================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 1-4743
STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(718) 392-0200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |X|
Non-Accelerated Filer |_| Smaller reporting company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of the close of business on October 31, 2008, there were 18,693,509
outstanding shares of the registrant's Common Stock, par value $2.00 per share.
================================================================================
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations (Unaudited)
for the Three Months and Nine Months Ended
September 30, 2008 and 2007........................................ 3
Consolidated Balance Sheets
as of September 30, 2008 (Unaudited) and December 31, 2007......... 4
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2008 and 2007.............. 5
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Three Months and Nine Months Ended September 30, 2008...... 6
Notes to Consolidated Financial Statements (Unaudited)............. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................21
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........33
Item 4. Controls and Procedures............................................34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................35
Item 6. Exhibits...........................................................36
Signatures....................................................................36
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
(In thousands, except share and per share data) September 30, September 30,
2008 2007 2008 2007
(Unaudited) (Unaudited)
Net sales ............................................ $ 202,938 $ 206,169 $ 626,365 $ 622,934
Cost of sales ........................................ 154,166 151,527 477,740 459,728
------------ ------------ ------------ ------------
Gross profit ....................................... 48,772 54,642 148,625 163,206
Selling, general and administrative expenses ......... 41,294 42,861 128,080 128,916
Restructuring and integration expenses ............... 1,905 2,630 6,117 3,867
------------ ------------ ------------ ------------
Operating income ................................... 5,573 9,151 14,428 30,423
Other income, net .................................... 1,293 1,864 21,665 2,910
Interest expense ..................................... 3,109 4,605 10,428 13,941
------------ ------------ ------------ ------------
Earnings from continuing operations before taxes ... 3,757 6,410 25,665 19,392
Provision for income tax ............................. 3,360 1,628 12,693 6,018
------------ ------------ ------------ ------------
Earnings from continuing operations ................ 397 4,782 12,972 13,374
Loss from discontinued operations, net of income taxes (1,579) (2,148) (2,228) (2,776)
------------ ------------ ------------ ------------
Net earnings (loss) ................................ $ (1,182) $ 2,634 $ 10,744 $ 10,598
============ ============ ============ ============
PER SHARE DATA:
Net earnings (loss) per common share -- Basic:
Earnings from continuing operations ......... $ 0.02 $ 0.26 $ 0.70 $ 0.72
Discontinued operation ...................... (0.08) (0.12) (0.12) (0.15)
------------ ------------ ------------ ------------
Net earnings (loss) per common share -- Basic ......... $ (0.06) $ 0.14 $ 0.58 $ 0.57
============ ============ ============ ============
Net earnings (loss) per common share -- Diluted:
Earnings from continuing operations ......... $ 0.02 $ 0.26 $ 0.70 $ 0.72
Discontinued operation ...................... (0.08) (0.12) (0.12) (0.15)
------------ ------------ ------------ ------------
Net earnings (loss) per common share -- Diluted ....... $ (0.06) $ 0.14 $ 0.58 $ 0.57
============ ============ ============ ============
Average number of common shares ...................... 18,558,330 18,593,165 18,479,817 18,609,268
============ ============ ============ ============
Average number of common shares and dilutive
common shares ........................................ 18,617,724 18,623,138 18,512,475 18,692,217
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
-3-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands, except share and per share data) 2008 2007
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 11,023 $ 13,261
Accounts receivable, less allowance for discounts and doubtful
accounts of $10,088 and $8,964 for 2008 and 2007, respectively ... 239,996 204,445
Inventories .......................................................... 239,262 252,277
Deferred income taxes ................................................ 15,154 17,003
Assets held for sale ................................................. 1,805 5,373
Prepaid expenses and other current assets ............................ 11,031 10,748
--------- ---------
Total current assets ............................................. 518,271 503,107
Property, plant and equipment, net .......................................... 68,602 71,775
Goodwill, net ............................................................... 41,714 41,566
Other intangibles, net ...................................................... 14,585 16,325
Other assets ................................................................ 30,086 45,319
--------- ---------
Total assets ..................................................... $ 673,258 $ 678,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ........................................................ $ 159,992 $ 156,756
Current portion of long-term debt .................................... 69,554 8,021
Accounts payable ..................................................... 73,889 64,384
Sundry payables and accrued expenses ................................. 25,834 29,242
Accrued customer returns ............................................. 30,374 23,149
Accrued rebates ...................................................... 21,618 21,494
Payroll and commissions .............................................. 17,455 16,987
--------- ---------
Total current liabilities ..................................... 398,716 320,033
Long-term debt .............................................................. 370 90,534
Post-retirement medical benefits and other accrued liabilities .............. 43,002 56,510
Accrued asbestos liabilities ................................................ 24,293 22,651
--------- ---------
Total liabilities ............................................. 466,381 489,728
--------- ---------
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 ....................................... 58,790 59,220
Retained earnings .................................................... 111,908 106,147
Accumulated other comprehensive income ............................... 15,911 5,546
Treasury stock - at cost 1,926,891 and 2,189,079 shares in
2008 and 2007, respectively ................................... (20,704) (23,521)
--------- ---------
Total stockholders' equity ................................ 206,877 188,364
--------- ---------
Total liabilities and stockholders' equity ................ $ 673,258 $ 678,092
========= =========
See accompanying notes to consolidated financial statements.
-4-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Nine Months Ended
September 30,
--------------------
2008 2007
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................. $ 10,744 $ 10,598
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization ............................................... 10,714 11,256
Increase in allowance for doubtful accounts ................................. 900 1,301
Increase in inventory reserves .............................................. 2,104 3,372
Gain on sale of building .................................................... (21,583) --
Loss (gain) on disposal of property, plant and equipment .................... 468 (646)
Loss on defeasance of mortgage loan ......................................... 1,444 --
Gain on repurchase of convertible debentures ................................ (1,570) --
Equity (income) loss from joint ventures ................................... 454 (296)
Loss on impairment of assets ................................................ 355 --
Employee stock ownership plan allocation .................................... 1,196 1,400
Stock-based compensation .................................................... 791 423
Decrease in deferred income taxes ........................................... 14,409 1,439
Loss from discontinued operation, net of income tax ......................... 2,228 2,776
Change in assets and liabilities:
Increase in accounts receivable ............................................. (36,450) (52,423)
Decrease (increase) in inventories .......................................... 13,057 (8,465)
Increase in prepaid expenses and other current assets ....................... (326) (2,416)
Decrease (increase) in other assets ......................................... 4,126 (23)
Increase in accounts payable ................................................ 4,696 5,790
Increase in sundry payables and accrued expenses ............................ 4,932 487
(Decrease) increase in other liabilities .................................... (13,397) 13,115
-------- --------
Net cash used in operating activities ................................... (708) (12,312)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and equipment ....................... 64 133
Net cash received from the sale of buildings ................................. 37,341 4,173
Capital expenditures .......................................................... (8,031) (9,613)
Acquisitions of businesses and assets ......................................... (3,638) --
-------- --------
Net cash provided by (used in) investing activities ..................... 25,736 (5,307)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements ................................ 2,154 16,751
Defeasance of mortgage loan ................................................... (7,755) --
Repurchase of convertible debentures .......................................... (18,907) --
Net repayment of long-term debt ............................................... (318) (495)
Increase in overdraft balances ................................................ 4,809 1,424
Purchase of treasury stock .................................................... -- (4,997)
Proceeds from exercise of employee stock options .............................. -- 4,185
Excess tax benefits related to the exercise of employee stock options ........ -- 454
Dividends paid ................................................................ (4,983) (5,043)
-------- --------
Net cash provided by (used in) financing activities ..................... (25,000) 12,279
-------- --------
Effect of exchange rate changes on cash ........................................ (2,266) 2,441
-------- --------
Net decrease in cash and cash equivalents ...................................... (2,238) (2,899)
CASH AND CASH EQUIVALENTS at beginning of the period ........................... 13,261 22,348
-------- --------
CASH AND CASH EQUIVALENTS at end of the period ................................. $ 11,023 $ 19,449
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 12,423 $ 15,460
======== ========
Income taxes .................................................................. $ 3,116 $ 2,665
======== ========
See accompanying notes to consolidated financial statements.
-5-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY
(In thousands) STOCK PAR VALUE EARNINGS INCOME STOCK TOTAL
----- --------- -------- ------ ----- -----
Balance at June 30, 2008 ....... $ 40,972 $ 58,684 $ 114,760 $ 18,609 $ (20,732) $ 212,293
Comprehensive income:
Net loss ................... -- -- (1,182) -- -- (1,182)
Foreign currency translation
adjustment ............... -- -- -- (1,658) -- (1,658)
Pension and retiree medical
adjustment ............... -- -- -- (1,040) -- (1,040)
----------
Total comprehensive income . -- -- -- -- -- (3,880)
Cash dividends paid ............ -- -- (1,670) -- -- (1,670)
Stock-based compensation ....... -- 106 -- -- 28 134
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2008 .. $ 40,972 $ 58,790 $ 111,908 $ 15,911 $ (20,704) $ 206,877
========= ========= ========= ========= ========= =========
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY
(In thousands) STOCK PAR VALUE EARNINGS INCOME STOCK TOTAL
----- --------- -------- ------ ----- -----
Balance at December 31, 2007 ... $ 40,972 $ 59,220 $ 106,147 $ 5,546 $ (23,521) $ 188,364
Comprehensive income:
Net earnings ............... -- -- 10,744 -- -- 10,744
Foreign currency translation
adjustment ............... -- -- -- (2,456) -- (2,456)
Pension and retiree medical
adjustment ............... -- -- -- 12,821 -- 12,821
----------
Total comprehensive income . -- -- -- -- -- 21,109
Cash dividends paid ............ -- -- (4,983) -- -- (4,983)
Stock-based compensation ....... -- 118 -- -- 673 791
Employee Stock Ownership Plan .. -- (548) -- -- 2,144 1,596
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2008 .. $ 40,972 $ 58,790 $ 111,908 $ 15,911 $ (20,704) $ 206,877
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-6-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as the "Company," "we," "us," or "our") is
engaged in the manufacture and distribution of replacement parts for motor
vehicles in the automotive aftermarket industry.
