in our Engine Management Segment that permitted
a significant reduction in safety stocks. Our Engine Management Segment also
introduced a new distribution system, which permits pack-to-order systems to be
implemented. Such systems permit us to retain slow moving items in a bulk
storage state until an order for a specific brand part is received. This system
reduces the volume of a given part in inventory and reduces the labor
requirements to package and repackage inventory. 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 addition, in order to better control overstock return levels, we
placed further restrictions on the amounts customers can return and instituted a
program so that our management can better estimate potential future product
returns.
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 certain
products 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, 2006, we employed approximately 3,000 people in the United
States, and 1,000 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong.
Of these, approximately 2,100 are production employees. We operate primarily in
non-union facilities and have binding labor agreements with the workers at our
two unionized facilities. We have approximately 160 production employees in
Edwardsville, Kansas who are covered by a contract with The International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
("UAW") that expires April 1, 2009. As of December 31, 2006, approximately 150
of our production employees in Long Island City, New York are under a UAW
contract that expires October 1, 2007. We also have a union relationship in
Mexico with an agreement negotiated each year. The current union agreement in
Mexico, which covers approximately 300 employees, expires on January 28, 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 two $10 million environmental policies, each covering a
separate number of our existing U.S. facilities. One of our facilities is
currently undergoing minor environmental remediation. The environmental
remediation costs at such facility are covered by an insurance policy of $3
million, which is subject to a $1.5 million deductible; we have purchased
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. We have no
reason to expect this experience to change, but there can be no assurances that
liability losses in the future will not exceed our coverage.
AVAILABLE INFORMATION
We are a New York corporation founded in 1919. Our principal executive offices
are located at 37-18 Northern Boulevard, Long Island City, New York 11101, and
our main telephone number at that location is (718) 392-0200. Our Internet
address is WWW.SMPCORP.COM. We provide a link to reports that we have filed with
the SEC. However, for those persons that make a request in writing or by e-mail
(financial@smpcorp.com), we will provide free of charge our Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. These reports and other
information are also available, free of charge, at WWW.SEC.GOV. Alternatively,
you may read and copy any materials that we file with the SEC at the SEC's
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information
on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330.
-13-
ITEM 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, Jordan Automotive Aftermarket,
Inc., Proliance International, Inc., Siemens VDO Automotive and Visteon
Corporation. In addition, automobile manufacturers supply virtually every
replacement part 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. We have in the past had to, and may in the
future have to, reduce prices to remain competitive. Price reductions have
impacted our sales and profit margins and are expected to do so in the future.
Also, our future profitability will depend in part upon 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 51%, 52% and 50% of our consolidated net sales for 2006, 2005 and
2004, respectively. Two individual customers accounted for 18% and 14%,
respectively, of our 2006 consolidated net sales, 18% and 15%, respectively, of
our 2005 consolidated net sales, and 17% and 14%, respectively, of our 2004
consolidated net sales. The loss of one or more of these customers or, if any of
them ceases to acquire a significant product line, 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. 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 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. We currently do not have insurance
coverage for the defense and indemnity costs associated with the claims we face.
-16-
Actuarial consultants with experience in assessing asbestos-related liabilities
conducted a study to estimate our potential claim liability as of August 31,
2006. Based upon all the information considered by the actuarial firm, the
actuarial study estimated an undiscounted liability for settlement payments,
excluding legal costs, ranging from $22.1 million to $53.9 million for the
period through 2050. The change from the prior year study was a $3.2 million
decrease for the low end of the range and a $2.6 million increase for the high
end of the range. Based on the information contained in the actuarial study and
all other available information considered by us, we concluded that no amount
within the range of settlement payments was more likely than any other and,
therefore, recorded the low end of the range as the liability associated with
future settlement payments through 2050 in our consolidated financial
statements, in accordance with generally accepted accounting principles. Legal
costs, which are expensed as incurred and reported in loss from discontinued
operation, are estimated to range from $11.6 million to $21.6 million during the
same period.
At December 31, 2006, approximately 3,270 cases were outstanding for which we
were responsible for any related liabilities. Since inception in September 2001
through February 28, 2007, the amounts paid for settled claims are approximately
$5 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, 2006, our total
outstanding indebtedness was $238.3 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 $305 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,
2006, we had $133.3 million of outstanding indebtedness and approximately $82.5
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
o limit, along with the financial and other restrictive covenants of our
indebtedness, among other things, our ability to borrow additional
funds.
-17-
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 (other than our Long Island
City facility) and other assets. We have also pledged shares of stock in our
subsidiaries to those lenders. In addition, our revolving credit facility
requires us to meet specified financial ratios and limits our ability to enter
into various transactions. 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. open
market. 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,
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.
-18-
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 minor environmental remediation. The environmental remediation costs
at such facility are covered by an insurance policy of $3 million, which is
subject to a $1.5 million deductible; we have purchased additional environmental
insurance coverage in the amount of $2 million with a $0.1 million deductible
relating to such facility. We also maintain two $10 million environmental
policies to cover our existing U.S. facilities. Based upon our experience to
date, we believe that the future cost of compliance with existing environmental
laws, and liability for known environmental claims pursuant to such
environmental laws, will not give rise to additional significant expenditures or
liabilities that would be material to us. However, 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 and a manufacturing plant in Long Island City,
New York. The table below describes our principal physical properties.
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
----------------------- -------------- ------------------------------------------------------ ------------ --------------
ENGINE MANAGEMENT
Orlando FL Manufacturing (Ignition) 50,640 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) 294,000 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 2007
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 2008
Lewisville TX Administration and Distribution 415,000 2009
Fort Worth TX Manufacturing and Distribution 204,000 Owned
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) 29,000 Owned
Nottingham England Manufacturing (Ignition) 46,780 Owned
Wellingborough England Manufacturing (Wire) 18,500 2017
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
The real property that we own in Indiana, Kansas, Nevada, 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 that we own in Long Island City, New York is encumbered by a
mortgage in favor of Wells Fargo Bank N.A., and the real property we own in
England is encumbered by a lien in favor of the Royal Bank of Scotland.
-20-
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, 2006, approximately 3,270 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 February 28, 2007, the amounts paid for settled claims are approximately
$5 million. We do not have insurance coverage for the defense and indemnity
costs associated with these claims. See note 20 of the notes to consolidated
financial statements for further discussion.
On November 30, 2004, the Company was served with a summons and complaint in the
U.S. District Court for the Southern District of New York by The Coalition For A
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. 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 excused 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, 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
FISCAL YEAR ENDED DECEMBER 31, 2005
First Quarter............................ $16.00 $11.15 $0.09
Second Quarter........................... 13.60 8.81 0.09
Third Quarter............................ 14.17 7.70 0.09
Fourth Quarter........................... 9.55 7.88 0.09
The last reported sale price of our common stock on the NYSE on February 28,
2007 was $15.38 per share. As of February 28, 2007, there were 561 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 nor any
repurchases of our common stock during the period covered by this Report.
-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 growth of a $100 investment in the Company's Common
Stock and each of the above indices on December 31, 2001 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][GRAPHIC OMITTED]
S&P 1500 Auto Parts
& Equipment
SMP S&P 500 Index
---------------------------------------
2001............................ $100 $100 $100
2002............................ 96 78 91
2003............................ 93 100 134
2004............................ 123 111 135
2005............................ 75 117 108
2006............................ 125 135 113
* 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, 2006. 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,
--------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales (1) ............................. $ 812,024 $ 830,413 $ 824,283 $ 678,783 $ 598,437
Gross profit (1) .......................... 205,221 185,980 194,993 174,772 157,544
Goodwill impairment charge (3) ............ -- -- 6,429 -- 3,334
Operating income (loss) ................... 35,315 14,082 (1,737) 15,815 25,068
Earnings (loss) from continuing
operations (2) .......................... 9,163 (1,770) (8,907) 224 6,091
Earnings (loss) from discontinued
operation, net of tax ................... 248 (1,775) (3,909) (1,742) (18,297)
Cumulative effect of accounting
change, net of tax (3)(4) ............... -- -- (1,564) -- (18,350)
Net earnings (loss) (5) ................... 9,411 (3,545) (14,380) (1,518) (30,556)
PER SHARE DATA:
Earnings (loss) from continuing operations:
Basic ................................. $ 0.50 $ (0.09) $ (0.46) $ 0.01 $ 0.51
Diluted ............................... 0.50 (0.09) (0.46) 0.01 0.51
Earnings (loss) per common share:
Basic ................................. 0.51 (0.18) (0.74) (0.10) (2.57)
Diluted ............................... 0.51 (0.18) (0.74) (0.10) (2.54)
Cash dividends per common
share .................................. 0.36 0.36 0.36 0.36 0.36
OTHER DATA:
Depreciation and amortization ............. $ 15,486 $ 17,356 $ 19,013 $ 17,092 $ 16,128
Capital expenditures ...................... 10,080 9,957 9,774 8,926 7,598
Dividends ................................. 6,579 7,024 6,955 5,615 4,290
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ................. $ 22,348 $ 14,046 $ 14,934 $ 19,647 $ 9,690
Working capital ........................... 183,313 169,768 194,760 191,333 140,683
Total assets .............................. 640,092 653,044 656,569 694,525 490,758
Total debt ................................ 238,320 248,327 224,186 217,810 176,917
Long-term debt (excluding
current portion) ........................ 97,979 98,549 114,236 114,757 93,191
Stockholders' equity ...................... 190,699 185,707 207,312 226,041 153,881
--------------------------------------------------------------------------------------------------------------
(1) We adopted the guidelines of the Emerging Issues Task Force (EITF) entitled
"Accounting for Certain Sales Incentives" and "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products," on January 1, 2003. These guidelines address when sales
incentives and discounts should be recognized and the accounting for
certain costs incurred by a vendor on behalf of a customer, as well as
where the related revenues and expenses should be classified in the
financial statements.
-24-
(2) We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," on January
1, 2003. The new guidance eliminates the automatic classification of gain
or loss on extinguishment of debt as an extraordinary item of income and
requires that such gain or loss be evaluated for extraordinary
classification under the criteria of Accounting Principles Board ("APB")
No. 30, Reporting Results of Operations.
(3) We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS No.
142") on January 1, 2002. The new guidance replaced the amortization of
goodwill with periodic assessments of the fair value of goodwill. Our
initial impairment test, performed as of January 1, 2002, indicated that
the carrying amounts of some of our reporting units exceeded the
corresponding fair values, which were determined based on the discounted
estimated future cash flows of the reporting units, the Company's weighted
average cost of capital and market multiples. As a result, we recorded an
impairment loss on goodwill as a cumulative effect of accounting change of
$18.3 million during the first quarter of 2002. The impairment loss related
to our European Segment and Temperature Control Segment for which we
recorded a charge of $10.9 million and $7.4 million, respectively. We
completed our annual impairment test of goodwill as of December 31, 2002
and after consideration to 2002 losses and budgeted 2003 losses, we
recorded an impairment loss of $3.3 million associated with the Engine
Management reporting unit of our European Segment. Our annual impairment
test of goodwill as of December 31, 2004, indicated that the carrying
amounts of two of our reporting units exceeded the corresponding fair
values. As a result, we recorded an impairment loss on goodwill of $6.4
million during the fourth quarter of 2004. The impairment loss related to
our European Segment and Temperature Control Segment for which we recorded
a charge of $1.6 million and $4.8 million, respectively.
(4) New customer acquisition costs refer to arrangements pursuant to which we
incur change-over-costs to induce a new or existing customer to switch from
a competitor's brand. In addition, change-over-costs include the costs
related to removing the new customer's inventory and replacing it with
Standard Motor Products inventory commonly referred to as a stocklift. New
customer acquisition costs were initially recorded as a prepaid asset and
the related expense was recognized ratably over a 12-month period beginning
in the month following the stocklift as an offset to sales. In the fourth
quarter of 2004, we determined that it was a preferable accounting method
to reflect the customer acquisition costs as a reduction to revenue when
incurred. We recorded a cumulative effect of a change in accounting for new
customer acquisition costs totaling $1.6 million, net of tax effects, and
recorded the accounting change as if it had taken effect on October 1,
2004.
(5) We recorded an after tax gain (loss) of $0.2 million, $(1.8) million and
$(3.9) million as a loss from discontinued operation to account for legal
expenses and potential costs associated with our asbestos-related liability
for the years ended December 31, 2006, 2005 and 2004, 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, 2006.
OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific segment of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts. We
sell our products primarily in the United States, Canada and Latin America. We
also sell our products in Europe through our European Segment.
As part of our efforts to grow our business, as well as to achieve increased
production and distribution efficiencies, in June 2003 we completed the
acquisition of substantially all of the assets and assumed substantially all of
the operating liabilities of Dana Corporation's Engine Management Group ("DEM").
