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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ____ to ____
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
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 392-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $2.00 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filler. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting common stock based on the closing price
on the New York Stock Exchange on June 30, 2005 (the last business day of
registrant's most recently completed second fiscal quarter) of $13.20 per share
held by non-affiliates of the registrant was $216,063,725. For purposes of the
foregoing calculation only, all directors and officers have been deemed to be
affiliates, but the registrant disclaims that any of such are affiliates.
As of February 28, 2006, there were 18,470,891 outstanding shares of the
registrant's common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated herein by
reference from the registrant's definitive proxy statement relating to its
annual meeting of stockholders to be held on May 18, 2006.
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STANDARD MOTOR PRODUCTS, INC.
INDEX
PART I. PAGE NO.
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Item 1. Business .......................................................... 3
Item 1A. Risk Factors.......................................................13
Item 1B. Unresolved Staff Comments..........................................18
Item 2. Properties.........................................................19
Item 3. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................20
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..................21
Item 6. Selected Financial Data............................................22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........36
Item 8. Financial Statements and Supplementary Data........................37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................83
Item 9A. Controls and Procedures............................................83
Item 9B. Other Information..................................................85
PART III.
Item 10. Directors and Executive Officers of the Registrant.................85
Item 11. Executive Compensation.............................................85
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................85
Item 13. Certain Relationships and Related Transactions ....................85
Item 14. Principal Accounting Fees and Services.............................85
PART IV.
Item 15. Exhibits and Financial Statement Schedules.........................86
Signatures.........................................................87
2
PART I
IN THIS ANNUAL REPORT ON FORM 10-K, "STANDARD MOTOR PRODUCTS," "WE," "US," "OUR"
AND THE "COMPANY" REFER TO STANDARD MOTOR PRODUCTS, INC. AND ITS SUBSIDIARIES,
UNLESS THE CONTEXT REQUIRES OTHERWISE. THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE
INDICATED BY WORDS SUCH AS "ANTICIPATES," "EXPECTS," "BELIEVES," "INTENDS,"
"PLANS," "ESTIMATES," "PROJECTS" AND SIMILAR EXPRESSIONS. THESE STATEMENTS
REPRESENT OUR EXPECTATIONS BASED ON CURRENT INFORMATION AND ASSUMPTIONS AND ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN
RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, ECONOMIC AND MARKET
CONDITIONS; THE PERFORMANCE OF THE AFTERMARKET SECTOR; CHANGES IN BUSINESS
RELATIONSHIPS WITH OUR MAJOR CUSTOMERS AND IN THE TIMING, SIZE AND CONTINUATION
OF OUR CUSTOMERS' PROGRAMS; CHANGES IN THE PRODUCT MIX AND DISTRIBUTION CHANNEL
MIX; THE ABILITY OF OUR CUSTOMERS TO ACHIEVE THEIR PROJECTED SALES; COMPETITIVE
PRODUCT AND PRICING PRESSURES; INCREASES IN PRODUCTION OR MATERIAL COSTS THAT
CANNOT BE RECOUPED IN PRODUCT PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED
BUSINESSES; PRODUCT LIABILITY MATTERS (INCLUDING, WITHOUT LIMITATION, THOSE
RELATED TO ASBESTOS-RELATED CONTINGENT LIABILITIES); AS WELL AS OTHER RISKS AND
UNCERTAINTIES, SUCH AS THOSE DESCRIBED UNDER RISK FACTORS, QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND THOSE DETAILED HEREIN AND FROM
TIME TO TIME IN THE FILINGS OF THE COMPANY WITH THE SEC. FORWARD-LOOKING
STATEMENTS ARE MADE ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE OR REVISE THE FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. IN ADDITION, HISTORICAL
INFORMATION SHOULD NOT BE CONSIDERED AS AN INDICATOR OF FUTURE PERFORMANCE.
ITEM 1. 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 line 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 to warehouse distributors and large retail chains
in the United States, Canada and Latin America. We also sell our products in
Europe through our European Segment. Our customers consist of many of the
leading warehouse distributors, such as CARQUEST and NAPA Auto Parts, as well as
many of the leading auto parts retail chains, such as Advance Auto Parts,
AutoZone, CSK Auto, O'Reilly Automotive and Pep Boys. We distribute parts under
our own brand names, such as Standard, Blue Streak, BWD Automotive, Niehoff,
Hayden and Four Seasons, and through private labels, such as CARQUEST and NAPA
Auto Parts.
BUSINESS STRATEGY
Our goal is to grow revenues and earnings and deliver returns in excess of our
cost of capital by providing high quality, low cost replacement parts in the
engine management and temperature control automotive aftermarkets. The key
elements of our strategy are as follows:
o MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT
AND TEMPERATURE CONTROL BUSINESSES. We are one of the leading
independent manufacturers serving North America and other geographic
areas in our core businesses of Engine Management and Temperature
Control. We believe that our success is attributable to our emphasis
on product quality, the breadth and depth of our product lines for
both domestic and imported automobiles, and our reputation for
outstanding customer service, as measured by rapid order turn-around
times and high-order fill rates.
3
To maintain our strong competitive position in our markets, we
remain committed to the following:
o providing our customers with broad lines of high quality
engine management and temperature control products,
supported by the highest level of customer service and
reliability;
o continuing to maximize our production and distribution
efficiencies;
o continuing to improve our cost position; and
o further focusing our engineering development efforts.
o PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND
TECHNICAL SUPPORT. Our goal is to increase sales to existing and new
customers by leveraging our skills in rapidly filling orders,
maintaining high levels of product availability and providing
technical support in a cost-effective manner. In addition, our
technically skilled sales force professionals provide product
selection and application support to our customers.
o EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales
by continuing to develop and expand the range of Engine Management
and Temperature Control products that we offer to our customers. We
are committed to investing the resources necessary to maintain and
expand our technical capability to manufacture multiple product
lines that incorporate the latest technologies developed by original
equipment manufacturers (OEMs) in North America and Europe.
o BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by
marketing our products more broadly to the distribution businesses
of OEMs who sell products to new car dealer service areas.
o IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management
places significant emphasis on improving our financial performance
by achieving operating efficiencies and improving asset utilization,
while maintaining product quality and high customer order fill
rates. We intend to continue to improve our operating efficiency and
cost position by:
o increasing cost-effective vertical integration in key
product lines through internal development;
o focusing on efficient inventory management, including
warranty and overstock return management;
o maintaining and improving our cost effectiveness and
competitive responsiveness to better serve the
automotive aftermarket customer base, including sourcing
certain products from low cost countries such as those
in Asia.
o adopting company-wide programs geared toward
manufacturing and distribution efficiency; and
o focusing on company-wide overhead and operating expense
cost reduction programs, such as closing excess
facilities and consolidating redundant functions.
o CASH UTILIZATION. We intend to apply any excess cash flow from
operations and the management of working capital to reduce our
outstanding indebtedness, pay dividends and repurchase our stock.
THE AUTOMOTIVE AFTERMARKET
The automotive aftermarket industry is comprised of a large, diverse number of
manufacturers varying in product specialization and size. In addition to
manufacturing, aftermarket companies allocate resources towards an efficient
distribution process and product engineering in order to maintain the
flexibility and responsiveness on which their customers depend. Aftermarket
manufacturers must be efficient producers of small lot sizes and do not have to
provide systems engineering support. Aftermarket manufacturers also must
distribute, with rapid turnaround times, products for a full range of vehicles
on the road. The primary customers of the automotive aftermarket manufacturers
are national and regional warehouse distributors, large retail chains,
automotive repair chains and the dealer service networks of OEMs.
4
During periods of economic decline or weakness, more automobile owners may
choose to repair their current automobiles using replacement parts rather than
purchasing new automobiles, which benefit the automotive aftermarket industry,
including suppliers like us. The automotive aftermarket industry is also
dependent on new car sales, although to a lesser degree than OEMs and their
suppliers, because these sales create the total number of cars available for
repair. Aggressive financing programs by automakers has increased demand for new
cars and trucks, which should benefit the automotive aftermarket manufacturers
in the long term as vehicles age.
The automotive aftermarket industry differs substantially from the OEM supply
business. Unlike the OEM supply business that primarily follows trends in new
car production, the automotive aftermarket industry's performance primarily
tends to follow different trends, such as:
o growth in number of vehicles on the road;
o increase in average vehicle age;
o increase in total miles driven per year;
o new and modified environmental regulations;
o increase in pricing of new cars; and
o new car quality and related warranties.
Traditionally, the parts manufacturers of OEMs and the independent manufacturers
who supply the original equipment (OE) part applications have supplied a
majority of the business to new car dealer networks. However, certain parts
manufacturers have become more independent and are no longer affiliated with
OEMs, which may provide future opportunities for us to supply replacement parts
to the dealer service networks of the OEMs, both for warranty and
out-of-warranty repairs.
FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS
The table below shows our consolidated net sales by operating segment and by
major product group within each segment for the three years ended December 31,
2005. Our three reportable operating segments are Engine Management, Temperature
Control and Europe.
YEAR ENDED
DECEMBER 31,
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2005 2004 2003
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AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission
Parts .................... $ 446,706 53.8% $ 459,452 55.7% $ 337,134 49.7%
Wires and Cables ............. 91,883 11.1% 92,868 11.3% 69,528 10.2%
Fuel System Parts ............ 8,419 1.0% 10,449 1.3% 7,713 1.1%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL ENGINE MANAGEMENT ........... 547,008 65.9% 562,769 68.3% 414,375 61.0%
---------- ---------- ---------- ---------- ---------- ----------
TEMPERATURE CONTROL:
Compressors .................. 101,876 12.3% 85,403 10.4% 89,676 13.2%
Other Air Conditioning
Parts ..................... 115,420 13.9% 113,223 13.7% 117,720 17.3%
Heating Parts ................ 11,930 1.4% 11,468 1.4% 12,180 1.8%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL TEMPERATURE CONTROL ......... 229,226 27.6% 210,094 25.5% 219,576 32.3%
---------- ---------- ---------- ---------- ---------- ----------
EUROPE:
Engine Management Parts ...... 26,802 3.2% 25,539 3.1% 27,514 4.1%
Temperature Control Parts .... 16,621 2.0% 15,112 1.8% 12,627 1.9%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL EUROPE ...................... 43,423 5.2% 40,651 4.9% 40,141 6.0%
---------- ---------- ---------- ---------- ---------- ----------
ALL OTHER ......................... 10,756 1.3% 10,769 1.3% 4,691 0.7%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL ..................... $ 830,413 100.0% $ 824,283 100.0% $ 678,783 100.0%
========== ========== ========== ========== ========== ==========
5
The following table shows our operating profit and identifiable assets by
operating segment for the three years ended December 31, 2005.
