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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-4743
STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(718) 392-0200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
As of July 31, 2002, there were 12,556,176 outstanding shares of the
registrant's $2.00 par value common stock.
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EXPLANATORY NOTE
This Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, as originally filed on August 14, 2002, is being
filed to amend and reflect the restatement of the Registrant's Consolidated
Financial Statements. See Note 15 of Notes to Consolidated Financial Statements
for further discussion. Each item of the Quarterly Report on Form 10-Q as filed
on August 14, 2002 that was affected by the restatement has been amended and
restated. No attempt has been made in this Form 10-Q/A to modify or update other
disclosures as presented in the original Form 10-Q except as required to reflect
the effects of the restatement.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION
ITEM 1 PAGE
CONSOLIDATED BALANCE SHEETS at
June 30, 2002 (Unaudited) (As Restated) and December 31, 2001 4
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (Unaudited) for the three-month and six-month
periods ended June 30, 2002 and 2001 (As Restated) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) for the
six-month periods ended June 30, 2002 (As Restated) and 2001 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
2
PART II - OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS 21
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURE 22
CERTIFICATIONS 23
3
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
June 30,
2002 December 31,
(Unaudited) 2001
- -----------------------------------------------------------------------------------
(Restated)
Current assets:
Cash and cash equivalents $ 3,586 $ 7,496
Accounts and notes receivable, net of
allowance for doubtful accounts and
discounts of $6,245 (2001 - $4,362) (Note 6) 207,474 117,965
Inventories (Notes 4 and 6) 172,491 177,291
Deferred income taxes 12,847 12,316
Prepaid expenses and other current assets 15,504 13,881
-------- --------
Total current assets 411,902 328,949
-------- --------
Property, plant and equipment, net of
accumulated depreciation (Notes 5 and 6) 109,242 101,646
Goodwill, net (Note 3) 20,017 38,040
Other assets 37,516 40,794
-------- --------
Total assets $578,677 $509,429
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
2002 December 31,
(Unaudited) 2001
- ----------------------------------------------------------------------------------------
(Restated)
Current liabilities:
Notes payable $ 3,421 $ 4,075
Current portion of long-term debt (Note 6) 4,387 1,784
Accounts payable 46,547 26,110
Sundry payables and accrued expenses 52,046 41,968
Accrued customer returns 21,584 18,167
Payroll and commissions 11,304 8,489
--------- ---------
Total current liabilities 139,289 100,593
--------- ---------
Long-term debt (Note 6) 242,953 200,066
Postretirement benefits other than pensions
and other accrued liabilities 24,104 23,083
--------- ---------
Total liabilities 406,346 323,742
--------- ---------
Commitments and contingencies (Notes 6,7,10,12 and 14)
Stockholders' equity (Notes 6,7,9,10,11 and 12):
Common stock - par value $2.00 per share:
Authorized - 30,000,000 shares,
issued and outstanding 11,946,010
and 11,823,650 shares
in 2002 and 2001, respectively) 26,649 26,649
Capital in excess of par value 1,738 1,877
Retained earnings 166,265 183,532
Accumulated other comprehensive loss (1,519) (3,722)
--------- ---------
193,133 208,336
Less:Treasury stock - at cost (1,378,466 and 1,500,826
shares in 2002 and 2001, respectively) 20,802 22,649
--------- ---------
Total stockholders' equity 172,331 185,687
--------- ---------
Total liabilities and stockholders' equity $ 578,677 $ 509,429
========= =========
See accompanying notes to unaudited consolidated financial statements.
5
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED) (in thousands, except shares and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------- ------------ ------------
(Restated) (Restated) (Restated) (Restated)
Net sales (Note 2) $ 180,629 $ 183,167 $ 306,950 $ 337,630
Cost of sales (Note 2) 133,796 141,336 229,141 258,368
------------ ------------ ------------ ------------
Gross profit 46,833 41,831 77,809 79,262
Selling, general and administrative expenses (Note 2) 34,452 33,323 65,321 66,318
------------ ------------ ------------ ------------
Operating income 12,381 8,508 12,488 12,944
Other income (expense) - net 88 (138) 756 459
Interest expense 3,809 5,040 7,271 9,167
------------ ------------ ------------ ------------
Earnings from continuing operations before taxes 8,660 3,330 5,973 4,236
Income taxes 2,393 1,055 1,627 1,342
------------ ------------ ------------ ------------
Earnings from continuing operations 6,267 2,275 4,346 2,894
Loss from discontinued operations, net of tax (806) -- (1,125) --
Earnings before extraordinary item and cumulative
------------ ------------ ------------ ------------
effect of accounting change 5,461 2,275 3,221 2,894
Extraordinary item, net of tax -- (2,797) -- (2,797)
Cumulative effect of accounting change,
net of tax (Note 3) -- -- (18,350) --
------------ ------------ ------------ ------------
Net earnings(loss) 5,461 (522) (15,129) 97
Retained earnings at beginning of period 161,878 189,820 183,532 190,253
------------ ------------ ------------ ------------
167,339 189,298 168,403 190,350
Less: cash dividends for period 1,074 1,059 2,138 2,111
------------ ------------ ------------ ------------
Retained earnings at end of period $ 166,265 $ 188,239 $ 166,265 $ 188,239
============ ============ ============ ============
PER SHARE DATA:
Net earnings(loss) per common share - basic:
Earnings per share from continuing operations $ 0.53 $ 0.19 $ 0.36 $ 0.25
