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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 1-4743
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STANDARD MOTOR PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
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(Address of principal executive offices) (Zip Code)
(718) 392-0200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of the close of business on October 28, 2005, there were 19,849,651
outstanding shares of the registrant's Common Stock, par value $2.00 per share.
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
as of September 30, 2005 (Unaudited) and December 31, 2004 .... 3
Consolidated Statements of Operations and Retained Earnings
(Unaudited) for the Three Months and Nine Months Ended
September 30, 2005 and 2004 ................................... 4
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2005 and 2004 ......... 5
Notes to Consolidated Financial Statements (Unaudited) ........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 29
Item 4. Controls and Procedures ....................................... 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 33
Item 5. Other Information ............................................. 33
Item 6. Exhibits ...................................................... 34
Signature .............................................................. 34
2
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for shares and per share data)
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 13,596 $ 14,934
Accounts receivable, less allowances for discounts and doubtful
accounts of $9,978 and $9,354 for 2005 and 2004, respectively .... 260,877 151,352
Inventories, net ..................................................... 240,266 258,641
Deferred income taxes, net ........................................... 14,797 14,809
Prepaid expenses and other current assets ............................ 9,224 7,480
------------ ------------
Total current assets ............................................. 538,760 447,216
------------ ------------
Property, plant and equipment, net .......................................... 88,086 97,425
Goodwill and other intangibles, net ......................................... 68,662 69,911
Other assets ................................................................ 40,854 42,017
------------ ------------
Total assets ..................................................... $ 736,362 $ 656,569
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ........................................................ $ 180,465 $ 109,416
Current portion of long-term debt .................................... 534 534
Accounts payable ..................................................... 56,381 46,487
Sundry payables and accrued expenses ................................. 22,193 31,241
Restructuring accrual ................................................ 2,699 6,999
Accrued rebates ...................................................... 26,069 24,210
Accrued customer returns ............................................. 31,687 23,127
Payroll and commissions .............................................. 14,232 10,442
------------ ------------
Total current liabilities ..................................... 334,260 252,456
------------ ------------
Long-term debt .............................................................. 113,829 114,236
Postretirement medical benefits and other accrued liabilities ............... 45,268 44,111
Restructuring accrual ....................................................... 11,515 12,394
Accrued asbestos liabilities ................................................ 25,565 26,060
------------ ------------
Total liabilities ............................................. 530,437 449,257
------------ ------------
Commitments and contingencies (Notes 8, 10 and 12) Stockholders' equity:
Common stock - par value $2.00 per share:
Authorized - 30,000,000 shares; issued 20,486,036 shares ...... 40,972 40,972
Capital in excess of par value ....................................... 56,966 57,424
Retained earnings .................................................... 117,648 120,218
Accumulated other comprehensive income ............................... 4,478 4,805
Treasury stock - at cost 936,885 and 1,067,308 shares in
2005 and 2004, respectively ................................... (14,139) (16,107)
------------ ------------
Total stockholders' equity ................................ 205,925 207,312
------------ ------------
Total liabilities and stockholders' equity ................ $ 736,362 $ 656,569
============ ============
See accompanying notes to consolidated financial statements.
3
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands, except for shares and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ..................................................... $ 224,438 $ 203,487 $ 658,276 $ 643,317
Cost of sales ................................................. 175,301 150,945 511,794 477,547
---------- ---------- ---------- ----------
Gross profit ............................................. 49,137 52,542 146,482 165,770
Selling, general and administrative expenses .................. 39,134 43,436 124,915 137,438
Restructuring expenses ........................................ 218 4,669 4,620 8,592
---------- ---------- ---------- ----------
Operating income ......................................... 9,785 4,437 16,947 19,740
Other income, net ............................................. 67 823 1,046 1,766
Interest expense .............................................. 4,552 3,474 12,617 10,389
---------- ---------- ---------- ----------
Earnings from continuing operations before taxes ......... 5,300 1,786 5,376 11,117
Provision for income tax ...................................... 1,137 446 1,441 2,779
---------- ---------- ---------- ----------
Earnings from continuing operations ...................... 4,163 1,340 3,935 8,338
Loss from discontinued operation, net of tax .................. 449 2,016 1,240 3,292
---------- ---------- ---------- ----------
Net earnings (loss) ...................................... 3,714 (676) 2,695 5,046
Retained earnings at beginning of period ...................... 115,694 143,805 120,218 141,553
---------- ---------- ---------- ----------
119,408 143,129 122,913 146,599
Less: cash dividends for period ............................... 1,760 1,742 5,265 5,212
---------- ---------- ---------- ----------
Retained earnings at end of period ............................ $ 117,648 $ 141,387 $ 117,648 $ 141,387
========== ========== ========== ==========
PER SHARE DATA:
Net earnings (loss) per common share - Basic:
Earnings (loss) from continuing operations ............... $ 0.21 $ 0.07 $ 0.20 $ 0.43
Discontinued operation ................................... (0.02) (0.10) (0.06) (0.17)
---------- ---------- ---------- ----------
Net earnings (loss) per common share - Basic ............. $ 0.19 $ (0.03) $ 0.14 $ 0.26
========== ========== ========== ==========
Net earnings (loss) per common share - Diluted:
Earnings (loss) from continuing operations ............... $ 0.21 $ 0.07 $ 0.20 $ 0.43
Discontinued operation ................................... (0.02) (0.10) (0.06) (0.17)
---------- ---------- ---------- ----------
Net earnings (loss) per common share - Diluted ........... $ 0.19 $ (0.03) $ 0.14 $ 0.26
========== ========== ========== ==========
Average number of common shares ............................... 19,547,319 19,356,423 19,509,040 19,312,334
========== ========== ========== ==========
Average number of common shares and dilutive common shares .... 19,577,972 19,460,252 19,546,261 19,415,562
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
--------------------
2005 2004
---- ----
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings ....................................................................... $ 2,695 $ 5,046
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization ..................................................... 12,968 13,719
Loss on disposal and impairment of property, plant and equipment .................. 2,461 49
Equity income from joint ventures ................................................. (675) (872)
Employee stock ownership plan allocation .......................................... 1,009 1,233
Loss from discontinued operation, net of tax ...................................... 1,240 3,292
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable, net .............................................. (109,525) (3,201)
Decrease (increase) in inventories ................................................ 18,375 (15,316)
Increase in prepaid expenses and other current assets ............................. (1,399) (5,193)
Decrease in other assets .......................................................... 1,838 810
Increase (decrease) in accounts payable ........................................... 7,848 (10,306)
(Decrease) increase in sundry payables and accrued expenses ....................... (7,190) 9,774
Decrease in restructuring accrual ................................................. (5,179) (8,587)
Increase in other liabilities ..................................................... 12,340 10,113
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Net cash (used in) provided by operating activities ......................... (63,194) 561
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and equipment ........................... 1,937 887
Capital expenditures, net of effects from acquisitions ............................ (7,169) (6,112)
Payments for acquisitions, net of cash acquired ................................... -- (2,906)
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Net cash used in investing activities ....................................... (5,232) (8,131)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements .................................... 71,049 11,515
Principal payments and retirement of long-term debt ............................... (407) (3,196)
Increase in overdraft balances .................................................... 2,046 1,844
Dividends paid .................................................................... (5,265) (5,212)
Proceeds from exercise of employee stock options .................................. -- 569
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Net cash provided by financing activities ................................... 67,423 5,520
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Effect of exchange rate changes on cash ............................................ (335) (692)
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Net decrease in cash and cash equivalents .......................................... (1,338) (2,742)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ............................... 14,934 19,647
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ..................................... $ 13,596 $ 16,905
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest ...................................................................... $ 13,709 $ 12,026
======== ========
Income taxes .................................................................. $ 2,882 $ 1,627
======== ========
See accompanying notes to consolidated financial statements.
5
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as the "Company," "we," "us," or "our") is
engaged in the manufacture and distribution of replacement parts for motor
vehicles in the automotive aftermarket industry.
The accompanying unaudited financial information should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
The unaudited consolidated financial statements include our accounts and all
domestic and international companies in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant inter-company items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the entire year.
Where appropriate, certain amounts in 2004 have been reclassified to conform
with the 2005 presentation.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare Reform Act") was signed into law. In
connection with the Medicare Reform Act, the Financial Accounting Standards
Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." FSP No. FAS 106-2 provides guidance on
accounting for the effects of the new Medicare prescription drug legislation for
employers whose prescription drug benefits are actuarially equivalent to the
drug benefit under Medicare Part D and are therefore entitled to receive
subsidies from the federal government beginning in 2006. The FSP was adopted for
periods beginning after July 1, 2004. Under the FSP, if a company concludes that
its defined benefit post-retirement benefit plan is actuarially equivalent to
the Medicare Part D benefit, the employer should recognize subsidies from the
federal government in the measurement of the accumulated post-retirement benefit
obligation ("APBO") under Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employers' Accounting for Post-retirement Benefits Other Than
Pensions." The resulting reduction of the APBO should be accounted for as an
actuarial gain. On January 21, 2005, the Centers for Medicare and Medicaid
Services ("CMS") released final regulations implementing major provisions of the
Medicare Reform Act of 2003. The regulations address key concepts, such as
defining a plan, as well as the actuarial equivalence test for purposes of
obtaining a government subsidy. Pursuant to the guidance in FSP No. FAS 106-2,
we have assessed the financial impact of the regulations and concluded that our
post-retirement benefit plan will qualify for the direct subsidies and that our
APBO decreased by $9.3 million. As a result, our 2005 post-retirement benefit
cost is expected to decrease by $1.1 million. The impact of the Medicare Reform
Act on our post-retirement plan was compounded by changes made during the year
in the modalities of the plan, namely regarding increased participant
contributions and reduced eligibility. Prior to these changes, the impact of the
Medicare Reform Act had been estimated to be immaterial and therefore not
included in previous actuarial evaluations.
