1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended SEPTEMBER 30, 2001
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-4743
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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)
NONE
----
(Former name, former address and former fiscal year,
if changed since last report.)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
DATE CLASS SHARES
OUTSTANDING
COMMON STOCK PAR
OCTOBER 31, 2001 VALUE $2.00 PER SHARE 12,469,980
---------------- --------------------- ----------
1
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL AND OTHER INFORMATION
SEPTEMBER 30, 2001
PART 1 - FINANCIAL INFORMATION
ITEM 1 PAGE NO.
- ------ --------
CONSOLIDATED BALANCE SHEETS for
September 30, 2001 and December 31, 2000 3 & 4
CONSOLIDATED STATEMENTS OF EARNINGS AND
RETAINED EARNINGS for the three-month and nine-month
periods ended SEPTEMBER 30, 2001 and 2000 5
CONSOLIDATED STATEMENTS OF CASH FLOWS for the
nine-month periods ended September 30, 2001 and 2000 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 11
ITEM 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12 - 15
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II - OTHER INFORMATION
---------------------------
ITEM 1
- ------
Legal Proceedings 16
ITEM 6
- ------
Exhibits and Reports on Form 8-K 16
Signature 16
2
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
September 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 11,814 $ 7,699
Accounts and notes receivable, net of
allowance for doubtful accounts and
discounts of $4,939 (2000 - $4,577) (Notes 4 and 6) 180,740 106,261
Inventories (Notes 2 and 4) 177,187 234,257
Deferred income taxes 12,466 12,482
Prepaid expenses and other current assets 16,442 12,060
-------- --------
Total current assets 398,649 372,759
-------- --------
Property, plant and equipment, net of
accumulated depreciation (Notes 3 and 4) 104,028 104,536
Goodwill, net 38,955 40,685
Other assets 37,125 31,416
-------- --------
Total assets $578,757 $549,396
======== ========
See accompanying notes to consolidated financial statements.
3
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for shares and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
Current liabilites:
Notes payable (Note 4) $ 4,577 $ 38,930
Current portion of long-term debt (Note 5) 1,827 13,643
Accounts payable 36,435 56,612
Sundry payables and accrued expenses 47,294 49,671
Accrued customer returns 25,404 17,693
Payroll and commissions 11,552 8,119
--------- ---------
Total current liabilites 127,089 184,668
--------- ---------
Long-term debt (Notes 5 and 7) 237,392 150,018
Postretirement benefits other than pensions
and other accrued liabilities 21,869 20,405
--------- ---------
Total liabilities 386,350 355,091
--------- ---------
Commitments and contingencies (Notes 4, 5, 7, 9, 11 and 13)
Stockholders' equity (Notes 5, 7, 8, 9, 10 and 11):
Common stock - par value $2.00 per share
Authorized - 30,000,000 shares Issued - 13,324,476 shares in 2001
and 2000 (including 1,529,496 and 1,629,297 shares held as
treasury shares in 2001 and
2000, respectively) 26,649 26,649
Capital in excess of par value 1,994 2,541
Retained earnings 190,923 190,253
Accumulated other comprehensive loss (4,077) (591)
--------- ---------
215,489 218,852
Less: treasury stock - at cost 23,082 24,547
--------- ---------
Total stockholders' equity 192,407 194,305
--------- ---------
Total liabilities and stockholders' equity $ 578,757 $ 549,396
========= =========
See accompanying notes to consolidated financial statements.