Discontinued operation (0.07) -- (0.09) --
Extraordinary Item -- (0.24) -- (0.24)
Cumulative effect of accounting change -- -- (1.54) --
------------ ------------ ------------ ------------
Net earnings(loss) per common share - basic $ 0.46 $ (0.05) $ (1.27) $ 0.01
============ ============ ============ ============
Net earnings(loss) per common share - diluted:
Earnings per share from continuing operations $ 0.48 $ 0.19 $ 0.36 $ 0.25
Discontinued operation (0.05) -- (0.09) --
Extraordinary Item -- (0.24) -- (0.24)
Cumulative effect of accounting change -- -- (1.53) --
------------ ------------ ------------ ------------
Net earnings(loss) per common share - diluted $ 0.43 $ (0.05) $ (1.26) $ 0.01
============ ============ ============ ============
Weighted average number of
common shares outstanding - basic 11,918,439 11,781,383 11,873,288 11,748,050
============ ============ ============ ============
Weighted average number of common and
common equivalent shares - diluted 14,840,360 11,850,421 11,984,935 11,782,444
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
6
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended
June 30,
---------------------------
2002 2001
------------ ------------
(Restated)
Cash flows from operating activities:
Net earnings (loss) $ (15,129) $ 97
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities:
Depreciation and amortization 7,872 9,570
Gain on sale of property, plant & equipment (140) --
Equity income from joint ventures (263) (233)
Employee stock ownership plan allocation 584 352
Cumulative effect of accounting change, net of tax 18,350 --
Extraordinary loss on repayment of debt -- 3,772
Change in assets and liabilities,
net of effects from acquisitions:
Increase in accounts receivable, net (88,527) (108,154)
Decrease in inventories 10,290 47,370
Increase in prepaid expenses and other current assets (1,776) (568)
Decrease (Increase) in other assets 5,983 (7,694)
Increase (Decrease) in accounts payable 19,955 (9,942)
Increase (Decrease) in sundry payables and accrued expenses 9,353 (1,151)
Increase in other liabilities 7,129 7,952
--------- ---------
Net cash used in operating activities (26,319) (58,629)
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of property, plant & equipment 513 --
Capital expenditures (4,275) (8,691)
Payments for acquisitions, net of cash acquired (17,715) (1,069)
--------- ---------
Net cash used in investing activities (21,477) (9,760)
--------- ---------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 40,004 159,983
Net borrowings (payments) of long-term debt 4,832 (94,227)
Proceeds from exercise of employee stock options 412 216
Dividends paid (2,138) (2,111)
--------- ---------
Net cash provided by financing activities 43,110 63,861
--------- ---------
Effect of exchange rate changes on cash 776 (47)
Net decrease in cash and cash equivalents (3,910) (4,575)
Cash and cash equivalents at beginning of the period 7,496 7,699
--------- ---------
Cash and cash equivalents at end of the period $ 3,586 $ 3,124
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,266 $ 7,745
========= =========
Income taxes $ 324 $ 1,236
========= =========
See accompanying notes to unaudited consolidated financial statements.
7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
Standard Motor Products, Inc. (the "Company") is engaged in the manufacturing
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 consolidated financial statements, including the notes thereto, for the
year ended December 31, 2001.
The unaudited 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. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
only 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 reclassifications have been made to the 2001
unaudited consolidated financial statements to conform with the 2002
presentation.
NOTE 2 (RESTATED)
On January 1, 2002, the Company adopted the guidelines of the Emerging Issues
Task Force (EITF) entitled "Accounting for Certain Sales Incentives" and "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendors Products." 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. Historically, the Company has
provided certain consideration, including rebates, product and discounts to
customers and treated such costs as advertising, marketing and sales force
expenses. Beginning with the first quarter of 2002, such costs are now treated
as a reduction of revenue or as cost of sales. As a result, certain costs have
been reclassified for the three month and six month periods ended June 30, 2001,
from selling, general and administrative expenses, of approximately $7.4 million
and $14.5 million, respectively. These reclassifications had no effect on net
earnings.
NOTE 3 (RESTATED)
Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
(SFAS No. 142). In accordance with SFAS No. 142, goodwill will no longer be
amortized, but instead, will be subject to an annual review for potential
impairment. Using the discounted cash flows method, based on the Company's
weighted average cost of capital and market multiples, the Company reviewed the
fair values of each of its reporting units. The recent decline in economic and
market conditions, higher integration costs than anticipated and the general
softness in the automotive aftermarket has caused a decrease in the fair values
of certain of the Company's reporting units. As a result, the Company recorded
an impairment loss on goodwill as a cumulative effect of accounting change of
$18.3 million, net of tax, or $1.55 per diluted share during the first quarter
of 2002. The impairment loss relates to goodwill pertaining to certain of the
Company's reporting units within its European Operations (classified as "All
Other") for segment reporting and within its Temperature Control Segment and
recorded charges of $10.9 million and $7.4 million, respectively.