The accompanying unaudited financial information should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2007.
The unaudited consolidated financial statements include our accounts and all
domestic and international companies in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant inter-company items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the entire year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of consolidated annual and quarterly financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities, the 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 have made a number of estimates and
assumptions in the preparation of these consolidated financial statements. We
can give no assurance that actual results will not differ from those estimates.
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.
The impact and any associated risks related to significant accounting 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. There have been no material
changes to our critical accounting policies and estimates from the information
provided in Note 1 of the notes to our consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2007.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. This statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. SFAS 157 is effective for the fiscal year beginning after
-7-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
November 15, 2007, which for us is the year ending December 31, 2008. As of
January 1, 2008, we adopted SFAS 157. The adoption of SFAS 157 did not impact
our consolidated financial statements in any material respect.
In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's effective
date for all non-financial assets and liabilities, except those items recognized
or disclosed at fair value on an annual or more frequently recurring basis,
until years beginning after November 15, 2008. Derivatives measured at fair
value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing the
impact, if any, which the adoption of FSP FAS 157-b will have on our
consolidated financial position, results of operations and cash flows.
FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"), including an amendment
of FASB Statement No. 115. SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value. The Statement's
objective is to improve financial reporting by allowing entities to mitigate
volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge
accounting provisions. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
new Statement establishes presentation and disclosure requirements to help
financial statement users understand the effect of the entity's election on its
earnings, but does not eliminate disclosure requirements of other accounting
standards. SFAS 159 is effective as of the beginning of the first fiscal year
that begins after November 15, 2007, and is effective for us as of January 1,
2008. The adoption of SFAS 159 did not impact our consolidated financial
statements in any material respect.
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141R"). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for the fiscal year beginning after December 15, 2008, which for us is
the fiscal year beginning January 1, 2009. SFAS 141R will have an impact on the
manner in which we account for future acquisitions beginning in the fiscal year
2009.
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, which for us is the fiscal year beginning January 1, 2009. We are
assessing the impact, if any, which the adoption of SFAS 160 will have on our
consolidated financial position, results of operations and cash flows.
-8-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). This Statement requires
enhanced disclosures about an entity's derivative and hedging activities and
thereby improves the transparency of financial reporting. This Statement is
effective for financial statements issued for fiscal years and interim periods
ending after November 15, 2008, which for us is the fiscal year ending December
31, 2008. The adoption of SFAS 161 will have an impact on the manner in which we
would disclose any derivative or hedging activities, if present.
CONVERTIBLE DEBT INSTRUMENTS
In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion" ("FSP
APB 14-1") which requires issuers of convertible debt that may be settled wholly
or partly in cash to account for the debt and equity components separately. This
FSP is effective for fiscal years beginning after December 15, 2008, which for
us is the fiscal year beginning January 1, 2009 and must be applied
retrospectively to all periods presented. We are assessing the impact, if any,
which the adoption of FSP APB 14-1 will have on our financial statements.
NOTE 3. RESTRUCTURING AND INTEGRATION COSTS
RESTRUCTURING COSTS
In connection with our acquisition of substantially all of the assets and the
assumption of substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM") in June 2003, we established
restructuring accruals relating to the consolidation of DEM into our existing
operations. Of the original provision, we have a restructuring accrual of $0.8
million remaining as of September 30, 2008. The restructuring accrual relates to
work force reductions, employee termination benefits and contract termination
costs.
INTEGRATION EXPENSES
Integration expenses relate primarily to the cost of moving and closing our
Puerto Rico production operations, the integration of operations in Mexico, the
closure of our Fort Worth, Texas and Long Island City, New York production
facilities, the closure and consolidation of our distribution operations in
Reno, Nevada, the closure of our production operations in Edwardsville, Kansas
and the cost of consolidating our European production operations.
In August 2008, we announced plans to consolidate our ignition distribution
operations in Reno, Nevada with our current facility in Disputanta, Virginia.
The closure and transition to Disputanta, Virginia is targeted to be completed
in December 2008, and we intend to sell the building in Reno, Nevada once the
closure and consolidation is complete and the building is vacated.
In September 2008, we entered into an agreement with the International Union,
United Automobile, Aerospace and Agricultural Implement Workers or America and
its Local 710 ("UAW") regarding the shutdown of our manufacturing operations at
Edwardsville, Kansas, which will be transferred to our Reynosa, Mexico facility.
The relocation of such manufacturing operations is expected to be completed by
the end of the third quarter 2009.
-9-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
In connection with the closure of our distribution operations in Reno, Nevada
and manufacturing operations in Edwardsville, Kansas, and corresponding
consolidation plans, we expect to incur one-time termination benefits to be paid
to certain employees at the end of a specified requisite service period. We
estimate these termination benefits to be $1.2 million related to our Reno,
Nevada and Edwardsville, Kansas personnel which will be recognized as expense
ratably over the requisite service period. We are still evaluating the estimates
related to additional incremental costs such as equipment removal and
impairment, headcount overlap during a transitional training period and other
plant move cash costs.
During 2008, we incurred integration expenses of $6.1 million, consisting of the
cost of workforce reductions of $3.6 million related primarily to production
facility closures at Long Island City, New York, Edwardsville, Kansas, and
Puerto Rico and to the distribution center closure in Reno, Nevada, and other
exit costs of $2.5 million. Other exit costs consist primarily of lease and
contract termination costs and the cost of upkeep at vacated facilities. Cash
payments made during the first nine months of 2008 were $7.5 million and will
continue over a period which is not to exceed 20 years.
Selected information relating to integration activities is as follows (in
thousands):
WORKFORCE OTHER EXIT
(in thousands) REDUCTION COSTS TOTAL
-------------- --------- ----- -----
Exit activity liability at December 31, 2007 .. $ 5,591 $ 2,507 $ 8,098
Amounts provided for during 2008 .............. 3,599 2,518 6,117
Adjustments ................................... (28) -- (28)
Cash payments during 2008 ..................... (4,501) (3,027) (7,528)
------- ------- -------
Exit activity liability at September 30, 2008 . $ 4,661 $ 1,998 $ 6,659
======= ======= =======
As of September 30, 2008, in accordance with the requirements of FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we
have reported $1.8 million as assets held for sale on our consolidated balance
sheet related to the net book value of two buildings in our European Segment.
Following plant closures resulting from integration activities, these buildings
have been vacant and therefore a decision to solicit bids has been made. We
anticipate that a negotiated sale to a third-party will occur within the next
twelve months and will record any resulting gain in other income as appropriate.
NOTE 4. SALE OF LONG ISLAND CITY, NEW YORK PROPERTY
In March 2008, we completed the sale of the Long Island City, New York property
and entered into a Lease Agreement with the purchaser whereby we would lease
space at the property. The purchase price for the property was $40.6 million
with the proceeds used to reduce debt. The initial term of the lease is ten
years and contains four 5-year renewal options.
The sale has been recorded as a sale and leaseback transaction. As our retention
rights to the property will be more than minor but less than substantially all,
a portion of the gain has been deferred. The total gain from the sale of the
property was $31.6 million, of which $21.1 million was recognized upon closing
with the balance of the gain deferred to be recognized over the initial term of
the lease of ten years. In connection with the closing, we have defeased the
existing mortgage loan on the property of $7.8 million which resulted in a loss
on the extinguishment of debt of $1.4 million, consisting of fees and expenses
of $1 million and the write-off of deferred finance costs of $0.4 million. The
gain on the sale of the property and the loss on extinguishment of debt are
included in other income, net in the consolidated statement of operations.
-10-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. SALE OF RECEIVABLES
In April 2008, we began to sell undivided interests in certain of our
receivables to financial institutions. 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 $83.4 million of receivables as of September 30, 2008. Under the terms
of the agreements, we retain no rights or interest, have no obligations with
respect to the sold receivables, and do not service the receivables after the
sale. As such, these transactions are being accounted for as a sale in
accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." A charge in the amount of
$0.4 million and $0.7 million related to the sale of receivables is included in
selling, general and administrative expense in our consolidated statements of
operations for the three and nine months ended September 30, 2008, respectively.
NOTE 6. INVENTORIES
Inventories consist of (in thousands):
September 30, December 31,
2008 2007
------------- -------------
Finished goods, net .......................... $159,023 $182,914
Work in process, net ......................... 9,792 5,850
Raw materials, net ........................... 70,447 63,513
-------- --------
Total inventories, net ................... $239,262 $252,277
======== ========
NOTE 7. CREDIT FACILITIES AND LONG-TERM DEBT
Total debt consists of (in thousands):
September 30, December 31,
2008 2007
------------- -------------
Revolving credit facilities (1) ...................... $159,992 $156,756
6.75% convertible subordinated debentures (2) ........ 69,443 90,000
Mortgage loan (3) .................................... -- 7,891
Other ................................................ 481 664
-------- --------
Total debt .................................... $229,916 $255,311
======== ========
Current maturities of long-term liabilities .......... $229,546 $164,777
Long-term debt ....................................... 370 90,534
-------- --------
Total debt ....................................... $229,916 $255,311
======== ========
(1) Consists of the revolving credit facility, the Canadian term loan and the
European revolving credit facilities.
(2) In the third quarter 2008, we repurchased $20.6 million principal amount of
the debentures. In October and November 2008, we repurchased in the
aggregate an additional $9.5 million principal amount of the debentures.