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- ----------------------------
OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE
PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Engine Management .......... $ 19,338 $ 438,116 $ 24,549 $ 429,631 $ 31,871 $ 448,687
Temperature Control ........ 11,936 114,441 (2,114) 125,656 4,702 150,248
Europe ..................... (572) 28,217 (2,034) 30,936 (3,605) 31,188
All Other .................. (16,620) 72,270 (22,138) 70,346 (17,153) 64,402
------------ ------------ ------------ ------------ ------------ ------------
Total ................... $ 14,082 $ 653,044 $ (1,737) $ 656,569 $ 15,815 $ 694,525
============ ============ ============ ============ ============ ============
"All Other" consists of items pertaining to our corporate headquarters function
and our Canadian business unit, each of which does not meet the criteria of a
reportable operating segment.
ENGINE MANAGEMENT SEGMENT
BREADTH OF PRODUCTS. In our Engine Management Segment, replacement parts for
ignition and emission control systems accounted for approximately 54%, 56%, and
50% of our consolidated net sales in 2005, 2004 and 2003, respectively. These
parts include distributor caps and rotors, electronic ignition control modules,
voltage regulators, coils, switches, sensors, EGR valves and many other engine
management components. We are a basic manufacturer of many of the engine
management parts we market and continue to develop ways of increasing the number
of parts we manufacture, rather than purchasing such parts from third parties.
In addition, our strategy includes sourcing certain products from low cost
countries such as those in Asia.
COMPUTER-CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped
with computer-controlled engine management systems to control ignition, emission
and fuel injection systems. The on-board computers monitor inputs from many
types of sensors located throughout the vehicle, and control a myriad of valves,
switches and motors to manage engine and vehicle performance. Electronic
ignition systems enable the engine to improve fuel efficiency and reduce the
level of hazardous fumes in exhaust gases.
In 1992, we entered into a 50/50 joint venture in Canada with Blue Streak
Electronics, Inc. to rebuild automotive engine management computers and mass air
flow sensors. The volume of products produced by the joint venture are sold
primarily to us and has positioned us as a key supplier in the growing
remanufactured electronics markets. The Blue Streak joint venture has further
expanded its product range to include computers used in temperature control,
anti-lock brake systems and air bags, and development of diagnostic repair
tools.
We divide our electronic operations between product design and highly automated
manufacturing operations in Orlando, Florida and assembly operations, which are
performed in assembly plants in Orlando and Hong Kong.
Government emission laws have been implemented throughout the majority of the
United States. The Clean Air Act, as amended in 1990, imposes strict emission
control test standards on existing and new vehicles, and remains the preeminent
legislation in the area of vehicle emissions. As many states have implemented
required inspection/maintenance tests, the Environmental Protection Agency,
through its rulemaking ability, has also encouraged both manufacturers and
drivers to reduce vehicle emissions. As the Clean Air Act was "phased in"
beginning in 1994, automobiles must now comply with emission standards from the
time they were manufactured, and in most states, until the last day they are in
use. This law has, and in the future we expect this law and other new government
emission laws to have, a positive impact on sales of our ignition and emission
controls parts. Vehicles failing these new, more stringent tests have required
repairs utilizing parts sold by us.
6
Our sales of sensors, valves, solenoids and related parts have increased
steadily as automobile manufacturers equip their cars with more complex engine
management systems.
WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 11%,
11% and 10% of our consolidated net sales in 2005, 2004 and 2003, respectively.
These products include ignition (spark plug) wires, battery cables and a wide
range of electrical wire, terminals, connectors and tools for servicing an
automobile's electrical system.
The largest component of this product line is the sale of ignition wire sets. We
have historically offered a premium brand of ignition wires and battery cables,
which capitalize on the market's awareness of the importance of quality. We have
the ability to extrude high voltage wire in Mishawaka, Indiana to be used in our
ignition wire sets. This vertical integration of a critical component offers us
the ability to achieve lower costs and our own controlled source of supply and
quality.
TEMPERATURE CONTROL SEGMENT
We manufacture, remanufacture and market a full line of replacement parts for
automotive temperature control (air conditioning and heating systems) engine
cooling systems, power window accessories and windshield washer systems,
primarily under the brand names of Four Seasons, Factory Air, Murray, NAPA,
CARQUEST, Hayden, Imperial and Aci. The major product groups sold by our
Temperature Control Segment are new and remanufactured compressors, clutch
assemblies, blower and radiator fan motors, filter dryers, evaporators,
accumulators, hose assemblies, expansion valves, heater cores, heater valves, AC
service tools and chemicals, fan assemblies, fan clutches, engine oil coolers,
transmission coolers, window lift motors and windshield washer pumps. Our
temperature control products accounted for approximately 28%, 26% and 32% of our
consolidated net sales in 2005, 2004 and 2003, respectively.
Due to increasing offshore competitive price pressure, in 2005 our Temperature
Control business made several changes within its manufacturing portfolio. We
have outsourced the manufacturing of several major AC product groups and have
implemented plans to consolidate manufacturing facilities. In addition, we have
recently started limited production of remanufactured compressors in Reynosa,
Mexico and have entered into several supply agreements for certain products with
vendors in low cost countries such as those in Asia.
Today's vehicles are being produced with smaller, more complex and efficient
designs. Our Temperature Control Segment continues to be a leader in providing
superior training to service dealers who seek the knowledge in which to perform
proper repairs for today's vehicles. We believe that our training module (Tip's
& Technique's) remains one of the most sought-after training clinics in the
industry and among professional service dealers.
Our customers are leading warehouse distributors, national program distribution
groups, retail auto parts chains, specialty market distributors and original
equipment service parts organizations supplying replacement parts for domestic
and import passenger cars, trucks and equipment.
EUROPE SEGMENT
In July 1996, we acquired an equity interest in Standard Motor Products (SMP)
Holdings Limited (formerly Intermotor Holdings Limited) located in Nottingham,
England. During 2002, we acquired the remaining equity interest bringing the
Company's ownership percentage to 100%. SMP Holdings Limited manufactures and
distributes a broad line of engine management products primarily to customers in
Europe. Also in 1996, we expanded our presence in Europe by opening a European
distribution center in Strasbourg, France for temperature control products. A
joint venture (Blue Streak Europe) between SMP Holdings Limited and Blue Streak
Electronics was also initiated in 1996, which joint venture supplies rebuilt
engine computers for the European market.
7
Since 1996, we have made a series of smaller acquisitions supplementing both the
Engine Management and Temperature Control portions of our business. With respect
to the engine management business, in January 1999 we acquired Webcon UK
Limited, an assembler and distributor of fuel system components, which we
subsequently divested in June 2003 incurring an $0.8 million loss. In January
1999, Blue Streak Europe acquired Injection Correction UK LTD, a subsidiary of
Webcon, and in September 2001, acquired TRW Inc.'s electronic control unit
remanufacturing division. In April 1999, we acquired Lemark Auto Accessories, a
supplier of wire sets. In April 2002, the wire business was further expanded by
acquiring Carol Cable Limited, a manufacturer and distributor of wire.
With respect to the temperature control portion of our business, following the
opening of the distribution center in France, in 1997 a joint venture was
entered into with Valeo SA to remanufacture air conditioner compressors for the
European market. In addition, in January 2000 we acquired Four Seasons UK Ltd.
(formerly Vehicle Air Conditioning Parts Ltd.), a distributor of components for
the repair of air conditioning systems. In July 2000, the Temperature Control
business was further expanded by purchasing Four Seasons Italy SRL (formerly
Automotive Heater Exchange SRL) in Italy. In 2001 we entered into a joint
venture with Pedro Sanz in Madrid, Spain to distribute our products in the
Iberian Peninsula.
Our European Segment accounted for approximately 5%, 5% and 6% of our
consolidated net sales in 2005, 2004 and 2003, respectively. Aftermarket margins
are under pressure, while volumes are in a general decline in the ignition and
carburetor product lines. We have responded to the adverse market conditions by
reducing manufacturing costs through consolidating certain facilities and
outsourcing products. In addition, in the fourth quarter of 2004 we entered into
an agreement to supply Lucas branded engine management products into the United
Kingdom, which arrangement helped to increase our sales in 2005.
European Temperature Control product sales continue to increase. Through
acquisitions and more importantly a growing market, net sales have increased
from $6.1 million in 2000 to $16.6 million in 2005. To date, the focus has been
on product coverage and high customer service levels.
FINANCIAL INFORMATION ABOUT OUR FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We sell our line of products primarily in the United States, with additional
sales in Canada, Europe and Latin America. Our sales are substantially
denominated in U.S. dollars.
The table below shows our consolidated net sales by geographic area for the
three years ended December 31, 2005.
YEAR ENDED
DECEMBER 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
(IN THOUSANDS)
United States .......................... $ 716,358 $ 714,955 $ 584,853
Canada ................................. 46,353 45,115 38,187
Europe ................................. 43,423 40,651 40,141
Other Foreign .......................... 24,279 23,562 15,602
---------- ---------- ----------
Total ............................. $ 830,413 $ 824,283 $ 678,783
========== ========== ==========
The table below shows our long-lived assets by geographical area for the three
years ended December 31, 2005.