8
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Upon adoption of SFAS No. 142, the Company's earnings before cumulative effect
of accounting change and extraordinary item for basic and diluted earnings per
share adjusted to exclude goodwill amortization expense (net of taxes) are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
(In thousands, except per share amounts) 2002 2001 2002 2001
---------------------------------------------
(Unaudited)
Reported earnings before extraordinary item and
cumulative effect of accounting change $ 5,461 $ 2,275 $ 3,221 $ 2,894
Add back: goodwill amortization expense, net of tax -- 671 -- $ 1,338
--------- --------- --------- ---------
Adjusted earnings before extraordinary item and
cumulative effect of accounting change $ 5,461 $ 2,946 $ 3,221 $ 4,232
========= ========= ========= =========
Basic earnings per share:
Reported basic earnings per share before
extraordinary item and cumulative effect
of accounting change $ 0.46 $ 0.19 $ 0.27 $ 0.25
Add back: goodwill amortization expense, net of tax -- 0.06 -- 0.11
--------- --------- --------- ---------
Adjusted basic earnings per share before
extraordinary item and cumulative effect
of accounting change $ 0.46 $ 0.25 $ 0.27 $ 0.36
========= ========= ========= =========
Diluted earnings per share:
Reported diluted earnings per share before
extraordinary item and cumulative effect
of accounting change $ 0.43 $ 0.19 $ 0.27 $ 0.25
Add back: goodwill amortization expense, net of tax -- 0.06 -- 0.11
--------- --------- --------- ---------
Adjusted diluted earnings per share before
extraordinary item and cumulative effect
of accounting change $ 0.43 $ 0.25 $ 0.27 $ 0.36
========= ========= ========= =========
NOTE 4
INVENTORIES
(in thousands)
June 30, 2002 December 31,
(unaudited) 2001
-------------------
Finished Goods $136,687 $141,799
Work in Process 3,188 3,155
Raw Materials 32,616 32,337
-------- --------
Total inventories $172,491 $177,291
======== ========
NOTE 5
PROPERTY, PLANT AND EQUIPMENT
(in thousands)
June 30, 2002 December 31,
(unaudited) 2001
-------- --------
Land, buildings and improvements $ 66,023 $ 60,665
Machinery and equipment 117,034 109,617
Tools, dies and auxiliary equipment 19,143 17,815
Furniture and fixtures 27,951 27,643
Computer software 10,309 10,231
Leasehold improvements 7,438 7,450
Construction in progress 8,355 6,440
-------- --------
256,253 239,861
Less: accumulated depreciation and amortization 147,011 138,215
-------- --------
Total property, plant and equipment - net $109,242 $101,646
======== ========
9
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6
LONG-TERM DEBT
(in thousands)
June 30, 2002 December 31,
(unaudited) 2001
----------------------
Long Term Debt Consists of:
6.75% convertible subordinated debentures $ 90,000 $ 90,000
Revolving credit facility 147,448 106,790
Other 9,892 5,060
-------- --------
247,340 201,850
Less: current portion 4,387 1,784
-------- --------
Total non-current portion of
Long-term debt $242,953 $200,066
======== ========
Effective April 27, 2001, the Company entered into an agreement with GE Capital
Corp. and a syndicate of lenders for a new secured 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 were used to
refinance approximately $97 million of the outstanding indebtedness under the
Company's former bank line of credit, a senior note of $52 million, a $25
million accounts receivable sale 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, eligible inventory and eligible fixed assets. 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.
On July 26, 1999, the Company 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 2,796,000 shares of
the Company's common stock.
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 June 30, 2002,
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. If, at any time, the
swaps are determined to be ineffective, in all or in part, due to changes in the
interest rate swap agreements, the fair value of the portion of the interest
rate swap determined to be ineffective will be recognized as gain or loss in the
statement of operations in the period.
NOTE 8
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. This
agreement was terminated in the second quarter of 2001 as part of the new credit
facility described in Note 6. These sales were reflected as reductions of trade
accounts receivable and the related fees and discounting expense were recorded
as other expense.
10
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 (RESTATED)
Total comprehensive income (loss) was $6,885,000 and $213,000 for the
three-month periods ended June 30, 2002 and 2001, respectively, and
$(12,925,000) and $(107,000) for the six-month periods ended June 30, 2002 and
2001, respectively.
NOTE 10
During the six-month period ended June 30, 2002, 42,840 stock options were
exercised. At June 30, 2002, an aggregate of 1,277,440 shares of authorized but
unissued common stock were reserved for issuance under the Company's stock
option plans, of which 923,695 shares were subject to outstanding options.
751,039 shares of these outstanding options were vested at June 30, 2002.