Under the terms of the acquisition, we paid Dana Corporation $93.2 million in
cash, issued an unsecured promissory note of $15.1 million, and issued 1,378,760
shares of our common stock valued at $15.1 million. Including transaction costs,
our total purchase price was approximately $130.5 million. In December 2005, we
entered into a Repurchase and Prepayment Agreement with Dana, in which we
repurchased the 1,378,760 shares of our common stock at a repurchase price of
$8.63 per share (or an aggregate approximate repurchase price of $11.9 million)
and prepaid at a discount the $15.1 million unsecured promissory note plus
accrued and unpaid interest for an aggregate approximate amount of $14.5
million. We recognized the discount of $1 million as a gain on the repayment of
the note as well as the unrecognized deferred interest expense thereon of $0.2
million as income in 2005.
In connection with the DEM acquisition, we reviewed our operations and
implemented integration plans to restructure the operations of DEM. At the time,
we announced that we would close seven DEM facilities, which has subsequently
occurred. As part of the integration and restructuring plans, we accrued an
initial restructuring liability of approximately $34.7 million at June 30, 2003.
Such amounts were recognized as liabilities assumed in the acquisition and
included in the allocation of the cost to acquire DEM. Accordingly, such amounts
resulted in additional goodwill being recorded in connection with the
acquisition. Subsequent to the acquisition, our estimate of the restructuring
liability was updated and revised downward at various points in time, with a
cumulative reduction to goodwill of $12.8 million as of December 31, 2006. As of
December 31, 2006, the remaining restructuring accrual was $1.1 million. We
expect to pay most of the remaining amount in 2007 and 2008.
Of the initial restructuring accrual, approximately $15.7 million related to
work force reductions and represented employee termination benefits. The accrual
amount primarily provides for severance costs relating to the involuntary
termination of employees, individually employed throughout DEM's facilities
across a broad range of functions, including managerial, professional, clerical,
manufacturing and factory positions. During the years ended December 31, 2006
and 2005, termination benefits of $0.2 million and $2.3 million, respectively,
have been charged to the restructuring accrual. As of December 31, 2006, the
reserve balance for workforce reductions was $0.5 million.
-26-
The initial restructuring accrual also included approximately $18 million
consisting of the net present value of costs associated with exiting certain
activities, primarily related to lease and contract termination costs, which
will not have future benefits. Specifically, our plans were to consolidate
certain of DEM operations into our existing plants. At December 31, 2005, we had
a sublease commitment for one facility with Dana through 2021. However, on March
3, 2006, Dana filed a voluntary petition for relief under Chapter 11 of the US
Bankruptcy Code. Pursuant to a court ruling in connection with Dana's Chapter 11
bankruptcy proceedings, effective March 31, 2006, we were released from, and no
longer have any obligations with respect to, such lease commitment for the
facility. We have accounted for the termination of such lease commitment as a
reduction of $10.5 million in our restructuring accrual, with a corresponding
reduction to goodwill established on the acquisition of DEM. In addition to the
above reduction, exit costs of $0.8 million were paid as of December 31, 2006,
leaving the exit reserve balance for exit costs at $0.6 million as of December
31, 2006.
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 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. The Company accrues
for overstock returns as a percentage of sales, after giving consideration to
recent returns history. In addition, the seasonality of our Temperature Control
Segment requires that we increase our inventory during the winter season in
preparation of the summer selling season and customers purchasing such inventory
have the right to make returns.
In order to better control warranty and overstock return levels, we tightened
the rules for authorized warranty returns, placed further restrictions on the
amounts customers can return and instituted a program so that our management can
better estimate potential future product returns. In addition, with respect to
our air conditioning compressors, our most significant customer product warranty
returns, we established procedures whereby a warranty will be voided if a
customer does not provide acceptable proof that complete AC system repair was
performed.
DISCOUNTS, ALLOWANCES AND INCENTIVES. In connection with our sales activities,
we offer a variety of usual customer discounts, allowances and incentives.
First, we offer cash discounts for paying invoices in accordance with the
specified discounted terms of the invoice. Second, we offer pricing discounts
based on volume and different product lines purchased from us. These discounts
are principally in the form of "off-invoice" discounts and are immediately
deducted from sales at the time of sale. For those customers that choose to
receive a payment on a quarterly basis instead of "off-invoice," we accrue for
such payments as the related sales are made and reduce sales accordingly.
-27-
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 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 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. 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.
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.
-28-
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. Deferred tax assets of $54.1 million,
net of a valuation allowance of $28 million and net of deferred tax liabilities
of $15.7 million, were $38.4 million as of December 31, 2006. We have concluded
that our current level of valuation allowance of $28 million continues to be
appropriate, as discussed in note 16 of the notes to our consolidated financial
statements. 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.
INCOME (LOSS) FROM DISCONTINUED OPERATION. Income (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 2006, cash provided by operations amounted to $33.7
million, compared to cash used in 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 $6 million in 2006,
compared to $7.8 million in the same period of 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 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 the DEM acquisition.
We are parties to an agreement with General Electric Capital Corporation, as
agent, and a syndicate of lenders for a secured revolving credit facility. The
term of the credit agreement is through 2008 and provides for a line of credit
up to $305 million. Availability under our revolving credit facility is based on
a formula of eligible accounts receivable, eligible inventory and eligible fixed
assets. After taking into account outstanding borrowings under the revolving
credit facility, there was an additional $82.5 million available for us to
borrow pursuant to the formula at December 31, 2006. Our credit agreement also
permits dividends and distributions by us provided specific conditions are met.
-29-
Direct borrowings under our revolving credit facility bear interest at the prime
rate plus the applicable margin (as defined in the credit agreement) or, at our
option, the LIBOR rate plus the applicable margin (as defined in the credit
agreement). Borrowings are collateralized by substantially all of our assets,
including accounts receivable, inventory and fixed assets, and those of certain
of our subsidiaries. The terms of our revolving credit facility provide for,
among other provisions, financial covenants requiring us, on a consolidated
basis: (1) to maintain specified levels of fixed charge coverage at the end of
each fiscal quarter (rolling twelve months) through 2008; and (2) to limit
capital expenditure levels for each fiscal year through 2008. The terms of our
revolving credit facility also provide, among other things, for the prohibition
of accepting drafts under our customer draft programs after November 18, 2005.
In December 2005, our Canadian subsidiary entered into a credit agreement with
GE Canada Finance Holding Company, for itself and as agent for the lenders, and
GECC Capital Markets, Inc., as lead arranger and book runner. The credit
agreement provides for, among other things, a $7 million term loan, which term
loan is guaranteed and secured by us and certain of our wholly-owned
subsidiaries and which term loan is coterminous with the term of our revolving
credit facility. The $7 million term loan is part of the $305 million available
for borrowing under our revolving credit facility.
In addition, in order to facilitate the aggregate financing of the DEM
acquisition in June 2003, we completed a public equity offering of 5,750,000
shares of our common stock for net proceeds of approximately $55.7 million. We
also issued to Dana Corporation 1,378,760 shares of our common stock valued at
approximately $15.1 million and an unsecured subordinated promissory note in the
aggregate principal amount of approximately $15.1 million due December 31, 2008.
The promissory note had an interest rate of 9% per annum for the first year,
with such interest rate increasing by one-half of a percentage point (0.5%) on
each anniversary of the date of issuance. Accrued and unpaid interest was due
quarterly under the promissory note. In December 2005, we entered into an
agreement with Dana, in which we repurchased the 1,378,760 shares of our common
stock at a repurchase price of $8.63 per share (or an aggregate approximate
repurchase price of $11.9 million) and prepaid at a discount the $15.1 million
unsecured promissory note plus accrued and unpaid interest for an aggregate
approximate amount of $14.5 million.
In June 2003, we borrowed $10 million under a mortgage loan agreement. The loan
is payable in equal monthly installments. The loan bears interest at a fixed
rate of 5.5% maturing in July 2018. The mortgage loan is secured by the related
building and property.
Our profitability and working capital requirements are seasonal due to the sales
mix of temperature control products. Our working capital requirements usually
peak near the end of the second quarter, as the inventory build-up of air
conditioning products is converted to sales and payments on the receivables
associated with such sales begin to be received. These increased working capital
requirements are funded by borrowings from our lines of credit. In 2004 and the
first quarter of 2005, we also received the benefit from accelerating accounts
receivable collections from customer draft programs. However, in the second
quarter of 2005 we reduced the early monetizing of these accounts receivable
under the draft program. An amendment to our revolving credit facility in
November 2005 prohibits us from accepting drafts under our customer draft
programs after November 18, 2005. We anticipate that our present sources of
funds will continue to be adequate to meet our near term needs.
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.
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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. The proceeds from the
sale of the debentures were used to prepay an 8.6% senior note, reduce short
term bank borrowings and repurchase a portion of our common stock.
As of December 31, 2006, we have Board authorization to repurchase additional
shares at a maximum cost of $1.7 million. During 2006, we did not repurchase any
shares of our common stock.
The following is a summary of our contractual commitments as of December 31,
2006:
(IN THOUSANDS) 2007 2008 2009 2010 2011 2012-2016 TOTAL
---------------------------------------------------------------------------------------------------------
Principal payments of
long term debt .......... $ 542 $ 570 $ 90,586 $ 620 $ 655 $ 5,548 $ 98,521
Operating leases ............ 6,657 5,614 4,446 2,059 1,913 8,582 29,271
Post retirement
benefits ................ 1,095 1,549 1,669 1,800 1,912 12,203 20,228
Severance payments related
to integration .......... 89 383 -- -- -- -- 472
-------- -------- -------- -------- -------- -------- --------
Total commitments . $ 8,383 $ 8,116 $ 96,701 $ 4,479 $ 4,480 $ 26,333 $148,492
======== ======== ======== ======== ======== ======== ========
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see note 1 of the notes to our consolidated financial
statements. 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.
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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, 2006, the
allowance for sales returns was $21.7 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, 2006, the allowance for
doubtful accounts and for discounts was $9.5 million.
NEW CUSTOMER ACQUISITION COSTS. New customer acquisition costs refer to
arrangements pursuant to which we incur change-over costs to induce a new
customer to switch from a competitor's brand. In addition, change-over costs
include the costs related to removing the new customer's inventory and replacing
it with Standard Motor Products inventory commonly referred to as a stocklift.
New customer acquisition costs are recorded as a reduction to revenue when
incurred.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax expense together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income, and to the extent we believe that it is more likely than not that the
deferred tax assets will not be recovered, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase or
decrease this allowance in a period, we must include an expense or recovery,
respectively, within the tax provision in the statement of operations.
Significant management judgment is required in determining the adequacy of our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. At December
31, 2006, we had a valuation allowance of $28 million, due to uncertainties
related to our ability to utilize some of our deferred tax assets. The
assessment of the adequacy of our valuation allowance is based on our estimates
of taxable income by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable.
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.
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VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important, which could trigger an impairment
review, include the following: (a) significant underperformance relative to
expected historical or projected future operating results; (b) significant
changes in the manner of our use of the acquired assets or the strategy for our
overall business; and (c) significant negative industry or economic trends. With
respect to goodwill, if necessary, we test for potential impairment in the
fourth quarter of each year as part of our annual budgeting process. We review
the fair values of each of our reporting units using the discounted cash flows
method and market multiples.
In the event our planning assumptions were modified resulting in impairment to
our assets, we would be required to include an expense in our statement of
operations, which could materially impact our business, financial condition and
results of operations.
RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS. Each year, we calculate the
costs of providing retiree benefits under the provisions of SFAS 87, Employers'
Accounting for Pensions, and SFAS 106, Employers' Accounting for Post-retirement
Benefits Other than Pensions. The key assumptions used in making these
calculations are disclosed in notes 13 and 14 of the notes to our consolidated
financial statements. The most significant of these assumptions are the
eligibility criteria of participants, the discount rate used to value the future
obligation, expected return on plan assets and health care cost trend rates. We
select discount rates commensurate with current market interest rates on
high-quality, fixed-rate debt securities. The expected return on assets is based
on our current review of the long-term returns on assets held by the plans,
which is influenced by historical averages. The medical cost trend rate is based
on our actual medical claims and future projections of medical cost trends.
Under FASB Staff Position ("FSP") No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," the Company has concluded that its post-retirement
plan is actuarially equivalent to the Medicare Part D benefit and accordingly
recognizes subsidies from the federal government in the measurement of the
accumulated post-retirement benefit obligation under SFAS 106, "Employers'
Accounting for Post-Retirement Benefits Other Than Pensions." In addition, in
accordance with SFAS No. 106, Employers' Accounting For Post-Retirement Benefits
Other Than Pensions, in September 2005 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.
ASBESTOS RESERVE. We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. In accordance with our
accounting policy, our most recent actuarial study estimated a liability for
settlement payments, excluding legal costs, ranging from $22.1 million to $53.9
million. Based on the information contained in the actuarial study and all other
available information considered by us, we concluded that no amount within the
range of settlement payments was more likely than any other and, therefore,
recorded the low end of the range as the liability associated with future
settlement payments through 2050 in our consolidated financial statements, in
accordance with generally accepted accounting principles. Legal costs, which are
expensed as incurred and reported in loss from discontinued operation, are
estimated to range from $11.6 million to $21.6 million during the same period.