YEAR ENDED
DECEMBER 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
(IN THOUSANDS)
United States .......................... $ 161,451 $ 174,056 $ 192,574
Europe ................................. 4,682 6,214 8,905
Canada ................................. 3,900 4,144 4,488
Other Foreign .......................... 754 785 998
---------- ---------- ----------
Total ............................. $ 170,787 $ 185,199 $ 206,965
========== ========== ==========
8
SALES AND DISTRIBUTION
Over the last ten years, there has been a trend toward consolidation in the
distribution chain among warehouse distributors, retailers and auto parts
jobbers. In the traditional distribution channel, where we sell our products to
warehouse distributors, such distributors supply auto parts jobbers, who in turn
sell to professional technicians and to consumers who perform automotive repairs
themselves. In recent years, warehouse distributors have been consolidating with
other distributors, and an increasing number of distributors own their jobbers.
In the retail distribution channel, customers buy directly from us and sell
directly to technicians and "do it yourselfers." Retailers are also
consolidating with other retailers and expanding into the jobber market, thereby
adding additional competition in the "do it for me" business segment targeting
the professional technician.
As automotive parts grow more complex, consumers are less likely to service
their own vehicles and may become more reliant on dealers and technicians. In
addition to new car sales, automotive dealerships sell OE brand parts and
service vehicles. The products available through the dealers are purchased
through the original equipment service (OES) network. Traditionally, the parts
manufacturers of OEMs have supplied a majority of OES network. However, certain
parts manufacturers have become independent and are no longer affiliated with
OEMs, and because of this, there may be additional opportunities for independent
automotive aftermarket manufacturers like us to supply the OES network.
We believe that our sales force is the premier direct sales force for our
product lines, due to our high concentration of highly-qualified, well-trained
sales people dedicated to geographic territories, which allows us to provide a
level of customer service we believe is unmatched. From the outset, we
thoroughly train our sales people both in the function and application of our
product lines, as well as in proven sales techniques. Customers, therefore,
depend on these sales people as a reliable source for technical information. We
give newly hired sales people extensive instruction at our training facility in
Irving, Texas and have a policy of continuing education that allows our sales
force to stay current on troubleshooting and repair techniques, as well as the
latest automotive parts and systems technology.
We generate demand for our products by directing a significant portion of our
sales effort to our customers' customers (i.e., jobbers and professional
technicians). We also conduct instructional clinics, which teach technicians how
to diagnose and repair complex systems related to our products. To help our
sales people to be teachers and trainers, we focus our recruitment efforts on
candidates who already have strong technical backgrounds as well as sales
experience. We also create demand for our products through the Standard Plus
Club. Our Standard Plus Club, a professional service dealer network, offers
technical and business development support and has a technical service telephone
hotline which provides immediate diagnostic and installation support. This club
is available to technicians and provides training, special discount programs and
on-line diagnostic assistance.
In connection with our sales activities, we offer a variety of customer
discounts, allowances and incentives. For example, we offer cash discounts for
paying invoices in accordance with the specified discounted terms of the
invoice, and we offer pricing discounts based on volume and different product
lines purchased from us. We also offer rebates and discounts to customers as
advertising and sales force allowances, and allowances for warranty and
overstock returns are also provided. We believe these discounts, allowances and
incentives are a common practice throughout the automotive aftermarket industry,
and we intend to continue to offer them in response to competitive pressures.
CUSTOMERS
Our customer base is comprised largely of warehouse distributors, large
retailers, OES customers, other manufacturers and export customers. Our
warehouse distributor customers include CARQUEST and NAPA Auto Parts, and our
retail customers include Advance Auto Parts, AutoZone, CSK Auto, O'Reilly
Automotive and Pep Boys. In 2005, our consolidated net sales to our major market
channels consisted of $443 million to our traditional customers, $250 million to
our retail customers, $66 million to our OES customers and $71 million to other
customers.
9
Our five largest individual customers, including members of a marketing group,
accounted for 52% of our 2005 consolidated net sales. Two individual customers
accounted for 18% and 15%, respectively, of our 2005 consolidated net sales.
COMPETITION
We are a leading independent manufacturer of replacement parts for the product
lines in Engine Management and Temperature Control. We compete primarily on the
basis of product quality, product availability, customer service, product
coverage, order turn-around time, order fill rate and price. We believe we
differentiate ourselves from our competitors primarily through:
o a value-added, knowledgeable sales force;
o extensive product coverage;
o sophisticated parts cataloguing systems; and
o inventory levels sufficient to meet the rapid delivery requirements
of customers.
In the Engine Management business, we are one of the leading independent
manufacturers in the United States. Our competitors include AC Delco, Delphi
Corporation, Denso Corporation, Federal-Mogul Corporation, Robert Bosch
Corporation, Visteon Corporation and Wells Manufacturing Corporation, as well as
OE dealers.
Our Temperature Control business is one of the leading independent producers and
distributors of a full line of temperature control products in North America and
other geographic areas. AC Delco, Delphi Corporation, Denso Corporation, Jordan
Automotive Aftermarket, Inc., Proliance International, Inc., Siemens VDO
Automotive and Visteon Corporation are some of our key competitors in this
market.
The automotive aftermarket is highly competitive, and we face substantial
competition in all markets that we serve. Our success in the marketplace
continues to depend on our ability to offer competitive prices, improved
products and expanded offerings in competition with many other suppliers to the
aftermarket. Some of our competitors may have greater financial, marketing and
other resources than we do. In addition, we face competition from automobile
manufacturers who supply virtually every replacement part sold by us, although
these manufacturers generally supply parts only for cars they produce through OE
dealerships.
SEASONALITY
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
and customer inventories. For example, a cool summer may lessen the demand for
our Temperature Control products, while a hot summer may increase such demand.
As a result of this seasonality and variability in demand of our Temperature
Control products, our working capital requirements peak near the end of the
second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by 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.
10
WORKING CAPITAL MANAGEMENT
Automotive aftermarket companies have been under increasing pressure to provide
broad SKU (stock keeping unit) coverage in response to parts and brand
proliferation. In response to this, we have made significant changes to our
inventory management system to reduce inventory requirements. We implemented a
forecasting system in our Engine Management Segment that permitted a significant
reduction in safety stocks. Our Engine Management Segment also introduced a new
distribution system, which permits pack-to-order systems to be implemented. Such
systems permit us to retain slow moving items in a bulk storage state until an
order for a specific brand part is received. This system reduces the volume of a
given part in inventory and reduces the labor requirements to package and
repackage inventory. We also recently expanded our management system to improve
inventory deployment, enhance our collaboration with customers on forecasts, and
further integrate our supply chain both to customers and suppliers.
We face inventory management issues as a result of warranty and overstock
returns. Many of our products carry a warranty ranging from a 90-day limited
warranty to a lifetime limited warranty, which generally covers defects in
materials or workmanship and failure to meet industry published specifications.
In addition to warranty returns, we also permit our customers to return products
to us within customer-specific limits (which are generally limited to a
specified percentage of their annual purchases from us) in the event that they
have overstocked their inventories. 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, 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.
Our profitability and working capital requirements have become more seasonal
with the increased sales mix of 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. These increased
working capital requirements are funded by borrowings from our revolving credit
facility.
SUPPLIERS
The principal raw materials purchased by us consist of brass, electronic
components, fabricated copper (primarily in the form of magnet and insulated
cable), steel magnets, laminations, tubes and shafts, stamped steel parts,
copper wire, ignition wire, stainless steel coils and rods, aluminum coils,
fittings, tubes and rods, cast aluminum parts, lead, steel roller bearings,
rubber molding compound, thermo-set and thermo plastic molding powders.
Additionally, we use components and cores (used parts) in our remanufacturing
processes for air conditioning compressors.
We purchase many materials in the U.S. and foreign open markets and have a
limited number of supply agreements on key components. A number of prime
suppliers make these materials available. In the case of cores for air
conditioning compressors, we obtain them either from exchanges with customers
who return cores subsequent to purchasing remanufactured parts, or through
direct purchases from a network of core brokers. In addition, we acquire certain
materials by purchasing products that are resold into the market, particularly
by OEM sources and other domestic and foreign suppliers.
We believe there is an adequate supply of primary raw materials and cores. In
order to ensure a consistent, high quality, low cost supply of key components
for each product line, we continue to develop our own sources through internal
manufacturing capacity. Recently, prices of steel, aluminum, copper and other
commodities have risen. These increases did not have a material impact on us, as
we are not dependent on any single commodity, however, there can be no assurance
over the long term that increases in commodity prices will not materially effect
our business or results of operations.
11
PRODUCTION AND ENGINEERING
We engineer, tool and manufacture many of the components used in the assembly of
our products. We also perform our own plastic and rubber molding operations,
stamping and machining operations, automated electronics assembly and a wide
variety of other processes. In the case of remanufactured components, we conduct
our own teardown, diagnostics and rebuilding for air conditioning compressors.
We have found this level of vertical integration to provide advantages in terms
of cost, quality and availability. We intend to continue selective efforts
toward further vertical integration to ensure a consistent quality and supply of
low cost components. In addition, our strategy includes sourcing certain
products from low cost countries such as those in Asia.
We use the "just-in-time" cellular manufacturing concept as a major program to
lower costs and improve efficiency. The main thrust of "just-in-time" cellular
manufacturing is reducing work-in-process and finished goods inventory, and its
implementation reduces the inefficient operations that burden many manufacturing
processes. In 2000, we launched a program for the installation of a fully
integrated enterprise resource planning (ERP) system. The implementation of such
system was completed in 2003 in our Temperature Control Segment. In 2005, we
launched our program to implement such a system in our Engine Management
Segment, and we anticipate full implementation in 2008.
EMPLOYEES
As of December 31, 2005, we employed approximately 3,000 people in the United
States, and 1,000 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong.