NOTE 11 (RESTATED)
Following are reconciliations of the earnings available to common stockholders
and the shares used in calculating basic and diluted net earnings (loss) per
common share:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Earnings from continuing operations $ 6,267,000 $ 2,275,000 $ 4,346,000 $ 2,894,000
Loss from discontinued operation (806,000) -- (1,125,000) --
Extraordinary item -- (2,797,000) -- (2,797,000)
Cumulative effect of accounting change -- -- (18,350,000) --
------------ ------------ ------------ ------------
Earnings available to common stockholders 5,461,000 (522,000) (15,129,000) 97,000
Effect of convertible debentures 911,250 -- -- --
------------ ------------ ------------ ------------
Net earnings available to common
stockholders assuming dilution $ 6,372,250 $ (522,000) $(15,129,000) $ 97,000
============ ============ ============ ============
Weighted average common shares outstanding 11,918,439 11,781,383 11,873,288 11,748,050
Effect of convertible debentures 2,796,120 -- -- --
Effect of stock options 125,801 69,038 111,647 34,394
------------ ------------ ------------ ------------
Weighted average common
equivalent shares outstanding
assuming dilution 14,840,360 11,850,421 11,984,935 11,782,444
============ ============ ============ ============
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.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Stock options 566,574 634,074 566,574 762,229
Convertible debentures -- 2,796,120 2,796,120 2,796,120
========= ========= ========= =========
NOTE 12
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. As of June 30, 2002, 150,000 shares
have been released from the trust leaving 600,000 shares remaining in the trust.
11
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13 (RESTATED)
The Company's two reportable operating segments are Engine Management and
Temperature Control.
(in thousands)
Three months ended June 30,
-------------------------------------------------
2002 2001
-------------------------------------------------
Operating Operating
Net Sales Income Net Sales Income
-------------------------------------------------
Engine Management $ 82,975 $ 13,132 $ 74,318 $ 5,632
Temperature Control 86,099 3,931 98,544 5,540
All Other 11,555 (4,682) 10,305 (2,664)
-------- -------- -------- --------
Consolidated $180,629 $ 12,381 $183,167 $ 8,508
======== ======== ======== ========
(in thousands)
Six months ended June 30,
--------------------------------------------------
2002 2001
--------------------------------------------------
Operating Operating
Net Sales Income Net Sales Income
--------------------------------------------------
Engine Management $ 150,954 $20,272 $147,111 $12,356
Temperature Control 135,424 1,783 170,660 6,139
All Other 20,572 (9,567) 19,859 (5,551)
--------- ------- -------- --------
Consolidated $ 306,950 $12,488 $337,630 $12,944
========= ======= ======== ========
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 carrying value of goodwill for the Company's segments as of June 30, 2002
were as follows:
(in thousands)
Engine Management $ 10,490
Temperature Control 4,822
All Other 4,705
--------------
Goodwill, net $ 20,017
==============
NOTE 14
On January 28, 2000, a former significant customer of the Company which is
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 $0.5 million (formerly $19.8 million) of
preferential payments in the 90 days prior to the related Chapter 11 bankruptcy
petition. In addition, this former customer seeks $10.5 million 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 actions.
The claim pertaining to the preferential payments was settled for an immaterial
amount during the second quarter of 2002. The Company believes that these
matters will not have a material adverse 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. One of the product liability
matters involves a former Brake business of the Company, which is accounted for
as a discontinued operation in the accompanying financial statements. In 1986,
the Company acquired this business resulting in the assumption by the Company of
certain future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller. In accordance with the
related purchase agreement, the Company agreed to assume the liabilities for all
new claims filed fifteen years or more after the date of the purchase. The
ultimate exposure to the Company will depend upon the extent to which future
claims are filed and the amounts paid for indemnity and defense. At June 30,
2002, approximately 500 cases were outstanding whereby the Company is now
responsible for any related liabilities. Although the final outcome of these
matters or any other litigation or product liability matter cannot be
determined, based on the Company's understanding and evaluation of the relevant
facts and circumstances, it is management's opinion that the final outcome of
these matters will not have a material adverse effect on the Company's financial
statements taken as a whole.
12
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 15 RESTATEMENT
Upon initial adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," (SFAS No. 142), on January 1, 2002, the
Company recorded an impairment loss on goodwill as a cumulative effect of
accounting change of $16 million, net of tax, or $1.35 per diluted share during
the first quarter of 2002. The impairment loss related to goodwill pertaining to
the Company's reporting units within its European Operations (classified as "All
Other") for segment reporting and within its Temperature Control segment and
recorded a charge of $8.6 million and $7.4 million, respectively.
In preparing the year-end 2002 financial statements, the Company performed a
subsequent review of the earlier treatment of the tax benefit associated with
the goodwill impairment loss pertaining to its European Operations. As a result
of the review, it was concluded that a tax benefit will not be realized due to
the non-deductible nature of the goodwill on the European local accounts.
Therefore, this tax benefit recorded as part of the cumulative effect of
accounting change for the goodwill impairment loss has been reversed as of
January 1, 2002. This change resulted in an additional loss of approximately
$2.4 million.