4
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Dollars in thousands, except for shares and per share data)
(Unaudited)
For Three-Months Ended For Nine-Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ -------------
Net sales $ 163,670 $ 166,065 $ 506,126 $ 487,382
Cost of sales 113,477 114,905 362,056 332,964
------------ ------------ ------------ ------------
Gross profit 50,193 51,160 144,070 154,418
Selling, general and administrative expenses 40,729 39,467 121,503 123,938
------------ ------------ ------------ ------------
Operating income 9,464 11,693 22,567 30,480
Other income - net 819 190 1,119 663
Interest expense 4,795 4,959 13,962 13,613
------------ ------------ ------------ ------------
Earnings before taxes and extraordinary item 5,488 6,924 9,724 17,530
Income taxes 1,740 2,066 3,082 5,251
------------ ------------ ------------ ------------
Earnings before extraordinary item 3,748 4,858 6,642 12,279
Extraordinary loss on early extinguishment of debt,
net of tax benefits of $975 and $364, respectively -- -- (2,797) (501)
------------ ------------ ------------ ------------
Net earnings 3,748 4,858 3,845 11,778
Retained earnings at beginning of period 188,239 189,550 190,253 184,848
------------ ------------ ------------ ------------
191,987 194,408 194,098 196,626
Less: cash dividends for period 1,064 1,053 3,175 3,271
------------ ------------ ------------ ------------
Retained earnings at end of period $ 190,923 $ 193,355 $ 190,923 $ 193,355
============ ============ ============ ============
PER SHARE DATA:
Net earnings per common share - basic:
Earnings per share before extraordinary item $ 0.32 $ 0.41 $ 0.56 $ 1.02
Extraordinary loss on early extinguishment of debt -- -- (0.23) (0.04)
------------ ------------ ------------ ------------
Net earnings per common share - basic $ 0.32 $ 0.41 $ 0.33 $ 0.98
============ ============ ============ ============
Net earnings per common share - diluted:
Earnings per share before extraordinary item $ 0.32 $ 0.40 $ 0.56 $ 1.02
Extraordinary loss on early extinguishment of debt -- -- (0.23) (0.04)
------------ ------------ ------------ ------------
Net earnings per common share - diluted $ 0.32 $ 0.40 $ 0.33 $ 0.98
============ ============ ============ ============
Average number of common shares 11,797,961 11,697,788 11,764,870 12,013,886
============ ============ ============ ============
Average number of common and dilutive shares 11,893,848 14,493,788 11,816,646 12,062,000
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Nine-Months Ended
September 30,
--------------------------
2001 2000
-------- ----------
Cash flows from operating activities:
Net earnings $ 3,845 $ 11,778
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 14,072 14,203
Equity income from joint ventures (569) (661)
Employee Stock Ownership Plan Allocation 534 923
Extraordinary Loss on repayment of debt 3,772 865
Change in assets and liabilities,
net of effects from acquisitions:
Increase in accounts receivable, net (49,479) (42,142)
Decrease (Increase) in inventories 57,070 (30,289)
Increase in other current assets (4,203) (1,206)
(Increase) Decrease in other assets (8,741) 2,206
(Decrease) Increase in accounts payable (20,177) 8,148
Decrease in sundry payables and accrued expenses (4,477) (11,226)
Increase in other liabilities 12,645 7,587
--------- ---------
Net cash provided by (used in) operating activities 4,292 (39,814)
--------- ---------
Cash flows from investing activities:
Capital expenditures, net of effects from acquisitions (11,125) (11,679)
Payments for acquisitions, net of cash acquired (1,069) (1,499)
Proceeds from the sale of property, plant & equipment -- 657
--------- ---------
Net cash used in investing activities (12,194) (12,521)
--------- ---------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 110,647 62,568
Principal payments and retirement of other long-term debt (94,442) (27,752)
Dividends paid (3,175) (3,271)
Purchase of treasury stock -- (14,345)
Proceeds from exercise of employee stock options 206 --
--------- ---------
Net cash provided by financing activities 13,236 17,200
--------- ---------
Effect of exchange rate changes on cash (1,219) 470
--------- ---------
Net increase (decrease) in cash 4,115 (34,665)
Cash and cash equivalents at beginning of the period 7,699 40,380
--------- ---------
Cash and cash equivalents at end of the period $ 11,814 $ 5,715
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 15,243 $ 14,414
========= =========
Income taxes $ 2,025 $ 1,369
========= =========
See accompanying notes to consolidated financial statements.
6
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The accompanying unaudited financial information should be read in conjunction
with the consolidated financial statements, including the notes thereto, for the
year ended December 31, 2000.
The consolidated financial statements include the accounts of the Company and
all domestic and international companies in which the Company has more than a
50% equity ownership. The Company's 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.