We plan to perform an annual actuarial analysis during the third quarter of each
year for the foreseeable future. Based on this analysis and all other available
information, we will continue to reassess the recorded liability and, if deemed
necessary, record an adjustment to the reserve, which will be reflected as a
loss or gain from discontinued operation.
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability and litigation. Establishing loss
reserves for these matters requires the use of estimates and judgment of risk
exposure and ultimate liability. We estimate losses using consistent and
appropriate methods; however, changes to our assumptions could materially affect
our recorded liabilities for loss.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENT
Effective January 1, 2006, the Company adopted the provisions and accounts for
stock-based compensation in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R").
SFAS 123R requires that stock-based employee compensation be recorded as a
charge to earnings. We have adopted SFAS 123R using a modified prospective
application, under which prior periods are not revised for comparative purposes.
Under this application, we are required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS 123R, we applied Accounting Principles Board
Opinions ("APB") No. 25 and related interpretations to account for our stock
plans resulting in the use of the intrinsic value to value the stock. Under APB
25, we were not required to recognize compensation expense for the cost of stock
options. In accordance with the adoption of SFAS 123R, we recorded stock-based
compensation expense for the cost of incentive stock options, restricted stock
and performance-based stock granted under our stock plans. Stock-based
compensation expense for the year ended December 31, 2006 was $848,000 ($516,100
net of tax) or $0.03 per basic and diluted share. The adoption of SFAS 123R did
not have a material impact on our financial position, results of operation or
cash flows.
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a threshold for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of
this Interpretation. FIN 48 also provides guidance on accounting for
derecognition, interest and penalties, and classification and disclosure of
matters related to uncertainty in income taxes. FIN 48 is effective for fiscal
years beginning after December 15, 2006 and, as a result, is effective for our
Company beginning January 1, 2007. FIN 48 will require adjustment to the opening
balance of retained earnings (or other components of shareholders' equity in the
statement of financial position) for the cumulative effect of the difference in
the net amount of assets and liabilities for all open tax positions at the
effective date. The Company is assessing the impact, if any, which the adoption
of FIN 48 will have on our consolidated financial position, results of
operations and cash flows.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. This statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, which for the Company is the year ending December 31, 2008.
The Company is assessing the impact, if any, which the adoption of SFAS 157 will
have on our consolidated financial position, results of operations and cash
flows.
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)." 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 shareholders' equity. This statement also requires an
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employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. The Company 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 shareholders' 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, or for the Company's year ending
December 31, 2008. The Company is presently evaluating the impact of the
measurement date change, which is not expected to be material.
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 APPLICATION
OF SFAS OF SFAS
NO. 158 ADJUSTMENTS 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) ......................... 25,610 (1,100) 24,510
Pension and post-retirement medical
benefits (non-current) ..................... 47,964 3,714 51,678
--------
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
========
QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
provides interpretive guidance on how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in the current
year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement ("rollover") and balance sheet
("iron curtain") approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach, no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings (deficit) as of the beginning of the fiscal year of
adoption. SAB 108 is effective for fiscal years ending on or after November 15,
2006, which for the Company is the year ending December 31, 2006. There was no
impact of adopting SAB 108 to our consolidated financial position, results of
operations and cash flows.
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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, the Japanese Yen and the Hong Kong dollar. As of
December 31, 2006, our monetary assets and liabilities which are subject to this
exposure are immaterial, therefore the potential immediate loss to us that would
result from a hypothetical 10% change in foreign currency exchange rates would
not be expected to have a material impact on our earnings or cash flows. This
sensitivity analysis assumes an unfavorable 10% fluctuation in both of the
exchange rates affecting both of the foreign currencies in which the
indebtedness and the financial instruments described above are denominated and
does not take into account the offsetting effect of such a change on our
foreign-currency denominated revenues.
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, 2006, we had approximately $238.3 million in loans and financing
outstanding, of which approximately $98.5 million bear interest at fixed
interest rates and approximately $139.8 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 58.7% and 60% at December
31, 2006 and 2005, 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 $1.6 million negative impact on our earnings or cash
flows.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
Management's Report on Internal Control over Financial Reporting .......... 38
Report of Independent Registered Public Accounting Firm--
Internal Control Over Financial Reporting ............................... 39
Report of Independent Registered Public Accounting Firm--
Consolidated Financial Statements ....................................... 40
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 ........................................ 41
Consolidated Balance Sheets as of December 31, 2006 and 2005 .............. 42
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 ........................................ 43
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2006, 2005 and 2004 .................... 44
Notes to Consolidated Financial Statements ................................ 45
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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, 2006. 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, 2006, our
internal control over financial reporting is effective.
Our independent registered public accounting firm, Grant Thornton LLP, has
audited our consolidated financial statements for 2006 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."
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
INTERNAL CONTROL OVER REPORTING
The Board of Directors and Shareholders
Standard Motor Products, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report On Internal Control Over Financial Reporting, that Standard
Motor Products, Inc. (a New York corporation) maintained effective internal
control over financial reporting as of December 31, 2006, 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.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's 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, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
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, management's assessment that Standard Motor Products, Inc.
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by COSO. Also in
our opinion, Standard Motor Products, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
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. as of December 31, 2006 and 2005, and the related
consolidated statements of operations, shareholder's equity and cash flows for
each of the three years in the period ended December 31, 2006, and our report
dated March 15, 2007 expressed an unqualified opinion on those consolidated
financial statements and includes explanatory paragraphs relating to the
application of Statement of Financial Accounting Standards No. 123(R) as of
January 1, 2006 and No. 158 as of December 31, 2006.
New York, New York
March 15, 2007
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited the accompanying consolidated balance sheets of Standard Motor
Products, Inc. and Subsidiaries (a New York corporation) as of December 31, 2006
and 2005, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2006. 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, 2006 and 2005, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 12 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 13 and 14 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."
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, 2006, 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 15, 2007 expressed an unqualified
opinion thereon.
New York, New York
March 15, 2007
-40-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
2006 2005 2004
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
Net sales ................................................ $ 812,024 $ 830,413 $ 824,283
Cost of sales ............................................ 606,803 644,433 629,290
------------ ------------ ------------
Gross profit .......................................... 205,221 185,980 194,993
Selling, general and administrative expenses ............. 168,050 166,556 178,852
Restructuring expenses ................................... 1,856 5,342 11,449
Goodwill impairment charge ............................... -- -- 6,429
------------ ------------ ------------
Operating income (loss) ............................... 35,315 14,082 (1,737)
Other (expense) income, net .............................. (383) 2,648 2,861
Interest expense ......................................... 19,275 17,077 13,710
------------ ------------ ------------
Earnings (loss) from continuing operations before taxes 15,657 (347) (12,586)
Provision (benefit) for income taxes ..................... 6,494 1,423 (3,679)
------------ ------------ ------------
Earnings (loss) from continuing operations ............... 9,163 (1,770) (8,907)
Earnings (loss) from discontinued operation,
net of income tax of $809, $ 1,118 and $2,606 .......... 248 (1,775) (3,909)
------------ ------------ ------------
Earnings (loss) before cumulative effect of
accounting change ................................... 9,411 (3,545) (12,816)
Cumulative effect of accounting change,
net of tax of $1,043 ................................... -- -- (1,564)
------------ ------------ ------------
Net earnings (loss) ................................... $ 9,411 $ (3,545) $ (14,380)
============ ============ ============
Net earnings (loss) per common share - Basic:
Earnings (loss) from continuing operations .......... $ 0.50 $ (0.09) $ (0.46)
Discontinued operation .............................. 0.01 (0.09) (0.20)
Cumulative effect of accounting change .............. -- -- (0.08)
------------ ------------ ------------
Net earnings (loss) per common share - Basic ............. $ 0.51 $ (0.18) $ (0.74)
============ ============ ============
Net earnings (loss) per common share - Diluted:
Earnings (loss) from continuing operations .......... $ 0.50 $ (0.09) $ (0.46)
Discontinued operation .............................. 0.01 (0.09) (0.20)
Cumulative effect of accounting change .............. -- -- (0.08)
------------ ------------ ------------
Net earnings (loss) per common share - Diluted ........... $ 0.51 $ (0.18) $ (0.74)
============ ============ ============
Average number of common shares .......................... 18,283,707 19,507,818 19,331,358
============ ============ ============
Average number of common shares and
dilutive common shares ................................. 18,325,175 19,507,818 19,331,358
============ ============ ============
See accompanying notes to consolidated financial statements.
-41-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
2006 2005
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 22,348 $ 14,046
Accounts receivable, less allowances for discounts and doubtful accounts
of $9,465 and $9,574 in 2006 and 2005, respectively........................... 183,664 176,294
Inventories...................................................................... 233,970 243,297
Deferred income taxes............................................................ 14,011 14,081
Prepaid expenses and other current assets........................................ 7,845 7,972
-------------- --------------
Total current assets.................................................... 461,838 455,690
Property, plant and equipment, net.................................................... 80,091 85,805
Goodwill and other intangibles, net................................................... 56,289 67,402
Other assets.......................................................................... 41,874 44,147
-------------- --------------
Total assets............................................................ $ 640,092 $ 653,044
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable.................................................................... $ 139,799 $ 149,236
Current portion of long-term debt................................................ 542 542
Accounts payable................................................................. 53,783 52,535
Sundry payables and accrued expenses............................................. 24,510 24,466
Accrued customer returns......................................................... 21,705 22,346
Restructuring accrual............................................................ 703 1,286
Accrued rebates.................................................................. 20,769 24,017
Payroll and commissions.......................................................... 16,714 11,494
-------------- --------------
Total current liabilities........................................... 278,525 285,922
Long-term debt........................................................................ 97,979 98,549
Post-retirement medical benefits and other accrued liabilities........................ 51,678 45,962
Restructuring accrual................................................................. 383 11,348
Accrued asbestos liabilities.......................................................... 20,828 25,556
-------------- --------------
Total liabilities................................................... 449,393 467,337
-------------- --------------
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................................................... 57,429 56,966
Retained earnings................................................................ 112,481 109,649
Accumulated other comprehensive income........................................... 3,541 4,158
Treasury stock - at cost (2,109,816 and 2,315,645 shares in 2006
and 2005, respectively)...................................................... (23,724) (26,038)
-------------- --------------
Total stockholders' equity.......................................... 190,699 185,707
-------------- --------------
Total liabilities and stockholders' equity.......................... $ 640,092 $ 653,044
============== ==============
See accompanying notes to consolidated financial statements.
-42-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
2006 2005 2004
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) .................................................. $ 9,411 $ (3,545) $(14,380)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................... 15,486 17,356 19,013
Increase to allowance for doubtful accounts ..................... 405 655 404
Increase to inventory reserves .................................. 6,128 5,286 1,487
Loss on disposal of property, plant and equipment ............... 71 2,940 1,379
Loss on divestiture of European Temperature Control division .... 3,209 -- --
Gain on retirement of debt ...................................... -- (1,258) --
Equity income from joint ventures ............................... (915) (955) (752)
Employee stock ownership plan allocation ........................ 1,190 1,341 1,643
Stock-based compensation ........................................ 848 -- --
Decrease (increase) in deferred income taxes .................... 328 (4,760) (6,243)
Increase (decrease) in tax valuation allowance .................. 1,875 3,074 (182)
(Earnings) loss on discontinued operations, net of tax .......... (248) 1,775 3,909
Cumulative effect of accounting change .......................... -- -- 1,564
Goodwill impairment charge ...................................... -- -- 6,429
Change in assets and liabilities, net of effects from acquisitions and
divestitures:
(Increase) decrease in accounts receivable ...................... (11,758) (25,597) 21,833
(Increase) decrease in inventories .............................. (701) 10,058 (5,350)
(Increase) in prepaid expenses and other current assets ......... (43) (491) (82)
Decrease in other assets ........................................ 313 1,237 3,662
Increase (decrease) in accounts payable ......................... 7,693 2,760 (12,376)
Decrease in sundry payables and accrued expenses ................ (2,637) (6,968) (5,969)
Decrease in restructuring accrual ............................... (1,095) (5,516) (12,222)
Increase (decrease) in other liabilities ........................ 4,129 370 (301)
-------- -------- --------
Net cash provided by (used in) operating activities ......... 33,689 (2,238) 3,466
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment .............. 995 2,164 1,734
Capital expenditures, net of effects from acquisitions ............... (10,080) (9,957) (9,774)
Payments for acquisitions, net of cash acquired ...................... -- -- (2,906)
Proceeds from the divestiture of European Temperature
Control division ................................................... 3,119 -- --
-------- -------- --------
Net cash used in investing activities ....................... (5,966) (7,793) (10,946)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreements ....................... (9,082) 39,820 9,717
Principal payments and retirement of long-term debt .................. (570) (14,655) (3,341)
(Decrease) increase in overdraft balances ............................ (4,716) 3,288 834
Repurchase of shares held by Dana Corporation ........................ -- (11,899) --
Proceeds from exercise of employee stock options ..................... 738 169 972
Dividends paid ....................................................... (6,579) (7,024) (6,955)
-------- -------- --------
Net cash (used in) provided by financing activities ......... (20,209) 9,699 1,227
-------- -------- --------
Effect of exchange rate changes on cash .............................. 788 (556) 1,540
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................. 8,302 (888) (4,713)
CASH AND CASH EQUIVALENTS at beginning of year ....................... 14,046 14,934 19,647
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year ............................. $ 22,348 $ 14,046 $ 14,934
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .................................................... $ 19,224 $ 17,227 $ 13,741
======== ======== ========
Income taxes ................................................ $ 2,976 $ 3,456 $ 2,582
======== ======== ========
Non-cash investing and financing activities:
Reduction of restructuring accrual applied against goodwill ..... $ 10,606 $ 1,243 $ 1,000
======== ======== ========
See accompanying notes to consolidated financial statements.