The convertible debentures will mature on July 15, 2009.
(3) The mortgage loan was secured by the Long Island City, New York property.
In March 2008 in connection with the sale of the property, we defeased the
mortgage loan.
-11-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
We had deferred financing costs of $2.7 million as of December 31, 2007. These
costs related to our revolving credit facility, the convertible subordinated
debentures and the mortgage loan agreement. In March 2008 in connection with the
sale of the Long Island City, New York property, we defeased the mortgage loan
and deferred financing costs of $0.4 million were written off. Deferred
financing costs of $1.7 million as of September 30, 2008 are being amortized in
the amount of $0.2 million in 2008, $0.6 million in 2009, $0.4 million in 2010
and $0.5 million for the period 2011-2012.
REVOLVING CREDIT FACILITY
In March 2007, we entered into a Second Amended and Restated Credit Agreement
with General Electric Capital Corporation, as agent, and a syndicate of lenders
for a secured revolving credit facility. The restated credit agreement provides
for a line of credit of up to $275 million (inclusive of the Canadian term loan
described below) and expires in 2012. The restated credit agreement also
provides a $50 million accordion feature, which would allow us to expand the
facility. Direct borrowings under the restated credit agreement bear interest at
the LIBOR rate plus the applicable margin (as defined), or floating at the index
rate plus the applicable margin, at our option, and the interest rate may vary
depending upon our borrowing availability. The restated credit agreement is
guaranteed by certain of our subsidiaries.
Borrowings under the restated credit agreement are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of certain of our subsidiaries. After taking into
account outstanding borrowings under the restated credit agreement, there was an
additional $75.3 million available for us to borrow pursuant to the formula at
September 30, 2008, of which $24.4 million is reserved for repayment, repurchase
or redemption, as the case may be, of the aggregate outstanding amount of our
convertible debentures. At September 30, 2008 and December 31, 2007, the
interest rate on our restated credit agreement was 3.8% and 6.4%, respectively.
Outstanding borrowings under the restated credit agreement (inclusive of the
Canadian term loan described below), which are classified as current
liabilities, were $152 million and $148.7 million at September 30, 2008 and
December 31, 2007, respectively.
At any time that our borrowing availability in the aggregate is less than $30
million and until such time that we have maintained an average borrowing
availability in the aggregate of $30 million or greater for a continuous period
of ninety days, the terms of our restated credit agreement provide for, among
other provisions, financial covenants requiring us, on a consolidated basis, (1)
to maintain specified levels of fixed charge coverage at the end of each fiscal
quarter (rolling twelve months), and (2) to limit capital expenditure levels. As
of September 30, 2008, we were not subject to these covenants. Availability
under our restated credit agreement is based on a formula of eligible accounts
receivable, eligible inventory and eligible fixed assets. In addition, the
restated credit agreement provides that, beginning on January 15, 2008 and on a
quarterly basis thereafter, a certain amount of our borrowing availability shall
be reserved for the repayment, repurchase or redemption, as the case may be, of
the aggregate outstanding amount of our convertible debentures. As of September
30, 2008, our required reserve amount is $24.4 million. Our restated credit
agreement also permits dividends and distributions by us provided specific
conditions are met.
CANADIAN TERM LOAN
In March 2007, we amended our credit agreement with GE Canada Finance Holding
Company, for itself and as agent for the lenders. The amended credit agreement
provides for a line of credit of up to $12 million, of which $7 million is
currently outstanding and which amount is part of the $275 million available for
-12-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
borrowing under our restated credit agreement with General Electric Capital
Corporation (described above). The amended credit agreement is guaranteed and
secured by us and certain of our wholly-owned subsidiaries and expires in 2012.
Direct borrowings under the amended credit agreement bear interest at the same
rate as our restated credit agreement with General Electric Capital Corporation
(described above).
REVOLVING CREDIT FACILITY--EUROPE
Our European subsidiary has revolving credit facilities which, at September 30,
2008, provide for a line of credit up to $9.5 million. The amount of short-term
bank borrowings outstanding under these facilities was $8 million on September
30, 2008 and December 31, 2007. The weighted average interest rate on these
borrowings on September 30, 2008 was 6.2% and December 31, 2007 was 6.7%.
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 our existing and future senior indebtedness.
We may, from time to time, repurchase the debentures in the open market, or
through privately negotiated transactions, on terms that we believe to be
favorable with any gains or losses as a result of the difference between the net
carrying amount and the reacquisition price recognized in the period of
repurchase. In the third quarter 2008, we repurchased $20.6 million principal
amount of the debentures resulting in a gain on the repurchase of $1.6 million.
In October and November 2008, we repurchased in the aggregate an additional $9.5
million principal amount of the debentures resulting in a gain of $1 million,
which will be recorded in the fourth quarter of 2008. As of September 30, 2008,
the convertible debentures are convertible into 2,157,455 shares of our common
stock at the option of the holder.
MORTGAGE LOAN AGREEMENT
In June 2003, we borrowed $10 million under a mortgage loan agreement. In
connection with the sale of the Long Island City, New York property in March
2008, we defeased the mortgage loan. We incurred fees and expenses in the
defeasance of approximately $1 million, and deferred finance costs capitalized
of $0.4 million were written off upon the defeasance.
NOTE 8. STOCK-BASED COMPENSATION PLANS
We account for our five stock-based compensation plans in accordance with the
provisions of FASB Statement No. 123R, "Share-Based Payment" ("FAS 123R"), which
requires that a company measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. That cost is recognized in the statement of operations over the
period during which an employee is required to provide service in exchange for
the award.
-13-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
STOCK OPTION GRANTS
There were no stock options granted in the nine months ended September 30, 2008
and 2007. 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. Our
policy was to calculate the compensation expense related to the stock-based
compensation granted to employees and directors on a straight-line basis over
the full vesting period of the grants. The expense for the nine months ended
September 30, 2008 and 2007 reflects our estimate of expected forfeitures which
we determine to be immaterial, based on history and remaining time until vesting
of the remaining options.
As of September 30, 2008, we have no unrecognized compensation cost related to
stock options and non-vested stock options.
The following is a summary of the changes in outstanding stock options for the
nine months ended September 30, 2008:
WEIGHTED
AVERAGE
WEIGHTED REMAINING
STOCK AVERAGE CONTRACTUAL
OPTIONS EXERCISE PRICE TERM (YRS)
Outstanding at January 1, 2008........ 607,620 $ 13.34 4.8
Expired............................ (39,498) 11.92 --
Forfeited.......................... (19,683) 13.47 4.8
-------------------------------------- -------------- ---------------- ---------
Outstanding at September 30, 2008..... 548,439 $ 13.44 4.4
-------------------------------------- -------------- ---------------- ---------
At September 30, 2008, the aggregated intrinsic value of outstanding and
exercisable stock options was essentially zero. All outstanding stock options as
of September 30, 2008 are exercisable.
RESTRICTED AND PERFORMANCE STOCK GRANTS
As part of the 2006 Omnibus Incentive Plan, we currently grant shares of
restricted and/or performance-based stock to eligible employees and directors.
Selected executives and other key personnel are granted performance awards whose
vesting is contingent upon meeting various performance measures with a retention
feature. This component of compensation is designed to encourage the long-term
retention of key executives and to tie executive compensation directly to
Company performance and the long-term enhancement of shareholder value. The
performance awards are earned at the end of the three year period provided that
the strategic three year plan is achieved. Each period we evaluate the
probability of achieving the applicable targets and we adjust our accrual
accordingly.
Our restricted and performance-based share activity was as follows for the nine
months ended September 30, 2008:
WEIGHTED AVERAGE
GRANT DATE
FAIR VALUE
SHARES PER SHARE
Outstanding at January 1, 2008............... 193,200 $ 7.25
Granted................................... 110,250 6.53
Vested.................................... (10,300) 11.13
Forfeited................................. (2,200) 6.83
--------------------------------------------- -------------- ------------------
Outstanding at September 30, 2008............ 290,950 $6.88
--------------------------------------------- -------------- ------------------
-14-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
We recorded compensation expense related to restricted shares and
performance-based shares of $380,000 ($187,800 net of tax) and $196,000
($128,500 net of tax) for the nine months ended September 30, 2008 and 2007,
respectively. The unamortized compensation expense related to our restricted and
performance-based shares was $1.1 million at September 30, 2008, and is expected
to be recognized as they vest over a weighted average period of 1.9 and 0.6
years for employees and directors, respectively.
NOTE 9. EMPLOYEE BENEFITS
In 2000, we created an employee benefits trust to which we contributed 750,000
shares of treasury stock. We are authorized to instruct the trustees to
distribute such shares toward the satisfaction of our future obligations under
employee benefit plans. The shares held in trust are not considered outstanding
for purposes of calculating earnings per share until they are committed to be
released. The trustees will vote the shares in accordance with its fiduciary
duties. During 2008, we contributed to the trust an additional 137,023 shares
from our treasury and released 199,471 shares from the trust leaving 529 shares
remaining in the trust as of September 30, 2008.
In August 1994, we established an unfunded Supplemental Executive Retirement
Plan (SERP) for key employees. Under the plan, these employees may elect to
defer a portion of their compensation and, in addition, we may at our discretion
make contributions to the plan on behalf of the employees. In March 2008 and
2007, contributions of $113,500 and $83,000 were made related to calendar years
2007 and 2006, respectively.
In October 2001, we adopted a second unfunded SERP. The SERP, as amended, is a
defined benefit plan pursuant to which we will pay supplemental pension benefits
to certain key employees upon the attainment of a contractual participant's
payment date based upon the employees' years of service and compensation. On
June 15, 2008, a participant in the unfunded SERP reached his applicable payment
date. In connection therewith, we recorded a settlement loss of $0.6 million in
June 2008. The corresponding distribution of $5 million was made in July 2008.