Where appropriate, certain amounts in 2000 have been reclassified to conform
with the 2001 presentation.
In June 1998 and June 2000, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." These statements
establish accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. For derivatives that have been formally designated
as a cash flow hedge (interest rate swap agreements), the effective portion of
changes in the fair value of the derivatives are recorded in "other
comprehensive income". Payment or receipts on interest rate swap agreements are
recorded in the "interest expense" caption in the statement of earnings. The
adoption of these pronouncements on January 1, 2001 has not had a material
effect on the Company's consolidated financial statements taken as a whole.
NOTE 2
INVENTORIES
(Dollars in Thousands)
September 30, 2001 December 31, 2000
(unaudited)
Finished Goods $137,659 $165,381
Work in Process 4,404 3,552
Raw Materials 35,124 65,324
------ ------
Total inventories $177,187 $234,257
======== ========
7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
September 30, December 31,
2001 2000
(unaudited)
--------------- -----------
Land, buildings and improvements $60,840 $60,345
Machinery and equipment 106,355 101,538
Tools, dies and auxiliary equipment 16,176 12,035
Furniture and fixtures 31,953 32,345
Leasehold improvements 7,480 7,475
Construction in progress 14,312 12,328
------ ------
237,116 226,066
Less: accumulated depreciation and amortization 133,088 121,530
------- -------
Total property, plant and equipment - net $104,028 $104,536
======== ========
NOTE 4
On November 30, 1998, the Company entered into a three-year revolving credit
facility with eight lending institutions, providing for an unsecured line of
credit of $110,000,000. The facility allowed the Company to select from two
interest rate options, one based on a spread over the prime rate and the other
based on a spread over LIBOR. The spread above each interest rate option was
determined by the Company's ratio of consolidated debt to earnings before
interest, taxes, depreciation and amortization.
With the revolving credit facility set to expire on November 30, 2001, the
Company, effective April 27, 2001 entered into an agreement with GE Capital
Corp. and a syndicate of lenders for a new revolving credit facility. The term
of the new credit agreement is for a period of five years and provides for a
line of credit up to $225,000,000. The initial proceeds have been used to
refinance approximately $97 million of the outstanding indebtedness under the
Company's aforementioned existing bank line of credit, the 7.56% senior note of
$52 million, a $25 million accounts receivable sales arrangement and a Canadian
Credit Facility of $5 million. The Company recorded an extraordinary loss of
approximately $2.8 million, net of taxes, in the second quarter of 2001, for a
prepayment penalty and write-off of unamortized fees for the retirement of the
above related debt. Availability under the new credit facility is based on a
formula of eligible accounts receivable and eligible inventory. Direct
borrowings bear interest at the Prime Rate plus the applicable margin (as
defined) or the LIBOR Rate plus the applicable margin (as defined), at the
option of the Company. Borrowings are collateralized by accounts receivable,
inventory and fixed assets of the Company and its subsidiaries. The terms of the
new revolving credit facility contain, among other provisions, requirements of
maintaining defined levels of tangible net worth and specific limits or
restrictions on additional indebtedness, capital expenditures, liens and
acquisitions.
NOTE 5
LONG-TERM DEBT
(Dollars in thousands)
September 30, December 31,
2001 2000
(unaudited)
--------------- --------------
Long Term Debt Consists of:
6.75% convertible subordinated debentures $ 90,000 $ 90,000
Revolving credit facility 145,000 -
7.56% senior note payable - 62,571
Canadian Credit Facility - 5,335
Other 4,219 5,755
--------------- --------------
239,219 163,661
Less: current portion 1,827 13,643
--------------- --------------
Total non-current portion of
Long-term debt: $237,392 $ 150,018
=============== ==============
8
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 26, 1999, the Company completed a public offering of convertible
subordinated debentures amounting to $90,000,000. The Convertible Debentures
carry an interest rate of 6.75%, payable semi-annually, and will mature on July
15, 2009. The Debentures are convertible into 2,796,000 shares of the Company's
common stock.
