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 SEPTEMBER 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 October 31, 2002, there were 12,557,009 outstanding shares of
the registrant's common stock, par value $2.00 per share.
EXPLANATORY NOTE
This Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, as originally filed on November 13, 2002, is
being filed to amend and reflect the restatement of the Registrant's
Consolidated Financial Statements. See Note 16 of Notes to Consolidated
Financial Statements for further discussion. Each item of the Quarterly Report
on Form 10-Q as filed on November 13, 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 I - FINANCIAL INFORMATION
ITEM 1 PAGE
CONDENSED CONSOLIDATED BALANCE SHEETS at
September 30, 2002 (Unaudited) (As Restated) and December 31, 2001 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (Unaudited) for the three-month and nine-month
periods ended September 30, 2002 and 2001 (As Restated) 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) for the
nine-month periods ended September 30, 2002 (As Restated) and 2001 7
NOTES TO CONDENSED 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 21
ITEM 4
CONTROLS AND PROCEDURES 21
2
PART II - OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS 22
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 23
CERTIFICATIONS 24
3
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
September 30,
2002 December 31,
(Unaudited) 2001
- -----------------------------------------------------------------------------------------
(Restated)
Current assets:
Cash and cash equivalents $ 9,672 $ 7,496
Marketable securities 7,200 -
Accounts and notes receivable, net of
allowance for doubtful accounts and
discounts of $5,523 (2001 - $4,362) (Note 7) 191,703 117,965
Inventories (Notes 5 and 7) 161,709 177,291
Other current assets 30,978 26,197
------------- ------------
Total current assets 401,262 328,949
------------- ------------
Property, plant and equipment, net of
accumulated depreciation (Notes 6 and 7) 106,854 101,646
Goodwill, net (Note 3) 20,017 38,040
Other assets 37,313 40,794
------------- ------------
Total assets $ 565,446 $ 509,429
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
4
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
2002 December 31,
(Unaudited) 2001
- ----------------------------------------------------------------------------------------------------------------------
(Restated)
Current liabilities:
Notes payable $ 3,229 $ 4,075
Current portion of long-term debt (Note 7) 4,242 1,784
Accounts payable 47,130 26,110
Sundry payables and accrued expenses 53,341 41,968
Accrued customer returns 26,177 18,167
Payroll and commissions 14,913 8,489
------------- ------------
Total current liabilities 149,032 100,593
------------- ------------
Long-term debt (Note 7) 200,879 200,066
Other liabilities (Note 15) 52,064 23,083
------------- ------------
Total liabilities 401,975 323,742
------------- ------------
Commitments and contingencies (Notes 7,8,11,13 and 15)
Stockholders' equity (Notes 7,8,10,11 and 13 ): Common stock - par value $2.00
per share:
Authorized - 30,000,000 shares, issued and outstanding -
11,957,009 and 11,823,650 shares
in 2002 and 2001, respectively) 26,649 26,649
Capital in excess of par value 1,684 1,877
Retained earnings 158,103 183,532
Accumulated other comprehensive loss (2,328) (3,722)
------------- ------------
184,108 208,336
Less:Treasury stock - at cost (1,367,467 and 1,500,826
shares in 2002 and 2001, respectively) 20,637 22,649
------------- ------------
Total stockholders' equity 163,471 185,687
------------- ------------
Total liabilities and stockholders' equity $ 565,446 $ 509,429
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
5
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
(Unaudited)
(in thousands, except shares and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- -------------
(Restated) (Restated) (Restated) (Restated)
Net sales (Note 2) $ 183,631 $ 157,590 $ 490,581 $ 495,220
Cost of sales (Note 2) 133,023 116,439 362,164 374,807
-------------- -------------- -------------- -------------
Gross profit 50,608 41,151 128,417 120,413
Selling, general and administrative expenses (Note 2) 33,516 31,949 98,837 98,267
-------------- -------------- -------------- -------------
Operating income 17,092 9,202 29,580 22,146
Other income (expense) - net 969 1,081 1,725 1,540
Interest expense 3,606 4,795 10,877 13,962
-------------- -------------- -------------- -------------
Earnings from continuing operations before taxes 14,455 5,488 20,428 9,724
Income taxes 4,623 1,740 6,250 3,082