We use a January 1 measurement date for this plan.
Our UK pension plan is comprised of a defined benefit plan and a defined
contribution plan. The defined contribution benefit plan is closed to new
entrants and existing active members ceased accruing any further benefits.
In December 2007, we entered into an agreement with the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America and
its Local 365 regarding the shut down of our manufacturing operations at Long
Island City, New York, which operations were transferred to other facilities. As
part of the agreement, effective January 5, 2008, we agreed to withdraw from the
multi-employer pension plan covering our UAW employees at the Long Island City
facility. As a result, we incurred a withdrawal liability. The pension plan
withdrawal liability is related to trust asset under-performance and will be
paid over a period which is not to exceed 20 years. In December 2007, we
recorded a charge of $3.3 million related to the present value of the
undiscounted $5.6 million withdrawal liability discounted over 80 quarterly
payments using a credit-adjusted, risk-free rate. Under the terms of the
agreement, quarterly payments totaling $0.3 million annually will commence in
December 2008.
We provide certain medical and dental care benefits to eligible retired
employees. Eligibility of employees who can participate in this program is
limited to employees hired before 1996. On May 30, 2008, we announced that, in
lieu of the current retiree medical and dental plans previously funded on a
pay-as-you-go basis, a Health Reimbursement Account ("HRA") will be established
beginning January 1, 2009 for each qualified retiree. The plan amendment will
effectively reduce benefits attributed to employee services already rendered and
-15-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
credit a fixed amount into an HRA to cover both medical and dental costs for all
current and future eligible retirees. The remeasurement of the postretirement
welfare benefit plan as a result of these benefit modifications generated a
$24.5 million reduction in the accumulated postretirement benefit obligation on
June 1, 2008 which will be amortized on a straight-line basis and recognized as
a reduction in benefit costs over the remaining service to full eligibility (3.8
years). The annual reduction to expense over the amortization period will be
$6.4 million commencing on June 1, 2008.
The components of net periodic benefit cost for our North America and European
defined benefit plans and post retirement benefit plans for the three months and
nine months ended September 30, 2008 and 2007 were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
PENSION BENEFITS 2008 2007 2008 2007
------- ------- ------- -------
Service cost ....................... $ 22 $ 99 $ 68 $ 295
Interest cost ...................... 72 113 350 341
Amortization of prior service cost . 28 27 82 83
Actuarial net (gain) loss .......... (34) (27) 492 (83)
------- ------- ------- -------
Net periodic benefit cost .......... $ 88 $ 212 $ 992 $ 636
======= ======= ======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
POSTRETIREMENT BENEFITS 2008 2007 2008 2007
------- ------- ------- -------
Service cost ....................... $ 68 $ 204 $ 469 $ 610
Interest cost ...................... 277 584 1,412 1,666
Amortization of prior service credit (2,314) (714) (4,273) (2,140)
Amortization of unrecognized loss .. 1 1 3 3
Actuarial net loss ................. 350 395 1,047 971
------- ------- ------- -------
Net periodic benefit cost (credit) . $(1,618) $ 470 $(1,342) $ 1,110
======= ======= ======= =======
-16-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. EARNINGS PER SHARE
The following are reconciliations of the earnings available to common
stockholders and the shares used in calculating basic and dilutive net earnings
per common share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2008 2007 2008 2007
-------- -------- -------- --------
BASIC NET EARNINGS (LOSS) PER COMMON SHARE:
Earnings from continuing operations ..................... $ 397 $ 4,782 $ 12,972 $ 13,374
Loss from discontinued operation ........................ (1,579) (2,148) (2,228) (2,776)
-------- -------- -------- --------
Net earnings (loss) available to common
stockholders ........................................ $ (1,182) $ 2,634 $ 10,744 $ 10,598
======== ======== ======== ========
Weighted average common shares outstanding ......... 18,558 18,593 18,480 18,609
Net earnings from continuing operations per common
share ................................................. $ 0.02 $ 0.26 $ 0.70 $ 0.72
Loss from discontinued operations per common share ...... (0.08) (0.12) (0.12) (0.15)
-------- -------- -------- --------
Basic net earnings (loss) per common share .............. $ (0.06) $ 0.14 $ 0.58 $ 0.57
======== ======== ======== ========
DILUTED NET EARNINGS (LOSS) PER COMMON SHARE:
Earnings from continuing operations ..................... $ 397 $ 4,782 $ 12,972 $ 13,374
Loss from discontinued operation ........................ (1,579) (2,148) (2,228) (2,776)
-------- -------- -------- --------
Net earnings (loss) available to common stockholders plus
assumed conversions ................................. $ (1,182) $ 2,634 $ 10,744 $ 10,598
======== ======== ======== ========
Weighted average common shares outstanding - Basic . 18,558 18,593 18,480 18,609
PLUS INCREMENTAL SHARES FROM ASSUMED CONVERSIONS:
Dilutive effect of restricted stock ................ 59 27 33 28
Dilutive effect of stock options ................... -- 3 -- 55
-------- -------- -------- --------
Weighted average common shares outstanding - Diluted 18,617 18,623 18,513 18,692
======== ======== ======== ========
Net earnings from continuing operations per common
share ............................................. $ 0.02 $ 0.26 $ 0.70 $ 0.72
Loss from discontinued operations per common share ...... (0.08) (0.12) (0.12) (0.15)
-------- -------- -------- --------
Diluted net earnings (loss) per common share ............ $ (0.06) $ 0.14 $ 0.58 $ 0.57
======== ======== ======== ========
The shares listed below were not included in the computation of diluted earnings
per share because to do so would have been anti-dilutive for the periods
presented (in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------
2008 2007 2008 2007
---- ---- ---- ----
Stock options................................ 548 536 548 226
Convertible debentures..................... 2,413 2,796 2,667 2,796
-17-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. COMPREHENSIVE INCOME
Comprehensive income, net of income tax expense is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2008 2007 2008 2007
-------- -------- -------- --------
Net (loss) earnings as reported ................. $ (1,182) $ 2,634 $ 10,744 $ 10,598
Foreign currency translation adjustment ......... (1,658) 1,084 (2,456) 2,845
Postretirement benefit plans:
Plan amendment adjustment .................... -- -- 14,708 --
Reclassification adjustment for recognition of
prior period amounts ..................... (1,040) -- (1,376) --
Unrecognized amounts ......................... -- -- (511) (1)
-------- -------- -------- --------
Total comprehensive income ...................... $ (3,880) $ 3,718 $ 21,109 $ 13,442
======== ======== ======== ========
NOTE 12. INDUSTRY SEGMENTS
The following tables show our net sales and operating income by our operating
segments (in thousands):
Three Months Ended September 30,
----------------------------------------------------
2008 2007
------------------------ -------------------------
Net Operating Net Operating
Sales Income (Loss) Sales Income (Loss)
--------- ------------- --------- --------------
Engine Management ........ $135,502 $ 6,900 $130,513 $ 8,334
Temperature Control ...... 53,697 1,076 60,124 3,288
Europe ................... 11,536 (111) 11,161 588
All Other ................ 2,203 (2,292) 4,371 (3,059)
-------- -------- -------- --------
Consolidated ............. $202,938 $ 5,573 $206,169 $ 9,151
======== ======== ======== ========
Nine Months Ended September 30,
----------------------------------------------------
2008 2007
------------------------ -------------------------
Net Operating Net Operating
Sales Income (Loss) Sales Income (Loss)
--------- ------------- --------- --------------
Engine Management ........ $417,346 $ 20,114 $406,039 $ 32,264
Temperature Control ...... 164,759 3,444 174,262 8,914
Europe ................... 35,343 758 32,850 1,967
All Other ................ 8,917 (9,888) 9,783 (12,722)
-------- -------- -------- --------
Consolidated ............. $626,365 $ 14,428 $622,934 $ 30,423
======== ======== ======== ========
NOTE 13. COMMITMENTS AND CONTINGENCIES
ASBESTOS. In 1986, we acquired a brake business, which we subsequently sold in
March 1998 and which is accounted for as a discontinued operation. When we
originally acquired this brake business, we assumed future liabilities relating
to any alleged exposure to asbestos-containing products manufactured by the
seller of the acquired brake business. In accordance with the related purchase
agreement, we agreed to assume the liabilities for all new claims filed on or
after September 1, 2001. Our ultimate exposure will depend upon the number of
claims filed against us on or after September 1, 2001 and the amounts paid for
-18-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
indemnity and defense thereof. At September 30, 2008, approximately 3,620 cases
were outstanding for which we were responsible for any related liabilities. We
expect the outstanding cases to increase gradually due to legislation in certain
states mandating minimum medical criteria before a case can be heard. Since
inception in September 2001 through September 30, 2008, the amounts paid for
settled claims are approximately $6.5 million. In September 2007, we entered
into an agreement with an insurance carrier to provide us with limited insurance
coverage for the defense and indemnity costs associated with certain
asbestos-related claims. We have submitted various asbestos-related claims to
the insurance carrier for coverage under this agreement and expect to receive
$1.3 million from the carrier before the end of the year.
In evaluating our potential asbestos-related liability, we have considered
various factors including, among other things, an actuarial study performed by a
leading actuarial firm with expertise in assessing asbestos-related liabilities,
our settlement amounts and whether there are any co-defendants, the jurisdiction
in which lawsuits are filed, and the status and results of settlement
discussions. As is our accounting policy, we engage actuarial consultants with
experience in assessing asbestos-related liabilities to estimate our potential
claim liability. The methodology used to project asbestos-related liabilities
and costs in the study considered: (1) historical data available from publicly
available studies; (2) an analysis of our recent claims history to estimate
likely filing rates into the future; (3) an analysis of our currently pending
claims; and (4) an analysis of our settlements to date in order to develop
average settlement values.