Under the terms of the 7.56% senior note agreement, the Company was required to
repay the loan in seven equal annual installments beginning in 2000. As noted
above, this senior note was paid off as part of the new revolving credit
facility described in Note 4.
Under the terms of a Canadian (CDN) credit agreement, the Company was required
to repay the loan as follows: $2,000,000 CDN in 2001 and a final payment of
$6,000,000 CDN in 2002. The credit agreement had various interest rate options.
As noted above, this credit agreement was paid off as part of the new revolving
credit facility described in Note 4.
NOTE 6
The Company sold certain accounts receivable to an independent financial
institution, through its wholly owned subsidiary, SMP Credit Corp., a qualifying
special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three
year agreement whereby it could sell up to a $25 million undivided ownership
interest in a designated pool of certain of these eligible receivables. As noted
above, this agreement was terminated as part of the new revolving credit
facility described in Note 4.
NOTE 7
The Company does not enter into financial instruments for trading or speculative
purposes. The principal financial instruments used for cash flow hedging
purposes are interest rate swaps.
In July 2001, the Company entered into interest rate swap agreements to manage
its exposure to interest rate changes. The swaps effectively convert a portion
of the Company's variable rate debt under the revolving credit facility to a
fixed rate, without exchanging the notional principal amounts. At September 30,
2001, the Company had two outstanding interest rate swap agreements maturing in
January 2003 and 2004, with aggregate notional principal amounts of $75 million.
Under these agreements the Company receives a floating rate based on the LIBOR
interest rate, and pays a fixed rate of 4.92% on a notional amount of $45
million and 4.37% on a notional amount of $30 million. The fair values of the
interest rate swaps are the amounts at which they could be settled based on
estimates of market rates.
NOTE 8
Total comprehensive income was $466,000 and $4,644,000 for the three-month
periods ended September 30, 2001 and 2000, respectively, and $359,000 and
$11,517,000 for the nine-month periods ended September 30, 2001 and 2000,
respectively.
NOTE 9
During the nine-month period ended September 30, 2001, 26,204 stock options were
exercised. At September 30, 2001, in aggregate 1,348,950 shares of authorized
but unissued common stock were reserved for issuance under the Company's stock
option plans, of which 1,059,204 shares were subject to outstanding options.
702,895 shares of these outstanding options were vested at September 30, 2001.
9
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10
Following are reconciliations of the earnings available to common stockholders
and the shares used in calculating basic and dilutive net earnings per common
share:
For Three-Months Ended For Nine-Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Earnings before extraordinary item $ 3,748,000 $ 4,858,000 $ 6,642,000 $ 12,279,000
Extraordinary item -- -- (2,797,000) (501,000)
------------ ------------ ------------ ------------
Earnings available to common stockholders 3,748,000 4,858,000 3,845,000 11,778,000
Effect of convertible debentures -- 911,250 -- --
------------ ------------ ------------ ------------
Net earnings available to common
stockholders assuming $ 3,748,000 $ 5,769,250 $ 3,845,000 $ 11,778,000
dilution
============ ============ ============ ============
Weighted average common shares 11,797,961 11,697,788 11,764,870 12,013,886
Effect of convertible debentures -- 2,796,000 -- --
Effect of stock options 95,887 51,776 48,114
------------ ------------ ------------ ------------
Weighted average common
equivalent shares
outstanding 11,893,848 14,493,788 11,816,646 12,062,000
assuming dilution
============ ============ ============ ============
The average shares listed below were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for the
periods presented.
For Three-Months Ended For Nine-Months Ended
September 30, September 30,
------------------------ ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Stock options 640,074 1,223,075 768,229 808,575
Convertible debentures 2,796,000 -- 2,796,000 2,796,000
========= ========= ========= =========
NOTE 11
In fiscal 2000, the Company created an employee benefits trust to which it
contributed 750,000 shares of treasury stock. The Company is authorized to
instruct the trustees to distribute such shares toward the satisfaction of the
Company's 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 March of 2001, the Company
committed 75,000 shares to be released.
NOTE 12
The Company's two reportable operating segments are Engine Management and
Temperature Control.