The Company reclassified $1.1 million and $1.5 million of expenses recorded in
the three months ended and six months ended June 30, 2002, respectively,
associated with the discontinued operation from selling, general and
administrative to loss from discontinued operations. The expenses were not
considered significant in the original filed Form 10-Q for the quarter ended
June 30, 2002, however, they have been reclassified to conform to the
presentation beginning with the quarterly period ended September 30, 2002. This
reclassification had no impact on net earnings (loss).
In addition, certain costs of $1.3 million and $1.3 million for the three month
periods ended June 30, 2002 and 2001, respectively, and $1.5 million and $1.8
million for the six-month periods ended June 30, 2002 and 2001, respectively,
previously treated as a reduction to gross sales have been reclassified to
selling, general and administrative. This reclassification had no impact on net
earnings (loss).
A summary of the effects of the restatement on the Company's Consolidated
Financial Statements follows:
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS) June 30, 2002
-------------------------------
As Previously As
Reported Restated
-------------------------------
Sundry payables and accrued expenses $49,681 $ 52,046
Total current liabilities 136,924 139,289
Total liabilities 403,981 406,346
Retained earnings 168,630 166,265
Total stockholders' equity $174,696 $172,331
13
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 15 RESTATEMENT (CONTINUED)
For the Three Months Ended
CONSOLIDATED STATEMENT OF OPERATIONS June 30, 2002 June 30, 2001
- ------------------------------------
-----------------------------------------------
(IN THOUSANDS) As Previously As As Previously As
Reported Restated Reported Restated
-----------------------------------------------
Net Sales $ 179,329 $ 180,629 $ 181,914 $ 183,167
Gross profit 45,533 46,833 40,578 41,831
Selling, general and administrative
expenses 34,227 34,452 32,070 33,323
Operating income (loss) 11,306 12,381 8,508 8,508
Earnings (loss) before taxes 7,585 8,660 3,330 3,330
Income tax expense (benefit) 2,124 2,393 1,055 1,055
Earnings (loss) from continuing operations 5,461 6,267 2,275 2,275
Loss from discontinued operation -- (806) -- --
Cumulative effect of accounting
change, net of tax -- -- -- --
Net earnings (loss) 5,461 5,461 (522) (522)
Earnings (loss) per basic share from
continuing operations 0.46 0.53 0.19 0.19
Discontinued operation on a basic
loss per common share -- (0.07) -- --
Cumulative effect of accounting change
on a basic loss per common share -- -- -- --
Basic net income (loss) per common share 0.46 0.46 (0.05) (0.05)
Earnings (loss) per diluted share from
continuing operations 0.43 0.48 0.19 0.19
Discontinued operation on a diluted
loss per common share -- (0.05) -- --
Cumulative effect of accounting change
on a diluted loss per common share -- -- -- --
Diluted net income (loss) per common share $ 0.43 $ 0.43 $ (0.05) $ (0.05)
14
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 15 RESTATEMENT (CONTINUED)
For the Six Months Ended
June 30, 2002 June 30, 2001
-----------------------------------------------
As Previously As As Previously As
Reported Restated Reported Restated
-----------------------------------------------
Net Sales $ 305,409 $ 306,950 $ 335,874 $ 337,630
Gross profit 76,268 77,809 77,506 79,262
Selling, general and administrative
expenses 65,280 65,321 64,562 66,318
Operating income (loss) 10,988 12,488 12,944 12,944
Earnings (loss) before taxes 4,473 5,973 4,236 4,236
Income tax expense (benefit) 1,252 1,627 1,342 1,342
Earnings (loss) from continuing operations 3,221 4,346 2,894 2,894
Loss from discontinued operation -- (1,125) -- --
Cumulative effect of accounting
change, net of tax (15,985) (18,350) -- --
Net earnings (loss) (12,764) (15,129) 97 97
Earnings (loss) per basic share from
continuing operations 0.27 0.36 0.25 0.25
Discontinued operation on a basic
loss per common share -- (0.09) -- --
Cumulative effect of accounting change
on a basic loss per common share (1.35) (1.54) -- --
Basic net income (loss) per common share (1.08) (1.27) 0.01 0.01
Earnings (loss) per diluted share from
continuing operations 0.27 0.36 0.25 0.25
Discontinued operation on a diluted
loss per common share -- (0.09) -- --
Cumulative effect of accounting change
on a diluted loss per common share (1.34) (1.53) -- --
Diluted net income (loss) per common share $ (1.07) $ (1.26) $ 0.01 $ 0.01
CONSOLIDATED STATEMENT OF CASH FLOWS For the Six Months Ended
------------------------------------
(IN THOUSANDS) June 30, 2002
--------------------------------------------
As Previously As
Reported Restated
-------------------- --- -------------------
Net earnings (loss) $ (12,764) $ (15,129)
Cumulative effect of accounting change, net of tax
15,985 18,350
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q/A CONTAINS FORWARD-LOOKING STATEMENTS. 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. FORWARD-LOOKING STATEMENTS 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 A NUMBER OF FACTORS, INCLUDING
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; THE ABILITY OF OUR CUSTOMERS
TO ACHIEVE THEIR PROJECTED SALES; COMPETITIVE PRODUCT AND PRICING PRESSURES;
INCREASES IN PRODUCTION OR MATERIAL COSTS THAT CANNOT BE RECOUPED IN PRODUCT
PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED BUSINESSES; PRODUCT LIABILITY
(INCLUDING, WITHOUT LIMITATION, THOSE RELATED TO ESTIMATES TO ASBESTOS-RELATED
CONTINGENT LIABILITIES) MATTERS; AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH
AS THOSE DESCRIBED UNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK AND THOSE DETAILED HEREIN AND FROM TIME TO TIME IN THE FILINGS OF THE
COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. THOSE 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. THE FOLLOWING DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
FORM 10-Q/A.