The most recent actuarial study was performed as of August 31, 2008. The updated
study has estimated an undiscounted liability for settlement payments, excluding
legal costs and any potential recovery from insurance carriers, ranging from
$25.3 million to $69.2 million for the period through 2059. The change from the
prior year study was a $1.5 million increase for the low end of the range and a
$14 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 2059 in our
consolidated financial statements. Accordingly, an incremental $2.1 million
provision in our discontinued operation was added to the asbestos accrual in
September 2008 increasing the reserve to approximately $25.3 million. According
to the updated study, legal costs, which are expensed as incurred and reported
in earnings (loss) from discontinued operation in the accompanying statement of
operations, are estimated to range from $19.1 million to $32.1 million during
the same period.
We plan to perform an annual actuarial evaluation during the third quarter of
each year for the foreseeable future. Given the uncertainties associated with
projecting such matters into the future and other factors outside our control,
we can give no assurance that additional provisions will not be required. We
will continue to monitor the circumstances surrounding these potential
liabilities in determining whether additional provisions may be necessary. At
the present time, however, we do not believe that any additional provisions
would be reasonably likely to have a material adverse effect on our liquidity or
consolidated financial position.
ANTITRUST LITIGATION. In November 2004, we were served with a summons and
complaint in the U.S. District Court for the Southern District of New York by
The Coalition For A Level Playing Field, which is an organization comprised of a
large number of auto parts retailers. The complaint alleges antitrust violations
by us and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. In August 2005, we filed a
motion to dismiss the complaint, following which the plaintiff filed an amended
complaint dropping, among other things, all claims under the Sherman Act. The
-19-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
remaining claims allege violations of the Robinson-Patman Act. Motions to
dismiss those claims were filed by us in February 2006. Plaintiff filed
opposition to our motions, and we subsequently filed replies in June 2006. Oral
arguments were originally scheduled for September 2006, however the court
adjourned these proceedings until a later date to be determined. Subsequently,
the judge initially assigned to the case recused himself, and a new judge has
been assigned before whom further preliminary proceedings have been held.
Although we cannot predict the ultimate outcome of this case or estimate the
range of any potential loss that may be incurred in the litigation, we believe
that the lawsuit is without merit, deny all of the plaintiff's allegations of
wrongdoing and believe we have meritorious defenses to the plaintiff's claims.
We intend to defend vigorously this lawsuit.
OTHER LITIGATION. We are involved in various other litigation and product
liability matters arising in the ordinary course of business. Although the final
outcome of any asbestos-related matters or any other litigation or product
liability matter cannot be determined, based on our understanding and evaluation
of the relevant facts and circumstances, it is our opinion that the final
outcome of these matters will not have a material adverse effect on our
business, financial condition or results of operations.
WARRANTIES. We generally warrant our products against certain manufacturing and
other defects. These product warranties are provided for specific periods of
time of the product depending on the nature of the product. As of September 30,
2008 and 2007, we have accrued $12.3 million and $14.4 million, respectively,
for estimated product warranty claims included in accrued customer returns. The
accrued product warranty costs are based primarily on historical experience of
actual warranty claims.
The following table provides the changes in our product warranties (in
thousands):
-------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
2008 2007 2008 2007
------------ -------- -------- --------
Balance, beginning of period............................$ 13,115 $ 14,715 $ 11,317 $ 11,704
Liabilities accrued for current year sales .............. 12,020 11,472 35,934 37,870
Settlements of warranty claims .......................... (12,818) (11,814) (34,934) (35,201)
------------ -------- -------- --------
Balance, end of period..................................$ 12,317 $ 14,373 $ 12,317 $ 14,373
============ ======== ======== ========
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE INDICATED BY WORDS SUCH AS
"ANTICIPATES," "EXPECTS," "BELIEVES," "INTENDS," "PLANS," "ESTIMATES,"
"PROJECTS" AND SIMILAR EXPRESSIONS. THESE STATEMENTS REPRESENT OUR EXPECTATIONS
BASED ON CURRENT INFORMATION AND ASSUMPTIONS AND ARE INHERENTLY SUBJECT TO RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE WHICH
ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING, BUT NOT LIMITED TO, ECONOMIC AND MARKET CONDITIONS; THE PERFORMANCE
OF THE AFTERMARKET SECTOR; CHANGES IN BUSINESS RELATIONSHIPS WITH OUR MAJOR
CUSTOMERS AND IN THE TIMING, SIZE AND CONTINUATION OF OUR CUSTOMERS' PROGRAMS;
CHANGES IN THE PRODUCT MIX AND DISTRIBUTION CHANNEL MIX; THE ABILITY OF OUR
CUSTOMERS TO ACHIEVE THEIR PROJECTED SALES; COMPETITIVE PRODUCT AND PRICING
PRESSURES; INCREASES IN PRODUCTION OR MATERIAL COSTS THAT CANNOT BE RECOUPED IN
PRODUCT PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED BUSINESSES; PRODUCT AND
ENVIRONMENTAL LIABILITY MATTERS (INCLUDING, WITHOUT LIMITATION, THOSE RELATED TO
ASBESTOS-RELATED CONTINGENT LIABILITIES OR ENVIRONMENTAL REMEDIATION
LIABILITIES); AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH AS THOSE DESCRIBED
UNDER RISK FACTORS, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AND THOSE DETAILED HEREIN AND FROM TIME TO TIME IN THE FILINGS OF THE COMPANY
WITH THE SEC. FORWARD-LOOKING STATEMENTS ARE MADE ONLY AS OF THE DATE HEREOF,
AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
IN ADDITION, HISTORICAL INFORMATION SHOULD NOT BE CONSIDERED AS AN INDICATOR OF
FUTURE PERFORMANCE. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS REPORT.
BUSINESS OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific segment of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts. We
sell our products primarily in the United States, Canada and Latin America. We
also sell our products in Europe through our European Segment.
We place significant emphasis on improving our financial performance by
achieving operating efficiencies and improving asset utilization, while
maintaining product quality and high customer order fill rates. We intend to
continue to improve our operating efficiency and cost position by focusing on
company-wide overhead and operating expense cost reduction programs, such as
closing excess facilities and consolidating redundant functions. In that regard,
we are closing our manufacturing operations in Edwardsville, Kansas, closing and
consolidating our distribution operations in Reno, Nevada, integrating
operations in Mexico, and have closed our Fort Worth, Texas, Long Island City,
New York, and Puerto Rico manufacturing operations.
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.
-21-
The seasonality of our business offers significant operational challenges in our
manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we have traditionally
offered a pre-season selling program, known as our "Spring Promotion," in which
customers are offered longer payment terms.
INVENTORY MANAGEMENT. We face inventory management issues as a result of
warranty and overstock returns. Many of our products carry a warranty ranging
from a 90-day limited warranty to a lifetime limited warranty, which generally
covers defects in materials or workmanship and failure to meet industry
published specifications. In addition to warranty returns, we also permit our
customers to return products to us within customer-specific limits (which are
generally limited to a specified percentage of their annual purchases from us)
in the event that they have overstocked their inventories. We accrue for
overstock returns as a percentage of sales, after giving consideration to recent
returns history.
In order to better control warranty and overstock return levels, we tightened
the rules for authorized warranty returns, placed further restrictions on the
amounts customers can return and instituted a program so that our management can
better estimate potential future product returns. Despite these additional
controls, in the fourth quarter of 2007, we experienced significant overstock
returns as customers reduced their working capital levels in response to a
difficult economic climate. During 2008, we are establishing reserves for
overstock returns which reflect the impact of the significant returns
experienced in the fourth quarter of 2007. In addition, with respect to our air
conditioning compressors, our most significant customer product warranty
returns, we established procedures whereby a warranty will be voided if a
customer does not provide acceptable proof that complete AC system repair was
performed.
DISCOUNTS, ALLOWANCES AND INCENTIVES. In connection with our sales activities,
we offer a variety of usual customer discounts, allowances and incentives.
First, we offer cash discounts for paying invoices in accordance with the
specified discounted terms of the invoice. Second, we offer pricing discounts
based on volume and different product lines purchased from us. These discounts
are principally in the form of "off-invoice" discounts and are immediately
deducted from sales at the time of sale. For those customers that choose to
receive a payment on a quarterly basis instead of "off-invoice," we accrue for
such payments as the related sales are made and reduce sales accordingly.
Finally, rebates and discounts are provided to customers as advertising and
sales force allowances, and allowances for warranty and overstock returns are
also provided. Management analyzes historical returns, current economic trends,
and changes in customer demand when evaluating the adequacy of the sales returns
and other allowances. Significant management judgments and estimates must be
made and used in connection with establishing the sales returns and other
allowances in any accounting period. We account for these discounts and
allowances as a reduction to revenues, and record them when sales are recorded.
INTERIM RESULTS OF OPERATIONS:
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2008 TO THREE MONTHS ENDED
SEPTEMBER 30, 2007
SALES. Consolidated net sales for the three months ended September 30, 2008 were
$202.9 million, a decrease of $3.3 million, or 1.6%, compared to $206.2 million
in the same period of 2007. The decrease in consolidated net sales resulted
primarily from decreases in net sales of $6.4 million in our Temperature Control
Segment and $2.2 million in our Other Operating Segment, which consists
primarily of our Canadian operations, partially offset by growth in our Engine
Management operations which recorded an increase in net sales of $5 million or
3.8% as a result of increased sales volumes in our retail division and a
reduction in customer returns. The decline in Temperature Control and the Other
Operating Segment net sales was the result of price reductions initiated in 2008
to compete against low cost Chinese imports of new compressors and a decline in
sales volumes in our traditional and retail sales markets due to rising gas
prices and economic concerns negatively impacting consumer driving behavior.