Industry Segment
(Dollars in thousands)
For three-months ended September 30,
------------------------------------------------------
2001 2000
------------------------------------------------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
Engine Management $76,633 $8,669 $72,875 $9,223
Temperature Control 77,491 4,107 82,782 5,223
All Other 9,546 (3,312) 10,408 (2,753)
----------- --------- ---------- --------
Consolidated $163,670 $9,464 $166,065 $11,693
=========== ========= ========== ========
10
NOTE 12 (CONTINUED)
Industry Segment
(Dollars in thousands)
For nine-months ended September 30,
-------------------------------------------------
2001 2000
-------------------------------------------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
Engine Management $229,141 $ 21,008 $218,897 $ 26,797
Temperature Control 247,508 10,250 235,775 16,130
All Other 29,477 (8,691) 32,710 (12,447)
-------- -------- -------- --------
Consolidated $506,126 $ 22,567 $487,382 $ 30,480
======== ======== ======== ========
All other consists of items pertaining to European and Canadian operations and
the corporate headquarters function, which do not meet the criteria of a
reportable operating segment.
The following table reconciles the measure of profit used in the previous
disclosure to the Company's consolidated Earnings before taxes and extraordinary
item:
For Three-Months For Nine-Months
Ended Ended
September 30, September 30,
----------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating income $ 9,464 $11,693 $22,567 $30,480
Other income (expense) - net 819 190 1,119 663
Interest expense 4,795 4,959 13,962 13,613
------- ------- ------- -------
Earnings before taxes
and extraordinary item $ 5,488 $ 6,924 $ 9,724 $17,530
======= ======= ======= =======
NOTE 13
On January 28, 2000, a former significant customer of the Company currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including the Company. The claim
against the Company alleges $500,000 (formerly $19,759,000) of preferential
payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In
addition, this former customer seeks $10,500,000 from the Company for a variety
of claims including antitrust, breach of contract, breach of warranty and
conversion. These latter claims arise out of allegations that this customer was
entitled to various discounts, rebates and credits after it filed for
bankruptcy. The Company has purchased insurance with respect to the two actions.
The Company believes this matter will not have a material effect on the
Company's consolidated financial position or results of operations.
The Company is involved in various other litigation and product liability
matters arising in the ordinary course of business. Although the final outcome
of these matters cannot be determined, it is management's opinion that the final
resolution of these matters will not have a material effect on the Company's
consolidated financial statements taken as a whole.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
FORM 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2001, cash provided by operations amounted to
$4.3 million, as compared to cash used in operations of $39.8 million in the
same period of 2000. The improvement is primarily attributable to the Company's
efforts to reduce inventory levels from their elevated levels at December 31,
2000. This improvement was offset by higher accounts receivable primarily due to
an increase in net sales and a reduction in accounts payable.
In connection with inventories and their $57.1 million decrease, this reflects
the Company's commitment to its inventory reduction programs, previously
discussed, which have resulted from increased sales, reduced production, and
where needed, temporarily closing manufacturing facilities. The reductions have
effected both the Engine Management and Temperature Control segments. Inventory
turnover was 2.0x in 2001 vs. 1.9x in 2000, on a rolling twelve-month basis,
reflecting the high inventory levels at December 31, 2000, as previously
discussed, and should improve as a result of the inventory reduction efforts.
Cash used in investing activities was $12.2 million in the first nine months of
2001, as compared to $12.5 million in the same period of 2000. The decrease is
primarily due to a reduction in capital expenditures and acquisitions.
Cash provided by financing activities was $13.2 million in the first nine months
of 2001, as compared to $17.2 million in the same period of 2000. The change is
primarily due to the seasonal working capital needs of our Temperature Control
segment where accounts receivable levels have increased primarily due to the
increase in net sales.
During the years 1998 through 2000, the Board of Directors authorized multiple
repurchase programs under which the Company could repurchase shares of its
common stock. During such years, $26.7 million (in the aggregate) of common
stock has been repurchased to meet present and future requirements of the
Company's stock option programs and to fund the Company's ESOP. As of September
30, 2001, the Company has Board authorization to repurchase additional shares at
a maximum cost of $1.7 million. During the nine months of 2001, the Company did
not repurchase any shares of its common stock. During the first nine months of
2000, the Company repurchased approximately 1.1 million shares at a cost of
approximately $14.3 million.