As discussed in Note 15 of Notes to the Consolidated Financial Statements, the
Company has restated its financial statements for the quarter ended June 30,
2002 and 2001. The accompanying Management's Discussion and Analysis of
Financial Condition and Results of Operations gives effect to the restatement.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2002, cash used in operations amounted to $26.3
million, as compared to $58.6 million in the same period of 2001. The decrease
is primarily attributable to lower accounts receivable as a result of the
decline in net sales and an increase in accounts payable.
Cash used in investing activities was $21.5 million in the first six months of
2002, as compared to $9.8 million in the same period of 2001. The increase is
primarily due to acquisitions, partially offset by decreases in capital
expenditures. Assets acquired consist primarily of property, plant and
equipment, receivables and inventory. All acquisitions were financed with funds
provided under the Company's revolving credit facility.
In January 2002, the Company acquired the assets of a Temperature Control
business from Hartle Industries for $4.8 million. The assets consist primarily
of property, plant and equipment, and inventory. In April 2002, the Company
acquired Carol Cable Limited, a manufacturer and distributor of wire sets, based
in England, for $1.7 million. Assets consist primarily of property, plant and
equipment, and inventory. In May 2002, the Company purchased the aftermarket
fuel injector business of Sagem Inc., a subsidiary of Johnson Controls, for
$10.5 million. Sagem Inc. is a basic manufacturer of fuel injectors, and was the
primary supplier to the Company prior to its acquisition. Assets acquired
consist primarily of property, plant and equipment, and inventory. The purchase
was partially financed by the seller ($5.4 million to be paid over a two year
period), with the remaining funds being provided under the Company's revolving
credit facility.
Cash provided by financing activities was $43.1 million in the first six months
of 2002, as compared to $63.9 million in the same period of 2001. The decreased
borrowings reflect the Company's focus on reducing capital employed in the
business.
Effective April 27, 2001, the Company entered into an agreement with GE Capital
Corp. and a syndicate of lenders for a new secured revolving credit facility.
The former unsecured revolving credit facility was set to expire on November 30,
2001. 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 former bank line of credit, a 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, eligible inventory and eligible fixed
assets.
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 limitations 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 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
revolving credit facility. The Company anticipates that its present sources of
funds will continue to be adequate to meet its near term needs.
16
LIQUIDITY AND CAPITAL RESOURCES, (CONTINUED)
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 was repurchased to meet present and future requirements of the Company's
stock option programs and to fund the Company's ESOP. As of June 30, 2002, the
Company has Board authorization to repurchase additional shares at a maximum
cost of $1.7 million. During the first six months of 2002 and 2001, the Company
did not repurchase any shares of its common stock.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTHS ENDED JUNE 30, 2002 TO THE THREE-MONTHS
ENDED JUNE 30, 2001
On a consolidated basis, net sales in the second quarter of 2002 were $180.6
million, as compared to $183.2 million in the second quarter of 2001. The sales
shortfall was attributable to decreased sales of Temperature Control products,
which were partially offset by sales increases in Engine Management products.
Temperature Control net sales were down $12.4 million due to a combination of a
loss of a few locations at a major retailer and a continued reduction of
distributor inventories, as those distributors work off inventory left over from
previous mild summer seasons. Engine Management net sales recovered in the
second quarter, with new business orders increasing net sales by $8.7 million
over the comparable period in 2001.
Reported gross margins as a percentage of net sales, improved 3.1 percentage
points to 25.9% in the second quarter of 2002 from 22.8% in the comparable
quarter of 2001. The improvement in gross margins is primarily the result of
price increases and higher production levels. Gross margins should continue to
improve as production levels are more closely aligned to shipping levels as
compared to the significant inventory reduction program in 2001.
Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
(SFAS No. 142). In accordance with SFAS No. 142, goodwill will no longer be
amortized, but instead, will be subject to an annual review for potential
impairment. The adoption of the new accounting standard eliminated goodwill
amortization expense of $0.6 million after tax for the second quarter of 2002.
Selling, general and administrative expenses increased to $34.5 million in the
second quarter of 2002, as compared to $33.3 million in the second quarter of
2001. The increase is attributable to insurance and employee benefit costs.
Operating income increased by $3.9 million in the second quarter of 2002, as
compared to the second quarter of 2001, primarily due to improvements in gross
margins, as discussed above.