-22-
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 24% in the third quarter of 2008, compared to 26.5% in the third
quarter of 2007. The decrease resulted primarily from decreases in Engine
Management margins of 3 percentage points and Temperature Control margins of 1.6
percentage points. The decrease in the Engine Management margin was primarily
due to unabsorbed overhead during our planned closure of two manufacturing
facilities, start up and training costs at our new Mexico facility, and an
increase in sales from our OES customers with lower margins. The Temperature
Control Segment's decrease resulted primarily from price reductions initiated in
2008 to compete against low cost Chinese imports and lower demand that resulted
in unfavorable manufacturing variances due to low production volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) decreased by $1.6 million to $41.3 million or
20.3% of consolidated net sales, in the third quarter of 2008, as compared to
$42.9 million, or 20.8% of consolidated net sales in the third quarter of 2007.
The decrease in SG&A expenses is due primarily to the benefit recognized from
the post-retirement benefit plan amendment, which benefit commenced in June
2008.
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring and integration expenses
decreased to $1.9 million in the third quarter of 2008, compared to $2.6 million
in the third quarter of 2007. The 2008 expenses related primarily to charges
incurred in connection with the closure of our Puerto Rico manufacturing
operations, the integration of operations to Mexico and for severance in
connection with the consolidation of our Reno distribution operations and
shutdown of our Edwardsville, Kansas manufacturing operations. Third quarter
2007 expenses related primarily to charges in connection with the closure of our
Puerto Rico manufacturing operations, the integration of operations to Mexico
and the closure of our Fort Worth, Texas production facility.
OPERATING INCOME. Operating income was $5.6 million in the third quarter of
2008, compared to $9.2 million in the third quarter of 2007. The decrease of
$3.6 million was due primarily to lower gross margins as a percentage of sales
driven by higher manufacturing costs from unabsorbed overhead during our planned
transition to new manufacturing facilities offset by lower SG&A expenses
reflecting the impact of our post-retirement benefit amendment and lower
restructuring and integration expenses.
OTHER INCOME, NET. Other income, net in the third quarter of 2008 was $0.6
million lower than other income, net in the same period in 2007. Other income,
net in the third quarter of 2008 included a $1.6 million gain on the repurchase
of $20.6 million principal amount of our convertible debentures and the
recognition of the deferred gain of $0.3 million on the sale of our Long Island
City, New York property offset by losses from our joint ventures of $0.3 million
and foreign exchange translation losses of $0.2 million.
INTEREST EXPENSE. Interest expense decreased by $1.5 million in the third
quarter 2008 compared to the same period in 2007 due to lower average borrowing
costs and lower average outstanding borrowings. Borrowings were lower in the
third quarter of 2008 due to accounts receivable factoring programs initiated
with some of our larger customers to accelerate collection of accounts
receivable balances. Discount fees associated with the program of $0.4 million
were recorded in SG&A.
INCOME TAX PROVISION. The income tax provision was $3.4 million in the third
quarter of 2008 compared to $1.6 million for the same period in 2007. The income
tax provision in the third quarter of 2008 reflects the impact of an increase in
the estimated annual effective tax rate from 42.6% projected in the second
quarter of 2008 to 49.5% projected in the third quarter of 2008. The effective
tax rate for the third quarter of 2007 was 25.4%.
-23-
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operations, net of
income tax, reflects adjustments made to our indemnity liability in line with
information contained in actuarial studies obtained in August 2008 and 2007 and
other information available and considered by us, and legal expenses incurred
associated with our asbestos-related liability. During the third quarter of 2008
and 2007, we recorded a loss of $1.6 million and $2.1 million from discontinued
operations, respectively. The loss from discontinued operations for the third
quarter of 2008 and 2007 reflects a $2.1 million and $2.8 million pre-tax
adjustment, respectively, to increase our indemnity liability in line with the
August 2008 and 2007 actuarial studies, as well as legal fees incurred in
litigation. As discussed more fully in Note 13 in the notes to our consolidated
financial statements, we are responsible for certain future liabilities relating
to alleged exposure to asbestos containing products.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2008 TO NINE MONTHS ENDED
SEPTEMBER 30, 2007
SALES. Consolidated net sales for the nine months ended September 30, 2008 were
$626.4 million, an increase of $3.5 million, or 0.6%, compared to $622.9 million
in the same period of 2007. The increase in consolidated net sales resulted
primarily from growth in Engine Management net sales which increased $11.3
million or 2.8% and an increase of $2.5 million in our European Segment
partially offset by a decrease in net sales of $9.5 million or 5.5% in our
Temperature Control Segment. The Engine Management sales growth was mainly due
to continued sales volume increases from our OES customers. The European Segment
witnessed increased sales volumes due to new product introductions. The decline
in Temperature Control net sales is the result of price reductions initiated in
2008 to compete against low cost Chinese imports and a decrease in our
traditional market sales.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 23.7% for the nine months ended September 30, 2008 compared to
26.2% in the same period of 2007. The lower gross margin resulted from decreases
in Engine Management margins of 3 percentage points, Temperature Control margins
of 2.6 percentage points and European Segment of 0.5 percentage points offset,
in part, by a 0.7 percentage point increase in margin in our Other Operating
Segment, which consists primarily of our Canadian operations. The decrease in
the Engine Management margin was primarily due to unabsorbed fixed costs in our
planned closure of the Puerto Rico and Long Island City, New York manufacturing
plants, start up and training costs at our new Mexico plant, and an increase in
sales from our OES customers with lower margins. Temperature Control's gross
margin decrease resulted primarily from price reductions initiated in 2008 and
changes in product mix where sales of lower margin products have increased.
Europe's decrease in gross margin was due to unfavorable exchange rates on
increased raw material procurements, partially offset by a shift in raw material
procurements from Asia. The increase in gross margin of our Other Operating
Segment was due to a foreign exchange benefit on procurement costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) decreased by $0.8 million to $128.1 million in
the nine months ended September 30, 2008, as compared to $128.9 million for the
nine months ended September 30, 2007. The decrease in SG&A expenses is due
primarily to the benefit recognized from the post-retirement benefit plan
amendment, which benefit commenced in June 2008, and other cost reduction
efforts partially offset by discount fees of $0.7 million related to our
customer accounts receivable factoring program. As a percentage of net sales,
SG&A expenses decreased to 20.4% in the three quarters of 2008 as compared to
20.7% in the comparable period in 2007.
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring and integration expenses
increased to $6.1 million for the nine months ended September 30, 2008, compared
to $3.9 million in the same period of 2007. The 2008 expenses related primarily
to charges incurred in connection with the shutdown of our Long Island City, New
York manufacturing operations, the closure of our Puerto Rico manufacturing
operations, the integration of operations to Mexico and for severance in
connection with the consolidation of our Reno distribution operations and
shutdown of our Edwardsville, Kansas manufacturing operations. Restructuring and
integration expense for 2007 related primarily to charges in connection with the
closure of our Puerto Rico production operations, integration of operations in
Mexico, and the closure of our Fort Worth, Texas production facility.
-24-
OPERATING INCOME. Operating income was $14.4 million in the nine months ended
September 30, 2008, compared to $30.4 million in 2007. The decrease of $16
million was due primarily to lower gross margins as a percentage of sales driven
by higher cost of goods sold due to unabsorbed fixed costs during our planned
transition to new manufacturing facilities, and increased restructuring and
integration expenses which more than offset the increase in consolidated net
sales and benefit received from the post-retirement plan amendment.
OTHER INCOME, NET. Other income, net increased to $21.7 million for the nine
months ended September 30, 2008, compared to $2.9 million in the same period of
2007. During 2008, we completed the sale of our Long Island City, New York
property for a purchase price of $40.6 million resulting in a recognized gain in
2008 of $21.6 million, offset partially by a $1.4 million charge related to the
defeasance of our mortgage on the property. In addition, other income, net
during 2008 included a $1.6 million gain on the repurchase of $20.6 million
principal amount of our convertible debentures.
INTEREST EXPENSE. Interest expense decreased by $3.5 million during the first
nine months of 2008 compared to the same period in 2007 mainly due to lower
average borrowing costs and lower average borrowings. Borrowings were lower in
the first nine months of 2008 due to accounts receivable factoring programs
initiated with some of our larger customers to accelerate collection of accounts
receivable balances. Discount fees associated with the program of $0.7 million
were recorded in SG&A.
INCOME TAX PROVISION. The income tax provision was $12.7 million for the nine
months ended September 30, 2008, compared to $6 million for the same period in
2007. The increase was due to higher earnings and a higher effective tax rate,
which is 49.5% in 2008 compared to 31% in the same period of 2007. The 2008 rate
was higher primarily due to the differences in the mix of domestic and foreign
earnings as a result of the gain on the sale of the Long Island City, New York
property, the tax impact of the non-deductibility of a portion of the $5 million
distribution to a participant in the unfunded supplemental executive retirement
plan, and a tollgate tax on our operations in Puerto Rico. The 2007 rate was
reduced by a benefit from discreet items.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations, net of
income tax, reflects adjustments made to our indemnity liability in line with
information contained in actuarial studies obtained in August 2008 and 2007 and
other information available and considered by us, and legal expenses incurred
associated with our asbestos-related liability. During nine months ended
September 30, 2008 and 2007, we recorded a loss of $2.2 million and $2.8 million
from discontinued operations, respectively. The loss from discontinued
operations for the nine months ended 2008 and 2007 reflects a $2.1 million and
$2.8 million pre-tax adjustment, respectively, to increase our indemnity
liability in line with the August 2008 and 2007 actuarial studies, as well as
legal fees incurred in litigation. As discussed more fully in Note 13 in the
notes to our consolidated financial statements, we are responsible for certain
future liabilities relating to alleged exposure to asbestos containing products.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the nine months of 2008, cash used in operations
amounted to $0.7 million compared to cash used in operations of $12.3 million in
the same period of 2007. The year-over-year improvement in cash used in
operations is primarily the result of improved working capital management when
compared to the same period last year. During the first nine months of 2008, we
began a program to sell undivided interests in certain of our receivables which
improved our year-over-year comparison. Further working capital management
improvements were realized during the first nine months of 2008 as inventory was
reduced from levels built up in 2007 in preparation for our production facility
moves, and accounts payable balances increased.