-------------- -------------- -------------- -------------
Earnings from continuing operations 9,832 3,748 14,178 6,642
Loss from discontinued operation, net of tax (Note 15) (16,918) - (18,043) -
Earnings (loss) before extraordinary item and
-------------- -------------- -------------- -------------
cumulative effect of accounting change (7,086) 3,748 (3,865) 6,642
Extraordinary item, net of tax - - - (2,797)
Cumulative effect of accounting change, net of tax (Note 3) - - (18,350) -
-------------- -------------- -------------- -------------
Net earnings(loss) (7,086) 3,748 (22,215) 3,845
Retained earnings at beginning of period 166,265 188,239 183,532 190,253
-------------- -------------- -------------- -------------
159,179 191,987 161,317 194,098
Less: cash dividends for period 1,076 1,064 3,214 3,175
-------------- -------------- -------------- -------------
Retained earnings at end of period $ 158,103 $ 190,923 $ 158,103 $ 190,923
============== ============== ============== =============
PER SHARE DATA:
Net earnings(loss) per common share - basic:
Basic earnings per share from continuing operations $ 0.82 $ 0.32 $ 1.19 $ 0.56
Discontinued operation (1.41) - (1.52) -
Extraordinary Item - - - (0.23)
Cumulative effect of accounting change - - (1.54) -
-------------- -------------- -------------- -------------
Net earnings(loss) per common share - basic $ (0.59) $ 0.32 $ (1.87) $ 0.33
============== ============== ============== =============
Net earnings(loss) per common share - diluted:
Diluted earnings per share from continuing operations $ 0.72 $ 0.32 $ 1.14 $ 0.56
Discontinued operation (1.14) - (1.22) -
Extraordinary Item - - - (0.23)
Cumulative effect of accounting change - - (1.24) -
-------------- -------------- -------------- -------------
Net earnings(loss) per common share - diluted $ (0.42) $ 0.32 $ (1.32) $ 0.33
============== ============== ============== =============
Weighted average number of common shares outstanding - basic 11,954,928 11,797,961 11,900,800 11,764,870
============== ============== ============== =============
Weighted average number of common and common
equivalent shares - diluted 14,859,401 11,893,848 14,805,121 11,816,646
============== ============== ============== =============
See accompanying notes to unaudited condensed consolidated financial statements.
6
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine-Months Ended
September 30,
----------------------------------
2002 2001
-------------- -------------
(Restated)
Cash flows from operating activities:
Net earnings (loss) $ (22,215) $ 3,845
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 11,715 14,072
Gain on sale of property, plant & equipment (136) -
Equity income from joint ventures (607) (569)
Employee stock ownership plan allocation 907 534
Cumulative effect of accounting change 18,350 -
Loss from discontinued operation 18,043 -
Extraordinary loss on repayment of debt - 2,797
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable, net (72,757) (49,479)
Decrease in inventories 21,072 57,070
Increase in prepaid expenses and other current assets (4,026) (4,203)
Increase in other assets (674) (8,741)
Increase (Decrease) in accounts payable 20,538 (20,177)
Increase (Decrease) in sundry payables and accrued expenses 12,205 (3,502)
Increase (Decrease) in other liabilities 24,021 12,645
-------------- -------------
Net cash provided by operating activities 26,436 4,292
-------------- -------------
Cash flows from investing activities:
Proceeds from the sale of property, plant & equipment 514 -
Capital expenditures (5,804) (11,125)
Payments for acquisitions, net of cash acquired (19,455) (1,069)
-------------- -------------
Net cash used in investing activities (24,745) (12,194)
-------------- -------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements (441) 110,647
Net borrowings (payments) of long-term debt 2,866 (94,442)
Proceeds from exercise of employee stock options 524 206
Dividends paid (3,214) (3,175)
-------------- -------------
Net cash (used in) provided by financing activities (265) 13,236
-------------- -------------
Effect of exchange rate changes on cash 750 (1,219)
Net increase in cash and cash equivalents 2,176 4,115
Cash and cash equivalents at beginning of the period 7,496 7,699
-------------- -------------
Cash and cash equivalents at end of the period $ 9,672 $ 11,814
============== =============
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 12,506 $ 15,243
============== =============
Income taxes $ 347 $ 2,025
============== =============
See accompanying notes to unaudited condensed consolidated financial statements.