Of these, approximately 2,400 are production employees. We operate primarily in
non-union facilities and have binding labor agreements with the workers at our
two unionized facilities. We have approximately 175 production employees in
Edwardsville, Kansas who are covered by a contract with The International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
("UAW") that expires April 1, 2006; we expect to renew this agreement with the
UAW upon mutually agreeable terms. As of December 31, 2005, approximately 150 of
our production employees in Long Island City, New York are under a UAW contract
that expires October 1, 2007. We also have a union relationship in Mexico with
an agreement negotiated each year. The current union agreement in Mexico, which
covers approximately 300 employees, expires on January 29, 2007. We believe that
our facilities are in favorable labor markets with ready access to adequate
numbers of skilled and unskilled workers, and we believe our relations with our
union and non-union employees are good.
INSURANCE
We maintain basic liability coverage up to $2 million for automobile liability,
general and product liability and $50 million for umbrella liability coverage.
We also maintain two $10 million environmental policies, each covering a
separate number of our existing U.S. facilities. One of our facilities is
currently undergoing minor environmental remediation. The environmental
remediation costs at such facility are covered by an insurance policy of $3
million, which is subject to a $1.5 million deductible; we have purchased
additional environmental insurance coverage in the amount of $2 million with a
$0.1 million deductible relating to such facility. Historically, we have not
experienced casualty losses in any year in excess of our coverage. We have no
reason to expect this experience to change, but there can be no assurances that
liability losses in the future will not exceed our coverage.
12
AVAILABLE INFORMATION
We are a New York corporation founded in 1919. Our principal executive offices
are located at 37-18 Northern Boulevard, Long Island City, New York 11101, and
our main telephone number at that location is (718) 392-0200. Our Internet
address is WWW.SMPCORP.COM. We provide a link to reports that we have filed with
the SEC. However, for those persons that make a request in writing or by e-mail
(financial@smpcorp.com), we will provide free of charge our Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. These reports and other
information are also available, free of charge, at WWW.SEC.GOV. Alternatively,
you may read and copy any materials that we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
COMPETE WITH SUPPLIERS OF AUTOMOTIVE AFTERMARKET PRODUCTS, SOME OF WHICH MAY
HAVE SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND OTHER RESOURCES THAN WE DO.
While we believe that our business is well positioned to compete in our two
primary market segments, Engine Management and Temperature Control, the
automotive aftermarket industry is highly competitive, and our success depends
on our ability to compete with suppliers of automotive aftermarket products. In
the Engine Management business, our competitors include AC Delco, Delphi
Corporation, Denso Corporation, Federal-Mogul Corporation, Robert Bosch
Corporation, Visteon Corporation and Wells Manufacturing Corporation. In the
Temperature Control business, we compete with AC Delco, Delphi Corporation,
Denso Corporation, Jordan Automotive Aftermarket, Inc., Proliance International,
Inc., Siemens VDO Automotive and Visteon Corporation. In addition, automobile
manufacturers supply virtually every replacement part we sell.
Some of our competitors may have larger customer bases and significantly greater
financial, technical and marketing resources than we do. These factors may allow
our competitors to:
o respond more quickly than we can to new or emerging technologies and
changes in customer requirements by devoting greater resources than
we can to the development, promotion and sale of automotive
aftermarket products and services;
o engage in more extensive research and development;
o sell products at a lower price than we do;
o undertake more extensive marketing campaigns; and
o make more attractive offers to existing and potential customers and
strategic partners.
We cannot assure you that our competitors will not develop products or services
that are equal or superior to our products or that achieve greater market
acceptance than our products or that in the future other companies involved in
the automotive aftermarket industry will not expand their operations into
product lines produced and sold by us. We also cannot assure you that additional
entrants will not enter the automotive aftermarket industry or that companies in
the aftermarket industry will not consolidate. Any of such competitive pressures
could cause us to lose market share or could result in significant price
decreases and could have a material adverse effect upon our business, financial
condition and results of operations.
13
THERE IS SUBSTANTIAL PRICE COMPETITION IN OUR INDUSTRY, AND OUR SUCCESS AND
PROFITABILITY WILL DEPEND ON OUR ABILITY TO MAINTAIN A COMPETITIVE COST AND
PRICE STRUCTURE.
There is substantial price competition in our industry, and our success and
profitability will depend on our ability to maintain a competitive cost and
price structure. We may have to reduce prices in the future to remain
competitive. Also, our future profitability will depend in part upon our ability
to respond to changes in the product and distribution channel mix, to continue
to improve our manufacturing efficiencies, to generate cost reductions,
including reductions in the cost of components purchased from outside suppliers,
and to maintain a cost structure that will enable us to offer competitive
prices. Our inability to maintain a competitive cost structure could have a
material adverse effect on our business, financial condition and results of
operations.
WE DEPEND ON A LIMITED NUMBER OF KEY CUSTOMERS, AND THE LOSS OF ANY SUCH
CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Our five largest individual customers, including members of a marketing group,
accounted for 52%, 50% and 43% of our consolidated net sales for 2005, 2004 and
2003, respectively. Two individual customers accounted for 18% and 15%,
respectively, of our 2005 consolidated net sales, 17% and 14%, respectively, of
our 2004 consolidated net sales, and 12% and 12%, respectively, of our 2003
consolidated net sales. The loss of one or more of these customers or, if any of
them ceases to acquire a significant product line, could have a materially
adverse impact on our business, financial condition and results of operations.
Also, we do not typically enter into long-term agreements with any of our
customers. Instead, we enter into a number of purchase order commitments with
our customers, based on their current or projected needs. We have in the past
and may in the future lose customers or lose a particular product line of a
customer due to the highly competitive conditions in the automotive aftermarket
industry, including pricing pressures. A decision by any significant customer,
whether motivated by competitive conditions, financial difficulties or
otherwise, to materially decrease the amount of products purchased from us, to
change their manner of doing business with us, or to stop doing business with
us, could have a material adverse effect on our business, financial condition
and results of operations.
OUR BUSINESS IS SEASONAL AND IS SUBJECT TO SUBSTANTIAL QUARTERLY FLUCTUATIONS,
WHICH IMPACT OUR QUARTERLY PERFORMANCE AND WORKING CAPITAL REQUIREMENTS.
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year and with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
and customer inventories. For example, a cool summer may lessen the demand for
our Temperature Control products, while a hot summer may increase such demand.
As a result of this seasonality and variability in demand of our Temperature
Control products, our working capital requirements peak near the end of the
second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by borrowing from our revolving credit facility.
WE MAY INCUR MATERIAL LOSSES AND SIGNIFICANT COSTS AS A RESULT OF
WARRANTY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
Our products are required to meet rigorous standards imposed by our customers
and our industry. 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 the event that there are material deficiencies or defects in
the design and manufacture of our products and/or installer error, the affected
products may be subject to warranty returns and/or product recalls. Although we
maintain a comprehensive quality control program, we cannot give any assurance
that our products will not suffer from defects or other deficiencies or that we
will not experience material warranty returns or product recalls in the future.
14
We accrue for warranty returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for warranty returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. We have in
the past incurred, and may in the future incur, material losses and significant
costs as a result of our customers returning products to us as a result of
warranty-related issues in excess of anticipated amounts. Deficiencies or
defects in our products in the future may result in warranty returns and product
recalls in excess of anticipated amounts and may have a material adverse effect
on our business, financial condition and results of operations.
OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF OVERSTOCK
INVENTORY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
We permit overstock returns of inventory that we allow customers to return to us
and that may be either new or non-defective or non-obsolete but that we believe
we can re-sell. Customers are generally limited to returning overstocked
inventory according to a specified percentage of their annual purchases from us.
In addition, a customer's annual allowance cannot be carried forward to the
upcoming year.
We accrue for overstock returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for overstock returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. To the
extent that overstocked returns are materially in excess of our projections, our
business, financial condition and results of operations may be materially
adversely affected.
OVER THE LONG TERM, OUR BUSINESS IS DEPENDENT ON THE AUTOMOTIVE INDUSTRY, AND
OUR FUTURE PERFORMANCE MAY BE MATERIALLY ADVERSELY AFFECTED BY PERSISTENT
DECLINES IN THE AUTOMOTIVE INDUSTRY OR CHANGES IN TECHNOLOGIES AND IMPROVEMENTS
IN THE QUALITY OF NEW VEHICLE PARTS.
Over the long term, our business is dependent upon the sales of automobiles
within the automotive industry, which creates the total number of vehicles
available for repair following the expiration of vehicle warranties. A
persistent decline in automotive sales and production over the long term would
likely affect sales to our aftermarket customers. Changes in automotive
technologies, such as vehicles powered by fuel cells or electricity, could also
negatively affect sales to our aftermarket customers. These factors could result
in less demand for our products thereby resulting in a decline in our results of
operations or a deterioration in our business and financial condition and may
have a material adverse effect on our long-term performance.
In addition, the size of the automobile replacement parts market depends, in
part, upon the growth in number of vehicles on the road, increase in average
vehicle age, increase in total miles driven per year, new and modified
environmental regulations, increase in pricing of new cars and new car quality
and related warranties. The automobile replacement parts market has been
negatively impacted by the fact that the quality of more recent automotive
vehicles and their component parts has improved, thereby lengthening the repair
cycle. Generally, if parts last longer, there will be less demand for our
products, and the average useful life of automobile parts has been steadily
increasing in recent years due to innovations in products and technology. These
factors could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE MATERIALLY ADVERSELY AFFECTED BY ASBESTOS CLAIMS ARISING FROM PRODUCTS
SOLD BY OUR FORMER BRAKE BUSINESS, AS WELL AS BY OTHER PRODUCT LIABILITY CLAIMS.
In 1986, we acquired a brake business, which we subsequently sold in March 1998.
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
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. We currently do not have insurance coverage for
the defense and indemnity costs associated with the claims we face.
15
Actuarial consultants with experience in assessing asbestos-related liabilities
conducted a study to estimate our potential claim liability as of August 31,
2005. The actuarial study estimated an undiscounted liability for settlement
payments, excluding legal costs, ranging from $25 to $51 million for the period
through 2049. Accordingly, based on the information contained in the actuarial
study and all other available information that we considered, we maintain a
reserve of $27.6 million for this liability. Legal costs, which are expensed as
incurred, are estimated to range from $16 to $20 million during the same period.