-43-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2006, 2005 AND 2004
CAPITAL ACCUMULATED
IN EXCESS OTHER
COMMON OF PAR RETAINED COMPREHENSIVE TREASURY
STOCK VALUE EARNINGS INCOME STOCK TOTAL
(LOSS)
------------------------------------------------------------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2003 ................ $ 40,972 $ 58,086 $141,553 $ 4,814 $(19,384) $226,041
Comprehensive Loss:
Net loss .............................. (14,380) (14,380)
Foreign currency translation adjustment 2,242 2,242
Unrealized gain on interest rate swap
agreements, net of tax of $127 ...... 383 383
Minimum pension liability adjustment .. (2,634) (2,634)
--------
Total comprehensive loss .............. (14,389)
Cash dividends paid ......................... (6,955) (6,955)
Exercise of employee stock options .......... (645) 1,617 972
Employee Stock Ownership Plan ............... (17) 1,660 1,643
-------- ------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2004 ................ 40,972 57,424 120,218 4,805 (16,107) 207,312
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 Income:
Net income ............................ 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 income ............ 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
See accompanying notes to consolidated financial statements
-44-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as "we," "us" or "our") is engaged in the
manufacture and distribution of replacement parts for motor vehicles in the
automotive aftermarket industry. The consolidated financial statements include
our accounts and all subsidiaries in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant intercompany items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have made a
number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Some of the more
significant estimates include allowances for doubtful accounts, realizability of
inventory, goodwill and other intangible assets, depreciation and amortization
of long-lived assets, product liability, pensions and other post-retirement
benefits, asbestos and litigation matters, deferred tax asset valuation
allowance and sales return allowances. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
The Company does not generally require collateral for its trade accounts
receivable. Accounts receivable have been reduced by an allowance for amounts
that may become uncollectible in the future. These allowances are established
based on a combination of write-off history, aging analysis, and specific
account evaluations. When a receivable balance is known to be uncollectible, it
is written off against the allowance for doubtful accounts. Cash discounts are
provided based on an overall average experience rate applied to qualifying
accounts receivable balances.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market. Inventories are reduced by an allowance
for excess and obsolete inventories, based on the Company's review of on-hand
inventories. We provided for an inventory reserve of $35.4 million and $39.1
million as of December 31, 2006 and 2005, 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.
-45-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes derivatives as either an asset or liability measured at
its fair value. For derivatives that have been formally designated as a cash
flow hedge (interest rate swap agreements), the effective portion of changes in
the fair value of the derivatives are recorded in "accumulated other
comprehensive income (loss)." Amounts in "accumulated other comprehensive income
(loss)" are reclassified into earnings in the "interest expense" caption when
interest expense on the underlying borrowings 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 accounted for as purchases.
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 Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, we compare the carrying value of such
assets with finite lives to the estimated undiscounted future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair
value and their carrying value.
-46-
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 Standard Motor Products 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 $9.9 million as of
December 31, 2006 and 2005 were capitalized in other assets and are being
amortized over the life of the related financing arrangements through 2009. As
of December 31, 2006 and 2005, total accumulated amortization was $7 million and
$5.4 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.
-47-
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 Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities, as measured by the current enacted tax rates. The Company
establishes valuation allowances against deferred tax assets when it is more
likely than not that some portion or all of those deferred assets will not be
realized. The valuation allowance is intended in part to provide for the
uncertainty regarding the ultimate utilization of the Company's U.S. net
operating loss carry forwards, U.S. capital loss carryovers, U.S. foreign tax
credit carryovers, and foreign net operating loss carry forwards. Deferred tax
expense (benefit) is the result of changes in the deferred tax asset and
liability.
REPORTING OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes (a) net income, (b) the cumulative effect
of translating balance sheets of foreign subsidiaries to U.S. dollars, (c) the
effect of adjusting interest rate swaps to market, and (d) the recognition of
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 shareholder's equity.
NET EARNINGS PER COMMON SHARE
We present two calculations of earnings per common share. "Basic" earnings per
common share equals net income divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share equals net
income divided by the sum of weighted average common shares outstanding during
the period plus potentially dilutive common shares. Potentially dilutive common
shares that are anti-dilutive are excluded from net earnings per common share.
The following is a reconciliation of the shares used in calculating basic and
dilutive net earnings per common share.
2006 2005 2004
---- ---- ----
(IN THOUSANDS)
Weighted average common shares.....................18,284 19,508 19,331
Effect of potentially dilutive common shares....... 41 -- --
------ ------ ------
Weighted average common equivalent shares
outstanding assuming dilution....................18,325 19,508 19,331
====== ====== ======
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.
2006 2005 2004
---- ---- ----
(IN THOUSANDS)
Stock options and restricted shares............ 991 1,249 1,192
====== ====== ======
Convertible debentures......................... 2,796 2,796 2,796
====== ====== ======
ASBESTOS LITIGATION
In evaluating our potential asbestos-related liability, it is the accounting
policy of the Company 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.
-48-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash investments and accounts receivable.
We place our cash investments with high quality financial institutions and limit
the amount of credit exposure to any one institution. 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 51%, 52% and 50% of consolidated net sales in 2006, 2005 and 2004,
respectively. Two individual customers accounted for 18% and 14%, respectively,
of consolidated net sales in 2006, 18% and 15%, respectively, of consolidated
net sales in 2005, and 17% and 14%, respectively, of consolidated net sales in
2004. Substantially all of the cash and cash equivalents, including foreign cash
balances, at December 31, 2006 and 2005 were uninsured. Foreign cash balances at
December 31, 2006 and 2005 were $11.7 million and $3 million, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENT
Effective January 1, 2006, the Company adopted the provisions and accounts for
stock-based compensation in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R").
SFAS 123R requires that stock-based employee compensation be recorded as a
charge to earnings. We have adopted SFAS 123R using a modified prospective
application, under which prior periods are not revised for comparative purposes.
Under this application, we are required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS 123R, we applied Accounting Principles Board
Opinions ("APB") No. 25 and related interpretations to account for our stock
plans resulting in the use of the intrinsic value to value the stock. Under APB
25, we were not required to recognize compensation expense for the cost of stock
options. In accordance with the adoption of SFAS 123R, we recorded stock-based
compensation expense for the cost of incentive stock options, restricted stock
and performance-based stock granted under our stock plans. Stock-based
compensation expense for the year ended December 31, 2006 was $848,000 ($516,100
net of tax) or $0.03 per basic and diluted share. The adoption of SFAS 123R did
not have a material impact on our financial position, results of operation or
cash flows.
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a threshold for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of
this Interpretation. FIN 48 also provides guidance on accounting for
derecognition, interest and penalties, and classification and disclosure of
matters related to uncertainty in income taxes. FIN 48 is effective for fiscal
years beginning after December 15, 2006 and, as a result, is effective for our
Company beginning January 1, 2007. FIN 48 will require adjustment to the opening
balance of retained earnings (or other components of shareholders' equity in the
statement of financial position) for the cumulative effect of the difference in
the net amount of assets and liabilities for all open tax positions at the
effective date. The Company is assessing the impact, if any, which the adoption
of FIN 48 will have on our consolidated financial position, results of
operations and cash flows.
-49-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. This statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, which for the Company is the year ending December 31, 2008.
The Company is assessing the impact, if any, which the adoption of SFAS 157 will
have on our consolidated financial position, results of operations and cash
flows.
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)." 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 shareholders' 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. The Company 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 shareholders' 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, or for the Company's year ending
December 31, 2008. The Company is presently evaluating the impact of the
measurement date change, which is not expected to be material.
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 APPLICATION AFTER APPLICATION
OF SFAS NO. 158 OF SFAS NO. 158
------------ ------------
ADJUSTMENTS
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)......... 25,610 (1,100) 24,510
Pension and post-retirement medical benefits (non-current)...... 47,964 3,714 51,678
------
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
=======
-50-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
provides interpretive guidance on how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in the current
year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement ("rollover") and balance sheet
("iron curtain") approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach, no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings (deficit) as of the beginning of the fiscal year of
adoption. SAB 108 is effective for fiscal years ending on or after November 15,
2006, which for the Company is the year ending December 31, 2006. There was no
impact of adopting SAB 108 to 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 reviewed our
operations and implemented integration plans to restructure the operations of
DEM. At the time, we announced that we would close seven DEM facilities, which
has subsequently occurred. As part of the integration and restructuring plans,
we accrued an initial restructuring liability of approximately $34.7 million at
June 30, 2003. Such amounts were recognized as liabilities assumed in the
acquisition and included in the allocation of the cost to acquire DEM.
Accordingly, such amounts resulted in additional goodwill being recorded in
connection with the acquisition. Subsequent to the acquisition, our estimate of
the restructuring liability was updated and revised downward at various points
in time, with a cumulative reduction to goodwill of $12.8 million as of December
31, 2006. As of December 31, 2006, the remaining restructuring accrual was $1.1
million as of December 31, 2006. We expect to pay most of the remaining amount
in 2007 and 2008.
Of the initial restructuring accrual, approximately $15.7 million related to
work force reductions and represented employee termination benefits. The accrual
amount primarily provides for severance costs relating to the involuntary
termination of employees, individually employed throughout DEM's facilities
across a broad range of functions, including managerial, professional, clerical,
manufacturing and factory positions. During the years ended December 31, 2006
and 2005, termination benefits of $0.2 million and $2.3 million, respectively,
have been charged to the restructuring accrual. As of December 31, 2006, the
reserve balance for workforce reductions was $0.5 million.
The initial restructuring accrual also included approximately $18 million
consisting of the net present value of costs associated with exiting certain
activities, primarily related to lease and contract termination costs, which
will not have future benefits. Specifically, our plans were to consolidate
certain of DEM operations into our existing plants. At December 31, 2005, we had
a sublease commitment for one facility with Dana through 2021. However, on March
3, 2006, Dana filed a voluntary petition for relief under Chapter 11 of the US
Bankruptcy Code. Pursuant to a court ruling in connection with Dana's Chapter 11
bankruptcy proceedings, effective March 31, 2006, we were released from, and no
longer have any obligations with respect to, such lease commitment for the
facility. We have accounted for the termination of such lease commitment as a
-51-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reduction of $10.5 million in our restructuring accrual, with a corresponding
reduction to goodwill established on the acquisition of DEM. In addition to the
above reduction, exit costs of $0.8 million were paid in 2006, leaving the exit
reserve balance for exit costs at $0.6 million as of December 31, 2006.
Selected information relating to the restructuring costs included in the
allocation of the cost to acquire DEM for the years ended December 31, 2006 and
2005 is as follows (in thousands):
Workforce Other Exit
Reduction Costs Total
----------------- ---------------- -----------------
Restructuring liability at December 31, 2004.............. $ 4,250 $ 15,143 $19,393
Cash payments during 2005................................. (2,338) (3,178) (5,516)
Adjustments during 2005................................... (1,103) (140) (1,243)
----------------- ---------------- -----------------
Restructuring liability as of 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
================ ================ ==================
INTEGRATION EXPENSES
For the year ended December 31, 2006 and 2005, we incurred integration expenses
of $1.9 million and $5.3 million, respectively. The 2006 amount primarily
relates to the costs of moving our European and Puerto Rico production
operations and the divestiture of a production unit of our Temperature Control
Segment. In the second quarter of 2005, the Company effected an asset write-down
for the outsourcing of some of its Temperature Control product lines resulting
in a $3.3 million integration expense. The remainder of the 2005 costs is
primarily due to the DEM integration.
On October 10, 2006, the Company announced plans to close its Puerto Rico
manufacturing facility related to our Engine Management Segment following the
expiration of the Internal Revenue Code Section 936 benefit and to further our
efforts in streamlining costs. These operations will be moved to other
manufacturing sites of the Company. The facility move and closure is planned to
occur in a phased manner over the next 18-24 months. In connection with this
closing, the Company will incur one-time termination benefits to be paid to
certain employees at the end of a specified requisite service period. The
Company estimates these termination benefits will amount to approximately $2
million which will be recognized as expense ratably over the requisite service
period. The Company also expects to incur approximately $2.4 million of various
expenses to move the production assets, close the Puerto Rico facility, and
relocate some employees. These expenses will be recognized as incurred. In 2006
we incurred expenses of $0.4 million included above for one-time termination
benefits.