7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 of
approximately $8.8 million and $23.2 million, respectively, have been
reclassified from selling, general and administrative expenses for the three
month and nine month periods ended September 30, 2001. 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 relating to the
Company's acquisitions 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Upon adoption of SFAS No. 142, the Company's earnings from continuing operations
for basic and diluted earnings per share adjusted to exclude goodwill
amortization expense (net of taxes) are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------
2002 2001 2002 2001
---------------------------- -------------------------
(Unaudited)
(in thousands,except per share amounts)
Reported earnings from continuing operations $ 9,832 $ 3,748 $14,178 $ 6,642
Add back: goodwill amortization expense, net of tax - 703 - $ 2,041
------------- ------------ ----------- -----------
Adjusted earnings from continuing operations $ 9,832 $ 4,451 $14,178 $ 8,683
============= ============ =========== ===========
Basic earnings per share:
Reported basic earnings per share from
continuing operations $ 0.82 $ 0.32 $ 1.19 $ 0.56
Add back: goodwill amortization expense, net of tax - 0.06 - 0.17
------------- ------------ ----------- -----------
Adjusted basic earnings per share from
continuing operations $ 0.82 $ 0.38 $ 1.19 $ 0.73
============= ============ =========== ===========
Diluted earnings per share:
Reported diluted earnings per share from continuing
operations $ 0.72 $ 0.32 $ 1.14 $ 0.56
Add back: goodwill amortization expense, net of tax - 0.06 - 0.17
------------- ------------ ----------- -----------
Adjusted diluted earnings per share from continuing
operations $ 0.72 $ 0.38 $ 1.14 $ 0.73
============= ============ =========== ===========
NOTE 4
In January 2002, the Company acquired the assets of a Temperature Control
business from Hartle Industries for $4.8 million. The assets acquired 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. The assets
acquired 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. The 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.
The above acquisitions had an immaterial effect on earnings from continuing
operations.
NOTE 5
INVENTORIES
(in thousands)
September 30, December 31,
2002 (unaudited) 2001
---------------- --------------
Finished Goods $ 124,112 $ 141,799
Work in Process 2,777 3,155
Raw Materials 34,820 32,337
---------------- --------------
Total inventories $ 161,709 $ 177,291
================ ==============
9
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6
PROPERTY, PLANT AND EQUIPMENT
(in thousands)
September 30, 2002 December 31,
(unaudited) 2001
------------------- --------------
Land, buildings and improvements $ 66,070 $ 60,665
Machinery and equipment 118,623 109,617
Tools, dies and auxiliary equipment 19,526 17,815
Furniture and fixtures 26,817 26,211
Computer software 12,351 11,663
Leasehold improvements 7,398 7,450
Construction in progress 6,899 6,440
------------------- --------------
257,684 239,861
Less: accumulated depreciation and amortization 150,830 138,215
------------------- --------------
Total property, plant and equipment - net $ 106,854 $ 101,646
=================== ==============
NOTE 7
LONG-TERM DEBT
(in thousands)
September 30, 2002 December 31,
(unaudited) 2001
------------------- -------------
Long-term debt consists of:
6.75% convertible subordinated debentures $ 90,000 $ 90,000
Revolving credit facility 107,195 106,790
Other 7,926 5,060
------------------- -------------
205,121 201,850
Less: current portion 4,242 1,784
------------------- -------------
Total non-current portion of
long-term debt $ 200,879 $ 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 it
provides for a line of credit up to $225 million. The initial proceeds were used
to refinance the approximately $97 million of 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, inventory and 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 2,796,120 shares of
the Company's common stock, subject to adjustment.
10
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8
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,
2002, the Company had two outstanding interest rate swap agreements maturing in
January 2003 and 2004, respectively, with an aggregate notional principal amount
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 whole 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 for the applicable period.
NOTE 9
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 7. These sales were reflected as reductions of trade
accounts receivable and the related fees and discounting expense were recorded
as other expense.
NOTE 10 (RESTATED)
Total comprehensive income (loss) was $(7,895,000) and $466,000 for the
three-month periods ended September 30, 2002 and 2001, respectively, and
$(20,821,000) and $359,000 for the nine-month periods ended September 30, 2002
and 2001, respectively.
NOTE 11
During the nine-month period ended September 30, 2002, options to purchase
53,839 shares of common stock were exercised. At September 30, 2002, an
aggregate of 1,266,441 shares of authorized but unissued common stock were
reserved for issuance under the Company's stock option plans, of which 912,196
shares were subject to outstanding options. At September 30, 2002, options to
purchase 740,040 shares of common stock were vested.