6
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
123R"). SFAS 123R is a revision to SFAS No. 123, "Accounting for Stock-Based
Compensation" and supercedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. Entities will be required to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service, the
requisite service period (usually the vesting period), in exchange for the
award. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models. If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. SFAS
123R is effective for interim and annual financial statements for years
beginning after December 15, 2005 and will apply to all outstanding and unvested
share-based payments at the time of adoption. Also, in March 2005, the SEC
released Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment" ("SAB
107"). SAB 107 provides the SEC staff position regarding the application of SFAS
No. 123R. SAB 107 contains interpretive guidance related to the interaction
between SFAS No. 123R and certain SEC rules and regulations, as well as provides
the Staff's views regarding the valuation of share-based payment arrangements
for public companies. SAB 107 also highlights the importance of disclosures made
related to the accounting for share-based payment transactions. The Company is
currently reviewing the effect of SAB 107 on its condensed consolidated
financial statements as it prepares to adopt SFAS 123R in 2006.
ACCOUNTING CHANGES AND ERROR CORRECTIONS
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements" ("FAS 154"). FAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. FAS 154 also
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The provisions of FAS 154 are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of FAS
154 is not expected to have a material impact on the Company's financial
position or results of operations.
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2005, the FASB issued an Exposure Draft of the proposed Interpretation,
"Accounting for Uncertain Tax Positions, an interpretation of FASB Statement No.
109." The proposed Interpretation would clarify criterion to be used in the
recognition of uncertain tax positions in an enterprise's financial statements.
The Company is evaluating the proposed Interpretation but does not believe it
would materially change the way our Company evaluates tax positions for
recognition. The FASB expects to issue the final Interpretation in the first
quarter of 2006.
7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 3. RESTRUCTURING AND INTEGRATION COSTS
RESTRUCTURING COSTS
In connection with the acquisition of substantially all of the assets and the
assumption of substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM") on June 30, 2003, we reviewed our
operations and implemented integration plans to restructure the operations of
DEM. We announced in a press release on July 8, 2003 that we will close seven
DEM facilities, and we have subsequently ceased operations in all of these
facilities. As part of the integration and restructuring plans, we accrued an
initial restructuring liability of approximately $34.7 million at June 30, 2003
(subsequently reduced to $33.7 million during 2003). Such amounts were
recognized as liabilities assumed in the acquisition and included in the
allocation of the costs to acquire DEM. Accordingly, such amounts resulted in
additional goodwill being recorded in connection with the acquisition.
Of the total restructuring accrual, approximately $15.7 million related to work
force reductions and represented employee termination benefits. The accrual
amount primarily provides for severance costs relating to the involuntary
termination of DEM employees, individually employed throughout DEM's facilities
across a broad range of functions, including managerial, professional, clerical,
manufacturing and factory positions. During the year ended December 31, 2004 and
the nine months ended September 30, 2005, termination benefits of $9.4 million
and $2.2 million, respectively, have been charged to the restructuring accrual.
As of September 30, 2005, the reserve balance was $2.0 million. We expect to pay
most of this amount for work force reductions in 2006.
The restructuring accrual also included approximately $18.0 million associated
with exiting certain activities, primarily related to lease and contract
termination costs, which will not have future benefits. Specifically, our plans
are to consolidate certain of DEM operations into our existing plants. At
September 30, 2005, seven facilities have ceased operating activities for which
we have lease commitments through 2021. Exit costs of $2.9 million were paid as
of September 30, 2005, leaving a reserve balance of $12.2 million as of
September 30, 2005. Selected information relating to the remaining restructuring
costs is as follows (in thousands):
Workforce Lease-Related
Reduction Exit Costs Totals
------------------------------------
Restructuring liability at December 31, 2004 ........ $ 4,250 $ 15,143 $ 19,393
Cash payments during first nine months of 2005 ...... 2,243 2,936 5,179
Restructuring liability as of September 30, 2005 .... $ 2,007 $ 12,207 $ 14,214
INTEGRATION COSTS
During the third quarter of 2005 and 2004, we incurred integration costs of $0.2
million and $4.7 million, respectively. For the nine months ended September 30,
2005 and 2004, we incurred integration costs of $4.6 million and $8.6 million,
respectively. The 2004 costs related to the DEM integration, namely equipment
and inventory move costs, employee stay bonuses and other facility consolidation
costs. In the second quarter of 2005, the Company effected an asset write down
for the outsourcing of some of its Temperature Control product lines, resulting
in a $3.4 million integration cost. Additional costs, which might be incurred to
dispose of these assets, would be immaterial and below the salvage value which
might be realized upon our eventual disposition of these assets. The remainder
of 2005 costs are primarily from the DEM integration, significantly reduced from
2004 given the advanced stage of the integration.
8
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 4. CHANGE IN ACCOUNTING PRINCIPLE
ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which we incur
changeover costs to induce a new or existing customer to switch from a
competitor's brand. In addition, changeover costs include the costs related to
removing the new customer's inventory and replacing it with Standard Motor
Products inventory commonly referred to as a stocklift. New customer acquisition
costs were initially recorded as a prepaid asset and the related expense was
recognized ratably over a 12-month period beginning in the month following the
stocklift as an offset to sales. In the fourth quarter of 2004, we determined
that it was a preferable accounting method to reflect the customer acquisition
costs as a reduction to revenue when incurred. In accordance with APB No. 20,
"Accounting Changes" and FAS No. 3, the change in accounting for new customer
acquisition costs effective as of October 1, 2004 is reflected in the following
unaudited quarterly 2004 results as if the change had occurred on January 1,
2004 with the quarterly results for the first, second and third quarters of 2004
restated as if the new policy had been in effect throughout 2004 (in thousands,
except per share data):
1st Quarter 2nd Quarter 3rd Quarter
(Restated) (Restated) (Restated)
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
2004
Net sales, as reported .............................. $ 204,781 $ 235,049 $ 203,487
Cumulative effect at January 1, 2004 ................ (2,605) -- --
Effect of change in accounting for new customer ..... 148 83 (220)
acquisition costs, net of tax effects
New sales, as adjusted .............................. 202,324 235,132 203,267
Net (loss) gain reported ............................ (970) 6,692 (676)
Cumulative effect at January 1, 2004, net of tax .... (1,564) -- --
effects
Effect of change in accounting for new customer ..... 89 50 (132)
acquisition costs, net of tax effects
Net (loss) gain, as adjusted ........................ (2,445) 6,742 (808)
Basic net (loss) gain per share, as reported ....... (0.05) 0.35 (0.03)
Cumulative effect at January 1, 2004, net of tax .... (0.08) -- --
effects
Effect of change in accounting for new customer ..... -- -- (0.01)
acquisition costs, net of tax effects
Basic net (loss) gain per share, as adjusted ........ (0.13) 0.35 (0.04)
Diluted net (loss) gain per share, as reported ..... (0.05) 0.34 (0.03)
Cumulative effect at January 1, 2004, net of tax .... (0.08) -- --
effects
Effect of change in accounting for new customer ..... -- -- (0.01)
acquisition costs, net of tax effects
Diluted net (loss) gain per share, as adjusted ..... (0.13) 0.34 (0.04)
9
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 5. INVENTORIES
September 30, December 31,
2005 2004
(unaudited)
----------------------------
(in thousands)
Finished goods, net ........................ $ 174,406 $ 192,017
Work in process, net ....................... 4,455 4,691
Raw materials, net ......................... 61,405 61,933
------------ ------------
Total inventories, net ................. $ 240,266 $ 258,641
============ ============
NOTE 6. CREDIT FACILITIES AND LONG-TERM DEBT
Effective April 27, 2001, we entered into an agreement with General Electric
Capital Corporation, as agent, and a syndicate of lenders for a secured
revolving credit facility. The term of the credit agreement was for a period of
five years and provided for a line of credit up to $225 million.
Effective June 30, 2003, in connection with our acquisition of DEM, we amended
and restated our credit agreement to provide for an additional $80 million
commitment. This additional commitment increases the total amount available for
borrowing under the revolving credit facility to $305 million from $225 million,
and extends the term of the credit agreement from 2006 to 2008. Availability
under our revolving credit facility is based on a formula of eligible accounts
receivable, eligible inventory and eligible fixed assets, which includes the
purchased assets of DEM. After taking into effect outstanding borrowings under
the revolving credit facility, there was an additional $64.4 million available
for us to borrow pursuant to the formula at September 30, 2005. Our credit
agreement also permits dividends and distributions by us provided specific
conditions are met.
At December 31, 2004 and September 30, 2005, the interest rate on the Company's
revolving credit facility was 4.4% and 5.9%, respectively. Direct borrowings
under our revolving 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 our option. Outstanding borrowings under the revolving credit
facility, classified as current liabilities, were $103.6 million and $173.7
million at December 31, 2004 and September 30, 2005, respectively. The Company
maintains cash management systems in compliance with its credit agreements. Such
systems require the establishment of lock boxes linked to blocked accounts
whereby cash receipts are channeled to various banks to insure pay-down of debt.
Agreements also classify such accounts and the cash therein as additional
security for loans and other obligations to the credit providers. Borrowings are
collateralized by substantially all of our assets, including accounts
receivable, inventory and fixed assets, and those of our domestic and Canadian
subsidiaries. The terms of our revolving credit facility provide for, among
other provisions, financial covenants requiring us, on a consolidated basis, (1)
to maintain specified levels of earnings before interest, taxes, depreciation
and amortization (EBITDA), as defined in the credit agreement, at the end of
each fiscal quarter through December 31, 2004, (2) commencing September 30,
2004, to maintain specified levels of fixed charge coverage at the end of each
fiscal quarter (rolling twelve months) through 2007, and (3) to limit capital
expenditure levels for each fiscal year through 2007. We subsequently received a
waiver of compliance with the EBITDA covenant for the fiscal quarters ending
September 30, 2004 and December 31, 2004, and received a waiver of compliance
with the fixed charge coverage ratio for the quarters ended December 31, 2004
and March 31, 2005.