At December 31, 2005, approximately 4,500 cases were outstanding for which we
were responsible for any related liabilities. Since inception in September 2001
through February 28, 2006, the amounts paid for settled claims are approximately
$3.9 million. Although we settled a significant number of cases in early 2006, a
substantial increase in the number of new claims or increased settlement
payments or awards of damages could have a material adverse effect on our
business, financial condition and results of operations.
Given the uncertainties associated with projecting asbestos-related matters into
the future and other factors outside our control, we cannot give any assurance
that significant increases in the number of claims filed against us will not
occur, that asbestos-related damages or settlement awards will not exceed the
amount we have in reserve, or that additional provisions will not be required.
Management will continue to monitor the circumstances surrounding these
potential liabilities in determining whether additional reserves and provisions
may be necessary. We plan on performing a similar annual actuarial analysis
during the third quarter of each year for the foreseeable future.
In addition to asbestos-related claims, our product sales entail the risk of
involvement in other product liability actions. We maintain product liability
insurance coverage, but we cannot give any assurance that current or future
policy limits will be sufficient to cover all possible liabilities. Further, we
can give no assurance that adequate product liability insurance will continue to
be available to us in the future or that such insurance may be maintained at a
reasonable cost to us. In the event of a successful product liability claim
against us, a lack or insufficiency of insurance coverage could have a material
adverse effect on our business, financial condition and results of operations.
OUR SUBSTANTIAL INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL HEALTH.
We have a significant amount of indebtedness. As of December 31, 2005, our total
outstanding indebtedness was $248 million. We incurred $90 million of
indebtedness in July 1999 from the sale of our convertible debentures. We have
an existing revolving bank credit facility of $305 million with General Electric
Capital Corporation, as agent, and a syndicate of lenders, which we refer to
throughout this Report as our revolving credit facility. As of December 31,
2005, we had $142 million of outstanding indebtedness and approximately $52
million of availability under this revolving credit facility. Our substantial
indebtedness could:
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our ability to fund future working capital, capital
expenditures, research and development costs and other general
corporate requirements;
o limit our ability to pay future dividends;
o limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
o increase the amount of interest expense that we have to pay because
some of our borrowings are at variable rates of interest, which, if
interest rates increase, could result in a higher interest expense;
and
o limit, along with the financial and other restrictive covenants of
our indebtedness, among other things, our ability to borrow
additional funds.
16
In addition, we have granted the lenders under our revolving credit facility a
first priority security interest in substantially all of our currently owned and
future acquired personal property, real property (other than our Long Island
City facility) and other assets. We have also pledged shares of stock in our
subsidiaries to those lenders. In addition, our credit facility requires us to
meet specified financial ratios and limits our ability to enter into various
transactions. If we default on any of our indebtedness, or if we are unable to
obtain necessary liquidity, our business could be adversely affected.
WE MAY NOT BE ABLE TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE
OUR INDEBTEDNESS AND FUND OUR FUTURE OPERATIONS.
Our ability either to make payments on or to refinance our indebtedness, or to
fund planned capital expenditures and research and development efforts, will
depend on our ability to generate cash in the future. Our ability to generate
cash is in part subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our revolving credit
facility will be adequate to meet our future liquidity needs for at least the
next few years. Significant assumptions underlie this belief, including, among
other things, that there will be no material adverse developments in our
business, liquidity or capital requirements. If we are unable to service our
indebtedness, we will be forced to adopt an alternative strategy that may
include actions such as:
o reducing capital expenditures;
o reducing research and development efforts;
o selling assets;
o restructuring or refinancing our indebtedness; and
o seeking additional funding.
We cannot assure you that our business will generate sufficient cash flow from
operations, or that future borrowings will be available to us under our
revolving credit facility in amounts sufficient to enable us to pay the
principal and interest on our indebtedness or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness on or before
maturity. We cannot assure you that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all.
OUR BUSINESS IS DEPENDENT ON OUR MAINTAINING SATISFACTORY RELATIONSHIPS WITH
SUPPLIERS, AND THE LOSS OF SEVERAL MAJOR SUPPLIERS OF RAW MATERIALS OR KEY
COMPONENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
Our business depends on our relationships with suppliers of raw materials and
components that we use on our product lines and on our ability to purchase these
raw materials and key components at prices and on terms comparable to
similarly-situated companies. We purchase most materials in the U.S. open
market. Although we do not expect that the loss of any one supplier would have a
material adverse effect on us, the loss of several major suppliers would have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY INCUR LIABILITIES UNDER GOVERNMENT REGULATIONS AND POLICIES AND
ENVIRONMENTAL LAWS, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Domestic and foreign political developments and government regulations and
policies directly affect automotive consumer products in the United States and
abroad. Regulations and policies relating to over-the-highway vehicles include
standards established by the United States Department of Transportation for
motor vehicle safety and emissions. The modification of existing laws,
regulations or policies, or the adoption of new laws, regulations or policies,
could have a material adverse effect on our business, financial condition and
results of operations. Our failure to comply with these laws and regulations
could subject us to civil and criminal penalties.
17
Our operations and properties are also subject to a wide variety of increasingly
complex and stringent federal, state, local and international laws and
regulations, including those governing the use, storage, handling, generation,
treatment, emission, release, discharge and disposal of materials, substances
and wastes, the remediation of contaminated soil and groundwater and the health
and safety of employees. Such environmental laws, including but not limited to
those under the Comprehensive Environmental Response Compensation & Liability
Act, may impose joint and several liability and may apply to conditions at
properties presently or formerly owned or operated by an entity or its
predecessors, as well as to conditions at properties at which wastes or other
contamination attributable to an entity or its predecessors have been sent or
otherwise come to be located.
The nature of our operations exposes us to the risk of claims with respect to
such matters, and we can give no assurance that violations of such laws have not
occurred or will not occur or that material costs or liabilities will not be
incurred in connection with such claims. One of our facilities is currently
undergoing minor environmental remediation. The environmental remediation costs
at such facility are covered by an insurance policy of $3 million, which is
subject to a $1.5 million deductible; we have purchased additional environmental
insurance coverage in the amount of $2 million with a $0.1 million deductible
relating to such facility. We also maintain two $10 million environmental
policies to cover our existing U.S. facilities. Based upon our experience to
date, we believe that the future cost of compliance with existing environmental
laws, and liability for known environmental claims pursuant to such
environmental laws, will not give rise to additional significant expenditures or
liabilities that would be material to us. However, future events, such as new
information, changes in existing environmental laws or their interpretation, and
more vigorous enforcement policies of regulatory agencies, may have a material
adverse effect on our business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We have one unresolved comment from the Staff of the SEC, relating to the
disclosure of our internal control over financial reporting contained in our
Annual Report on Form 10-K for the year ended December 31, 2004 (the "2004 Form
10-K"). The Staff commented that our 2004 Form 10-K was materially deficient
because (1) management was unable to complete its assessment of our internal
control over financial reporting as of December 31, 2004 as required under
Section 404 of the Sarbanes-Oxley Act ("SOX 404") and (2) Grant Thornton, our
auditors, disclaimed an opinion on the effectiveness of our internal control
over financial reporting. We believe that the Staff's comment will be resolved
upon the filing of this Report, which includes an assessment by management that
our internal controls are effective as of December 31, 2005 and an opinion of
Grant Thornton agreeing with management's assessment of our internal controls.
See "Item 8. Financial Statements and Supplementary Data--Management's Report on
Internal Control Over Financial Reporting" and "--Report of Independent
Registered Public Accounting Firm--Internal Control Over Financial Reporting"
for further discussion.
18
ITEM 2. PROPERTIES
We maintain our executive offices and a manufacturing plant in Long Island City,
New York. The table below describes our principal physical properties.
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
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ENGINE MANAGEMENT
Orlando FL Manufacturing (Ignition) 50,640 2017
Mishawaka IN Manufacturing 153,070 Owned
Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned
Independence KS Manufacturing 273,390 Owned
Wilson NC Manufacturing (Ignition) 31,500 2008
Reno NV Distribution (Ignition) 67,000 Owned
Long Island City NY Administration and Manufacturing (Ignition) 294,000 Owned
Greenville SC Manufacturing (Ignition) 181,525 Owned
Disputanta VA Distribution (Ignition) 411,000 Owned
Fajardo Puerto Rico Manufacturing (Ignition) 113,900 2007
Hong Kong HK Manufacturing (Ignition) 21,350 2008
Reynosa Mexico Manufacturing (Wire) 62,500 2009
TEMPERATURE CONTROL
Corona CA Manufacturing and Distribution 78,200 2008
Lewisville TX Administration and Distribution 415,000 2009
Fort Worth TX Manufacturing and Distribution 204,000 Owned
Grapevine TX Manufacturing 180,000 Owned
St. Thomas Canada Manufacturing 40,000 Owned
Reynosa Mexico Remanufacturing (Compressors) 80,140 2009
EUROPE
Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned
Nottingham England Manufacturing (Ignition) 46,780 Owned
Wellingborough England Manufacturing (Wire) 18,500 2017
Strasbourg France Administration and Distribution 16,150 2008
Massa Italy Administration and Distribution 13,100 2008
OTHER
Mississauga Canada Administration and Distribution (Ignition, Wire, Temperature Control)
128,400 2016
Irving TX Training Center 13,400 2009
Nashville TN Subleased 677,000 2021
The real property that we own in Indiana, Kansas, Nevada, South Carolina,
Virginia and Texas is encumbered by a mortgage or deed of trust, as applicable,
in favor of General Electric Capital Corporation, as agent for our revolving
credit facility. In addition, the real property that we own in Long Island City,
New York is encumbered by a mortgage in favor of Wells Fargo Bank N.A., and the
real property we own in England is encumbered by a mortgage in favor of the
Royal Bank of Scotland.