NOTE 12 (RESTATED)
The 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 Nine Months Ended
September 30, September 30,
------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(in thousands, except share amounts)
Earnings from continuing operations $ 9,832 $ 3,748 $ 14,178 $ 6,642
Loss from discontinued operation (16,918) -- (18,043) --
Extraordinary item -- -- -- (2,797)
Cumulative effect of accounting change -- -- (18,350) --
------------ ------------ ------------ ------------
Earnings (loss) available to common
stockholders (7,086) 3,748 (22,215) 3,845
Effect of convertible debentures 911 -- 2,734 --
------------ ------------ ------------ ------------
Net earnings (loss) available to common
stockholders assuming $ (6,175) $ 3,748 $ (19,481) $ 3,845
dilution
============ ============ ============ ============
Weighted average common shares outstanding 11,954,928 11,797,961 11,900,800 11,764,870
Effect of convertible debentures 2,796,120 -- 2,796,120 --
Effect of stock options 108,353 95,887 108,201 51,776
------------ ------------ ------------ ------------
Weighted average common
equivalent shares
outstanding
assuming dilution 14,859,401 11,893,848 14,805,121 11,816,646
============ ============ ============ ============
11
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------- --------- ------- ---------
Stock options 566,574 640,074 566,574 768,229
Convertible debentures -- 2,796,120 -- 2,796,120
======= ========= ======= =========
NOTE 13
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 September 30, 2002, 150,000
shares have been released from the trust leaving 600,000 shares remaining in the
trust.
NOTE 14 (RESTATED)
The Company's two reportable operating segments are Engine Management and
Temperature Control.
Three months ended September 30,
------------------------------------------------------------------------------------
2002 2001
-------------------------------------------- ---------------------------------------
Net Sales Operating Income Net Sales Operating Income
------------------ ----------------- ----------------- -----------------
(in thousands)
Engine Management $82,959 $11,716 $73,892 $8,671
Temperature Control 90,087 10,899 74,243 4,051
All Other 10,585 (5,523) 9,455 (3,520)
------------------ ----------------- ----------------- -----------------
Consolidated $183,631 $17,092 $157,590 $9,202
================== ================= ================= =================
Nine months ended September 30,
------------------------------------------------------------------------------------
2002 2001
-------------------------------------------- ---------------------------------------
Net Sales Operating Income Net Sales Operating Income
------------------ ----------------- ----------------- -----------------
(in thousands)
Engine Management $233,913 $31,988 $221,003 $21,027
Temperature Control 225,511 12,682 244,903 10,190
All Other 31,157 (15,090) 29,314 (9,071)
------------------ ----------------- ----------------- -----------------
Consolidated $490,581 $29,580 $495,220 $22,146
================== ================= ================= =================
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 values of goodwill for the Company's segments as of September 30,
2002 are as follows:
(in thousands)
Engine Management $ 10,490
Temperature Control 4,822
All Other 4,705
---------------------
Goodwill, net $ 20,017
=====================
12
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 15
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. The claim pertaining to the preferential payments was settled for an
immaterial amount during the second quarter of 2002. In addition, this former
customer seeks $9.4 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. On August 22, 2002, the court
dismissed the antitrust claims. The Company believes that these remaining
matters will not have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
In 1986, the Company acquired a brake business, which it subsequently sold in
March 1998 and which is accounted for as a discontinued operation in the
accompanying consolidated financial statements. When the Company originally
acquired this brake business, the Company assumed future liabilities relating to
any alleged exposure to asbestos-containing products manufactured by the seller
of the acquired brake business. In accordance with the related purchase
agreement, the Company agreed to assume the liabilities for all new claims filed
on or after September 1, 2001. The ultimate exposure to the Company will depend
upon the number of claims filed against the Company on or after September 1,
2001 and the amounts paid for indemnity and defense thereof. At December 31,
2001, approximately 100 cases were outstanding for which the Company was
responsible for any related liabilities. At September 30, 2002, the number of
cases outstanding for which the Company was responsible for related liabilities
had increased to approximately 600. To date, the amounts paid for settled claims
have been immaterial. The Company does not have insurance coverage for the
defense and indemnity costs associated with these claims.