10
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
In March 2005, we amended our revolving credit facility to provide, among other
things, for the following: (1) borrowings of the Company are no longer
collateralized by the assets, including accounts receivable, inventory and fixed
assets, of our Canadian subsidiary; (2) the specified levels of fixed charge
coverage has been modified for 2005 and thereafter; (3) our Canadian subsidiary
was released from its obligations under a guaranty and security agreement; and
(4) the Company's pledge of stock of its Canadian subsidiary to the lenders was
reduced from a 100% to a 65% pledge of stock.
In May 2005, we amended our revolving credit facility to provide, among other
things, for the following: (1) the specified levels of fixed charge coverage has
been modified for the remainder of 2005 and thereafter; and (2) there is a limit
on our ability to redeem drafts prior to the maturity date thereof under our
customer draft programs.
At September 30, 2005, we were not in compliance with a covenant contained in
our revolving credit facility relating to the limitation on redemption of drafts
prior to the maturity date thereof under our customer draft programs. However,
we received a waiver of compliance of such covenant for the quarter ended
September 30, 2005. The waiver was part of an amendment to our revolving credit
facility on November 4, 2005, which provided, among other things, for the
following: (1) the specified levels of fixed charge coverage has been modified
for the remainder of 2005 and thereafter; (2) the removal of the limit on our
ability to redeem the current drafts prior to the maturity date; and (3) the
prohibition of accepting drafts under our customer draft programs after November
18, 2005.
In addition, a foreign subsidiary of the Company has a revolving credit
facility. The amount of short-term bank borrowings outstanding under this
facility was $5.8 million and $6.8 million at December 31, 2004 and September
30, 2005, respectively. The weighted average interest rates on these borrowings
at December 31, 2004 and September 30, 2005 were 6.9% and 7.3%, respectively.
On July 26, 1999, we completed a public offering of convertible subordinated
debentures amounting to $90 million. The convertible debentures carry an
interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009.
The convertible debentures are convertible into 2,796,120 shares of our common
stock at the option of the holder. We may, at our option, redeem some or all of
the convertible debentures at any time on or after July 15, 2004 for a
redemption price equal to the issuance price plus accrued interest. In addition,
if a change in control, as defined in the agreement, occurs at the Company, we
will be required to make an offer to purchase the convertible debentures at a
purchase price equal to 101% of their aggregate principal amount, plus accrued
interest. The convertible debentures are subordinated in right of payment to all
of the Company's existing and future senior indebtedness.
On June 30, 2003, in connection with our acquisition of DEM, we issued to Dana
Corporation an unsecured subordinated promissory note in the aggregate principal
amount of approximately $15.1 million. The promissory note bears an interest
rate of 9% per annum for the first year, with such interest rate increasing by
one-half of a percentage point (0.5%) on each anniversary of the date of
issuance. Accrued and unpaid interest is due quarterly under the promissory
note. The maturity date of the promissory note is five and a half years from the
date of issuance. The promissory note may be prepaid in whole or in part at any
time without penalty.
On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The
loan is payable in monthly installments. The loan bears interest at a fixed rate
of 5.50% maturing in July 2018. The mortgage loan is secured by a building and
related property.
11
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
Long-term debt consists of (in thousands):
September 30, December 31,
2005 2004
---- ----
(Unaudited)
6.75% convertible subordinated debentures ........ $ 90,000 $ 90,000
Unsecured promissory note ........................ 15,125 15,125
Mortgage loan .................................... 9,032 9,381
Other ............................................ 206 264
------------ -----------
114,363 114,770
Less current portion ............................. 534 534
------------ -----------
Total non-current portion of long-term debt.. $ 113,829 $ 114,236
============ ===========
Maturities of long-term debt during the five years ending December 31, 2005
through 2009 are $0.5 million, $0.6 million, $0.5 million, $15.7 million and
$90.6 million, respectively, and $6.6 million thereafter.
The Company had deferred financing cost in other assets of $5.2 million and $4.1
million as of December 31, 2004 and September 30, 2005, respectively. These
costs are related to the Company's revolving credit facility, the convertible
subordinated debentures and a mortgage loan agreement, and these costs are being
amortized over three to eight years.
NOTE 7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), net of income tax expense is as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
Net earnings (loss) as reported ...................... $ 3,714 $ (676) $ 2,695 $ 5,046
Foreign currency translation adjustments ............. 1,056 430 (725) (593)
Minimum pension liability adjustment ................. 56 (2,610) 290 (2,610)
Change in fair value of interest rate
swap agreements ................................... 44 (141) 108 261
-------- -------- -------- --------
Total comprehensive earnings (loss), net of taxes .... $ 4,870 $ (2,997) $ 2,368 $ 2,104
======== ======== ======== ========
Accumulated other comprehensive income is comprised of the following (in
thousands):
September 30, December 31,
2005 2004
---- ----
Foreign currency translation adjustments ....... $ 7,297 $ 8,022
Unrealized gain on interest rate swap
agreement, net of tax ....................... 380 272
Minimum pension liability, net of tax .......... (3,199) (3,489)
------------ -----------
Total accumulated other comprehensive income ... $ 4,478 $ 4,805
============ ===========
12
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 8. STOCK-BASED COMPENSATION PLAN
Under SFAS No. 123, "Accounting for Stock-Based Compensation," we account for
stock-based compensation using the intrinsic value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Stock options granted are exercisable at prices equal to the
fair market value or greater of our common stock on the dates the options were
granted; therefore, no compensation cost has been recognized for any stock
options granted. There were no stock options granted during the three months
ended September 30, 2005 and 2004. If we accounted for stock-based compensation
using the fair value method of SFAS, as amended by Statement No. 148, the effect
on net earnings (loss) and basic and diluted earnings (loss) per share would
have been as follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
---- ---- ---- ----
Net earnings (loss) as reported ........................ $ 3,714 $ (676) $ 2,695 $ 5,046
Less: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects ............ 183 129 495 323
-------- -------- -------- --------
Pro forma net earnings (loss) .......................... $ 3,531 $ (805) $ 2,200 $ 4,723
======== ======== ======== ========
Earnings (loss) per share:
Basic - as reported ............................... $ 0.19 $ (0.03) $ 0.14 $ 0.26
======== ======== ======== ========
Basic - pro forma ................................. $ 0.18 $ (0.04) $ 0.11 $ 0.24
======== ======== ======== ========
Diluted - as reported ............................. $ 0.19 $ (0.03) $ 0.14 $ 0.26
======== ======== ======== ========
Diluted - pro forma ............................... $ 0.18 $ (0.04) $ 0.11 $ 0.24
======== ======== ======== ========
At September 30, 2005, under our stock option plans there were an aggregate of
(a) 1,299,251 shares of common stock authorized for grants, (b) 1,264,001 shares
of common stock granted, and (c) 35,250 shares of common stock available for
future grants.
NOTE 9. EARNINGS PER SHARE
The following are reconciliations of the earnings available to common
stockholders and the shares used in calculating basic and dilutive net earnings
per common share (in thousands, except share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2005 2004 2005 2004
---- ---- ---- ----
Earnings from continuing operations ..................... $ 4,163 $ 1,340 $ 3,935 $ 8,338
Loss from discontinued operations ....................... 449 2,016 1,240 3,292
---------- ---------- ---------- ----------
Net earnings (loss) available to common stockholders .... $ 3,714 $ (676) $ 2,695 $ 5,046
========== ========== ========== ==========
Weighted average common shares outstanding - basic ...... 19,547,319 19,356,423 19,509,040 19,312,334
Dilutive effect of stock options ........................ 30,653 103,829 37,221 103,228
---------- ---------- ---------- ----------
Weighted average common shares outstanding - diluted .... 19,577,972 19,460,252 19,546,261 19,415,562
========== ========== ========== ==========
13
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
The shares listed below were not included in the computation of diluted earnings
(loss) 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,
--------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
Stock options ............. 1,233,348 726,099 1,226,780 726,099
Convertible debentures .... 2,796,120 2,796,120 2,796,120 2,796,120
NOTE 10. EMPLOYEE BENEFITS
In 2000, we created an employee benefits trust to which we contributed 750,000
shares of treasury stock to the trust. We are authorized to instruct the
trustees to distribute such shares toward the satisfaction of our future
obligations under employee benefit plans. The shares held in trust are not
considered outstanding for purposes of calculating earnings per share until they
are committed to be released. The trustees will vote the shares in accordance
with their fiduciary duties. During the first quarter of 2005, we committed
114,500 shares to be released leaving 300,500 shares remaining in the trust.
In August 1994, we established an unfunded Supplemental Executive Retirement
Plan (SERP) for key employees. Under the plan, these employees may elect to
defer a portion of their compensation and, in addition, we may at our discretion
make contributions to the plan on behalf of the employees. During March 2005,
contributions were $79,000 for calendar year 2004.
In October 2001, we adopted a second unfunded SERP. The SERP is a defined
benefit plan pursuant to which we will pay supplemental pension benefits to
certain key employees upon retirement based upon the employees' years of service
and compensation. We use a January 1 measurement date for this plan.
We provide certain medical and dental care benefits to eligible retired
employees. Our current policy is to fund the cost of the health care plans on a
pay-as-you-go basis. Effective September 1, 2005, the Company restricted the
eligibility requirements of employees who can participate in this program,
whereby all active participants hired after 1995 are no longer eligible. On
January 21, 2005, the Centers for Medicare and Medicaid Services ("CMS")
released final regulations implementing major provisions of the Medicare Reform
Act. The regulations address key concepts, such as defining a plan, as well as
the actuarial equivalence test for purposes of obtaining a government subsidy.
Pursuant to the guidance in FSP No. FAS 106-2, we have assessed the financial
impact of the regulations and concluded that our post-retirement benefit plan
will be qualified for the direct subsidies, and our APBO is expected to decrease
by $9.3 million. As a result, our 2005 post-retirement benefit cost is expected
to decrease by approximately $1.1 million.
In addition, in accordance with SFAS No. 106, Employers' Accounting For
Post-Retirement Benefits Other Than Pensions, we recognized a curtailment gain
of $3.8 million for our post-retirement plan related to changes made to our
plan, namely reducing the number of participants eligible for our plan by making
all active participants hired after 1995 no longer eligible. The curtailment
accounting requires us to recognize immediately a pro-rata portion of the
unrecognized prior service cost as a result of the changes.