Selected information relating to this exit activity is as follows (in
thousands):
Workforce Other Exit
Reduction Costs Total
---------- ---------- -----------
Exit activity liability at December 31, 2006.............. $ -- $ -- $ --
Amounts provided for during 2006.......................... 387 35 422
Cash payments during 2006................................. -- -- --
------ ------- ------
Exit activity liability at December 31, 2006.............. $ 387 $ 35 $ 422
------ ------- ------
-52-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 2006, we divested a majority portion of our European Temperature
Control business. The transaction involved the sale of all of our voting stock
of our subsidiaries in Italy and France. The proceeds from the divestiture were
approximately $3.1 million, and the Company incurred a loss on divestiture of
$3.2 (included in earnings from continuing operations before taxes - other
(expense) income, net). 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.
3. ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which we incur
change-over-costs to induce a new or existing customer to switch from a
competitor's brand. In addition, change-over-costs include the costs related to
removing the new customer's inventory and replacing it with Standard Motor
Products inventory commonly referred to as a stocklift. New customer acquisition
costs were initially recorded as a prepaid asset and the related expense was
recognized ratably over a 12-month period beginning in the month following the
stocklift as an offset to sales. In the fourth quarter of 2004, we determined
that it was a preferable accounting method to reflect the customer acquisition
costs as a reduction to revenue when incurred.
4. SALES OF RECEIVABLES
Prior to November 18, 2005, the Company entered into agreements to sell
undivided interests in certain of its receivables to factoring companies, which
in turn have the right to sell an undivided interest to a financial institution
or other third parties. We 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 and $194.4 million of receivables during 2005 and 2004, respectively,
and none in 2006. 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.
The sale of receivables was accounted for as a sale in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The sold receivables were removed from the
balance sheet at the time of sale. The costs incurred in relation to the sale of
receivables were $3.4 million and $2.4 million in 2005 and 2004, respectively,
and are recorded in selling, general and administrative expense. Pursuant to an
amendment to our revolving credit facility in November 2005, we are prohibited
from accepting drafts under our customer draft programs after November 18, 2005.
5. INVENTORIES
DECEMBER 31,
---------------------------
2006 2005
---- ----
(IN THOUSANDS)
Finished goods, net....................... $169,183 $ 182,567
Work in process, net...................... 4,654 4,235
Raw materials, net........................ 60,133 56,495
-------- ---------
Total inventories, net................ $233,970 $ 243,297
======== =========
-53-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------------
2006 2005
---- ----
(IN THOUSANDS)
Land, buildings and improvements..................$ 71,147 $ 70,748
Machinery and equipment........................... 133,022 136,010
Tools, dies and auxiliary equipment............... 24,270 22,447
Furniture and fixtures............................ 29,255 28,634
Leasehold improvements............................ 7,595 7,485
Construction in progress.......................... 5,732 6,552
-------- ---------
271,021 271,876
Less accumulated depreciation..................... 190,930 186,071
-------- --------
Total property, plant and equipment, net..........$ 80,091 $ 85,805
======== ========
Depreciation expense was $13.4 million, $15 million and $16.8 million for 2006,
2005 and 2004, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
We test for impairment of our remaining goodwill at least annually. Under SFAS
No. 142, "Goodwill and Other Intangible Assets," we completed our annual
impairment test of goodwill as of December 31, 2006 and 2005, respectively, and
determined that our goodwill was not impaired.
For 2004, after completion of our annual impairment test of goodwill, we
determined that the carrying amounts of two of our reporting units exceeded the
corresponding fair values, which were determined based on the discounted
estimated future cash flows of the reporting units, the Company's weighted
average cost of capital and market multiples. As a result, we recorded an
impairment loss in the fourth quarter of 2004 of our remaining goodwill in our
Temperature Control and European segments of $4.8 million and $1.6 million,
respectively.
The changes in the carrying value of goodwill for our segments during the two
years ended December 31, 2006 are as follows (in thousands):
TEMPERATURE
ENGINE MANAGEMENT CONTROL EUROPE TOTAL
----------------- ------- ------ -----
Balance as of December 31, 2004........... $ 50,337 $ -- $ -- $ 50,337
Purchase accounting adjustments (Note 2).. (1,243) -- -- (1,243)
Balance as of December 31, 2005........... $ 49,094 $ -- $ -- $ 49,094
Purchase accounting adjustments (Note 2).. (10,606) -- -- (10,606)
-------- ------- -------- --------
Balance as of December 31, 2006........... $ 38,488 $ -- $ -- $ 38,488
======== ======= ======== ========
In connection with the acquisition of DEM, we completed the purchase price
allocation in June 2004. As a result, goodwill was reduced by $15.3 million in
2004 comprised of $16.1 million reclassified to other intangible assets based on
a fair market valuation and $0.8 million increase related to the acquired
inventory. During 2006 and 2005, goodwill was reduced $10.6 million and $1.2
million, respectively, based on a reduction in the restructuring cost estimate
that had been established in purchase accounting. (See Note 2)
-54-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER INTANGIBLE ASSETS
Other intangibles assets include computer software. Computer software, net of
amortization, was $4.5 million and $3.9 million as of December 31, 2006 and
2005, respectively. Computer software is amortized over its estimated useful
life of 3 to 10 years. Amortization expense for computer software was $1.0
million, $0.8 million and $1.5 million for the years ended December 31, 2006,
2005 and 2004, respectively.
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets associated with the acquisition of DEM,
as of December 31, 2006 and 2005, consist of (in thousands):
DECEMBER 31,
---------------------------
2006 2005
---- ----
Gross customer relationships.............. $10,000 $ 10,000
Trademarks and trade names................ 6,100 6,100
------- --------
16,100 16,100
Less accumulated amortization(1).......... 2,778 1,667
------- -------
Net....................................... $13,322 $14,433
======= =======
(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,
$1.1 million and $0.6 million for the years ended December 31, 2006, 2005 and
2004, respectively.
Estimated amortization expense for the next five years is $1.1 million in each
year during 2007 through 2011.
8. OTHER ASSETS
DECEMBER 31,
------------------------------
2006 2005
---- ----
(IN THOUSANDS)
Equity in joint ventures.................... $2,483 $ 2,014
Deferred income taxes, net (Note 16)........ 24,434 26,567
Deferred financing costs, net............... 2,897 4,558
Other....................................... 12,060 11,008
-------- -------
Total other assets, net................ $ 41,874 $44,147
======== =======
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 $37.4 million, $47.8 million and $65.3 million in 2006, 2005 and
2004, respectively.
-55-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CREDIT FACILITIES AND LONG-TERM DEBT
Total debt consists of (in thousands):
DECEMBER 31,
--------------------------------
2006 2005
---- ----
CURRENT
Revolving credit facilities (1)................. $ 139,799 $ 149,236
Current portion of mortgage loan................ 542 542
--------- ---------
140,341 149,778
--------- ---------
LONG-TERM DEBT
6.75% convertible subordinated debentures....... 90,000 90,000
Mortgage loan................................... 8,416 8,912
Other........................................... 105 179
Less current portion of long-term debt.......... 542 542
-------- ---------
97,979 98,549
-------- ---------
Total debt.................................. $238,320 $ 248,327
======== =========
(1) Consists of the revolving credit facility, the Canadian term loan and the
European revolving credit facility.
Maturities of long-term debt during the five years ending December 31, 2007
through 2011 are $0.5 million, $0.6 million, $90.6 million, $0.6 million and
$0.7 million, respectively.
The Company had deferred financing cost of $2.9 million and $4.5 million as of
December 31, 2006 and 2005, respectively. These costs related to the Company's
revolving credit facility, the convertible subordinated debentures and a
mortgage loan agreement, and these costs are being amortized in the amount of
$1.7 million in 2007, $0.7 million in 2008, $0.2 million in 2009 and $0.3
million for the period 2010-2018.
REVOLVING CREDIT FACILITY
We are parties to an agreement with General Electric Capital Corporation, as
agent, and a syndicate of lenders for a secured revolving credit facility. The
term of the credit agreement is through 2008 and provides for a line of credit
up to $305 million. Availability under our revolving credit facility is based on
a formula of eligible accounts receivable, eligible inventory and eligible fixed
assets. After taking into account outstanding borrowings under the revolving
credit facility, there was an additional $82.5 million available for us to
borrow pursuant to the formula at December 31, 2006. Our credit agreement also
permits dividends and distributions by us provided specific conditions are met.
At December 31, 2006, the interest rate on the Company's revolving credit
facility was 7.8%. Direct borrowings under our revolving credit facility bear
interest at the prime rate plus the applicable margin (as defined) or, at our
option, the LIBOR rate plus the applicable margin (as defined). Outstanding
borrowings under the revolving credit facility (inclusive of the Canadian term
loan described below), which are classified as current liabilities, was $133.3
million at December 31, 2006. The Company maintains cash management systems in
compliance with its credit agreements. Such systems require the establishment of
lock boxes linked to blocked accounts whereby cash receipts are channeled to
various banks to insure pay-down of debt. Agreements also classify such accounts
and the cash therein as additional security for loans and other obligations to
the credit providers. Borrowings are collateralized by substantially all of our
-56-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets, including accounts receivable, inventory and fixed assets, and those of
certain of our subsidiaries. The terms of our revolving credit facility provide
for, among other provisions, financial covenants requiring us, on a consolidated
basis, (1) to maintain specified levels of fixed charge coverage at the end of
each fiscal quarter (rolling twelve months) through 2008, and (2) to limit
capital expenditure levels for each fiscal year through 2008. The terms of our
revolving credit facility also provide, among other things, for the prohibition
of accepting drafts under our customer draft programs after November 18, 2005.
CANADIAN TERM LOAN
In December 2005, our Canadian subsidiary entered into a credit agreement with
GE Canada Finance Holding Company, for itself and as agent for the lenders, and
GECC Capital Markets, Inc., as lead arranger and book runner. The credit
agreement provides for, among other things, a $7 million term loan, which term
loan is guaranteed and secured by us and certain of our wholly-owned
subsidiaries and which term loan is coterminous with the term of our revolving
credit facility. The $7 million term loan is part of the $305 million available
for borrowing under our revolving credit facility.
REVOLVING CREDIT FACILITY--EUROPE
Our European subsidiary has a revolving credit facility. The amount of
short-term bank borrowings outstanding under this facility was $6.5 million and
$7 million at December 31, 2006 and 2005, respectively. The weighted average
interest rates on these borrowings at December 31, 2006 and 2005 were 6.3% and
6.5%, respectively. At December 31, 2006, there was an additional $0.8 million
available for our European subsidiary to borrow.
SUBORDINATED DEBENTURES
In July 1999, we completed a public offering of convertible subordinated
debentures amounting to $90 million. The convertible debentures carry an
interest rate of 6.75%, payable semi-annually, and will mature 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
is payable in monthly installments. The loan bears interest at a fixed rate of
5.5% maturing in July 2018. The mortgage loan is secured by a building and
related property.
10. 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.
-57-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. As of December 31, 2005 we had
recorded a liability of $0.2 million associated therewith. 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, 2005 or 2004.
11. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par value, and
our Board of Directors is vested with the authority to establish and designate
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, 2006.
As of December 31, 2006, we have Board authorization to repurchase additional
shares at a maximum cost of $1.7 million. 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,
-----------------------
2006 2005
---- ----
Foreign currency translation adjustments.......................... $ 8,382 $ 7,082
Unrealized gain on interest rate swap agreement, net of tax....... -- 298
Initial adoption of FASB Statement No. 158, net of income taxes (1,414) --
Minimum pension liability......................................... (3,427) (3,222)
------- --------
Total accumulated other comprehensive income...................... $ 3,541 $ 4,158
======= ========
In January 1996, our Board of Directors adopted a Shareholder Rights Plan
("Rights Plan"). Under the Rights Plan, the Board declared a dividend of one
Preferred Share Purchase Right ("Right") for each of our outstanding common
shares. The dividend was payable on March 1, 1996 to the shareholders of record
as of February 15, 1996. The Rights 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.
-58-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION PLANS
We have five stock-based compensation plans. Under the 1994 Omnibus Stock Option
Plan, as amended, which terminated as of May 25, 2004, we were authorized to
issue options to purchase 1,500,000 shares. The options become exercisable over
a three to five year period and expire at the end of five years following the
date they become exercisable. Under the 2004 Omnibus Stock Plan, which
terminates as of May 20, 2014, we were authorized to issue options to purchase
500,000 shares. The options become exercisable over a three to five year period
and expire at the end of ten years following the date of grant. Under the 1996
Independent Directors' Stock Option Plan and the 2004 Independent Directors'
Stock Option Plan, we were authorized to issue options to purchase 50,000 shares
under each plan. The options become exercisable one year after the date of grant
and expire at the end of ten years following the date of grant. Under the 2006
Omnibus Incentive Plan, which was approved by our shareholders in May 2006, we
are authorized to issue equity awards of up to 700,000 shares. Equity awards
forfeited under the previous stock option plans and incentive plan are eligible
to be granted again under the 2006 Omnibus Incentive Plan with respect to the
equity awards so forfeited. At December 31, 2006, under our stock option plans,
there were an aggregate of (a) 1,030,948 shares of common stock authorized for
grants, (b) 990,898 shares of common stock granted, and (c) no shares of common
stock available for future grants. At December 31, 2006, under our 2006 Omnibus
Incentive Plan, there were an aggregate of (a) 700,000 shares of common stock
authorized for grants, (b) 94,100 shares of common stock granted, and (c)
605,900 shares of common stock available for future grants.