In evaluating its potential asbestos-related liability, the Company has
considered various factors including, among other things, an actuarial study
performed by a leading actuarial firm with expertise in assessing
asbestos-related liabilities, settlement amounts of the Company, the incidence
of claims, the mix of the injuries of the plaintiffs, the number of cases
pending against the Company and whether there are any co-defendants, the
jurisdiction in which lawsuits are filed, and the status and results of
settlement discussions. Actuarial consultants with experience in assessing
asbestos-related liabilities completed a study in September 2002 to estimate the
Company's potential claim liability. The methodology used to project
asbestos-related liabilities and costs in the study considered: (1) historical
data available from publicly available studies; (2) an analysis of the Company's
recent claims history to estimate likely filing rates for the remainder of 2002
through 2052; (3) an analysis of the Company's currently pending claims; and (4)
an analysis of the Company's settlements to date in order to develop average
settlement values. Based upon all the information considered by the actuarial
firm, the actuarial study estimated an undiscounted liability for settlement
payments ranging from $27.3 million to $58 million for the period through 2052.
Accordingly, based on the information contained in the actuarial study and all
other available information considered by the Company, the Company recorded an
after tax charge of $16.9 million as a loss from discontinued operation during
the third quarter of 2002 to reflect such liability. The Company concluded that
no amount within the range of settlement payments was more likely than any other
and, therefore, recorded the low end of the range as the liability associated
with future settlement payments through 2052 in the Company's condensed
consolidated financial statements, in accordance with generally accepted
accounting principles. Given the uncertainties associated with projecting such
matters into the future, the short period of time that the Company has been
responsible for defending these claims, and other factors outside the control of
the Company, the Company can give no assurance that additional provisions will
not be required. Management will continue to monitor the circumstances
surrounding these potential liabilities in determining whether additional
provisions may be necessary. At the present time, however, the Company does not
believe that any additional provisions would be reasonably likely to have a
material adverse effect on the Company's liquidity or consolidated financial
position.
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
financial statements taken as a whole.
NOTE 16 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.
13
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16 RESTATEMENT (CONTINUED)
In addition, certain costs of $1.0 million and $0.9 million for the three month
periods ended September 30, 2002 and 2001, respectively, and $2.5 million and
$2.6 million for the nine-month periods ended September 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) September 30, 2002
----------------------------------
As Previously As
Reported Restated
------------------- --------------
Sundry payables and accrued expenses $51,059 $ 53,341
Total current liabilities 146,750 149,032
Total liabilities 399,693 401,975
Retained earnings 160,385 158,103
Total stockholders' equity $165,753 $163,471
CONSOLIDATED STATEMENT OF OPERATIONS For the Three Months Ended
- ------------------------------------ September 30, 2002 September 30, 2001
----------------------------------------- -----------------------------------------
(IN THOUSANDS) As Previously As As Previously As
Reported Restated Reported Restated
-------------------- --------------- -------------------- ----------------
Net Sales $ 182,625 $ 183,631 $ 156,707 $ 157,590
Gross profit 49,602 50,608 40,268 41,151
Selling, general and administrative expenses 32,510 33,516 31,066 31,949
For the Nine Months Ended
September 30, 2002 September 30, 2001
----------------------------------------- -----------------------------------------
As Previously As As Previously As
Reported Restated Reported Restated
-------------------- --------------- -------------------- ----------------
Net Sales $ 488,034 $ 490,581 $ 492,581 $ 495,220
Gross profit 125,870 128,417 117,774 120,413
Selling, general and administrative expenses 96,290 98,837 95,628 98,267
Income taxes 6,333 6,250 3,082 3,082
Earnings from continuing operations 14,095 14,178 6,642 6,642
Earnings (loss) before extraordinary item
and cumulative effect of
accounting change (3,948) (3,865) 6,642 6,642
Cumulative effect of accounting
change, net of tax (15,985) (18,350) - -
Net earnings (loss) (19,933) (22,215) 3,845 3,845
Earnings per basic share from
continuing operations 1.18 1.19 0.56 0.56
Cumulative effect of accounting change
on a basic loss per common share (1.34) (1.54) - -
Basic net income (loss) per common share (1.68) (1.87) 0.33 0.33
Cumulative effect of accounting change
on a diluted loss per common share (1.08) (1.24) - -
Diluted net income (loss) per common share $ (1.16) $ (1.32) $ 0.33 $ 0.33
14
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16 RESTATEMENT (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------ For the Nine Months Ended
(IN THOUSANDS) September 30, 2002
----------------------------------
As Previously As
Reported Restated
------------- -------------
Net earnings (loss) $ (19,933) $ (22,215)
Cumulative effect of accounting
change, net of tax 15,985 18,350
Increase in sundry payables and
accrued expenses 12,288 12,205
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 16 of Notes to the Consolidated Financial Statements, the
Company has restated its financial statements for the quarter ended September
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 nine months of 2002, cash provided by operations amounted to
$26.4 million, compared to $4.3 million in the same period of 2001. The increase
is primarily attributable to improved earnings from continuing operations,
higher accounts payable and continued reductions in inventory. Accounts
receivable has increased year over year, however, as a direct result of net
sales increasing for the quarter by $25.9 million.