19
ITEM 3. LEGAL PROCEEDINGS
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2005, approximately 4,500 cases were outstanding for which we
were responsible for any related liabilities. In early 2006, we settled a
significant number of cases. We expect the outstanding cases to increase
gradually due to recent legislation in certain states mandating minimum medical
criteria before a case can be heard. Since inception in September 2001 through
February 28, 2006, the amounts paid for settled claims are approximately $3.9
million. We do not have insurance coverage for the defense and indemnity costs
associated with these claims. See note 19 of the notes to consolidated financial
statements for further discussion.
On November 30, 2004, the Company was served with a summons and complaint in the
U.S. District Court for the Southern District of New York by The Coalition For A
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. In August 2005, we filed a
motion to dismiss the complaint, following which the plaintiff filed an amended
complaint dropping, among other things, all claims under the Sherman Act. The
remaining claims allege violations of the Robinson-Patman Act. Motions to
dismiss those claims were filed by us in February 2006, and we are awaiting a
decision from the court regarding these motions. Although we cannot predict the
ultimate outcome of this case or estimate the range of any potential loss that
may be incurred in the litigation, we believe that the lawsuit is without merit,
deny all of the plaintiff's allegations of wrongdoing and believe we have
meritorious defenses to the plaintiff's claims. We intend to defend vigorously
this lawsuit.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades publicly on the New York Stock Exchange under the
trading symbol "SMP." The following table shows the high and low sales prices
per share of our common stock as reported by the New York Stock Exchange and the
dividends declared per share for the periods indicated:
HIGH LOW DIVIDEND
---- --- --------
FISCAL YEAR ENDED DECEMBER 31, 2005
First Quarter................................. $16.00 $11.15 $0.09
Second Quarter................................ 13.60 8.81 0.09
Third Quarter................................. 14.17 7.70 0.09
Fourth Quarter................................ 9.55 7.88 0.09
FISCAL YEAR ENDED DECEMBER 31, 2004
First Quarter................................. $15.85 $12.00 $0.09
Second Quarter................................ 16.80 12.99 0.09
Third Quarter................................. 15.56 13.37 0.09
Fourth Quarter................................ 16.48 14.50 0.09
The last reported sale price of our common stock on the NYSE on February 28,
2006 was $10.61 per share. As of February 28, 2006, there were 427 holders of
record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our
board of directors and depend on our profitability, financial condition, capital
needs, future prospects, and other factors deemed relevant by our board. Our
current policy is to pay dividends on a quarterly basis. Our revolving credit
facility permits dividends and distributions by us provided specific conditions
are met. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a further
discussion of our revolving credit facility.
In December 2005, we entered into a Repurchase and Prepayment Agreement with
Dana Corporation, in which among other things we repurchased 1,378,760 shares of
our common stock at a repurchase price of $8.63 per share (or an aggregate
repurchase price of $11,898,699). The repurchased shares were initially issued
to Dana in connection with our acquisition of Dana's engine management business
in June 2003.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the five
years ended December 31, 2005. This selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the notes
thereto included elsewhere in this Form 10-K.
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales (1) ...................................... $830,413 $824,283 $678,783 $598,437 $591,652
Gross profit (1) ................................... 185,980 194,993 174,772 157,544 139,055
Goodwill impairment charge (3) ..................... -- 6,429 -- 3,334 --
Operating income (loss) ............................ 14,082 (1,737) 15,815 25,068 15,123
(Loss) earnings from continuing operations (2) ..... (1,770) (8,907) 224 6,091 (2,485)
Loss from discontinued operation, net of tax ....... (1,775) (3,909) (1,742) (18,297) --
Cumulative effect of accounting change, net
of tax (3)(4) ................................... -- (1,564) -- (18,350) --
Net loss (5) ....................................... (3,545) (14,380) (1,518) (30,556) (2,485)
PER SHARE DATA:
(Loss) earnings from continuing operations:
Basic ........................................ $ (0.09) $ (0.46) $ 0.01 $ 0.51 $ (0.21)
Diluted ...................................... (0.09) (0.46) 0.01 0.51 (0.21)
Net loss per common share:
Basic ........................................ (0.18) (0.74) (0.10) (2.57) (0.21)
Diluted ...................................... (0.18) (0.74) (0.10) (2.54) (0.21)
Cash dividends per common share .................... 0.36 0.36 0.36 0.36 0.36
OTHER DATA:
Depreciation and amortization ...................... $ 17,356 $ 19,013 $ 17,092 $ 16,128 $ 18,909
Capital expenditures ............................... 9,957 9,774 8,926 7,598 13,740
Dividends .......................................... 7,024 6,955 5,615 4,290 4,236
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents .......................... $ 14,046 $ 14,934 $ 19,647 $ 9,690 $ 7,496
Working capital .................................... 169,768 194,760 191,333 140,683 121,566
Total assets ....................................... 653,044 656,569 694,525 490,758 509,429
Total debt ......................................... 248,327 224,186 217,810 176,917 205,925
Long-term debt (excluding current portion) ......... 98,549 114,236 114,757 93,191 93,276
Stockholders' equity ............................... 185,707 207,312 226,041 153,881 185,687
(1) We adopted the guidelines of the Emerging Issues Task Force (EITF)
entitled "Accounting for Certain Sales Incentives" and "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products," on January 1, 2003. These guidelines address when
sales incentives and discounts should be recognized and the accounting for
certain costs incurred by a vendor on behalf of a customer, as well as
where the related revenues and expenses should be classified in the
financial statements. Net sales and gross profit amounts for the period
prior to 2002 included in this Report have been reclassified to conform to
our 2002 presentation. As a result, certain costs of approximately $30.4
million have been reclassified for December 31, 2001.
22
(2) We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," on January
1, 2003. The new guidance eliminates the automatic classification of gain
or loss on extinguishment of debt as an extraordinary item of income and
requires that such gain or loss be evaluated for extraordinary
classification under the criteria of Accounting Principles Board ("APB")
No. 30, Reporting Results of Operations. As a result, the extraordinary
loss on the early extinguishment of debt of approximately $2.8 million has
been reclassified to interest expense for December 31, 2001.
(3) We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS
No. 142") on January 1, 2002. The new guidance replaced the amortization
of goodwill with periodic assessments of the fair value of goodwill. Our
initial impairment test, performed as of January 1, 2002, indicated that
the carrying amounts of some of our reporting units exceeded the
corresponding fair values, which were determined based on the discounted
estimated future cash flows of the reporting units, the Company's weighted
average cost of capital and market multiples. As a result, we recorded an
impairment loss on goodwill as a cumulative effect of accounting change of
$18.3 million during the first quarter of 2002. The impairment loss
related to our European Segment and Temperature Control Segment for which
we recorded a charge of $10.9 million and $7.4 million, respectively. We
completed our annual impairment test of goodwill as of December 31, 2002
and after consideration to 2002 losses and budgeted 2003 losses, we
recorded an impairment loss of $3.3 million associated with the Engine
Management reporting unit of our European Segment. Our annual impairment
test of goodwill as of December 31, 2004, indicated that the carrying
amounts of two of our reporting units exceeded the corresponding fair
values. As a result, we recorded an impairment loss on goodwill of $6.4
million during the fourth quarter of 2004. The impairment loss related to
our European Segment and Temperature Control Segment for which we recorded
a charge of $1.6 million and $4.8 million, respectively.
(4) New customer acquisition costs refer to arrangements pursuant to which we
incur change-over-costs to induce a new or existing customer to switch
from a competitor's brand. In addition, change-over-costs include the
costs related to removing the new customer's inventory and replacing it
with 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 $1.6
million, net of tax effects, and recorded the accounting change as if it
had taken effect on October 1, 2004.
(5) We recorded an after tax charge of $1.8 million, $3.9 million and $1.7
million as a loss from discontinued operation to account for legal
expenses and potential costs associated with our asbestos-related
liability for the years ended December 31, 2005, 2004 and 2003,
respectively. Such costs were also separately disclosed in the Operating
Activity section of the Consolidated Statements of Cash Flows for those
same years.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto. This discussion summarizes the
significant factors affecting our results of operations and the financial
condition of our business during each of the fiscal years in the three year
period ended December 31, 2005.
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"). Our plan was to restructure and to
integrate the DEM business into our existing Engine Management business, which
we have essentially completed. We continue to review our operations and
implement plans to continue to achieve cost savings and operating efficiencies.
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. On December 29, 2005,
we entered into a Repurchase and Prepayment Agreement with Dana, in which we
repurchased the 1,378,760 shares of our common stock at a repurchase price of
$8.63 per share (or an aggregate approximate repurchase price of $11.9 million)
and prepaid at a discount the $15.1 million unsecured promissory note plus
accrued and unpaid interest for an aggregate approximate amount of $14.5
million. We recognized the discount of $1.1 million as a gain on the repayment
of the note as well as the unrecognized deferred interest expense thereon of
$0.2 million as income in 2005.
In connection with the DEM 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. We have currently estimated total restructuring costs of $32.5
million, which was reduced by $1.2 million from the prior year due to lower
actual costs. Such amounts were recognized as liabilities assumed in the
acquisition and included in the allocation of the cost to acquire DEM. The
reduction of $1.2 million has been applied as a reduction of goodwill
established on the acquisition of DEM.
Based on our most recent estimates of the total restructuring costs,
approximately $15.7 million relates to work force reductions and employee
termination benefits. This amount primarily represents 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 December 31,
2005, the remaining reserve balance was $0.8 million. We expect to pay most of
this amount for work force reductions in 2006 and 2007. Termination benefits of
$2.3 million and $9.4 million were paid in 2005 and 2004, respectively. The
restructuring costs also included approximately $18 million associated with
exiting certain activities, primarily related to lease and contract termination
costs. Exit costs of $3.2 million and $2.9 million were paid in 2005 and 2004,
respectively, leaving the exit reserve balance at $11.8 million as of December
31, 2005.
For additional information about our business, strategy and competitive
environment, see Item 1, "Business."
24
SEASONALITY. Historically, our operating results have fluctuated by quarter,
with the greatest sales occurring in the second and third quarters of the year
and revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
and customer inventories. For example, a cool summer may lessen the demand for
our Temperature Control products, while a hot summer may increase such demand.