Effective January 1, 2006, we adopted SFAS 123R, "Share-Based Payment," 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. In March 2005, the SEC
issued Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment,"
relating to SFAS 123R. We have followed the SEC's guidance in SAB 107 in our
adoption of SFAS 123R.
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 $848,000 ($516,100 net of
tax) or $0.03 per basic and diluted share for the year ended December 31, 2006.
-59-
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 income and net income
per common share would have been as follows (in thousands, except per share
data):
Year Ended Year Ended
December 31 2005 December 31 2004
---------------- ----------------
Net losses as reported............................. $ (3,545) $ (14,380)
-------- ---------
Less: Stock-based employee compensation expense
determined under fair value method for all awards, net
of related tax effects............................. 678 452
-------- --------
Pro forma net losses............................... $ (4,223) $ (14,832)
======== =========
Losses per share:
Basic - as reported............................ $ (0.18) $ (0.74)
-------- --------
Basic - pro forma.............................. $ (0.22) $ (0.77)
-------- --------
Diluted - as reported.......................... $ (0.18) $ (0.74)
-------- --------
Diluted - pro forma............................ $ (0.22) $ (0.77)
======== =========
STOCK OPTION GRANTS
There were no stock options granted in the year ended December 31, 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 this year, we provided pro forma net income and 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 2004
------------- ---- ----
Expected option life.................... 3.9 years 3.9 years
Expected stock volatility............... 39.1% 38.6%
Expected dividend yield................. 3.4% 2.7%
Risk-free rate.......................... 4.0% 3.6%
Fair value of option.................... $2.72 $3.46
-60-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the Company's common stock.
The following is a summary of the changes in outstanding stock options for the
year ended December 31, 2006:
Weighted Weighted Average
Average Remaining
Exercise Contractual
Shares Price Term (years)
---------- ----------------------------
Outstanding at beginning of year................ 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 end of year...................... 990,898 $ 13.61 5.1
-------------------------------------------------- ---------- ----------------------------
Options exercisable at end of year.............. 861,148 $ 13.91 4.6
-------------------------------------------------- ---------- ----------------------------
The aggregate intrinsic value of all outstanding stock options was $1.9 million,
of which $1.4 million relates to options that are exercisable. The total
intrinsic value of options exercised was $0.3 million, $0 million and $0.7
million during the years ended December 31, 2006, 2005 and 2004, respectively.
The following is a summary of the changes in non-vested stock options for the
year ended December 31, 2006:
Weighted
Average Grant
Shares Date Fair Value
---------- ------------------
Non-vested shares at January 1, 2006 .......... 494,426 $ 3.04
Forfeitures.................................... 5,000 $ 2.83
Vested......................................... 359,676 $ 3.16
-------
Non-vested shares at December 31, 2006......... 129,750 $ 2.72
=======
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, 2006, we have
$88,200 of unrecognized compensation cost related to non-vested stock options
granted, which will be recognized over a weighted-average period of 0.25 years.
RESTRICTED AND PERFORMANCE STOCK GRANTS
Under our 2006 Omnibus Incentive Plan, the Company is authorized to issue shares
of restricted and performance-based stock to eligible employees and directors.
Prior to the time a restricted share becomes fully vested or a performance share
is issued, the awardee cannot transfer, pledge, hypothecate or encumber such
shares. Prior to the time a restricted share is fully vested, the awardee has
all other rights of a stockholder, including the right to vote (but not receive
dividends during the vesting period). Prior to the time a performance share is
-61-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
issued, the awardee shall have no rights as a stockholder. Restricted shares
become fully vested upon the third and first anniversary of the date of grant
for employees and directors, respectively. Performance-based shares are subject
to a three year measuring period and the achievement of Company performance
targets and, depending upon the achievement of such performance targets, then
may become vested on the third anniversary of the date of grant. Management
believes it is probable that the performance targets will be achieved.
All shares and rights are subject to forfeiture if certain employment conditions
are not met. Under the plan, 700,000 shares are authorized to be issued. For the
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 for U.S. GAAP purposes, 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 year
ended December 31, 2006, forfeitures are estimated at 2% for employees and 0%
for executives and directors, respectively, based on evaluations of historical
and expected future turnover.
The Company recorded compensation expense related to restricted shares and
performance-based shares of $164,200 ($99,900 net of tax) and $0 for the year
ended December 31, 2006 and 2005, respectively. The unamortized compensation
expense related to the Company's restricted and performance-based shares was
$506,200 at December 31, 2006 and is expected to be recognized over a weighted
average period of 2.3 and 0.3 years for employees and directors, respectively.
The Company's restricted and performance-based share activity was as follows for
the year ended December 31, 2006:
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 December 31, 2006 .......... 93,775 $ 7.21
======
The weighted-average grant date fair value of restricted and performance-based
shares granted during the year ended December 31, 2006 was $676,600, or $7.21
per share. No restricted or performance-based shares were authorized, granted,
outstanding or vested during the years ended December 31, 2005 and 2004.
13. RETIREMENT BENEFIT PLANS
As discussed in Note 1, the Company adopted the provisions of SFAS No. 158 on
December 31, 2006. The adoption related to retirement benefit plans resulted in
a decrease to total assets of $0.1 million, a decrease to total liabilities $0.5
million, and an increase to shareholders' 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, or for the Company's year ending
December 31, 2008. The Company is presently evaluating the impact of the
measurement date change, which is not expected to be material.
-62-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We had a defined benefit pension plan covering certain former employees of our
former brake business. During 2002, a partial settlement of the plan occurred in
conjunction with the purchase of non-participating annuity contracts for plan
members. The final settlement under the plan has occurred as the remaining
assets under the plan have been distributed. All pension benefit obligations
have been satisfied, the projected benefit obligation under the plan was $0, and
the plan was closed out.
The following table represents a reconciliation of the beginning and ending
benefit obligation, the fair value of plan assets and the funded status of the
plan (in thousands):
DECEMBER 31,
------------------------
2006 2005
---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year............... $ -- $ --
Interest cost......................................... -- --
Actuarial loss........................................ -- --
Settlement............................................ -- --
Benefits paid......................................... -- --
------- ------
Benefit obligation at end of year..................... $ -- $ --
======= ======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year........ $ 587 $ 594
Settlement............................................ (610) --
Actual return on plan assets.......................... 23 (7)
Benefits paid......................................... -- --
------ ------
Fair value of plan assets at end of year.............. $ 0 $ 587
------ ------
FUNDED STATUS......................................... 0 $ 587
Unrecognized net actuarial loss....................... 0 66
------ ------
Net amount recognized (prepaid benefit cost).......... $ 0 $ 653
====== ======
Weighted average assumptions are as follows (in thousands):
DECEMBER 31,
------------------------
2006 2005 2004
---- ---- ----
Discount rates.......................................... N/A N/A N/A
Expected long-term rate of return on assets............. N/A N/A N/A
Components of net periodic (benefit) cost follow (in thousands):
DECEMBER 31,
------------------------------
2006 2005 2004
---- ---- ----
Interest cost..................................... $ - $ - $ -
Return on assets.................................. - - -
Settlement........................................ - - -
Recognized actuarial (gain) loss.................. 1 33 116
------- ----- -------
Net periodic (benefit) cost....................... $ 1 $ 33 $ 116
======= ===== =======
-63-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, we participate in several multi-employer plans which provide
defined benefits to substantially all unionized workers. The Multi-employer
Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers
associated with multi-employer plans. The plan is administered by the Company,
and contributions are determined in accordance with the provisions of a
negotiated labor contract. We have not received information from the plans'
administrators to determine our share, if any, of unfunded vested benefits.
We and certain of our subsidiaries also maintain various defined contribution
plans, which include profit sharing and provide retirement benefits for other
eligible employees. The provisions for retirement expense in connection with the
plans are as follows (in thousands):
DEFINED
MULTI- CONTRIBUTION AND
EMPLOYER PLANS OTHER PLANS
-------------- -----------
Year ended December 31,
2006....................................... $ 445 $ 3,804
2005....................................... 434 3,759
2004....................................... 454 3,980
We have an Employee Stock Ownership Plan and Trust ("ESOP") for employees who
are not covered by a collective bargaining agreement. Employees were granted
118,500 shares, 114,500 shares, and 110,000 shares during 2006, 2005 and 2004,
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 2006, we committed 118,500 shares to be released leaving 182,000
shares remaining in the trust. The provision for expense in connection with the
ESOP was approximately $1.2 million in 2006, $1.3 million in 2005, and $1.6
million in 2004.
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 $83,000 in 2006, $69,000 in 2005, and $79,000 in 2004.
-64-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 2001, we adopted a second unfunded SERP. The SERP is a defined
benefit plan pursuant to which we will pay supplemental pension benefits to
certain key employees upon retirement based upon the employees' years of service
and compensation. We use a January 1 measurement date for this plan.
DECEMBER 31,
------------------------
2006 2005
---- ----
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 5,495 $ 4,599
Service cost ......................................... 393 394
Interest cost ........................................ 284 255
Actuarial loss (gain) ................................ (530) 247
------- -------
Benefit obligation at end of year .................... $ 5,642 $ 5,495
======= =======
FUNDED STATUS ........................................ (5,642) (5,495)
Unrecognized prior service cost ...................... 690 801
Additional minimum pension liability ................. (1,029) (1,435)
Unrecognized net actuarial loss ...................... 912 1,559
------- -------
Net amount recognized (accrued benefit cost) ......... $(5,069) $(4,570)
======= =======
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
--------------------------------
2006 2005 2004
---- ---- ----
Service cost.................................... $ 393 $ 394 $ 355
Interest cost................................... 284 255 232
Amortization of prior service cost.............. 111 110 111
Amortization of unrecognized loss............... 117 118 128
----- ----- -----
Net periodic benefit cost....................... $ 905 $ 877 $ 826
===== ===== =====
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
-------------------------------------
2006 2005 2004
---- ---- ----
Discount rates............................. 5.75% 5.50% 5.75%
Salary increase............................ 4% 4% 4%
The following SERP benefit payments are expected to be paid (in thousands):
BENEFITS
--------------------
2007........................................... $ 0
2008........................................... 351
2009........................................... 351
2010........................................... 351
2011........................................... 351
Years 2012 - 2016.............................. 1,754
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 2007 are $0.1 million and $0.1 million, respectively.
-65-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our UK pension plan is comprised of a defined benefit plan and a defined
contribution plan. Effective April 1, 2001, the defined benefit plan was closed
to new entrants and existing active members ceased accruing any further
benefits.
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,
--------------------------
2006 2005
---- -----
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 2,886 $ 3,412
Service cost ......................................... -- --
Interest cost ........................................ 168 157
Actuarial loss ....................................... -- (216)
Benefits paid ........................................ (125) (121)
Translation adjustment ............................... 381 (346)
------- -------
Benefit obligation at end of year .................... $ 3,310 $ 2,886
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ....... $ 2,678 $ 2,353
Settlement ........................................... 94 109
Actual return on plan assets ......................... 288 587
Benefits paid ........................................ (125) (121)
Expenses ............................................. -- (12)
Translation adjustment ............................... 353 (238)
------- -------
Fair value of plan assets at end of year ............. $ 3,288 $ 2,678
------- -------
FUNDED STATUS ........................................ (22) (208)
Unrecognized prior service cost ...................... -- --
Additional minimum pension liability ................. (1,974) (2,380)
Unrecognized net actuarial loss ...................... -- --
------- -------
Net amount recognized (accrued benefit cost) ......... $(1,996) $(2,588)
======= =======
Amounts recognized in the consolidated balance sheet consist of (in thousands):
DECEMBER 31,
-----------------------
2006 2005
---- ----
Current liabilities..................................... $ -- $ (208)
Non-current liabilities................................. (22) --
Accumulated other comprehensive loss.................... (1,974) (2,380)
----------- -----------
Net amount recognized...................................$ (1,996) $ (2,588)
=========== ===========
-66-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amounts recognized in accumulated other comprehensive loss consist of (in
thousands):
DECEMBER 31,
----------------------
2006 2005
---- -----
Net actuarial (gain) loss................................ $ -- $ --
Prior service cost (credit).............................. 22 208
Additional minimum pension liability..................... 1,974 2,380
--------- ------------
Net amount recognized....................................$ 1,996 $ 2,588
========= ============
Information for the UK pension plan with accumulated benefit obligation in
excess of plan assets (in thousands):
DECEMBER 31,
-------------------------
2006 2005
---- ----
Projected benefit obligation........................... $ 3,310 $ 2,886
Accumulated benefit obligation......................... $ 3,310 $ 2,886
Fair value of plan assets.............................. $ 3,288 $ 2,678
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
--------------------------------
2006 2005 2004
---- ---- ----
Service cost ............................... $-- $-- $--
Interest cost .............................. 168 157 171
Amortization of transition obligation ...... -- -- --
Amortization of prior service cost ......... -- -- --
Amortization of net actuarial loss ......... -- -- --
Recognized actuarial (gain) loss ........... (196) (145) (150)
------ ----- -----
Net periodic benefit cost .................. $ (28) $ 12 $ 21
===== ===== =====
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
----------------------------------------
2006 2005 2004
---- ---- ----
Discount rates............ 5.23% 5.23% 5.23%
Inflation................. 3.00% 3.00% 2.97%
The UK pension plan's weighted-average asset allocation by asset category are as
follows:
DECEMBER 31,
--------------------------
2006 2005
---- -----
Equity securities..................................... 70% 78%
Bonds................................................. 14% 20%
Property.............................................. 16% 0%
Cash.................................................. 0% 2%
---------- -----------
---------- -----------
100% 100%
========== ===========
The return on plan assets for 2006 was approximately 9.8%. The return on plan
assets for 2005 was approximately 28%.