Cash used in investing activities was $24.7 million in the first nine months of
2002, compared to $12.2 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 and seller financing.
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 used in financing activities was $0.3 million in the first nine months of
2002, compared to cash provided by financing of $13.2 million in the same period
of 2001. The decreased borrowings reflect the Company's focus on reducing
capital employed in its 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 it
provides for a line of credit up to $225 million. The initial proceeds have been
used to refinance the 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 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, inventory and fixed assets.
Direct borrowings under the credit facility 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.
Historically, the Company's operating results have fluctuated by quarter, with
the greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for the Company's products is typically the highest,
specifically in the Temperature Control segment of the business. In addition to
this seasonality, the demand for the Company's Temperature Control products
during the second and third quarters of the year may vary significantly with the
summer weather. For example, a cool summer may lessen the demand for the
Company's Temperature
16
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Control products, while a hot summer may increase such demand. As a result,
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.
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, an aggregate of $26.7 million of common stock
was repurchased to meet present and future requirements of the Company's stock
option programs and to fund the Company's Employee Stock Option Plan (ESOP). As
of September 30, 2002, the Company has Board authorization to repurchase
additional shares at a maximum cost of $1.7 million. During the first nine
months of 2002 and 2001, the Company did not repurchase any shares of its common
stock.
In 1986, the Company acquired a brake business, which it subsequently sold in
March 1998 and which is accounted for as a discontinued operation in the
accompanying consolidated financial statements. When the Company originally
acquired this brake business, the Company assumed future liabilities relating to
any alleged exposure to asbestos-containing products manufactured by the seller
of the acquired brake business. In accordance with the related purchase
agreement, the Company agreed to assume the liabilities for all new claims filed
on or after September 1, 2001. The ultimate exposure to the Company will depend
upon the number of claims filed against the Company on or after September 1,
2001 and the amounts paid for indemnity and defense thereof. At December 31,
2001, approximately 100 cases were outstanding for which the Company was
responsible for any related liabilities. At September 30, 2002, the number of
cases outstanding for which the Company was responsible for related liabilities
had increased to approximately 600. To date, the amounts paid for settled claims
have been immaterial. The Company does not have insurance coverage for the
defense and indemnity costs associated with these claims.
In evaluating its potential asbestos-related liability, the Company has
considered various factors including, among other things, an actuarial study
performed by a leading actuarial firm with expertise in assessing
asbestos-related liabilities, settlement amounts of the Company, the incidence
of claims, the mix of the injuries of the plaintiffs, the number of cases
pending against the Company and whether there are any co-defendants, the
jurisdiction in which lawsuits are filed, and the status and results of
settlement discussions. Actuarial consultants with experience in assessing
asbestos-related liabilities completed a study in September 2002 to estimate the
Company's potential claim liability. The methodology used to project
asbestos-related liabilities and costs in the study considered: (1) historical
data available from publicly available studies; (2) an analysis of the Company's
recent claims history to estimate likely filing rates for the remainder of 2002
through 2052; (3) an analysis of the Company's currently pending claims; and (4)
an analysis of the Company's settlements to date in order to develop average
settlement values. Based upon all the information considered by the actuarial
firm, the actuarial study estimated an undiscounted liability for settlement
payments ranging from $27.3 million to $58 million for the period through 2052.