14
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
The components of net period benefit cost for the three months ended September
30 of our US and UK deferred benefit plans are as follows (in thousands):
Postretirement
Pension Benefits Benefits
--------------------------------------
2005 2004 2005 2004
--------------------------------------
Service cost ......................... $ 130 $ 113 $ 1,078 $ 871
Interest cost ........................ 131 80 776 455
Amortization of prior service cost ... 40 28 123 31
Actuarial net loss ................... 4 37 1 20
SFAS 106 curtailment gain ............ -- -- (3,842) --
------- ------- ------- -------
Net periodic benefit cost ............ $ 305 $ 258 $(1,864) $ 1,377
======= ======= ======= =======
The components of net period benefit cost for the nine months ended September 30
of our U.S. and UK deferred benefit plans are as follows (in thousands):
Postretirement
Pension Benefits Benefits
--------------------------------------
2005 2004 2005 2004
--------------------------------------
Service cost ......................... $ 390 $ 339 $ 2,714 $ 2,613
Interest cost ........................ 393 240 1,854 1,365
Amortization of prior service cost ... 120 84 185 93
Actuarial net loss ................... 14 111 3 60
SFAS 106 curtailment gain ............ -- -- (3,842) --
------- ------- ------- -------
Net periodic benefit cost ............ $ 917 $ 774 $ 914 $ 4,131
======= ======= ======= =======
NOTE 11. INDUSTRY SEGMENTS
Our three reportable operating segments are Engine Management, Temperature
Control and Europe.
Three Months Ended September 30,
------------------------------------------------------
2005 2004
------------------------------------------------------
Operating Operating
Net Sales Income (Loss) Net Sales Income (Loss)
--------- ------------- --------- -------------
(in thousands)
Engine Management ...... $135,819 $ 2,349 $136,269 $ 8,586
Temperature Control .... 74,537 7,078 54,821 1,368
Europe ................. 11,600 250 10,352 (508)
All Other .............. 2,482 108 2,045 (5,009)
-------- -------- -------- --------
Consolidated ........... $224,438 $ 9,785 $203,487 $ 4,437
======== ======== ======== ========
15
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
Nine Months Ended September 30,
------------------------------------------------------
2005 2004
------------------------------------------------------
Operating Operating
Net Sales Income (Loss) Net Sales Income (Loss)
--------- ------------- --------- -------------
(in thousands)
Engine Management ...... $419,855 $ 19,478 $422,802 $ 30,650
Temperature Control .... 195,539 8,577 182,266 6,645
Europe ................. 34,679 (212) 31,375 (878)
All Other .............. 8,203 (10,896) 6,874 (16,677)
-------- -------- -------- --------
Consolidated ........... $658,276 $ 16,947 $643,317 $ 19,740
======== ======== ======== ========
NOTE 12. COMMITMENTS AND CONTINGENCIES
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation. When we originally
acquired this brake business, we assumed future liabilities relating to any
alleged exposure to asbestos-containing products manufactured by the seller of
the acquired brake business. In accordance with the related purchase agreement,
we agreed to assume the liabilities for all new claims filed on or after
September 1, 2001. Our ultimate exposure will depend upon the number of claims
filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense thereof. At December 31, 2001, approximately 100 cases
were outstanding for which we were responsible for any related liabilities. At
December 31, 2002, the number of cases outstanding for which we were responsible
for related liabilities increased to approximately 2,500, which include
approximately 1,600 cases filed in December 2002 in Mississippi. We believe that
these Mississippi cases filed against us in December 2002 were due in large part
to potential plaintiffs accelerating the filing of their claims prior to the
effective date of Mississippi's tort reform statute in January 2003, which
statute eliminated the ability of plaintiffs to file consolidated cases. At
December 31, 2004 and September 30, 2005, approximately 3,700 cases and 3,900
cases, respectively, were outstanding for which we were responsible for any
related liabilities. We expect the outstanding cases to increase gradually due
to recent legislation in certain states mandating minimum medical criteria
before a case can be heard. Since inception in September 2001, the amounts paid
for settled claims are $2.8 million. We do not have insurance coverage for the
defense and indemnity costs associated with these claims.
In evaluating our potential asbestos-related liability, we have considered
various factors including, among other things, an actuarial study performed by a
leading actuarial firm with expertise in assessing asbestos-related liabilities,
our settlement amounts and whether there are any co-defendants, the jurisdiction
in which lawsuits are filed, and the status and results of settlement
discussions. Actuarial consultants with experience in assessing asbestos-related
liabilities completed a study in September 2002 to estimate our potential claim
liability. The methodology used to project asbestos-related liabilities and
costs in the study considered: (1) historical data available from publicly
available studies; (2) an analysis of our recent claims history to estimate
likely filing rates for the remainder of 2002 through 2052; (3) an analysis of
our currently pending claims; and (4) an analysis of our 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, excluding legal costs, 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 us, we 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, excluding legal costs. We concluded that no amount within the range
of settlement payments was more likely than any other and, therefore, recorded
the low end of the range as the liability associated with future settlement
payments through 2052 in our consolidated financial statements, in accordance
with generally accepted accounting principles.
16
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
As is our accounting policy, we update the actuarial study during the third
quarter of each year. The most recent update to the actuarial study was
performed as of August 31, 2005 using methodologies consistent with the
September 2002 study. The updated study has estimated an undiscounted liability
for settlement payments, excluding legal costs, ranging from $25 to $51 million
for the period through 2049. The change from the prior year study was a $3
million decrease for the low end of the range and a $12 million decrease for the
high end of the range. Although there was a decline in the range of liability,
given the relative volatility of the actuarial evaluations over the prior three
years, we decided to maintain the reserve of $27.6 million until more experience
is gained. Legal costs, which are expensed as incurred, are estimated to range
from $16 to $20 million during the same period.
We plan on performing a similar annual actuarial analysis during the third
quarter of each year for the foreseeable future. Given the uncertainties
associated with projecting such matters into the future, the relatively short
period of time that we have been responsible for defending these claims, and
other factors outside our control, we can give no assurance that additional
provisions will not be required. Management will continue to monitor the
circumstances surrounding these potential liabilities in determining whether
additional provisions may be necessary. At the present time, however, we do not
believe that any additional provisions would be reasonably likely to have a
material adverse effect on our liquidity or consolidated financial position.
On November 30, 2004, we were served with a summons and complaint in the U.S.
District Court for the Southern District of New York by The Coalition For A
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. In August 2005, we filed a
motion to dismiss the complaint. Although we cannot predict the ultimate outcome
of this case or estimate the range of any potential loss that may be incurred in
the litigation, we believe that the lawsuit is without merit, strenuously deny
all of the plaintiff's allegations of wrongdoing and believe we have meritorious
defenses to the plaintiff's claims. We intend to defend vigorously this lawsuit.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
We generally warrant our products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time
depending on the nature of the product. As of September 30, 2005 and 2004, we
have accrued $16.8 million and $16.8 million, respectively, for estimated
product warranty claims included in accrued customer returns. The accrued
product warranty costs are based primarily on historical experience of actual
warranty claims. Warranty expense for the three months ended September 30, 2005
and 2004 were $15.0 million and $14.7 million, respectively, and $42.1 million
and $40.0 million for the nine months ended September 30, 2005 and 2004,
respectively.
17
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
The following table provides the changes in our product warranties (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
---- ---- ---- ----
Balance, beginning of period .................. $ 15,898 $ 17,465 $ 13,194 $ 13,987
Liabilities accrued for current year sales .... 14,952 14,665 42,121 40,039
Settlements of warranty claims ................ (14,059) (15,300) (38,524) (37,196)
-------- -------- -------- --------
Balance, end of period ........................ $ 16,791 $ 16,830 $ 16,791 $ 16,830
======== ======== ======== ========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS HISTORICAL INFORMATION AND 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 AND ARE INHERENTLY SUBJECT TO RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE WHICH
ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING, BUT NOT LIMITED TO, ECONOMIC AND MARKET CONDITIONS; THE PERFORMANCE
OF THE AFTERMARKET SECTOR; CHANGES IN BUSINESS RELATIONSHIPS WITH OUR MAJOR
CUSTOMERS AND IN THE TIMING, SIZE AND CONTINUATION OF OUR CUSTOMERS' PROGRAMS;
THE ABILITY OF OUR CUSTOMERS TO ACHIEVE THEIR PROJECTED SALES; COMPETITIVE
PRODUCT AND PRICING PRESSURES; INCREASES IN PRODUCTION OR MATERIAL COSTS THAT
CANNOT BE RECOUPED IN PRODUCT PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED
BUSINESSES; PRODUCT LIABILITY MATTERS (INCLUDING, WITHOUT LIMITATION, THOSE
RELATED TO ESTIMATES TO ASBESTOS-RELATED CONTINGENT LIABILITIES); 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. IN ADDITION, HISTORICAL INFORMATION SHOULD NOT BE
CONSIDERED AS AN INDICATOR OF FUTURE PERFORMANCE. THE FOLLOWING DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
REPORT.
BUSINESS OVERVIEW
We are a leading independent manufacturer and distributor of replacement parts
for motor vehicles in the automotive aftermarket industry. We are organized into
two major operating segments, each of which focuses on a specific segment of
replacement parts. Our Engine Management Segment manufactures ignition and
emission parts, on-board computers, ignition wires, battery cables and fuel
system parts. Our Temperature Control Segment manufactures and remanufactures
air conditioning compressors, and other air conditioning and heating parts. We
sell our products primarily in the United States, Canada and Latin America. We
also sell our products in Europe through our European Segment.
As part of our efforts to grow our business, as well as to achieve increased
production and distribution efficiencies, on June 30, 2003 we completed the
acquisition of substantially all of the assets and assumed substantially all of
the operating liabilities of Dana Corporation's Engine Management Group
(subsequently referred to as "DEM"). Prior to the sale, DEM was a leading
manufacturer of aftermarket parts in the automotive industry focused exclusively
on engine management. Our plan was to restructure and to integrate the DEM
business into our existing Engine Management Business, which we have
substantially accomplished.