On November 30, 1998, the Company entered into a three-year revolving credit
facility with eight lending institutions, providing for a $110 million unsecured
line of credit. The facility allowed the Company to select from two interest
rate options, one based on a spread over the prime rate and the other based on a
spread over LIBOR. The spread above each interest rate option was determined by
the Company's ratio of consolidated debt to earnings before interest, taxes,
depreciation and amortization.
12
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
With the revolving credit facility set to expire on November 30, 2001, the
Company, effective April 27, 2001 entered into an agreement with GE Capital
Corp. and a syndicate of lenders for a new revolving credit facility. The term
of the new credit agreement is for a period of five years and provides for a
line of credit up to $225 million. The initial proceeds have been used to
refinance approximately $97 million of the outstanding indebtedness under the
Company's aforementioned existing bank line of credit, the 7.56% senior note of
$52 million, a $25 million accounts receivable sale arrangement and the Canadian
Credit Facility of $5 million. The Company recorded an extraordinary loss of
approximately $2.8 million, net of taxes, in the second quarter of 2001, for a
prepayment penalty and write-off of unamortized fees for the retirement of the
above related debt. Availability under the new credit facility is based on a
formula of eligible accounts receivable and eligible inventory. Direct
borrowings will bear interest at the Prime Rate plus the applicable margin (as
defined) or the LIBOR Rate plus the applicable margin (as defined), at the
option of the Company. Borrowings will be collateralized by accounts receivable,
inventory and fixed assets of the Company and its subsidiaries. The terms of the
new revolving credit facility contain, among other provisions, requirements of
maintaining defined levels of tangible net worth and specific limits or
restrictions on additional indebtedness, capital expenditures, liens and
acquisitions.
The Company's profitability and its working capital requirements have become
more seasonal with the increased sales mix of temperature control products.
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.
The Company anticipates that its present sources of funds will continue to be
adequate to meet its near term needs.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE-MONTHS
ENDED SEPTEMBER 30, 2000
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On a consolidated basis, net sales in the third quarter of 2001 were $163.7
million, slightly lower than net sales of $166.1 million in the third quarter of
2000.
Gross margins, as a percentage of net sales, decreased slightly to 30.7% in the
third quarter of 2001, from 30.8% in the third quarter of 2000. The overall
decrease in gross margins was primarily due to inventory reduction programs. The
reduction in gross margins was across all product lines as the Company targets a
minimum $50 million inventory reduction during 2001. These changes reflect the
impact of underabsorbed overhead costs as a result of cutting production and
temporarily closing manufacturing facilities.
Selling, general and administrative expenses increased by $1.2 million to $40.7
million in the third quarter of 2001, as compared to $39.5 million in the third
quarter of 2000. This increase is primarily due to new customer acquisition
costs.
Operating income decreased by $2.2 million in the third quarter of 2001, as
compared to the third quarter of 2000, primarily due to the lower net sales,
lower gross margins and higher customer acquisition costs, as discussed above.
The effective tax rate increased from 30% in the third quarter of 2000 to 32% in
the third quarter of 2001, due to a decrease in earnings from the Company's
foreign subsidiaries. The 32% current effective tax rate reflects the Company's
anticipated tax rate for the balance of the year.
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INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE NINE-MONTHS ENDED SEPTEMBER 30, 2001 TO THE NINE-MONTHS ENDED
SEPTEMBER 30, 2000
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On a consolidated basis, net sales for the nine-month period ended September 30,
2001 were $506.1 million, an increase of $18.7 million, or 3.8%, higher than net
sales of $487.4 million in the same period in 2000. The increase resulted
primarily from sales to new accounts in both the Engine Management and
Temperature Control divisions.