-25-
INVESTING ACTIVITIES. Cash provided by investing activities was $25.7 million in
the nine months of 2008, compared to cash used in investing activities of $5.3
million in the same period of 2007. Cash provided by investing activities in
2008 includes $37.3 million in net cash proceeds from the sale of the Long
Island City, New York property and $3.6 million paid relating to the purchase of
certain assets from a third party. Capital expenditures in the first nine months
of 2008 were $8 million compared to $9.6 million in the comparable period last
year.
FINANCING ACTIVITIES. Cash used in financing activities was $25 million in the
nine months of 2008, compared to cash provided by financing activities of $12.3
million in the same period of 2007. During the first nine months of 2008, we
were able to reduce our total borrowings using the net cash proceeds received
from the sale of the Long Island City, New York property and proceeds received
from our improved working capital management. During the first nine months of
2008, we defeased the remaining $7.8 million mortgage loan on our Long Island
City, New York property and repurchased $20.6 million principal amount of our
6.75% debentures. During the first nine months of 2007, proceeds from the
exercise of employee stock options was $4.2 million and we purchased $5 million
of our common stock.
In March 2007, we entered into a Second Amended and Restated Credit Agreement
with General Electric Capital Corporation, as agent, and a syndicate of lenders
for a secured revolving credit facility. The restated credit agreement provides
for a line of credit of up to $275 million (inclusive of the Canadian term loan
described below) and expires in 2012. The restated credit agreement also
provides a $50 million accordion feature, which would allow us to expand the
facility. Direct borrowings under the restated credit agreement bear interest at
the LIBOR rate plus the applicable margin (as defined), or floating at the index
rate plus the applicable margin, at our option, and the interest rate may vary
depending upon our borrowing availability. The restated credit agreement is
guaranteed by certain of our subsidiaries.
Borrowings under the restated credit agreement are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of certain of our subsidiaries. After taking into
account outstanding borrowings under the restated credit agreement, there was an
additional $75.3 million available for us to borrow pursuant to the formula at
September 30, 2008, of which $24.4 million is reserved for repayment, repurchase
or redemption, as the case may be, of the aggregate outstanding amount of our
convertible debentures. At September 30, 2008 and December 31, 2007, the
interest rate on our restated credit agreement was 3.8% and 6.4%, respectively.
Outstanding borrowings under the restated credit agreement (inclusive of the
Canadian term loan described below), which are classified as current
liabilities, were $152 million and $148.7 million at September 30, 2008 and
December 31, 2007, respectively.
At any time that our borrowing availability in the aggregate is less than $30
million and until such time that we have maintained an average borrowing
availability in the aggregate of $30 million or greater for a continuous period
of ninety days, the terms of our restated credit agreement provide for, among
other provisions, financial covenants requiring us, on a consolidated basis, (1)
to maintain specified levels of fixed charge coverage at the end of each fiscal
quarter (rolling twelve months), and (2) to limit capital expenditure levels. As
of September 30, 2008, we were not subject to these covenants. Availability
under our restated credit agreement is based on a formula of eligible accounts
receivable, eligible inventory and eligible fixed assets. In addition, the
restated credit agreement provides that, beginning on January 15, 2008 and on a
quarterly basis thereafter, a certain amount of our borrowing availability shall
be reserved for the repayment, repurchase or redemption, as the case may be, of
the aggregate outstanding amount of our convertible debentures. As of September
30, 2008, our required amount is $24.4 million. Our restated credit agreement
also permits dividends and distributions by us provided specific conditions are
met.
In March 2007, we amended our credit agreement with GE Canada Finance Holding
Company, for itself and as agent for the lenders. The amended credit agreement
provides for a line of credit of up to $12 million, of which $7 million is
currently outstanding and which amount is part of the $275 million available for
borrowing under our restated credit agreement with General Electric Capital
-26-
Corporation (described above). The amended credit agreement is guaranteed and
secured by us and certain of our wholly-owned subsidiaries and expires in 2012.
Direct borrowings under the amended credit agreement bear interest at the same
rate as our restated credit agreement with General Electric Capital Corporation
(described above).
Our European subsidiary has revolving credit facilities which, at September 30,
2008, provide for a line of credit up to $9.5 million. The amount of short-term
bank borrowings outstanding under these facilities was $8 million on September
30, 2008 and December 31, 2007. The weighted average interest rate on these
borrowings on September 30, 2008 was 6.2% and December 31, 2007 was 6.7%.
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. We may, from time to
time, repurchase the debentures in the open market, or through privately
negotiated transactions, on terms that we believe to be favorable with any gains
or losses as a result of the difference between the net carrying amount and the
reacquisition price recognized in the period of repurchase. We intend to fund
any such purchases from available cash. In the third quarter 2008, we
repurchased $20.6 million principal amount of the debentures resulting in a
third quarter gain on the repurchase of $1.6 million. In October and November
2008, we repurchased in the aggregate an additional $9.5 million principal
amount of the debentures resulting in a gain of $1 million, which will be
recorded in the fourth quarter of 2008. As of September 30, 2008, the
convertible debentures are convertible into 2,157,455 shares of our common stock
at the option of the holder. Any such repurchases may be suspended or
discontinued at any time.
In order to reduce our accounts receivable balances and improve our cash flow,
we sold undivided interests in certain of our receivables to financial
institutions. 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 $83.4 million of
receivables for the nine months ended September 30, 2008. Under the terms of the
agreements, we retain no rights or interest, have no obligations with respect to
the sold receivables and do not service the receivables after the sale. As such,
these transactions are being accounted for as a sale in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." A charge in the amount of $0.4 million and $0.7
million related to the sale of receivables is included in selling, general and
administrative expense in our consolidated statement of operations for the three
and nine months ended September 30, 2008, respectively.
Our profitability and working capital requirements are seasonal due to the sales
mix of Temperature Control products. Our working capital requirements usually
peak near the end of the second quarter, as the inventory build-up of air
conditioning products is converted to sales and payments on the receivables
associated with such sales begin to be received. These increased working capital
requirements are funded by borrowings from our lines of credit. We anticipate
that our present sources of funds will continue to be adequate to meet our
financing needs over the next twelve months. We continue to evaluate alternative
sources to further improve the liquidity of our business and to fund the
refinance, repurchase or redemption, as the case may be, of the aggregate
outstanding amount of our convertible debentures, which may include cash,
securities or a combination thereof. The timing, terms, size, and pricing of any
alternative sources of financing will depend on investor interest and market
conditions, and there can be no assurance that we will be able to obtain any
such financing. In addition, we have a significant amount of indebtedness which
could, among other things, increase our vulnerability to general adverse
economic and industry conditions, or limit our ability to fund future working
capital, capital expenditures, research and development costs and other general
corporate requirements. If we default on any of our indebtedness, or breach any
financial covenant in our revolving credit facility, our business could be
adversely affected. For further information regarding the risks of our business,
please refer to the Risk Factors section of our Annual Report on Form 10-K for
the year ending December 31, 2007.
-27-
The following table summarizes our contractual commitments as of September 30,
2008 and expiration dates of commitments through 2018:
(IN THOUSANDS) 4Q 08 2009 2010 2011 2012 2013-2018 TOTAL
----------------------------------------------------------------------------------------------------------
Principal payments of
long term debt (1) (2) .. $ 39 $ 61,062 $ 119 $ 119 $ 85 $ -- $ 61,424
Operating leases (1) ........ 2,568 9,392 6,770 5,731 5,178 21,977 51,616
Post retirement benefits .... 251 1,100 1,134 1,163 1,221 11,994 16,863
Severance payments related
to restructuring and
integration ................ 1,126 3,248 311 311 280 2,185 7,461
-------- -------- -------- -------- -------- -------- --------
Total commitments.. $ 3,984 $ 74,802 $ 8,334 $ 7,324 $ 6,764 $ 36,156 $137,364
======== ======== ======== ======== ======== ======== ========
(1) In March 2008, in connection with the closing of the sale of our Long
Island City, New York property the remaining balance of the $7.8
million mortgage loan was defeased and we entered into a lease
agreement with the purchaser whereby we would lease space at the
property. The initial term of the lease is ten years and contains four
5-year renewal options. Refer to Note 4 in the notes to our
consolidated financial statements for further details.
(2) In July 1999, we issued convertible debentures, payable semi-annually,
in the aggregate principal amount of $90 million that are scheduled to
mature on July 15, 2009. In the third quarter of 2008, we repurchased
$20.6 million principal amount of the debentures resulting in a gain on
the repurchase of $1.6 million. In October and November 2008, we
repurchased in the aggregate an additional $9.5 million principal
amount of the debentures resulting in a gain of $1 million. Refer to
Note 7 in the notes to our consolidated financial statements for
further details.
SUMMARY OF SIGNIFICANT 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. There have been no material changes to our critical
accounting policies and estimates from the information provided in Note 1 of the
notes to our consolidated financial statements in our Annual Report on Form 10-K
for the year ended December 31, 2007. You should be aware that preparation of
our consolidated quarterly financial statements in this Report requires us to
make estimates and assumptions that affect the reported amount of assets and
liabilities, the 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 assurances that actual
results will not differ from those estimates.
REVENUE RECOGNITION - Revenue is recognized 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.