Under the terms of the acquisition, we paid Dana Corporation $93.2 million in
cash, issued an unsecured promissory note of $15.1 million, and issued 1,378,760
shares of our common stock valued at $15.1 million. Including transaction costs,
our total purchase price was approximately $130.5 million.
In connection with the acquisition, we have reviewed our operations and
implemented integration plans to restructure the operations of DEM. As part of
the integration and restructuring plans, we closed seven of the nine acquired
DEM facilities, and we estimated total restructuring costs of $33.7 million.
Such amounts were recognized as liabilities assumed in the acquisition and
included in the allocation of the cost to acquire DEM.
19
Of the total liability, $15.7 million related to work force reductions and
employee termination benefits. This amount primarily represented severance costs
relating to the involuntary termination of DEM employees individually employed
throughout DEM facilities across a broad range of functions, including
managerial, professional, clerical, manufacturing and factory positions. As of
September 30, 2005, the remaining reserve balance was $2.0 million. We expect to
pay most of this amount for work force reductions in 2006. Termination benefits
of $0.0 million and $2.2 million were paid in the third quarter of 2005 and the
nine months ended September 30, 2005, respectively. The restructuring costs also
included approximately $18.0 million associated with exiting certain activities,
primarily related to lease and contract termination costs. Exit costs of $0.3
million and $2.9 million were paid in the third quarter of 2005 and the nine
months ended September 30, 2005, respectively, leaving the exit reserve balance
at $12.2 million as of September 30, 2005.
On February 3, 2004, we acquired inventory from the Canadian distribution
operation of DEM for approximately $1.0 million. We have relocated such
inventory into our distribution facility in Mississauga, Canada.
SEASONALITY. Historically, our operating results have fluctuated by quarter,
with the greatest sales occurring in the second and third quarters of the year
and revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather.
For example, a cool summer may lessen the demand for our Temperature Control
products, while a hot summer may increase such demand. As a result of this
seasonality and variability in demand of our Temperature Control products, our
working capital requirements peak near the end of the second quarter, as the
inventory build-up of air conditioning products is converted to sales and
payments on the receivables associated with such sales have yet to be received.
During this period, our working capital requirements are typically funded by
borrowings from our revolving credit facility.
The seasonality of our business offers significant operational challenges in our
manufacturing and distribution functions. To limit these challenges and to
provide a rapid turnaround time of customer orders, we traditionally offer a
pre-season selling program, known as our "Spring Promotion," in which customers
are offered a choice of a price discount or longer payment terms.
INVENTORY MANAGEMENT. We face inventory management issues as a result of
warranty and overstock returns. Many of our products carry a warranty ranging
from a 90-day limited warranty to a lifetime limited warranty, which generally
covers defects in materials or workmanship and failure to meet industry
published specifications. In addition to warranty returns, we also permit our
customers to return products to us within customer-specific limits (which is
generally limited to a specified percentage of their annual purchases from us)
in the event that they have overstocked their inventories. The Company accrues
for overstock returns as a percentage of sales, after giving consideration to
recent returns history. In addition, the seasonality of our Temperature Control
segment requires that we increase our inventory during the winter season in
preparation of the summer selling season and customers purchasing such inventory
have the right to make returns.
In order to better control warranty and overstock return levels, beginning in
2000 we tightened the rules for authorized warranty returns, placed further
restrictions on the amounts customers can return and instituted a program so
that our management can better estimate potential future product returns. In
addition, with respect to our air conditioning compressors, our most significant
customer product warranty returns, we established procedures whereby a warranty
will be voided if a customer does not follow a twelve-step warranty return
process.
DISCOUNTS, ALLOWANCES AND INCENTIVES. In connection with our sales activities,
we offer a variety of usual customer discounts, allowances and incentives.
First, we offer cash discounts for paying invoices in accordance with the
specified discounted terms of the invoice. Historical experience is analyzed on
a timely basis and is applied as a reduction of sales. Second, we offer pricing
discounts based on volume and different product lines purchased from us. These
discounts are principally in the form of "off-invoice" discounts and are
immediately deducted from sales at the time of sale. For those customers that
choose to receive a payment on a quarterly basis instead of "off-invoice", we
accrue for such payments as the related sales are made and reduce sales
accordingly. Finally, rebates and discounts are provided to customers as
advertising and sales force allowances, and allowances for warranty and
overstock returns are also provided. We account for these discounts and
allowances as a reduction to revenues, and record them when sales are recorded.
20
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
SALES. Consolidated net sales in the third quarter of 2005 were $224.4 million,
an increase of $21 million, or 10.3%, compared to $203.5 million in the third
quarter of 2004, mainly due to Temperature Control net sales increasing $19.7
million or 36% in the third quarter of 2005 driven by a very hot summer.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 21.9% in the third quarter of 2005 compared to 25.8% in the third
quarter of 2004 due to Engine Management margin reductions, partially offset by
volume driven margin improvements in Temperature Control. The margins in Engine
Management were negatively impacted due to price decreases initiated early in
2005 to match OE competitor prices as well as inventory write-downs related to
the integration of the DEM inventories. We expect Engine Management margins to
improve going forward due to the benefit of price increases implemented in the
third quarter of 2005 and improved material costs and other operational
improvements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses decreased by $4.3 million to $39.1 million in the
third quarter of 2005, compared to $43.4 million in the third quarter of 2004.
The reduction in SG&A expenses were primarily due to substantial changes made to
our retiree medical program, which will result in a reduction of roughly $5
million to our annual expense, $3.8 million of which is included in our third
quarter results as a SFAS 106 curtailment gain. In accordance with SFAS No. 106,
Employers' Accounting For Post-Retirement Benefits Other Than Pensions, we
recognized a curtailment gain for the post-retirement plans related to changes
made to our plan namely regarding limiting eligibility. The curtailment
accounting requires us to recognize immediately a pro-rata portion of the
unrecognized prior service cost as a result of the changes. During the three
months ended September 30, 2005, we recognized a $3.8 million curtailment gain
related to our post-retirement benefit plan which was recorded as a decrease of
net periodic benefit cost.
RESTRUCTURING EXPENSES. Restructuring expenses in the third quarter of 2005 were
$0.2 million, compared to $4.7 million in the third quarter of 2004. The
restructuring expenses for both periods primarily related to the DEM
integration, the reduction reflecting the advanced stage of the integration.
OPERATING INCOME. Operating income was $9.8 million in the third quarter of
2005, compared to $4.4 million in the third quarter of 2004. The increase was
due to higher sales in Temperature Control and lower overall SG&A and
restructuring expenses, partially offset by reduced Engine Management margins.
OTHER INCOME, NET. Other income, net decreased $0.8 million primarily due to
exchange losses related to the Canadian dollar.
INTEREST EXPENSE. Interest expense increased by $1.1 million in the third
quarter 2005 compared to the same period in 2004 due to higher borrowings and
higher average borrowing costs.
21
INCOME TAX PROVISION. The effective tax rate for continuing operations decreased
from 25% in the third quarter of 2004 to 21% in the third quarter of 2005. This
reflected a reduction in the valuation allowance, due to higher quarterly
earnings reducing our requirement for proportionate recognition for full year
valuation allowance estimates.
LOSS FROM DISCONTINUED OPERATION. Losses from discontinued operation, net of
tax, reflect legal expenses associated with our asbestos related liability and
adjustments to our indemnity reserve based upon an annual actuarial study. We
recorded $0.4 million and $2.0 million as a loss from discontinued operations
for the three months ended September 30, 2005 and 2004, respectively, reflecting
lower legal expenses in 2005 and a $3 million upward adjustment to the reserve
in 2004 in accordance with the higher liability determined by the August 2004
actuarial evaluation. This evaluation was slightly lower in August 2005. As
discussed more fully in note 12 of our notes to our consolidated financial
statements, we are responsible for certain future liabilities relating to
alleged exposure to asbestos containing products.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
SALES. Consolidated net sales for the nine months ended September 30, 2005 were
$658.3 million, an increase of $15 million, or 2.3%, compared to $643.3 million
in the same period of 2004. The net sales increase was primarily due to our
Temperature Control net sales increasing by $13.3 million or 7.3% driven by high
temperatures in the third quarter as explained above.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased by 3.5 percentage points to 22.3% for the nine months ended September
30, 2005 from 25.8% in the same period of 2004. The decrease was related to
Engine Management gross margin decreases, as explained above, declining from
27.3% to 20.5% of sales for the nine months ended September 30, 2004 and 2005,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses decreased $12.5 million to $124.9 million or 19%
of consolidated net sales for the nine months ended September 30, 2005, compared
to $137.4 million or 21.4% of consolidated net sales in the same period of 2004.
The reduction in SG&A expenses was attributable to synergies from the DEM
integration, namely from distribution facility reductions, as well as the SFAS
106 curtailment gain in the third quarter 2005 resulting from the changes to our
retiree medical program explained above.
RESTRUCTURING EXPENSES. Restructuring expenses for the nine months ended
September 30, 2005 were $4.6 million, compared to $8.6 million for the same
period in 2004. $3.5 million of the restructuring expenses for the nine months
ended September 30, 2005 was from an asset impairment charge in our Temperature
Control business related to a strategic decision to outsource certain products
previously manufactured. $3.4 million of this charge was for non-cash charges.
Additional costs, which might be incurred to dispose of these assets, would be
immaterial and below the salvage value which might be realized upon our eventual
disposition of these assets. The remaining $1.1 million of the 2005 expense
primarily relates to DEM, the reduction reflecting the significant advancement
of the termination program. The $8.6 million of the 2004 restructuring expenses
primarily relates to DEM.
OPERATING INCOME. Operating income decreased by $2.8 million to $16.9 million
for the nine months ended September 30, 2005, compared to $19.7 million in the
same period in 2004. The decrease was due to decreased Engine Management gross
margins, partially offset by higher sales in our other segments as well as lower
SG&A expenses.