As a result of this seasonality and variability in demand of our Temperature
Control products, our working capital requirements peak near the end of the
second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by borrowing from our revolving credit facility.
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 are
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.
COMPARISON OF FISCAL YEARS 2005 AND 2004
SALES. On a consolidated basis, net sales for 2005 were $830.4 million, an
increase of $6.1 million, or 0.7%, compared to $824.3 million in 2004. The
increase in net sales was primarily in our Temperature Control Segment which was
driven by a very hot summer, with our Europe Segment and Canadian business
experiencing increases as well. Our Engine Management Segment net sales,
however, decreased by $15.8 million or 2.8% as compared to 2004 partly due to
price decreases initiated early in 2005 to match OE competitor prices and
negative trends in product mix and distribution channel mix.
25
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 22.4% in 2005 compared to 23.7% in 2004. The margin decrease was
primarily attributable to the Engine Management Segment where the margin
declined to 20.1% from 24.0% in the prior year. The margin in Engine Management
was 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 DEM inventories and negative trends in product and distribution channel mix.
We expect Engine Management margins to improve going forward due to the benefit
of price increases already implemented at the end of 2005 and into early 2006
and improved material costs and other operational improvements. In our
Temperature Control Segment, margins increased to 23.9% from 19.3% in the prior
year due to increased sales volumes which improved cost utilization, and lower
sourced material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) decreased by $12.3 million to $166.6 million in
2005, compared to $178.9 million in 2004. This reduction was primarily due to
integration related savings in our Engine Management Segment, namely for
distribution expenses which declined $8.5 million following the rationalization
of the acquired DEM facilities. In 2005, we also made substantial changes to our
retiree medical program, which resulted in a reduction of $5.3 million to FAS
106 post-retirement expenses, which included a $3.8 million curtailment gain. In
accordance with SFAS No. 106 Employers' Accounting for Post-Retirement Benefits
Other Than Pension, we recognized a curtailment gain of $3.8 million 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. As a percentage of net sales, SG&A expenses decreased to
20.1% in 2005 from 21.7% in 2004.
GOODWILL. Goodwill is not amortized but, instead, is subject to an annual review
for potential impairment. We completed our annual impairment test of goodwill as
of December 31, 2005 and determined that our goodwill was not impaired. Goodwill
related to the DEM acquisition was reduced $1.2 in line with our reduction to
the DEM restructuring accrual reduction due to an improvement to our estimate of
severance costs to be paid. Our annual impairment test of goodwill as of
December 31, 2004 indicated that the carrying amounts of two of our reporting
units exceeded the corresponding fair values, which were determined based on the
discounted estimated future cash flows of the reporting units, the Company's
weighted average cost of capital and market multiples. As a result, we recorded
an impairment loss on goodwill of $6.4 million during the fourth quarter of
2004. The impairment loss related to our Temperature Control and European
Segments for which we recorded a charge of $4.8 million and $1.6 million,
respectively. As of December 31, 2005, there only remained goodwill in our
Engine Management Segment. We will continue to test for impairment of our
goodwill at least annually in the future.
RESTRUCTURING EXPENSES. Restructuring includes restructuring and integration
expenses. Restructuring and integration expenses in 2005 were $5.3 million, with
$1.4 million for restructuring and $3.9 million for integration, compared to
$11.4 million in 2004 which related entirely to restructuring expenses. Of the
integration expenses in 2005, $3.3 million was primarily for non-cash charges
from an asset impairment in our Temperature Control business related to a
strategic decision to outsource certain products that we previously
manufactured. The restructuring expense of $1.4 million in 2005 primarily
relates to the DEM restructuring, for which we incurred $10.7 million in 2004.
The DEM integration is essentially complete. However, we continue to rationalize
our capacity to further reduce our production costs.
OPERATING INCOME (LOSS). Operating income increased by $15.8 million to $14.1
million in 2005, compared to an operating loss of $1.7 million in 2004. The
increase was due to higher sales and expense reductions primarily from the SFAS
106 curtailment gain, reduction in restructuring charges and no goodwill
impairment expense in 2005, partly offset by lower gross margins.
OTHER INCOME, NET. Other income, net decreased by $0.2 million to $2.6 million
in 2005, compared to $2.8 million in 2004. The decrease was due in part to
exchange losses related to the Canadian dollar offset in part by the recognition
of the discount of $1.1 million as a gain on the repayment of the promissory
note held by Dana Corporation as well as the unrecognized deferred interest
expense thereon of $0.2 million in 2005.
26
INTEREST EXPENSE. Interest expense increased by $3.4 million to $17.1 million in
2005 compared to $13.7 million in 2004 due to higher borrowings and higher
average borrowing rates.
INCOME TAX PROVISION. The income tax provision was $1.4 million in 2005 compared
to a recovery of $3.7 million in 2004. The increase in the provision was due to
reduced consolidated losses, a decrease to the state tax rate applicable to
deferred tax assets, as well as an increase to the valuation allowance to
account for the uncertainty regarding the ultimate utilization of the Company's
U.S. capital loss, U.S. foreign tax credit carryovers, state tax carryovers,
foreign net operating loss carry forwards, and certain long lived deferred tax
assets stemming mainly from accrued asbestos liabilities and post-retirement
benefit obligations. The increase was partially offset by 2004 taxes on the
Canadian deemed dividend, which did not reoccur in 2005. Our foreign income tax
relates primarily to our profitable Canadian and Hong Kong operations.
Deferred tax assets, net of a valuation allowance of $26.1 million and deferred
tax credits of $17.3 million were $40.6 million as of December 31, 2005.
Approximately $110 million of taxable income will need to be generated to
realize the deferred tax asset. We believe it is more likely than not that we
will be able to generate this level of taxable income within 6 years based on
the following assumptions: that our Puerto Rico profits will create US taxable
income following the expiration of Section 936 of the Internal Revenue Code and
that our US based Engine Management Segment will gradually return to the levels
of profitability enjoyed prior to the DEM acquisition. Our US net operating
losses carried forward of $37.3 million expire between 2021 and 2025, and we
also have alternative minimum tax credit carry forwards of approximately $6
million for which there is no expiration date. All other tax attributes have no
carry forward limitation.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation, net of
taxes, in 2005 reflects $1.8 million associated with asbestos-related legal
expenses as compared to $3.9 million in 2004 which included a future litigation
claim provision in addition to legal expenses. As discussed more fully in note
19 of the notes to our consolidated financial statements, we are responsible for
certain future liabilities relating to alleged exposure to asbestos containing
products.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. As discussed in note 3 of the notes to
our consolidated financial statements, effective October 1, 2004 we reflected
new customer acquisition costs as a reduction to revenue when incurred. In 2004,
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.
COMPARISON OF FISCAL YEARS 2004 AND 2003
SALES. On a consolidated basis, net sales for 2004 were $824.3 million, an
increase of $145.5 million, or 21.4%, compared to $678.8 million in 2003. The
increase in net sales was primarily in our Engine Management Segment and our
Canadian distribution business. Engine Management net sales increased to $562.8
million (an increase of $148.4 million) or 35.8% in 2004 as compared to 2003.
The acquisition of DEM added approximately $122 million of incremental net sales
in the first half of 2004 with no sales in the comparable period in 2003.
Excluding the impact of the first half DEM net sales, the balance of Engine
Management sales increased $26.4 million or 6.4%. The $8.2 million increase in
sales in our Canadian business was related to the acquisition of the DEM
distribution business in February 2004. Temperature Control net sales decreased
to $210 million (a decrease of $9.5 million) or 4.3% in 2004 as compared to
2003. The decrease in Temperature Control net sales was primarily due to the
very cool and wet weather conditions existing in the spring and early summer.
In addition, in the fourth quarter of 2004, we determined that it was a
preferable accounting method to reflect new customer acquisition costs as a
reduction to revenue when incurred instead of as we initially recorded it as a
prepaid asset and the related expense which was recognized ratably over a
12-month period as an offset to sales. Accordingly, 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 accounting
change as if it had taken effect on October 1, 2004.
27
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased to 23.7% in 2004 compared to 25.7% in 2003. The margin decrease was
primarily related to a number of significant one-time related items from the
final DEM integration and lower net sales in our Temperature Control Segment.
The Engine Management gross margins were negatively impacted in the fourth
quarter of 2004 primarily related to (1) the underabsorption of factory overhead
expenses of approximately $3 million due to closing manufacturing facilities for
physical inventories and to reduce the "bridge inventories" which had been built
to cover the plant closings, (2) unfavorable physical inventory adjustments of
approximately $3 million primarily related to the scrapping of inventories in
facilities being closed, and (3) an inventory writedown of approximately $5
million related to the inventory turnover for products sourced on the outside at
substantial premiums to our manufactured costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) increased by $25.6 million to $178.9 million in
2004, compared to $153.3 million in 2003. This increase was primarily due to the
$145.5 million sales increase, as discussed above, and an increase of $2.4
million in discount fees associated with the sale of customer receivables (see
note 4 of the notes to our consolidated financial statements). As a percentage
of net sales, selling, general and administrative expenses decreased to 21.7% in
2004 from 22.6% in 2003. We anticipate further savings in 2005 as we have
completed the DEM integration and merged operations.
GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is no longer
amortized but, instead, is subject to an annual review for potential impairment.
Our annual impairment test of goodwill as of December 31, 2004, indicated that
the carrying amounts of two of our reporting units exceeded the corresponding
fair values, which were determined based on the discounted estimated future cash
flows of the reporting units, the companies weighted average cost of capital and
market multiples. As a result, we recorded an impairment loss on goodwill of
$6.4 million during the fourth quarter of 2004. The impairment loss related to
our Temperature Control and European Segment for which we recorded a charge of
$4.8 million and $1.6 million, respectively.
RESTRUCTURING EXPENSES. Restructuring expenses in 2004 were $11.4 million,
primarily related to the DEM integration, compared to $5.7 million in 2003,
which primarily related to expenses associated with the DEM integration and with
the divestiture of a product line within our European Segment.