Accordingly, based on the information contained in the actuarial study and all
other available information considered by the Company, the Company recorded an
after tax charge of $16.9 million as a loss from discontinued operation during
the third quarter of 2002 to reflect such liability. The Company concluded that
no amount within the range of settlement payments was more likely than any other
and, therefore, recorded the low end of the range as the liability associated
with future settlement payments through 2052 in the Company's condensed
consolidated financial statements, in accordance with generally accepted
accounting principles. Given the uncertainties associated with projecting such
matters into the future, the short period of time that the Company has been
responsible for defending these claims, and other factors outside the control of
the Company, the Company can give no assurance that additional provisions will
not be required. Management will continue to monitor the circumstances
surrounding these potential liabilities in determining whether additional
provisions may be necessary. At the present time, however, the Company does not
believe that any additional provisions would be reasonably likely to have a
material adverse effect on the Company's liquidity or consolidated financial
position.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE-MONTHS
ENDED SEPTEMBER 30, 2001
On a consolidated basis, net sales in the third quarter of 2002 were $183.6
million, $26 million, or 16.5%, higher, compared to $157.6 million of net sales
recorded in the third quarter of 2001. Temperature Control's consolidated net
sales increased $15.8 million, or 21.3% compared to the prior year's third
quarter, as a result of warmer temperatures in key demographic areas. Engine
Management's consolidated net sales also improved $9.1 million, or 12.3%, in the
third quarter of 2002 compared to 2001's third quarter, assisted by previously
announced new accounts.
Reported gross margins as a percentage of net sales improved 1.5 percentage
points to 27.6% in the third quarter of 2002 from 26.1% in the comparable
quarter of 2001. The improvement in gross margins reflects the return to more
normal production levels and the Company's ongoing cost reduction activities.
Selling, general and administrative expenses increased to $33.5 million in the
third quarter of 2002, compared to $31.9 million in the second quarter of 2001.
The increase is primarily attributable to higher insurance and employee benefit
costs. As a percentage of net sales, however, selling, general and
administrative expenses decreased from 20.3% in 2001 to 18.3% in 2002.
17
COMPARISON OF THE THREE-MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE-MONTHS
ENDED SEPTEMBER 30, 2001
(CONTINUED)
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 third quarter of 2002.
Operating income increased by $7.9 million to $17.1 million in the third quarter
of 2002, compared to $9.2 million in the third quarter of 2001, primarily due to
improvements in net sales and gross margins, as discussed above.
As discussed in Note 15 of the notes to the condensed consolidated financial
statements, the Company is responsible for certain future liabilities relating
to alleged exposure to asbestos containing products. Based on the information
contained in the September 2002 actuarial study, which estimated an undisclosed
liability for settlement payments ranging from $27.3 million to $58 million, and
all other available information considered by the Company, and as further set
forth in such Note 15, the Company recorded an after tax charge of $16.9 million
as a loss from discontinued operation during the third quarter of 2002 to
reflect such liability. The Company concluded that no amount within the range of
settlement payments was more likely than any other and, therefore, recorded the
low end of the range as the liability associated with future settlement payments
through 2052 in the Company's condensed consolidated financial statements, in
accordance with generally accepted accounting principles.
Interest expense decreased by $1.2 million in the third quarter 2002 compared to
the same period in 2001, due to lower average borrowings and lower interest
rates.
After giving effect to all of the above, including the charge of $16.9 million
related to potential future asbestos-related liabilities, the Company recorded a
net loss of $7.1 million in the third quarter of 2002, compared to net earnings
of $3.7 million in the third quarter of 2001.
The effective tax rate was 32% for the third quarter of 2002 and third quarter
of 2001. The effective tax rate increased in the third quarter of 2002 from 27%
recorded in the first six months of 2002 due to higher domestic earnings and
lower earnings from foreign subsidiaries.
COMPARISON OF THE NINE-MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE-MONTHS ENDED
SEPTEMBER 30, 2001
On a consolidated basis, net sales for the nine-month period ended September 30,
2002 were $490.6 million, a slight decrease of $4.6 million, or 0.9%, compared
to $495.2 million in the same period in 2001. The decrease resulted from a $19.3
million decrease in the comparative year-to-date net sales in Temperature
Control. Net sales were unfavorable due to a combination of a loss of a few
locations at a major retailer and a continued reduction of distributor
inventories during the first six months of the year, as those distributors work
off inventory left over from previous mild summer seasons. Engine Management's
net sales increased by $12.9 million for reasons discussed previously,
mitigating the overall decrease.