OTHER INCOME, NET. Other income, net decreased slightly primarily due to
exchange losses due to the Canadian dollar, partially offset by joint venture
income increases.
INTEREST EXPENSE. Interest expense increased by $2.2 million for the nine months
ended September 30, 2005 compared to the same period in 2004 due to higher
borrowings and higher average borrowing costs.
22
INCOME TAX PROVISION. The income tax provision rate for continuing operations
for the nine months ended September 30, 2005 increased by 1.8 percentage points
from 25% in 2004 to 26.8% in 2005. The increase was due to an increase to
valuation allowance as well as lower proportionate earnings in Puerto Rico which
carry a lower tax rate and higher proportionate earnings in Temperature Control
in the US which carry a higher tax rate.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation, net of tax,
reflects legal expenses associated with our asbestos related liability and
adjustments to our indemnity reserve based upon an annual actuarial study. We
recorded $1.2 million and $3.3 million as a loss from discontinued operations
for the nine months ended September 30, 2005 and 2004, respectively. In 2004, we
recorded a charge of $3 million pursuant to an increase in the asbestos
actuarial evaluation of August 2004. This evaluation was slightly lower in
August 2005. As discussed in note 12 of the notes to our consolidated financial
statements, we are responsible for certain future liabilities relating to
alleged exposure to asbestos containing products.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the first nine months of 2005, cash used in
operations amounted to $63.2 million, compared to $0.6 million cash provided by
operating activities in the same period of 2004. The increase is primarily
attributable to a net increase in accounts receivable of $106.3 million partly
offset by a net decrease in inventories of $33.7 million. The increase in
receivables is due to peak seasonality of our Temperature Control business and
from a decline in the early monetizing of the negotiable draft programs with
certain of our significant customers in order to comply with our revolving line
of credit. The inventory reduction primarily reflects the peak seasonality of
our Temperature Control business.
INVESTING ACTIVITIES. Cash used in investing activities was $5.2 million in the
first nine months of 2005, compared to $8.1 million in the same period of 2004.
The decrease is primarily attributable to payments related to the DEM
acquisition.
FINANCING ACTIVITIES. Cash provided by financing activities was $67.4 million in
the first nine months of 2005, compared to $5.5 million in the same period of
2004. The increase is primarily due to an increase in borrowings under our line
of credit.
Effective April 27, 2001, we entered into an agreement with General Electric
Capital Corporation, as agent, and a syndicate of lenders for a secured
revolving credit facility. The term of the credit agreement was for a period of
five years and provided for a line of credit up to $225 million.
Effective June 30, 2003, in connection with our acquisition of DEM, we amended
and restated our credit agreement to provide for an additional $80 million
commitment. This additional commitment increases the total amount available for
borrowing under our revolving credit facility to $305 million from $225 million,
and extends the term of the credit agreement from 2006 to 2008. Availability
under our revolving credit facility is based on a formula of eligible accounts
receivable, eligible inventory and eligible fixed assets, which includes the
purchased assets of DEM. We expect such availability under the revolving credit
facility to be sufficient to meet our ongoing operating and integration costs.
Our credit agreement also permits dividends and distributions by us provided
specific conditions are met.
Direct borrowings under our revolving credit facility bear interest at the prime
rate plus the applicable margin (as defined in the credit agreement) or the
LIBOR rate plus the applicable margin (as defined in the credit agreement), at
our option. Borrowings are collateralized by substantially all of our assets,
including accounts receivable, inventory and fixed assets, and those of our
domestic and Canadian subsidiaries. The terms of our revolving credit facility
provide for, among other provisions, new financial covenants requiring us, on a
consolidated basis, (1) to maintain specified levels of earnings before
interest, taxes, depreciation and amortization (EBITDA) as defined in the
amendments to the credit agreement, at the end of each fiscal quarter through
December 31, 2004, (2) commencing September 30, 2004, to maintain specified
levels of fixed charge coverage at the end of each fiscal quarter (rolling
twelve months) through 2007, and (3) to limit capital expenditure levels for
each fiscal year through 2007. We subsequently received a waiver of compliance
with the EBITDA covenant for the fiscal quarters ending September 30, 2004 and
December 31, 2004 and received a waiver of compliance with the fixed charge
coverage ratio for the fiscal quarters ending December 31, 2004 and March 31,
2005.
23
In March 2005, we amended our revolving credit facility to provide, among other
things, for the following: (1) borrowings of the Company are no longer
collateralized by the assets, including accounts receivable, inventory and fixed
assets, of our Canadian subsidiary; (2) the specified levels of fixed charge
coverage has been modified for 2005 and thereafter; (3) our Canadian subsidiary
was released from its obligations under a guaranty and security agreement; and
(4) the Company's pledge of stock of its Canadian subsidiary to the lenders was
reduced from a 100% to a 65% pledge of stock.
In May 2005, we amended our revolving credit facility to provide, among other
things, for the following: (1) the specified levels of fixed charge coverage has
been modified for the remainder of 2005 and thereafter; and (2) there is a limit
on our ability to redeem drafts prior to the maturity date thereof under our
customer draft programs.
At September 30, 2005, we were not in compliance with a covenant contained in
our revolving credit facility relating to the limitation on redemption of drafts
prior to the maturity date thereof under our customer draft programs. However,
we received a waiver of compliance of such covenant for the quarter ended
September 30, 2005. The waiver was part of an amendment to our revolving credit
facility on November 4, 2005, which provided, among other things, for the
following: (1) the specified levels of fixed charge coverage has been modified
for the remainder of 2005 and thereafter; (2) the removal of the limit on our
ability to redeem the current drafts prior to the maturity date; and (3) the
prohibition of accepting drafts under our customer draft programs after November
18, 2005.
In connection with our acquisition of DEM on June 30, 2003, we also issued to
Dana Corporation an unsecured subordinated promissory note in the aggregate
principal amount of approximately $15.1 million. The promissory note bears an
interest rate of 9% per annum for the first year, with such interest rate
increasing by one-half of a percentage point (0.5%) on each anniversary of the
date of issuance. Accrued and unpaid interest is due quarterly under the
promissory note. The maturity date of the promissory note is December 31, 2008.
The promissory note may be prepaid in whole or in part of any time without
penalty.
On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The
loan is payable in equal monthly installments. The loan bears interest at a
fixed rate of 5.50% maturing in July 2018. The mortgage loan is secured by the
related building and property.
Our profitability and working capital requirements are seasonal due to the sales
mix of temperature control products. Our working capital requirements usually
peak near the end of the second quarter, as the inventory build-up of air
conditioning products is converted to sales and payments on the receivables
associated with such sales begin to be received. Our working capital is further
being impacted by restructuring and integration costs, as well as inventory
build-ups necessary to ensure order fulfillment during the DEM integration.
These increased working capital requirements are funded by borrowings from our
lines of credit. In 2004 and the first quarter of 2005, we also received the
benefit from accelerating accounts receivable collections from customer draft
programs. However, in the second quarter of 2005 we reduced the early monetizing
of these accounts receivable under the draft program. As mentioned above, an
amendment to our revolving credit facility in November 2005 now enables us to
monetize the remaining drafts but prohibits us from accepting drafts under our
customer draft programs after November 18, 2005. We anticipate that our present
sources of funds will continue to be adequate to meet our near term needs.
24
In October 2003, we entered into a new interest rate swap agreement with a
notional amount of $25 million that is to mature in October 2006. Under this
agreement, we receive a floating rate based on the LIBOR interest rate, and pay
a fixed rate of 2.45% on the notional amount of $25 million.
On July 26, 1999, we issued convertible debentures, payable semi-annually, in
the aggregate principal amount of $90 million. The debentures carry an interest
of 6.75%, payable semi-annually, debentures are convertible into 2,796,120
shares of our common stock, and mature on July 15, 2009. The proceeds from the
sale of the debentures were used to prepay an 8.6% senior note, reduce
short-term bank borrowings and repurchase a portion of our common stock.
As of September 30, 2005, we have Board authorization to repurchase shares of
our common stock at a maximum cost of $1.7 million. During 2004, and the first
nine months of 2005, we did not repurchase any shares of our common stock.
The following is a summary of our contractual commitments, inclusive of our
acquisition of DEM as of December 31, 2004. There have been no significant
changes to this information at September 30, 2005.
-----------------------------------------------------------
(IN THOUSANDS) 2005 2006 2007 2008 2009 THEREAFTER TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Principal payments of
long term debt ............... $ 534 $ 586 $ 615 $ 15,695 $ 90,597 $ 6,743 $ 114,770
Operating leases ................. 7,079 6,421 5,358 4,621 3,720 19,784 46,983
Interest rate swap agreements
-- (362) -- -- -- -- (362)
Postemployee retirement
funding ...................... 1,201 1,278 1,408 1,556 1,720 12,475 19,638
Severance payments related
to integration ............... 3,999 251 -- -- -- -- 4,250
--------- --------- --------- --------- --------- --------- ---------
Total commitments ...... $ 12,813 $ 8,174 $ 7,381 $ 21,872 $ 96,037 $ 39,002 $ 185,279
========= ========= ========= ========= ========= ========= =========
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see note 1 of the notes to our consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2004. You should be aware that preparation of our consolidated quarterly
financial statements in this Report requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our consolidated
financial statements, and the reported amounts of revenue and expenses during
the reporting periods. We can give no assurance that actual results will not
differ from those estimates.
REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement
parts for motor vehicles from both our Engine Management and Temperature Control
Segments. We recognize revenues when products are shipped and title has been
transferred to a customer, the sales price is fixed and determinable, and
collection is reasonably assured. We estimate and record provisions for cash
discounts, quantity rebates, sales returns and warranties in the period the sale
is recorded, based upon our prior experience and current trends. As described
below, significant management judgments and estimates must be made and used in
estimating sales returns and allowances relating to revenue recognized in any
accounting period.