Interest expense decreased by $1.2 million in the second quarter 2002 as
compared to the same period in 2001, due to lower average borrowings and lower
interest rates.
The effective tax rate decreased from 32% in the second quarter of 2001 to 28%
in second quarter of 2002, due to a decrease in earnings from the Company's
domestic subsidiaries. The 28% current effective tax rate reflects the Company's
anticipated tax rate for the balance of the year.
COMPARISON OF THE SIX-MONTHS ENDED JUNE 30, 2002 TO THE SIX-MONTHS
ENDED JUNE 30, 2001
On a consolidated basis, net sales for the six-month period ended June 30, 2002
were $307 million, a decrease of $30.6 million, or 9.1%, as compared to the same
period in 2001. The decrease resulted primarily from the sales shortfall in
Temperature Control from earlier in the year, partially offset by improvements
in sales in Engine Management, as previously discussed.
Gross margins, as a percentage of net sales, increased 1.8 percentage points to
25.3% for the six-months ended June 30, 2002 from 23.5% in the same period of
2001. The improvement in gross margins reflects the return to more normal
production levels as the aggressive and successful inventory reduction campaign
in 2001 is now benefiting 2002.
Selling, general and administrative expenses decreased to $65.3 million for the
six-month period ended June 30, 2002, as compared to $66.3 million in the same
period of 2001. The decrease is attributable to the elimination of goodwill
amortization expense offset by increases to insurance and employee benefit
costs.
Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
(SFAS No. 142). In accordance with SFAS No. 142, goodwill will no longer be
amortized, but instead, will be subject to an annual review for potential
impairment. Using the discounted cash flows method, based on the Company's
weighted average cost of capital and market multiples, the Company reviewed the
fair values of each of its reporting units. The recent decline in economic and
market conditions, higher integration costs than anticipated and the general
softness in the automotive aftermarket has caused a decrease in the fair values
of certain of the Company's reporting units. As a result, the Company recorded
an impairment loss on goodwill as a cumulative effect of accounting change of
$18.3 million, net of tax, or $1.55 per diluted share during the first quarter
of 2002. The impairment loss relates to goodwill pertaining to certain of the
Company's reporting units within its European Operations (classified as "All
Other") for segment reporting and within its Temperature Control Segment and
recorded charges of $10.9 million and $7.4 million, respectively. The adoption
of the new accounting standard eliminated goodwill amortization expense of $1.2
million after tax for the first six months of 2002.
17
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE SIX-MONTHS ENDED JUNE 30, 2002 TO THE SIX-MONTHS
ENDED JUNE 30, 2001 (CONTINUED)
Operating income decreased by $0.4 million for the six-month period ended June
30, 2002, as compared to the same period of 2001, primarily due to the lower net
sales, as discussed above.
Interest expense decreased $1.9 million for the six-month period ended June 30,
2002 as compared to the same period in 2001, due to lower average borrowings and
lower interest rates.
The effective tax rate decreased from 32% for the first six-months of 2001 to
27% for the first six-months of 2002, due to a decrease in earnings from the
Company's domestic subsidiaries. The 27% current effective tax rate reflects the
Company's anticipated tax rate for the balance of the year.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. Note that our preparation of this Quarterly Report on Form
10-Q/A requires us to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ from those estimates.
REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement
parts for motor vehicles, from both our Engine Management and Temperature
Control Divisions. The Company recognizes revenue from product sales upon
shipment to customers. As described below, significant management judgments and
estimates must be made and used in connection with the revenue recognized in any
accounting period.
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The
preparation of financial statements requires our management to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our 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.
Similarly, our management must make estimates of the uncollectability of our
accounts receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
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 us
estimating our actual current tax exposure 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 recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At June 30, 2002, the
Company has a valuation allowance of $14.2 million, due to uncertainties related
to our ability to utilize some of our deferred tax assets. The valuation
allowance is based on our estimates of taxable income by jurisdiction in which
we operate and the period over which our deferred tax assets will be
recoverable.
In the event that actual results differ from these estimates or we adjust these
estimates in future periods we may need to establish an additional valuation
allowance which could materially impact our financial position and results of
operations.
18
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles, long-lived assets and goodwill whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of our use of the acquired assets or the strategy for our overall
business and significant negative industry or economic trends.
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability (including asbestos matters) and
litigation. Establishing loss reserves for these matters requires the use of
estimates and judgment in regards to 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 STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of Statement No. 143
for the quarter ending March 31, 2003. To accomplish this, the Company must
identify all legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption. The
determination of fair value is complex and will require the Company to gather
market information and develop cash flow models. Additionally, the Company will
be required to develop processes to track and monitor these obligations. Because
of the effort necessary to comply with the adoption of Statement No. 143, it is
not practicable for management to estimate the impact of adopting this Statement
at the date of this report.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement requires that long-lived assets be reviewed for impairment whenever
events and circumstances indicate that the carrying amount of the asset may not
be recoverable. If the carrying amount of the asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Additionally,
this standard broadens the presentation of discontinued operations to include
components of an entity rather than being limited to a segment of the business.