-67-
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):
PENSION
BENEFITS
-------------------
2007.......................................... $ 98
2008.......................................... 118
2009.......................................... 137
2010.......................................... 157
2011.......................................... 176
Years 2012 - 2016............................. $1,175
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,
2006..................................................... $ 289
2005..................................................... 305
2004..................................................... 313
14. 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 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 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 ("FSP") No. FAS 106-2, which provides guidance on accounting for the
effects of the new Medicare prescription drug legislation for employers whose
prescription drug benefits are actuarially equivalent to the drug benefit under
Medicare Part D and are therefore entitled to receive subsidies from the federal
government beginning in 2006. 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 No. FAS 106-2, we have
assessed the financial impact of the regulations and concluded that our
post-retirement benefit plan will be qualified for the direct subsidies and,
consequently, our accumulated post-retirement benefit obligation decreased by
$6.8 million.
-68-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result of the reduced eligibility and Medicare subsidy explained above, we
are benefiting in 2006 from a reduction to our post-retirement benefit costs
through negative amortization of prior service costs.
As discussed in Note 1, the Company 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 shareholders' 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 ending after December 15, 2008, or for the Company's
year ending December 31, 2008. The Company is presently evaluating the impact of
the measurement date change, which is not expected to be material.
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of the plan (in thousands):
DECEMBER 31,
-------------------------
2006 2005
---- ----
Benefit obligation at beginning of year .......... $ 35,302 $ 46,960
Service cost ..................................... 807 2,924
Interest cost .................................... 2,050 2,330
Amendments ....................................... -- (20,667)
Actuarial loss ................................... 953 4,749
Benefits paid .................................... (920) (994)
-------- --------
Benefit obligation at end of year ................ $ 38,192 $ 35,302
-------- --------
Funded status .................................... $(38,192) $(35,302)
Unrecognized transition obligation ............... -- 34
Unrecognized prior service costs ................. -- (14,334)
Unrecognized net actuarial loss .................. -- 15,114
-------- --------
Accrued benefit cost ............................. $(38,192) $(34,488)
======== ========
Components of net periodic benefit cost following (in thousands):
DECEMBER 31
---------------------------------------
2006 2005 2004
---- ---- ----
Service cost...................................... $ 807 $2,924 $ 3,486
Interest cost..................................... 2,050 2,330 2,389
Amortization of transition obligation............. 4 30 42
Amortization of prior service cost................ (2,868) (1,190) 124
Amortization of net actuarial loss................ - 6 5
Recognized actuarial (gain) loss.................. 1,481 1,056 663
------------ ------------ ---------
Net periodic benefit cost......................... $ 1,474 $5,156 $6,709
SFAS 106 curtailment gain......................... -- (3,842) --
------------ ------------ ---------
Total benefit cost........................... $ 1,474 $1,314 $6,709
============ ============ =========
-69-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
------------------------------
2006 2005 2004
---- ---- ----
Discount rate..................................... 5.75% 5.50% 5.75%
Current medical cost trend rate .................. 9% 9% 10%
Current dental cost trend......................... 5% 5% 5%
Ultimate medical cost trend rate.................. 5% 5% 5%
Year trend rate declines to ultimate.............. 2011 2010 2009
Our measurement date for this plan is December 31.
The following benefit payments which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
NET
POST-RETIREMENT
BENEFITS
-------------------------
2007........................ $ 997
2008........................ 1,080
2009........................ 1,181
2010........................ 1,292
2011........................ 1,385
Years 2012 - 2016........... $ 9,273
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 2006 (in
thousands):
1-PERCENTAGE- 1-PERCENTAGE- POINT
POINT INCREASE DECREASE
--------------- -------------------
Effect on total of service and interest cost components................ $ 565 $ (453)
Effect on post retirement benefit obligation........................... $ 6,762 $ (5,477)
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 2007 are $1.2 million and ($2.9)
million, respectively.
15. OTHER INCOME (EXPENSE), NET
YEAR ENDED DECEMBER 31,
------------------------------
2006 2005 2004
---- ---- ----
(IN THOUSANDS)
Interest and dividend income ................................. $ 498 $ 311 $ 615
Gain on early retirement of debt ............................. -- 1,258 --
Income from joint ventures ................................... 915 956 753
Loss on divestiture of European Temperature Control operations (3,209) -- --
Gain (loss) on disposal of property, plant and equipment ..... (71) 160 --
(Loss) gain on foreign exchange .............................. 646 (768) 731
Other income - net ........................................... 838 731 762
------- ------- -------
Total other income (expense), net ........................ $ (383) $ 2,648 $ 2,861
======= ======= =======
-70-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2006 2005 2004
---- ---- ----
Current:
Domestic...................................... $ 968 $ 233 $ (2,476)
Foreign...................................... 2,135 2,137 4,022
------- ------ ---------
Total Current................................... 3,103 2,370 1,546
Deferred:
Domestic..................................... 3,416 (1,074) (4,558)
Foreign...................................... (25) 127 (667)
------- ------- ---------
Total Deferred.................................. 3,391 (947) (5,225)
------- ------- ---------
Total income tax provision (benefit)............ $ 6,494 $ 1,423 $ (3,679)
======= ======= =========
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 $35.9 million at the end of 2006, $36.1 million at the end of
2005 and $28.8 million at the end of 2004.
Earnings before income taxes for foreign operations (excluding Puerto Rico)
amounted to approximately $6.6 million, $6.8 million and $6.8 million in 2006,
2005 and 2004, 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,
----------------------------
2006 2005 2004
---- ---- ----
U.S. federal income tax rate of 35%........................................ $5,480 $ (121) $ (4,405)
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal income tax benefit......... 33 (121) (361)
State tax credits....................................................... 8 (535) --
Non-deductible items, net............................................... 246 241 174
Impact on deferred tax assets, Puerto Rico.............................. (1,146) -- --
Income (benefit) taxes attributable to foreign income................... (2) (1,115) 1,095
Change in valuation allowance........................................... 1,875 3,074 (182)
------ ------ --------
Provision (benefit) for income taxes.................................... $6,494 $1,423 $ (3,679)
====== ====== ========
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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,
-----------------------------
2006 2005
---- ----
Deferred tax assets:
Inventories................................................... $9,922 $8,701
Allowance for customer returns................................ 7,285 8,298
Post-retirement benefits...................................... 13,261 12,889
Allowance for doubtful accounts............................... 3,495 3,375
Accrued salaries and benefits................................. 9,672 5,596
Net operating loss, capital loss and tax credit carry forwards 21,136 24,928
Goodwill...................................................... 1,512 2,458
Accrued asbestos liabilities.................................. 8,691 10,703
Other......................................................... 7,194 7,142
-------- --------
82,168 84,090
-------- --------
Valuation allowance........................................... (28,006) (26,131)
-------- --------
Total......................................................... $ 54,162 $ 57,959
======== ========
Deferred tax liabilities:
Depreciation.................................................. $4,743 $7,270
Promotional costs............................................. 482 233
Goodwill...................................................... 514 444
Restructuring costs........................................... 8,620 7,659
Other......................................................... 1,358 1,705
-------- --------
Total......................................................... 15,717 17,311
-------- --------
Net deferred tax assets.......................................... $ 38,445 $ 40,648
======== ========
The current net deferred tax assets are $14 million and $14.1 million for 2006
and 2005, respectively. The non-current net deferred tax assets are $24.4
million and $26.6 million for 2006 and 2005, respectively. The tax valuation
allowance was allocated to the current deferred tax assets in the amounts of
$10.3 million and $9.1 million in 2006 and 2005, respectively. The long term tax
deferred assets had a valuation allowance of $17.7 million and $17.1 million in
2006 and 2005, respectively.
We performed an assessment regarding the realization of the net deferred tax
assets, which includes projecting future taxable income, and have increased the
valuation allowance by $1.9 million. The increase in the valuation allowance
specifically applied to the capital loss realized in the US during the year as
well as to European operating losses, given the uncertainty of realizing these
benefits in the future. The valuation allowance is intended in part to provide
for the uncertainty regarding the ultimate utilization of the Company's U.S. net
operating and capital loss carryovers, 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. Approximately $21 million of the
valuation allowance relates to US tax assets of $53 million. Approximately $97
million of taxable income will need to be generated to realize the deferred tax
asset. We believe it is more likely than not that we will be able to generate
this level of taxable income within 5 years based on the continuance of recently
improved trends. As such, with regard to the remaining net deferred tax assets,
we have determined that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the related
benefits. However, if we are unable to generate sufficient taxable income in the
future through our operations, increases in the valuation allowance may be
required.
-72-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2006, we have approximately $32.6 million of domestic and
foreign net operating loss carry forwards, of which $21.3 million will expire
between 2024 and 2025, with the remainder (foreign) having an indefinite carry
forward period. We also have foreign tax credit carry forwards of approximately
$1.1 million that will expire between 2010 and 2012, a capital loss carry
forward of approximately $2.8 million that will expire in 2011 and an
alternative minimum tax credit carry forward of approximately $6.2 million,
which has no expiration date.
17. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of Statement of Financial Accounting Standards SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), we have three reportable operating segments, which are the major
product areas of the automotive aftermarket in which we compete. Engine
Management consists primarily of ignition and emission parts, wire and cable,
and fuel system parts. Temperature Control consists primarily of compressors,
other air conditioning parts and heater parts. The third reportable operating
segment is Europe, which consists of both Engine Management and Temperature
Control reporting units.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). The following tables
contain financial information for each reportable segment (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----- ----- -----
Net sales:
Engine Management .................. $ 543,221 $ 547,008 $ 562,769
Temperature Control ................ 211,102 229,226 210,094
Europe ............................. 47,044 43,423 40,651
Other .............................. 10,657 10,756 10,769
--------- --------- ---------
Total ............................ $ 812,024 $ 830,413 $ 824,283
========= ========= =========
Depreciation and amortization:
Engine Management .................. $ 9,893 $ 9,992 $ 10,921
Temperature Control ................ 3,457 4,717 5,640
Europe ............................. 816 1,415 1,444
Other .............................. 1,320 1,232 1,008
--------- --------- ---------
Total ............................ $ 15,486 $ 17,356 $ 19,013
========= ========= =========
Operating profit (loss):
Engine Management .................. $ 41,249 $ 19,338 $ 24,549
Temperature Control ................ 11,954 11,936 (2,114)
Europe ............................. 46 (572) (2,034)
Other ............................... (17,934) (16,620) (22,138)
--------- --------- ---------
Total ............................ $ 35,315 $ 14,082 $ (1,737)
========= ========= =========
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----- ----- ----
Investment in equity affiliates:
Engine Management ................... $ -- $ -- $ --
Temperature Control ................. -- -- --
Europe .............................. 201 (202) (322)
Other ............................... 2,282 2,216 2,260
--------- --------- ---------
Total ............................. $ 2,483 $ 2,014 $ 1,938
========= ========= =========
Capital expenditures:
Engine Management ................... $ 7,481 $ 7,511 $ 7,513
Temperature Control ................. 1,339 1,813 1,383
Europe .............................. 1,215 623 793
Other ............................... 45 10 85
--------- --------- ---------
Total ............................... $ 10,080 $ 9,957 $ 9,774
========= ========= =========
Total assets:
Engine Management ................... $ 430,158 $ 438,116 $ 429,631
Temperature Control ................. 109,734 114,441 125,656
Europe .............................. 26,708 28,217 30,936
Other ............................... 73,492 72,270 70,346
--------- --------- ---------
Total ............................. $ 640,092 $ 653,044 $ 656,569
========= ========= =========
Reconciliation of segment operating profit (loss) to net income (loss):
YEAR ENDED DECEMBER 31,
----------------------------------
2006 2005 2004
----- ---- -----
Operating profit (loss) .................... $ 35,315 $ 14,082 $ (1,737)
Other (expense) income ..................... (383) 2,648 2,861
Interest expense ........................... 19,275 17,077 13,710
-------- -------- --------
Earnings (loss) from continuing operations
before taxes ........................... 15,657 (347) (12,586)
Income tax expense (benefit) .............. 6,494 1,423 (3,679)
-------- -------- --------
Earnings (loss) from continuing operations . 9,163 (1,770) (8,907)
Discontinued operation, net of tax ........ 248 (1,775) (3,909)
Cumulative effect of accounting change, net
of tax ................................... -- -- (1,564)
-------- -------- --------
Net earnings (loss) ........................ $ 9,411 $ (3,545) $(14,380)
======== ======== ========
Our five largest individual customers, including members of a marketing group,
accounted for 51%, 52% and 50% of consolidated net sales in 2006, 2005 and 2004,
respectively. These net sales were generated from our Engine Management and
Temperature Control Segments.