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost
is generally determined on the first-in, first-out basis. Where appropriate,
standard cost systems are utilized for purposes of determining cost; the
standards are adjusted as necessary to ensure they approximate actual costs.
Estimates of lower of cost or market value of inventory are determined at the
reporting unit level and are based upon the inventory at that location taken as
a whole. These estimates are based upon current economic conditions, historical
sales quantities and patterns and, in some cases, the specific risk of loss on
specifically identified inventories.
25
We also evaluate inventories on a regular basis to identify inventory on hand
that may be obsolete or in excess of current and future projected market demand.
For inventory deemed to be obsolete, we provide a reserve on the full value of
the inventory. Inventory that is in excess of current and projected use is
reduced by an allowance to a level that approximates our estimate of future
demand.
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. At
September 30, 2005, the allowance for sales returns was $31.7 million.
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. At
September 30, 2005, the allowance for doubtful accounts and for early payment
discounts was $10.0 million.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS.
New customer acquisition costs refer to arrangements pursuant to which we incur
changeover costs to induce a new customer to switch from a competitor's brand.
In addition, changeover costs include the costs related to removing the new
customer's inventory and replacing it with Standard Motor Products inventory
commonly referred to as a stocklift. New customer acquisition costs were
initially recorded as a prepaid asset and the related expense was recognized
ratably over a 12-month period beginning in the month following the stocklift as
an offset to sales. In the fourth quarter of 2004, we determined that it was a
preferable accounting method to reflect the customer acquisition costs as a
reduction to revenue when incurred. We recorded a cumulative effect of a change
in accounting for new customer acquisition costs totaling $2.6 million (or $1.6
million, net of tax effects) and recorded the amount as if the change in
accounting principle had taken effect on October 1, 2004.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax 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 September 30, 2005,
we had a valuation allowance of $23.7 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.
26
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 business, financial condition and
results of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. 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. With respect to
goodwill, if necessary, we test for potential impairment in the fourth quarter
of each year as part of our annual budgeting process. We review the fair values
of each of our reporting units using the discounted cash flows method and market
multiples.
RETIREMENT AND POSTRETIREMENT MEDICAL BENEFITS. Each year, we calculate the
costs of providing retiree benefits under the provisions of SFAS 87, Employers'
Accounting for Pensions, and SFAS 106, Employers' Accounting for Postretirement
Benefits Other than Pensions. The key assumptions used in making these
calculations are disclosed in notes 13 and 14 of the notes to our consolidated
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2004. The most significant of these assumptions are the eligibility
criteria of participants, the discount rate used to value the future obligation,
expected return on plan assets and health care cost trend rates. We select
discount rates commensurate with current market interest rates on high-quality,
fixed-rate debt securities. The expected return on assets is based on our
current review of the long-term returns on assets held by the plans, which is
influenced by historical averages. The medical cost trend rate is based on our
actual medical claims and future projections of medical cost trends. Under FSP
106-2, the Company has concluded that its post-retirement plan is actuarially
equivalent to the Medicare Part D benefit and accordingly recognizes subsidies
from the federal government in the measurement of the accumulated
post-retirement benefit obligation under SFAS 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions." In addition, in accordance with
SFAS No. 106, Employers' Accounting For Post-Retirement Benefits Other Than
Pensions, we recognized a curtailment gain for our post-retirement plan related
to changes made to our plan, namely reducing the number of participants eligible
for our plan by making all active participants hired after 1995 no longer
eligible. The curtailment accounting requires us to recognize immediately a
pro-rata portion of the unrecognized prior service cost as a result of the
changes.
ASBESTOS RESERVE. We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. A September 2002 actuarial
study estimated a liability for settlement payments ranging from $27.3 million
to $58 million. We concluded that no amount within the range of settlement
payments was more likely than any other and, therefore, recorded the low end of
the range as the liability associated with future settlement payments through
2052 in our consolidated financial statements, in accordance with generally
accepted accounting principles.
In accordance with our accounting policy, we update the actuarial study during
the third quarter of each year. The most recent update to the actuarial study
was performed as of August 31, 2005 using methodologies consistent with the
September 2002 study. The updated study has estimated an undiscounted liability
for settlement payments, excluding legal costs, ranging from $25 to $51million
for the period through 2049. The change from the prior year study was a $3
million decrease for the low end of the range and a $12 million decrease for the
high end of the range. Although there was a decline in the range of liability,
given the relative volatility of the actuarial evaluations over the prior three
years, we decided to maintain the reserve of $27.6 million until more experience
is gained. Legal costs are estimated to range from $16 to $20 million during the
same period. We plan on performing a similar annual actuarial analysis during
the third quarter of each year for the foreseeable future. Based on this
analysis and all other available information, we will reassess the recorded
liability and, if deemed necessary, record an adjustment to the reserve, which
will be reflected as a loss or gain from discontinued operation. Legal expenses
associated with asbestos-related matters are expensed as incurred and recorded
as a loss from discontinued operation in the statement of operations.
27
OTHER LOSS RESERVES. We have numerous other loss exposures, such as
environmental claims, product liability and litigation. Establishing loss
reserves for these matters requires the use of estimates and judgment of risk
exposure and ultimate liability. We estimate losses using consistent and
appropriate methods; however, changes to our assumptions could materially affect
our recorded liabilities for loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare Reform Act") was signed into law. In
connection with the Medicare Reform Act, the Financial Accounting Standards
Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." FSP No. FAS 106-2 provides guidance on
accounting for the effects of the new Medicare prescription drug legislation for
employers whose prescription drug benefits are actuarially equivalent to the
drug benefit under Medicare Part D and are therefore entitled to receive
subsidies from the federal government beginning in 2006. The FSP was adopted for
periods beginning after July 1, 2004. Under the FSP, if a company concludes that
its defined benefit post-retirement benefit plan is actuarially equivalent to
the Medicare Part D benefit, the employer should recognize subsidies from the
federal government in the measurement of the accumulated post-retirement benefit
obligation ("APBO") under Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employers' Accounting for Post-retirement Benefits Other Than
Pensions." The resulting reduction of the APBO should be accounted for as an
actuarial gain. On January 21, 2005, the Centers for Medicare and Medicaid
Services ("CMS") released final regulations implementing major provisions of the
Medicare Reform Act of 2003. The regulations address key concepts, such as
defining a plan, as well as the actuarial equivalence test for purposes of
obtaining a government subsidy. Pursuant to the guidance in FSP No. FAS 106-2,
we have assessed the financial impact of the regulations and concluded that our
post-retirement benefit plan will qualify for the direct subsidies and that our
APBO decreased by $9.3 million. As a result, our 2005 post-retirement benefit
cost is expected to decrease by $1.1 million. The impact of the Medicare Reform
Act on our post-retirement plan was compounded by changes made during the year
in the modalities of the plan, namely regarding increased participant
contributions and reduced eligibility. Prior to these changes, the impact of the
Medicare Reform Act had been estimated to be immaterial and therefore not
included in previous actuarial evaluations.
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
123R"). SFAS 123R is a revision to SFAS No. 123, "Accounting for Stock-Based
Compensation" and supercedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. Entities will be required to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service, the
requisite service period (usually the vesting period), in exchange for the
award. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models. If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. SFAS
123R is effective for interim and annual financial statements for years
beginning after December 15, 2005 and will apply to all outstanding and unvested
share-based payments at the time of adoption. Also, in March 2005, the SEC
released Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment" ("SAB
107"). SAB 107 provides the SEC staff position regarding the application of SFAS
No. 123R. SAB 107 contains interpretive guidance related to the interaction
between SFAS No. 123R and certain SEC rules and regulations, as well as provides
the Staff's views regarding the valuation of share-based payment arrangements
for public companies. SAB 107 also highlights the importance of disclosures made
related to the accounting for share-based payment transactions. The Company is
currently reviewing the effect of SAB 107 on its condensed consolidated
financial statements as it prepares to adopt SFAS 123R in 2006.
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ACCOUNTING CHANGES AND ERROR CORRECTIONS
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements" ("FAS 154"). FAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. FAS 154 also
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The provisions of FAS 154 are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of FAS
154 is not expected to have a material impact on the Company's financial
position or results of operations.
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2005, the FASB issued an Exposure Draft of the proposed Interpretation,
"Accounting for Uncertain Tax Positions, an interpretation of FASB Statement No.
109." The proposed Interpretation would clarify criterion to be used in the
recognition of uncertain tax positions in an enterprise's financial statements.
The Company is evaluating the proposed Interpretation but does not believe it
would materially change the way our Company evaluates tax positions for
recognition. The FASB expects to issue the final Interpretation in the first
quarter of 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange
and interest rates. These exposures are actively monitored by management. Our
exposure to foreign exchange rate risk is due to certain costs, revenues and
borrowings being denominated in currencies other than one of our subsidiary's
functional currency. Similarly, we are exposed to market risk as the result of
changes in interest rates, which may affect the cost of our financing. It is our
policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
We have exchange rate exposure primarily with respect to the Canadian dollar and
the British pound. As of December 31, 2004 and September 30, 2005, our financial
instruments which are subject to this exposure are immaterial, therefore the
potential immediate loss to us that would result from a hypothetical 10% change
in foreign currency exchange rates would not be expected to have a material
impact on our earnings or cash flows. This sensitivity analysis assumes an
unfavorable 10% fluctuation in both of the exchange rates affecting both of the
foreign currencies in which the indebtedness and the financial instruments
described above are denominated and does not take into account the offsetting
effect of such a change on our foreign-currency denominated revenues.
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We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in our debt portfolio. To manage a portion of
our exposure to interest rate changes, we enter into interest rate swap
agreements. We invest our excess cash in highly liquid short-term investments.
Our percentage of variable rate debt to total debt was 49% at December 31, 2004
and 61% at September 30, 2005.
Other than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K
for the year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Exchange Act, as of the end of the
period covered by this Report. This evaluation also included consideration of
our internal controls and procedures for the preparation of our financial
statements as required under Section 404 of the Sarbanes-Oxley Act.