Gross margins, as a percentage of net sales, decreased to 28.5% for the
nine-months ended September 30, 2001 from 31.7% in the same period of 2000. The
overall decrease in gross margins was primarily due to inventory reduction
programs. The reduction in gross margins was across all product lines as the
Company targets a minimum $50 million inventory reduction during 2001. These
changes reflect the impact of underabsorbed overhead costs as a result of
cutting production and temporarily closing manufacturing facilities.
Selling, general and administrative expenses decreased by $2.4 million to $121.5
million for the nine-month period ended September 30, 2001, as compared to
$123.9 million in the same period of 2000. This decrease reflects the focus on
the Company's cost reduction efforts with benefits primarily in the marketing
and distribution areas.
Operating income decreased by $7.9 million for the nine-month period ended
September 30, 2001, as compared to the same period of 2000, primarily due to the
lower gross margins and higher customer acquisition costs, as discussed above.
Interest expense increased slightly by $0.3 million for the nine-month period
ended September 30, 2001 as compared to the same period in 2000, due to higher
average borrowings.
The effective tax rate increased from 30% for the first nine-months of 2000 to
32% for the first nine-months of 2001, due to a decrease in earnings from the
Company's foreign subsidiaries. The 32% current effective tax rate reflects the
Company's anticipated tax rate for the balance of the year.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2000 and April 2001, the FASB Emerging Issues Task Force (the "EITF")
issued new guidelines entitled "Accounting for Certain Sales Incentives" and
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products", respectively, (the Guidelines"). These Guidelines
address when sales incentives and discounts should be recognized and the
accounting for certain costs incurred by a vendor on behalf of a customer, as
well as where the related revenues and expenses should be classified in the
financial statements. The Guidelines, as amended, are now effective beginning
January 1, 2002 and would be applied retroactively for purposes of
comparability. The adoption of these guidelines is not expected to have a
significant effect on the Company's consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria for intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF.
The Company is required to adopt the provisions of Statement 141 immediately,
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
14
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of approximately $38 million all of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense related to
goodwill was $3.5 million and $2.7 million for the year ended December 31, 2000
and for the nine months ended September 30, 2001, respectively. Because of the
extensive effort needed to comply with adopting Statements 141 and 142, it is
not practicable to reasonably estimate the impact of adopting these Statements
on the Company's financial statements at the date of this report, including
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, primarily related to foreign exchange and
interest rates. These exposures are actively monitored by management. It is the
Company's policy and practice to use derivative financial instruments only to
the extent necessary to manage exposures. The Company does not hold or issue
derivative financial instruments for trading or speculative purposes.
The Company manages its exposure to interest rate risk through the proportion of
fixed rate debt and variable rate debt in its debt portfolio. To manage a
portion of its exposure to interest rate changes, the Company has entered into
interest rate swap agreements, as further described in Note 7.
As a result of the Company's refinancing agreement during the second quarter
2001, as described in note 4, the Company's percentage of variable rate debt to
total debt has increased from 23% at December 31, 2000 to 62% at September 30,
2001.
Other than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 28, 2000, a former significant customer of the Company currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including the Company. The claim
against the Company alleges $500,000 (formerly $19,759,000) of preferential
payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In
addition, this former customer seeks $10,500,000 from the Company for a variety
of claims including antitrust, breach of contract, breach of warranty and
conversion. These latter claims arise out of allegations that this customer was
entitled to various discounts, rebates and credits after it filed for
bankruptcy. The Company has purchased insurance with respect to the two actions.
The Company believes that these matters will not have a material effect on the
Company's consolidated financial statements taken as a whole.
The Company is involved in various other litigation and product liability
matters arising in the ordinary course of business. Although the final outcome
of these matters cannot be determined, it is management's opinion that the final
resolution of these matters will not have a material effect on the Company's
consolidated financial statements taken as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT(S)
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NUMBER DESCRIPTION METHOD OF FILING
10.25 The 1994 Omnibus Stock Incorporated by reference
Option Plan of Standard Motor Products,
Inc. as amended and restated, is filed as
Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (33359524),
dated April 25, 2001.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for this period.
SIGNATURE
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.
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(Registrant)
NOVEMBER 14, 2001 JAMES J. BURKE
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(Date) Vice President Finance,
Chief Financial Officer
16