-28-
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 September 30, 2008,
the allowance for sales returns was $30.4 million. Similarly, management must
make estimates of the collectability 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 September 30, 2008, the allowance for
doubtful accounts and for discounts was $10.1 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 our 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 September
30, 2008, we had a valuation allowance of $26.8 million, due to uncertainties
related to our ability to utilize some of our deferred tax assets. The
assessment of the adequacy of our valuation allowance is based on our estimates
of taxable income by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable.
-29-
In the event that actual results differ from these estimates, or we adjust these
estimates in future periods for current trends or expected changes in our
estimating assumptions, we may need to modify the level of valuation allowance
which could materially impact our business, financial condition and results of
operations.
In accordance with the provisions of SFAS Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No.109," we
recognize in our financial statements only those tax positions that meet the
more-likely-than-not-recognition threshold. We establish tax reserves for
uncertain tax positions that do not meet this threshold. Interest and penalties
associated with income tax matters are included in the provision for income
taxes in our consolidated statement of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL - We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. With respect to goodwill, we test for impairment at least annually
in the fourth quarter of each year as part of our annual budgeting process.
Factors we consider important, which could trigger an impairment review, include
the following: (a) significant underperformance relative to expected historical
or projected future operating results; (b) significant changes in the manner of
our use of the acquired assets or the strategy for our overall business; and (c)
significant negative industry or economic trends. We review the fair values of
each of our reporting units using the discounted cash flows method and market
multiples.
In the event our planning assumptions were modified resulting in impairment to
our assets, we would be required to include an expense in our statement of
operations, which could materially impact our business, financial condition and
results of operations.
RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS - Each year, we calculate the
costs of providing retiree benefits under the provisions of SFAS 87, "Employers'
Accounting for Pensions" and SFAS 106, "Employers' Accounting for
Post-Retirement Benefits Other than Pensions." The key assumptions used in
making these calculations are the eligibility criteria of participants, the
discount rate used to value the future obligation, and expected return on plan
assets. 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. Under SFAS Staff Position
No.106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," we have concluded
that our post-retirement plan is actuarially equivalent to the Medicare Part D
benefit and accordingly we recognize subsidies from the federal government in
the measurement of the accumulated post-retirement benefit obligation pursuant
to the requirements of SFAS 106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions."
ENVIRONMENTAL RESERVES - We are subject to various U.S. federal and state and
local environmental laws and regulations and are involved in certain
environmental remediation efforts. We estimate and accrue our liabilities
resulting from such matters based upon a variety of factors including the
assessments of environmental engineers and consultants who provide estimates of
potential liabilities and remediation costs.
Our aggregate environmental related accrual as of September 30, 2008 of $2
million declined $0.4 million from an accrual of $2.4 million as of December 31,
2007 reflecting the impact of cash payments made during the nine months ended
September 30, 2008. The environmental related accrual relates primarily to the
Long Island City, New York property. Such estimates may or may not include
potential recoveries from insurers or other third parties and are not discounted
to reflect the time value of money due to the uncertainty in estimating the
timing of the expenditures, which may extend over several years. We did not
incur any environmental remediation expense for the quarter ended September 30,
2008.
-30-
ASBESTOS RESERVE - We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. In accordance with our
accounting policy, our most recent actuarial study as of August 31, 2008
estimated an undiscounted liability for settlement payments, excluding legal
costs and any potential recovery from insurance carriers, ranging from $25.3
million to $69.2 million for the period through 2059. As a result, in September
2008 an incremental $2.1 million provision in our discontinued operation was
added to the asbestos accrual increasing the reserve to approximately $25.3
million as of that date. Based on the information contained in the actuarial
study and all other available information considered by us, we concluded that no
amount within the range of settlement payments was more likely than any other
and, therefore, recorded the low end of the range as the liability associated
with future settlement payments through 2059 in our consolidated financial
statements. In addition, according to the updated study, legal costs, which are
expensed as incurred and reported in earnings (loss) from discontinued
operation, are estimated to range from $19.1 million to $32.1 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. The aforementioned
estimated settlement payments and legal costs do not reflect any limited
coverage that we may obtain pursuant to an agreement with an insurance carrier
for certain asbestos-related claims. See Note 13 of notes to our consolidated
financial statements.
OTHER LOSS RESERVES - We have other loss exposures, such as environmental
claims, product liability and litigation. Establishing loss reserves for these
matters requires the use of estimates and judgment of risk exposure and ultimate
liability. We estimate losses using consistent and appropriate methods; however,
changes to our assumptions could materially affect our recorded liabilities for
loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. This statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. SFAS 157 is effective for the fiscal year beginning after
November 15, 2007, which for us is the year ending December 31, 2008. As of
January 1, 2008, we adopted SFAS 157. The adoption of SFAS 157 did not impact
our consolidated financial statements in any material respect.
In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's effective
date for all non-financial assets and liabilities, except those items recognized
or disclosed at fair value on an annual or more frequently recurring basis,
until years beginning after November 15, 2008. Derivatives measured at fair
value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing the
impact, if any, which the adoption of FSP FAS 157-b will have on our
consolidated financial position, results of operations and cash flows.
FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"), including an amendment
of FASB Statement No. 115. SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value. The Statement's
objective is to improve financial reporting by allowing entities to mitigate
volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge
accounting provisions. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
new Statement establishes presentation and disclosure requirements to help
financial statement users understand the effect of the entity's election on its
earnings, but does not eliminate disclosure requirements of other accounting
standards. SFAS 159 is effective as of the beginning of the first fiscal year
that begins after November 15, 2007, and is effective for us as of January 1,
2008. The adoption of SFAS 159 did not impact our consolidated financial
statements in any material respect.
-31-
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141R"). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for the fiscal year beginning after December 15, 2008, which for us is
the fiscal year beginning January 1, 2009. SFAS 141R will have an impact on the
manner in which we account for future acquisitions beginning in the fiscal year
2009.
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, which for us is the fiscal year beginning January 1, 2009. We are
assessing the impact, if any, which the adoption of SFAS 160 will have on our
consolidated financial position, results of operations and cash flows.
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). This Statement requires
enhanced disclosures about an entity's derivative and hedging activities and
thereby improves the transparency of financial reporting. This Statement is
effective for financial statements issued for fiscal years and interim periods
ending after November 15, 2008, which for us is the fiscal year ending December
31, 2008. The adoption of SFAS 161 will have an impact on the manner in which we
would disclose any derivative or hedging activities, if present.
CONVERTIBLE DEBT INSTRUMENTS
In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion" ("FSP
APB 14-1") which requires issuers of convertible debt that may be settled wholly
or partly in cash to account for the debt and equity components separately. This
FSP is effective for fiscal years beginning after December 15, 2008, which for
us is the fiscal year beginning January 1, 2009 and must be applied
retrospectively to all periods presented. We are assessing the impact, if any,
which the adoption of FSP APB 14-1 will have on our financial statements.
-32-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange
and interest rates. These exposures are actively monitored by management. Our
exposure to foreign exchange rate risk is due to certain costs, revenues and
borrowings being denominated in currencies other than one of our subsidiary's
functional currency. Similarly, we are exposed to market risk as the result of
changes in interest rates, which may affect the cost of our financing. It is our
policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
We have exchange rate exposure, primarily, with respect to the Canadian dollar,
the British Pound, the Euro and the Hong Kong dollar. As of September 30, 2008
and December 31, 2007, our monetary assets and liabilities which are subject to
this exposure are immaterial, therefore the potential immediate loss to us that
would result from a hypothetical 10% change in foreign currency exchange rates
would not be expected to have a material impact on our earnings or cash flows.
This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange
rates affecting the foreign currencies in which monetary assets and liabilities
are denominated and does not take into account the offsetting effect of such a
change on our foreign-currency denominated revenues.
We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in our debt portfolio. To manage a portion of
our exposure to interest rate changes, we have in the past entered into interest
rate swap agreements. We invest our excess cash in highly liquid short-term
investments. Our percentage of variable rate debt to total debt was 69.8% at
September 30, 2008 and 61.7% at December 31, 2007.
Other than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K
for the year ended December 31, 2007.
-33-
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as
of the end of the period covered by this Report. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this Report.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
During the quarter ended September 30, 2008, we have not made any changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
We continue to review, document and test our internal control over financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business. These
efforts will lead to various changes in our internal control over financial
reporting.
-34-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation 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 September 30, 2008, approximately 3,620 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 September 30, 2008, the amounts paid for settled claims are
approximately $6.5 million. In September 2007, we entered into an agreement with
an insurance carrier to provide us with limited insurance coverage for the
defense and indemnity costs associated with certain asbestos-related claims. We
have submitted various asbestos-related claims to the insurance carrier for
coverage under this agreement and expect to receive $1.3 million from the
carrier before the end of the year.
In November 2004, the Company was served with a summons and complaint in the
U.S. District Court for the Southern District of New York by The Coalition for a
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. In August 2005, we filed a
motion to dismiss the complaint, following which the plaintiff filed an amended
complaint dropping, among other things, all claims under the Sherman Act. The
remaining claims allege violations of the Robinson-Patman Act. Motions to
dismiss those claims were filed by us in February 2006. Plaintiff filed
opposition to our motions, and we subsequently filed replies in June 2006. Oral
arguments were originally scheduled for September 2006; however the court
adjourned these proceedings until a later date to be determined. Subsequently,
the judge initially assigned to the case recused himself, and a new judge has
been assigned. Although we cannot predict the ultimate outcome of this case or
estimate the range of any potential loss that may be incurred in the litigation,
we believe that the lawsuit is without merit, deny all of the plaintiff's
allegations of wrongdoing and believe we have meritorious defenses to the
plaintiff's claims. We intend to defend vigorously this lawsuit.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
-35-
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
(Registrant)
Date: November 6, 2008 /S/ JAMES J. BURKE
------------------
James J. Burke
Vice President Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-36-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
-37-