Gross margins, as a percentage of net sales, increased 1.9 percentage points to
26.2% for the nine-months ended September 30, 2002 from 24.3% 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 increased slightly to $98.8 million
for the nine-month period ended September 30, 2002, compared to $98.3 million in
the same period of 2001. The increase is primarily attributable 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 $1.9
million after tax for the first nine months of 2002.
Operating income increased by $7.5 million to $29.6 million for the nine-month
period ended September 30, 2002, as compared to $22.1 million for the same
period of 2001, primarily due to improved gross margins, as discussed above.
18
COMPARISON OF THE NINE-MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE-MONTHS ENDED
SEPTEMBER 30, 2001
(CONTINUED)
As discussed in Note 15 of the notes to the condensed consolidated financial
statements, the Company is responsible for certain future liabilities relating
to alleged exposure to asbestos containing products. Based on the information
contained in the September 2002 actuarial study, which estimated an undisclosed
liability for settlement payments ranging from $27.3 million to $58 million, and
all other available information considered by the Company, and as further set
forth in such Note 15, the Company recorded an after tax charge of $16.9 million
as a loss from discontinued operation during the third quarter of 2002 to
reflect such liability. The Company concluded that no amount within the range of
settlement payments was more likely than any other and, therefore, recorded the
low end of the range as the liability associated with future settlement payments
through 2052 in the Company's condensed consolidated financial statements, in
accordance with generally accepted accounting principles.
Interest expense decreased $3.1 million for the nine-month period ended
September 30, 2002 compared to the same period in 2001, due to lower average
borrowings and lower interest rates.
After giving effect to all of the above, including the cumulative effect of
accounting change of $18.3 million and the charge of $16.9 million related to
potential future asbestos-related liabilities, the Company recorded a net loss
of $22.2 million for the nine-month period ended September 30, 2002, compared to
net earnings of $3.8 million for the nine-month period ended September 30, 2001.
The effective tax rate decreased from 32% for the first nine-months of 2001 to
31% for the first nine-months of 2002, due to a decrease in earnings from the
Company's foreign subsidiaries. The 31% 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 receivable.
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.
19
CRITICAL ACCOUNTING POLICIES
(CONTINUED)
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 September 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.
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 material 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 2002.
20
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 8 of Notes to Condensed 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 7 of Notes to
Condensed Consolidated Financial Statements (Unaudited), the Company's
percentage of variable rate debt to total debt is 56% at December 31, 2001 and
54% at September 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on
their evaluation, our principal executive officer and principal
financial officer concluded that the Company's disclosure controls
and procedures are effective.
(b) There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in
our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation
referenced in paragraph (a) above.
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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. The claim pertaining to the preferential payments was settled for an
immaterial amount during the second quarter of 2002. In addition, this former
customer seeks $9.4 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. On August 22, 2002, the court
dismissed the antitrust claims. The Company believes that these remaining
matters will not have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
In 1986, the Company acquired a brake business, which it subsequently sold in
March 1998 and which is accounted for as a discontinued operation in the
accompanying consolidated financial statements. When the Company originally
acquired this brake business, the Company assumed future liabilities relating to
any alleged exposure to asbestos-containing products manufactured by the seller
of the acquired brake business. In accordance with the related purchase
agreement, the Company agreed to assume the liabilities for all new claims filed
on or after September 1, 2001. The ultimate exposure to the Company will depend
upon the number of claims filed against the Company on or after September 1,
2001 and the amounts paid for indemnity and defense thereof. At December 31,
2001, approximately 100 cases were outstanding for which the Company was
responsible for any related liabilities. At September 30, 2002, the number of
cases outstanding for which the Company was responsible for related liabilities
had increased to approximately 600. To date, the amounts paid for settled claims
have been immaterial. The Company does not have insurance coverage for the
defense and indemnity costs associated with these claims. The Company has
recorded a liability associated with future settlements through 2052 and
recorded an after tax charge of $16.9 as a loss from discontinued operation
during the third quarter of 2002 to reflect such liability.
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
financial statements taken as a whole.
22
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
23
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003
/S/ LAWRENCE I. SILLS
-----------------------
Lawrence I. Sills
Chief Executive Officer
24
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003
/S/ JAMES J. BURKE
-----------------------
James J. Burke
Chief Financial Officer
25