-74-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Adjustments consist of items pertaining to our corporate headquarters
function, as well as our Canadian business unit that does not meet the criteria
of a reportable operating segment under SFAS 131.
REVENUE
YEAR ENDED DECEMBER 31,
--------------------------------------------
2006 2005 2004
---- ---- ----
(IN THOUSANDS)
United States....................... $ 688,030 $ 716,358 $ 714,955
Canada.............................. 48,537 46,353 45,115
Europe.............................. 47,044 43,423 40,651
Other Foreign....................... 28,413 24,279 23,562
--------- --------- ---------
Total............................ $ 812,024 $ 830,413 $ 824,283
========= ========= =========
LONG LIVED ASSETS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2006 2005 2004
---- ---- ----
(IN THOUSANDS)
United States........................ $ 144,208 $ 161,451 $ 174,056
Europe............................... 4,821 4,682 6,214
Canada............................... 4,014 3,900 4,144
Other Foreign........................ 778 754 785
--------- --------- ---------
Total.............................. $ 153,821 $ 170,787 $ 185,199
========= ========= =========
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.
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.
-75-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted market prices
or current rates offered to us for debt of the same remaining maturities.
INTEREST RATE SWAPS
The fair value of our financial instruments is based on market quotes and
represents the net amount required to terminate the position, taking into
consideration market rates and counterparty credit risk.
The estimated fair values of our financial instruments are as follows (in
thousands):
CARRYING AMOUNT FAIR VALUE
DECEMBER 31, 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
Interest rate swaps............................ -- --
DECEMBER 31, 2005
Cash and cash equivalents...................... $ 14,046 $ 14,046
Trade accounts receivable...................... 176,294 176,294
Trade accounts payable......................... 52,535 52,535
Short term borrowings.......................... 149,236 149,236
Long-term debt................................. 99,091 97,847
Interest rate swaps............................ 496 496
20. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three years ended December 31, 2006 was as follows
(in thousands):
TOTAL REAL ESTATE OTHER
2006...................................... $8,438 $5,983 $2,455
2005...................................... 9,928 6,970 2,958
2004...................................... 11,858 7,686 4,172
At December 31, 2006, we are obligated to make minimum rental payments through
2017, under operating leases, which are as follows (in thousands):
2007................................................ $ 6,657
2008................................................ 5,614
2009................................................ 4,446
2010................................................ 2,059
2011................................................ 1,913
Thereafter.......................................... 8,582
-------
Total............................................... $29,271
=======
-76-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We also have lease and sub-lease agreements in place for various properties
under our control. We expect to receive operating lease payments from lessees
during the five years ending December 31, 2007 through 2012 of $0.7 million,
$0.6 million, $0.4 million, $0.2 million, and $0, respectively.
We generally warrant our products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time of
the product depending on the nature of the product. As of December 31, 2006 and
2005, we have accrued $11.7 million and $12.7 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 2006, 2005 and
2004 were $49.3 million, $50.3 million and $47.8 million, respectively.
The following table provides the changes in our product warranties (in
thousands):
DECEMBER 31,
------------------
2006 2005
---- ----
Balance, beginning of period......................... $ 12,701 $13,194
Liabilities accrued for current year sales........... 49,259 50,273
Settlements of warranty claims....................... (50,256) (50,766)
-------- -------
Balance, end of period............................... $ 11,704 $12,701
======== =======
LETTERS OF CREDIT. At December 31, 2006, we had outstanding letters of credit
with certain vendors aggregating approximately $2.2 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.
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 (as defined in the
agreement) and certain other benefits.
ASBESTOS. In 1986, we acquired a brake business, which we subsequently sold in
March 1998 and which is accounted for as a discontinued operation. When we
originally acquired this brake business, we assumed future liabilities relating
to any alleged exposure to asbestos-containing products manufactured by the
seller of the acquired brake business. In accordance with the related purchase
agreement, we agreed to assume the liabilities for all new claims filed on or
after September 1, 2001. Our ultimate exposure will depend upon the number of
claims filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense thereof. At December 31, 2006, approximately 3,270 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 February 28, 2007, the amounts paid
for settled claims are approximately $5 million. We do not have insurance
coverage for the defense and indemnity costs associated with these claims.
In evaluating our potential asbestos-related liability, we have considered
various factors including, among other things, an actuarial study performed by a
leading actuarial firm with expertise in assessing asbestos-related liabilities,
our settlement amounts and whether there are any co-defendants, the jurisdiction
in which lawsuits are filed, and the status and results of settlement
discussions. 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
-77-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
August 31, 2006. Based upon all the information considered by the actuarial
firm, the actuarial study estimated an undiscounted liability for settlement
payments, excluding legal costs, ranging from $22.1 million to $53.9 million for
the period through 2050. The change from the prior year study was a $3.2 million
decrease for the low end of the range and a $2.6 million increase for the high
end of the range. Based on the information contained in the actuarial study and
all other available information considered by us, we concluded that no amount
within the range of settlement payments was more likely than any other and,
therefore, recorded the low end of the range as the liability associated with
future settlement payments through 2050 in our consolidated financial
statements, in accordance with generally accepted accounting principles.
Accordingly, a $3.4 million benefit was recorded to our discontinued operation,
and we adjusted our accrued asbestos liability to approximately $22.1 million.
Legal costs, which are expensed as incurred and reported in loss from
discontinued operation, are estimated to range from $11.6 million to $21.6
million during the same period.
We plan on performing a similar annual actuarial analysis during the third
quarter of each year for the foreseeable future. Given the uncertainties
associated with projecting such matters into the future and other factors
outside our control, we can give no assurance that additional provisions will
not be required. Management will continue to monitor the circumstances
surrounding these potential liabilities in determining whether additional
provisions may be necessary. At the present time, however, we do not believe
that any additional provisions would be reasonably likely to have a material
adverse effect on our liquidity or consolidated financial position.
ANTITRUST LITIGATION. On November 30, 2004, 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 excused
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.
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.
-78-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. QUARTERLY FINANCIAL DATA UNIT (UNAUDITED)
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
--------- --------- --------- ---------
(Loss) earnings from continuing operations ... (1,473) 2,583 5,455 2,598
--------- --------- --------- ---------
(Loss) income from discontinued operation,
net of taxes ............................... (355) 1,656 (289) (764)
--------- --------- --------- ---------
Net (loss) earnings .......................... $ (1,828) $ 4,239 $ 5,166 $ 1,834
--------- --------- --------- ---------
Net (loss) earnings 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 (loss) earnings per common share:
Basic ................................... $ (0.10) $ 0.23 $ 0.28 $ 0.10
Diluted ................................. $ (0.10) $ 0.23 $ 0.28 $ 0.10
--------- --------- --------- ---------
2005:
QUARTER ENDED DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2005 2005 2005 2005
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales .................................... $ 172,137 $ 224,438 $ 226,512 $ 207,326
--------- --------- --------- ---------
Gross profit ................................. 39,498 49,137 48,910 48,435
--------- --------- --------- ---------
(Loss) earnings from continuing operations ... (5,705) 4,163 (1,281) 1,053
--------- --------- --------- ---------
Loss from discontinued operation, net of taxes (535) (449) (384) (407)
--------- --------- --------- ---------
Net (loss) earnings .......................... $ (6,240) $ 3,714 $ (1,665) $ 646
--------- --------- --------- ---------
Net (loss) earnings from continuing operations
per common share:
Basic ................................... $ (0.29) $ 0.21 $ (0.07) $ 0.05
Diluted ................................. $ (0.29) $ 0.21 $ (0.07) $ 0.05
--------- --------- --------- ---------
Net (loss) earnings per common share:
Basic ................................... $ (0.32) $ 0.19 $ (0.09) $ 0.03
Diluted ................................. $ (0.32) $ 0.19 $ ( 0.09) $ 0.03
--------- --------- --------- ---------
-79-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2006. 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 management's assessment and as to the effectiveness of the
Company's internal control over financial reporting as of December 31, 2006. 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, 2006 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.
ITEM 9B. OTHER INFORMATION
None.
-80-
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 2007 Annual Meeting of Stockholders (the "2007 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 2007 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 2007 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 2007 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 2007 Proxy Statement set forth under the captions "Audit and
Non-Audit Fees."
-81-
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
2006, 2005 and 2004 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.
-82-
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 16, 2007
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 16, 2007 /S/ LAWRENCE I. SILLS
----------------------
Lawrence I. Sills
Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
March 16, 2007 /S/ JAMES J. BURKE
------------------
James J. Burke
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
March 16, 2007 /S/ LUC GREGOIRE
Luc Gregoire
Corporate Controller and
Chief Accounting Officer
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March 16, 2007 /S/ ROBERT M. GERRITY
----------------------
Robert M. Gerrity, Director
March 16, 2007 /S/ ARTHUR S. SILLS
--------------------
Arthur S. Sills, Director
March 16, 2007 /S/ PETER J. SILLS
-------------------
Peter J. Sills, Director
March 16, 2007 /S/ FREDERICK D. STURDIVANT
----------------------------
Frederick D. Sturdivant, Director
March 16, 2007 /S/ WILLIAM H. TURNER
----------------------
William H. Turner, Director
March 16, 2007 /S/ ROGER M. WIDMANN
-----------------------------
Roger M. Widmann, Director
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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).
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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).
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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.
10.20 Retention Bonus and Insurance Agreement, dated December 26, 2006,
between Standard Motor Products, Inc. and John Gethin.
10.21 Retention Bonus and Insurance Agreement dated December 26, 2006,
between Standard Motor Products, Inc. and James Burke.
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 ON SCHEDULE
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 balance sheets of
Standard Motor Products, Inc. and Subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006
referred to in our report dated March 15, 2007, which is included in the annual
report to security holders and incorporated by reference in Part II of this
form. Our report on the consolidated financial statements includes explanatory
paragraphs, relating to 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 audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II is presented for purposes
of additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
New York, New York
March 15, 2007
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2006, 2005 and 2004
ADDITIONS
Balance at Charged to
beginning costs and Balance at
DESCRIPTION OF YEAR EXPENSES OTHER DEDUCTIONS END OF YEAR
----------- ------- -------- ------ ---------- -----------
YEAR ENDED DECEMBER 31, 2006:
Allowance for doubtful accounts $ 7,527,000 $ 405,000 $ (382,000) (1) $ 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) (1) $ 11,623,000 $ 9,465,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 22,346,000 $ 82,259,000 $ (95,000) (1) $ 82,805,400 $ 21,705,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 39,061,000 $ 6,128,000 $ (846,000) (1) $ 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
=============== ================ =============== =============== ===============
YEAR ENDED DECEMBER 31, 2004:
Allowance for doubtful accounts $ 3,009,000 $ 404,000 $ 5,163,000 (2) $ 1,154,000 $ 7,422,000
Allowance for discounts 2,000,000 12,319,000 -- 12,387,000 1,932,000
--------------- ---------------- --------------- --------------- ---------------
$ 5,009,000 $ 12,723,000 $ 5,163,000 $ 13,541,000 $ 9,354,000
=============== ================ =============== =============== ===============
Allowance for sales returns $ 24,115,000 $ 86,452,000 $ 194,000 (3) $ 87,634,000 $ 23,127,000
=============== ================ =============== =============== ===============
Allowance for inventory valuation $ 41,803,000 $ 1,487,000 $ 430,000 (3) $ 4,082,000 $ 39,638,000
=============== ================ =============== =============== ===============
(1) Allowances for divested companies.
(2) The Company previously presented the reserve for accounts receivable
balances over 90 days past due as a reduction to the gross receivable
balance instead of as part of the allowance for doubtful accounts. In
the fourth quarter of 2004, the Company decided to record the
$5,163,000 of accounts receivable over 90 days past due as part of
gross accounts receivable instead of as an offset to the allowance for
doubtful accounts. There was no impact on the net accounts receivable
recorded on the consolidated balance sheets.
(3) Allowances acquired through acquisitions.
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