Grant Thornton LLP, our independent registered public accounting firm, has
provided us with an unqualified report on our consolidated financial statements
for 2004. However, in the course of conducting its assessment of our internal
controls and its audit of our financial statements for our year ended December
31, 2004, Grant Thornton advised management and the audit committee of our board
of directors that it had identified the following material weaknesses in our
internal controls:
(1) There were insufficient personnel resources within the accounting
and financial reporting function due to accounting staff (including
senior level employees) turnover occurring in the fourth quarter of
2004.
(2) There were deficiencies identified in the following areas of the
Company's information technology function which, when considered in
the aggregate, constitute a material weakness over financial
reporting:
o The Company's IT system is decentralized with disparate IT
platforms, business solutions and software applications being
utilized.
o System maintenance policies and procedures (including an
enhanced disaster recovery plan) require development and
adoption.
o Security of systems used for the entry and maintenance of
accounting records requires additional documentation and
scrutiny to ensure that appropriate access to such systems and
the data contained therein is restricted.
o A policy and procedure to address an overall security
framework, including password usage, intrusion detection,
system security monitoring and back-up recovery must be
written and implemented.
(3) There were deficiencies in the analysis and reconciliation of
general ledger accounts which were indicative of a material weakness
in controls over closing procedures, including the (a) month end cut
off processes, and (b) the accounting and reporting of restructuring
charges.
While these material weaknesses did not have an effect on our reported results,
they nevertheless constituted deficiencies in our disclosure controls. In light
of these material weaknesses and the requirements enacted by the Sarbanes-Oxley
Act of 2002 and the related rules and regulations adopted by the SEC, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2004, our disclosure controls and procedures needed improvement and were not
effective at a reasonable assurance level. Despite those deficiencies in our
disclosure controls, management believes that there were no material
inaccuracies or omissions of material facts in this Report.
30
Since the discovery of the material weaknesses in internal controls described
above, management is strengthening the Company's internal control over financial
reporting beyond what has existed in prior years, and we have taken various
actions to improve our disclosure controls and procedures and to remediate our
internal control over financial reporting including, but not limited to, the
following:
(1) We have engaged a search firm to assist us in the hiring of
additional senior level accounting staff. In the third quarter of
2005, we hired a Corporate Controller/Chief Accounting Officer and
an Assistant Corporate Controller. In addition, we have hired other
accounting personnel for our Engine Management division. We intend
to continue to fill other accounting positions by the end of 2005.
In addition, in the first quarter of 2005, we hired a Financial
Compliance Manager to help drive our Sarbanes-Oxley compliance
effort.
(2) We have re-allocated resources to our accounting and finance
department to strengthen our accounting function. In particular, in
the first quarter of 2005 we transferred one employee from our
European operations to become our Engine Management Group
Controller; in the second quarter of 2005 we transferred one
employee from our Canadian operations to serve in a senior level
accounting position in our Engine Management division; and in the
third quarter of 2005 we transferred one employee from our Engine
Management division to become our Corporate Accounting Manager. In
addition, in the fourth quarter of 2004 and third quarter of 2005 we
hired, and are continuing to utilize, an outside consultant and
temporary employee to assist us with our accounting function.
(3) In 2004, we retained an independent third party consulting firm to
assist us in the preparation, documentation and testing of our
compliance with Section 404 of the Sarbanes-Oxley Act of 2002. We
are continuing to utilize this consulting firm with our
Sarbanes-Oxley compliance efforts in 2005.
(4) As part of our efforts to improve our IT function, we are in the
process of:
o Establishing an enterprise wide information technology
strategy to synthesize the disparate IT platforms and to
develop policies to unify the business solutions and software
applications being employed;
o Establishing a plan for uniform upgrades of workstations and
software, including virus protection and software fixes;
o Establishing a formal policy and procedure to address the
overall security framework, including password usage,
intrusion detection and system security monitoring;
o Improving our security measures to safeguard our data,
including enhancing our disaster recovery procedures;
o Improving our policies and procedures for system maintenance
and handling back-up and recovery tapes; and
o Utilizing a consulting firm to assist us with preparing an IT
policy and procedures manual to document all of our updated IT
procedures/standards on a company-wide basis.
The continued implementation of the initiatives described above is among our
highest priorities. We have discussed our corrective actions and future plans
with our audit committee and Grant Thornton and, as of the date of this Report,
we believe the actions outlined above should correct the above-listed material
weaknesses in our internal controls. However, in designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and are subject
to certain limitations, including the exercise of judgment by individuals, the
inability to identify unlikely future events, and the inability to eliminate
misconduct completely. As a result, there can be no assurance that our
disclosure controls and procedures will prevent all errors or fraud or ensure
that all material information will be made known to management in a timely
manner. In addition, we cannot assure you that neither we nor our independent
auditors will in the future identify further material weaknesses or significant
deficiencies in our internal control over financial reporting that we have not
discovered to date.
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When in certain of the Company's prior filings under the Exchange Act officers
of the Company provided conclusions regarding the effectiveness of our
disclosure controls and procedures, they believed that their conclusions were
accurate. However, after receiving and assessing the formal advice regarding our
internal control over financial reporting that our independent auditors provided
in the course of the audit of our financial statements for the year ended
December 31, 2004, our Chief Executive Officer and Chief Financial Officer have
reached the conclusions set forth above.
We believe that the material weaknesses in our internal controls identified
during our Sarbanes-Oxley testing review and described above do not materially
affect the fairness or accuracy of the presentation of our financial condition
and results of operation in our historical financial statements as set forth in
this Report or in our reports previously filed with the SEC under the Exchange
Act.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
During the quarter ended September 30, 2005 and subsequent to that date, we made
and continue to make changes in the Company's internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting, including the
following:
(1) Hired a new Corporate Controller/Chief Accounting Officer and an
Assistant Corporate Controller as well as other accounting
personnel. We are continuing a search for additional accounting
staff.
(2) Increased employee training on compliance with Section 404 of the
Sarbanes-Oxley Act at our various facilities.
(3) Continuing to utilize a consulting firm with the requisite
experience and expertise to assist us in the implementation and
compliance with Section 404 of the Sarbanes-Oxley Act.
(4) Improved the documentation of our significant accounting and IT
policies, and we are in the process of strengthening the integrity
and access controls of our systems.
We continue to review, document and test our internal control over financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business. These
efforts will lead to various changes in our internal control over financial
reporting.
The certifications of the Company's Chief Executive Officer and Chief Financial
Officer attached as Exhibits 31.1 and 31.2 to this Report include, in paragraph
4 of such certifications, information concerning the Company's disclosure
controls and procedures and internal control over financial reporting. These
officers believe these certifications to be accurate, because we did have
procedures in place during the quarter ended September 30, 2005 to detect errors
in our systems. Such certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of the
matters covered by such certifications.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation. When we originally
acquired this brake business, we assumed future liabilities relating to any
alleged exposure to asbestos-containing products manufactured by the seller of
the acquired brake business. In accordance with the related purchase agreement,
we agreed to assume the liabilities for all new claims filed on or after
September 1, 2001. Our ultimate exposure will depend upon the number of claims
filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense thereof. At December 31, 2001, approximately 100 cases
were outstanding for which we were responsible for any related liabilities. At
December 31, 2002, the number of cases outstanding for which we were responsible
for related liabilities increased to approximately 2,500, which include
approximately 1,600 cases filed in December 2002 in Mississippi. We believe that
these Mississippi cases filed against us in December 2002 were due in large part
to potential plaintiffs accelerating the filing of their claims prior to the
effective date of Mississippi's tort reform statute in January 2003, which
statute eliminated the ability of plaintiffs to file consolidated cases. At
December 31, 2004 and September 30, 2005 approximately 3,700 cases and 3,900
cases, respectively, were outstanding for which we were responsible for any
related liabilities. We expect the outstanding cases to increase gradually due
to recent legislation in certain states mandating minimum medical criteria
before a case can be heard. Since inception in September 2001, the amounts paid
for settled claims are $2.8 million. We do not have insurance coverage for the
defense and indemnity costs associated with these claims.
On November 30, 2004, we were served with a summons and complaint in the U.S.
District Court for the Southern District of New York by The Coalition For A
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. In August 2005, we filed a
motion to dismiss the complaint. Although we cannot predict the ultimate outcome
of this case or estimate the range of any potential loss that may be incurred in
the litigation, we believe that the lawsuit is without merit, strenuously deny
all of the plaintiff's allegations of wrongdoing and believe we have meritorious
defenses to the plaintiff's claims. We intend to defend vigorously this lawsuit.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
ITEM 5. OTHER INFORMATION
AMENDMENT TO CREDIT AGREEMENT
On November 4, 2005, the Company and certain of its wholly owned subsidiaries
entered into an amendment of its Amended and Restated Credit Agreement dated as
of February 7, 2003, as further amended (the "Credit Agreement"), with General
Electric Capital Corporation, as agent for the lenders, Bank of America, N.A.,
for itself and as syndicate agent, and GMAC Commercial Finance LLC, for itself
and as documentation agent. The amendment provides for the following: (1) the
specified levels of fixed charge coverage has been modified for the remainder of
2005 and thereafter; (2) the removal of the limit on our ability to redeem the
current drafts prior to the maturity date; and (3) the prohibition of accepting
drafts under our customer draft programs after November 18, 2005.
The description set forth above is qualified by the Waiver and Amendment No. 6
to the Amended and Restated Credit Agreement filed herewith as exhibit 10.17.
33
ITEM 6. EXHIBITS
10.17 Waiver and Amendment No. 6 to Amended and Restated Credit Agreement,
dated as of November 4, 2005, among Standard Motor Products, Inc.,
as Borrower, and General Electric Capital Corp. and Bank of America,
as Lenders
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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: November 9, 2005 /s/ James J. Burke
------------------
James J. Burke
Vice President Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
34
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
10.17 Waiver and Amendment No. 6 to Amended and Restated Credit Agreement,
dated as of November 4, 2005, among Standard Motor Products, Inc.,
as Borrower, and General Electric Capital Corp. and Bank of America,
as Lenders
31.2 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.4 Certification of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.