The Company adopted the provisions of Statement No. 144 as of January 1, 2002.
The adoption had no effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board No. 30 "Reporting Results of Operations". This
statement also requires sales-leaseback accounting for certain lease
modifications that have economic effects that are similar to sales leaseback
transactions, and makes various other technical corrections to existing
pronouncements. This statement will be effective for the year ending December
31, 2003. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associates
with Exit or Disposal Activities. Statement 146, which is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
applies to costs associated with an exit activity, including restructurings, or
with a disposal of long-lived assets. Those activities can include eliminating
or reducing product lines, terminating employees and contracts and relocating
plant facilities or personnel. Statement 146 requires that exit or disposal
costs are recorded as an operating expense when the liability is incurred and
can be measured at fair value. Commitment to an exit plan or a plan of disposal
by itself will not meet the requirement for recognizing a liability and the
related expense under Statement 146. Statement 146 grandfathers the accounting
for liabilities that were previously recorded under EITF Issue 94-3.
Accordingly, Statement 146 will have no effect on the restructuring costs
recorded or expected to be recorded by the Company in the second and third
quarters of 2002.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, primarily related to foreign currency
exchange and interest rates. These exposures are actively monitored by
management. The Company has exchange rate exposure primarily with respect to the
Canadian Dollar and the British Pound. The Company's exposure to foreign
exchange rate risk is due to certain costs, revenues and borrowings being
denominated in currencies other than a subsidiary's functional currency.
Similarly, the Company is exposed to market risk as the result of changes in
interest rates which may affect the cost of its financing. 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, see Note 7 of Notes to Consolidated Financial
Statements (Unaudited). The Company invests its excess cash in highly liquid
short-term investments. As a result of the Company's refinancing agreement
during the second quarter of 2001, as described in Note 6 of Notes to
Consolidated Financial Statements (Unaudited), the Company's percentage of
variable rate debt to total debt is 56% at December 31, 2001 and 62% at June 30,
2002.
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, 2001.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 28, 2000, a former significant customer of the Company which is
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 $0.5 million (formerly $19.8 million) of
preferential payments in the 90 days prior to the related Chapter 11 bankruptcy
petition. In addition, this former customer seeks $10.5 million 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 actions.
The claim pertaining to the preferential payments was settled for an immaterial
amount during the second quarter of 2002. The Company believes that these
matters will not have a material adverse 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. One of the product liability
matters involves a former Brake business of the Company, which is accounted for
as a discontinued operation in the accompanying financial statements. In 1986,
the Company acquired this business resulting in the assumption by the Company of
certain future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller. In accordance with the
related purchase agreement, the Company agreed to assume the liabilities for all
new claims filed fifteen years or more after the date of the purchase. The
ultimate exposure to the Company will depend upon the extent to which future
claims are filed and the amounts paid for indemnity and defense. At June 30,
2002, approximately 500 cases were outstanding whereby the Company is now
responsible for any related liabilities. Although the final outcome of these
matters or any other litigation or product liability matter cannot be
determined, based on the Company's understanding and evaluation of the relevant
facts and circumstances, it is management's opinion that the final outcome of
these matters will not have a material adverse effect on the Company's financial
statements taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) May 23, 2002 Annual Meeting
(b) Directors Elected -- Lawrence I. Sills
Arthur D. Davis
Susan F. Davis
William H. Turner
John L. Kelsey
Frederick D. Sturdivant
Marilyn F. Cragin
Arthur S. Sills
Peter J. Sills
Robert M. Gerrity
Kenneth A. Lehman
(c) Proposals voted upon:
(1) Election of Directors:
VOTES FOR VOTES WITHHELD
Lawrence I. Sills 8,945,397 2,670,606
Arthur D. Davis 9,119,774 2,496,229
Susan F. Davis 9,120,156 2,495,847
William H. Turner 9,120,488 2,495,515
John L. Kelsey 9,120,388 2,495,615
Frederick D. Sturdivant 9,120,488 2,495,515
Marilyn F. Cragin 9,120,203 2,495,800
Arthur S. Sills 9,119,793 2,496,210
Peter J. Sills 9,120,145 2,495,857
Robert M. Gerrity 9,120,488 2,495,515
Kenneth A. Lehman 9,120,688 2,495,315
(2) Shareholder Proposal Concerning Preferred Share Purchase
Rights
VOTED FOR VOTED AGAINST ABSTAINED
3,502,947 7,468,195 40,234
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT(S)
NUMBER DESCRIPTION
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(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.
(Registrant)
(Date): March 18, 2003 /S/ JAMES J. BURKE
------------------
Vice President Finance,
Chief Financial Officer
22
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Lawrence I. Sills, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Standard Motor
Products, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: March 18, 2003
/S/ LAWRENCE I. SILLS
---------------------
Lawrence I. Sills
Chief Executive Officer
23
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, James J. Burke, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Standard Motor
Products, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: March 18, 2003
/S/ JAMES J. BURKE
------------------
James J. Burke
Chief Financial Officer
24