OPERATING INCOME (LOSS). Operating income decreased by $17.5 million to an
operating loss of $1.7 million in 2004, compared to operating income of $15.8
million in 2003. The decrease was primarily due to fourth quarter charges
impacting the Engine Management gross margin, lower Temperature Control sales,
goodwill impairment charge and DEM integration expenses.
OTHER INCOME, NET. Other income, net, increased to $2.9 million in 2004 compared
to an expense of $0.5 million in 2003. The increase was primarily due to
increased earnings from joint ventures and foreign exchange transactions.
INTEREST EXPENSE. Interest expense decreased by $0.2 million to $13.7 million in
2004 compared to $13.9 million in 2003.
INCOME TAX PROVISION. The effective tax rate for continuing operations decreased
from 84.3% in 2003 to 29.2% in 2004. The 2003 effective rate was impacted by
various tax jurisdictions we do business in and no tax benefits recorded on
losses in Europe.
LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation, net of
taxes, in 2004 reflects $3.9 million associated with asbestos-related provisions
and legal expenses as compared to $1.7 million of legal expenses in 2003. As
discussed more fully in note 19 of the notes to the consolidated financial
statements, we are responsible for certain future liabilities relating to
alleged exposure to asbestos containing products.
28
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. As discussed above, we reflect new
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. See note 3 of the notes to the consolidated financial statements for a
further discussion.
IMPACT OF INFLATION
Although inflation is a concern, management believes it will be able to continue
to minimize any adverse effect of inflation on earnings through cost reduction
programs, including the sale of manufactured products, and, where competitive
situations permit, selling price increases. Recently, prices of steel and other
commodities have risen. These increases did not have a material impact on our
consolidated results, as we are not dependent on any single commodity, however,
there can be no assurance over the long-term that increases in commodity prices
will not materially effect our business or results of operations.
FUTURE RESULTS OF OPERATIONS
We continue to face competitive pressures. In order to sell at competitive
prices while maintaining profit margins, we are continuing to focus on overhead
and cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the year ended December 31, 2005, cash used in
operating activities amounted to $2.2 million, compared to cash provided by
operating activities of $3.5 million in 2004 and $31.5 million in 2003.
The cash decrease in 2005 was primarily attributable to an increase in accounts
receivable partly offset by a decrease in inventories and lower losses from
continuing operations. The increase in receivables is primarily due to our
decision to exit an accounts receivable draft program, which allowed the early
monetizing of negotiable drafts, at a discount which was recorded as SG&A
expenses.
The reduction in 2004 was primarily attributable to lower earnings from
continuing operations and restructuring charges incurred offset by a decrease in
accounts receivable, as compared to 2003.
For the year ended December 31, 2005, net inventory decreased by approximately
$15.3 million. Inventory turnover was 2.6x in 2005, 2.5x in 2004, and 2.2x in
2003.
INVESTING ACTIVITIES. Cash used in investing activities was $7.8 million for the
year ended December 31, 2005, compared to $10.9 million in 2004 and $101.9
million in 2003. The decrease is primarily due to the payments related to the
DEM acquisition in previous years.
The decrease in 2004 as compared to 2003 was primarily due to the payment for
the acquisition of DEM on June 30, 2003. During 2004, payments for acquisitions
include DEM in Canada and the final cash payment for the DEM acquisition.
Capital expenditures for the three most recent fiscal years ended December 31
totaled $10 million in 2005, $9.8 million in 2004, and $8.9 million in 2003.
FINANCING ACTIVITIES. Cash provided by financing activities was $9.7 million for
the year ended December 31, 2005, $1.2 million for 2004 and $75 million in 2003.
The increase in 2005 was primarily attributable to increased borrowings under
our revolving credit facility, part of which was used to fund the repurchase of
our common stock and the prepayment of a promissory note held by Dana
Corporation. The decrease in 2004 was primarily due to the financing related to
the acquisition of DEM on June 30, 2003.
29
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 with General Electric Capital Corporation 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. 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. As of December 31, 2005, we had $142 million of
outstanding indebtedness and approximately $52 million of availability under our
revolving credit facility.
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, financial covenants requiring us, on a
consolidated basis: (1) to maintain specified levels of fixed charge coverage at
the end of each fiscal quarter (rolling twelve months) through 2008; and (2) to
limit capital expenditure levels for each fiscal year through 2008. At March 31,
2005, we were not in compliance with the fixed charge coverage ratio contained
in our revolving credit facility and, 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. We received waivers of compliance of such
covenants for the applicable periods.
During 2005, we amended our revolving credit facility on three occasions 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; (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; (5) the removal
of the limit on our ability to redeem the current drafts prior to the maturity
date; and (6) the prohibition of accepting drafts under our customer draft
programs after November 18, 2005.
In December 2005, we further amended our revolving credit facility to provide,
among other things, for the following: (1) the lenders' consent to the Company's
repurchase of shares of Company common stock held by Dana Corporation and the
Company's prepayment of an unsecured promissory note held by Dana; (2) the
lenders' consent for a $7 million term loan issued to the Company's Canadian
subsidiary by affiliates of the lenders; and (3) the extension of the
termination date of our revolving credit facility from February 7, 2008 to
December 31, 2008.
In December 2005, our Canadian subsidiary entered into a credit agreement with
GE Canada Finance Holding Company, for itself and as agent for the lenders, and
GECC Capital Markets, Inc., as lead arranger and book runner. The credit
agreement provides for, among other things, a $7 million term loan, which term
loan is guaranteed and secured by us and certain of our wholly-owned
subsidiaries and which term loan is coterminous with the term of our revolving
credit facility. The $7 million term loan is part of the $305 million available
for borrowing under our revolving credit facility.
In addition, in order to facilitate the aggregate financing of the DEM
acquisition in June 2003, we completed a public equity offering of 5,750,000
shares of our common stock for net proceeds of approximately $55.7 million and
also issued to Dana Corporation 1,378,760 shares of our common stock valued at
approximately $15.1 million.
30
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 was December 31, 2008.
On December 29, 2005, we entered an agreement with Dana, in which we repurchased
the 1,378,760 shares of our common stock at a repurchase price of $8.63 per
share (or an aggregate approximate repurchase price of $11.9 million) and
prepaid at a discount the $15.1 million unsecured promissory note plus accrued
and unpaid interest for an aggregate approximate amount of $14.5 million.
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. 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.
In October 2003, we entered into an 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
rate of 6.75%, payable semi-annually. The debentures are convertible into
2,796,120 shares of our common stock, and mature on July 15, 2009. 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 December 31, 2005, we have Board authorization to repurchase additional
shares at a maximum cost of $1.7 million. During 2005, other than the repurchase
of our common stock held by Dana as discussed above, we did not repurchase any
shares of our common stock either in the open market or otherwise.
The following is a summary of our contractual commitments as of December 31,
2005:
(IN THOUSANDS) 2006 2007 2008 2009 2010 2011-2015 TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
Principal payments of long term
debt ......................... $ 542 $ 555 $ 512 $ 90,530 $ 560 $ 6,392 $ 99,091
Operating leases .................. 8,163 7,061 5,872 4,462 2,397 21,603 49,558
Interest rate swap agreements .....
(496) -- -- -- -- -- (496)
Post-employee retirement
benefits ..................... 970 1,069 1,536 1,655 1,768 10,849 17,847
Severance payments related
to integration ............... 396 413 -- -- -- -- 809
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total commitments ....... $ 9,575 $ 9,098 $ 7,920 $ 96,647 $ 4,725 $ 38,844 $ 166,809
========== ========== ========== ========== ========== ========== ==========
31
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. You should be aware that preparation of our consolidated annual and
quarterly financial statements 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. For some of our sales of remanufactured
products, we also charge our customers a deposit for the return of a used core
component which we can use in our future remanufacturing activities. Such
deposit is not recognized as revenue but rather carried as a core liability. The
liability is extinguished when a core is actually returned to us. We estimate
and record provisions for cash discounts, quantity rebates, sales returns and
warranties in the period the sale is recorded, based upon our prior experience
and current trends. As described below, significant management judgments and
estimates must be made and used in estimating sales returns and allowances
relating to revenue recognized in any accounting period.
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost
is 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.
We also evaluate inventories on a regular basis to identify inventory on hand
that may be obsolete or in excess of current and future projected market demand.
For inventory deemed to be obsolete, we provide a reserve on the full value of
the inventory. Inventory that is in excess of current and projected use is
reduced by an allowance to a level that approximates our estimate of future
demand.
We use cores (used parts) in our remanufacturing processes for air conditioning
compressors. The production of air conditioning compressors involves the
rebuilding of used cores, which we acquire either in outright purchases from
used parts brokers, or from returns pursuant to an exchange program with
customers. Under such exchange programs, we reduce our inventory, through a
charge to cost of sales, when we sell a finished good compressor, and put back
to inventory at standard cost through a credit to cost of sales the used core
exchanged when it is actually received from the customer.
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
Management must make estimates of potential future product returns related to
current period product revenue. Management analyzes historical returns, current
economic trends, and changes in customer demand when evaluating the adequacy of
the sales returns and other allowances. Significant management judgments and
estimates must be made and used in connection with establishing the sales
returns and other allowances in any accounting period. At December 31, 2005, the
allowance for sales returns was $22.3 million. Similarly, 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 December 31, 2005, the allowance for
doubtful accounts and for discounts was $9.6 million.
32
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS.
New customer acquisition costs refer to arrangements pursuant to which we incur
change-over-costs to induce a new customer to switch from a competitor's brand.
In addition, change-over-costs include the costs related to removing the new
customer's inventory and replacing it with 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 2004, 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 December 31, 2005, we
had a valuation allowance of $26.1 million, due to uncertainties related to our
ability to utilize some of our deferred tax assets. The valuation allowance is
based on our estimates of taxable income by jurisdiction in which we operate and
the period over which our deferred tax assets will be recoverable.
In the event that actual results differ from these estimates, or we adjust these
estimates in future periods, we may need to establish an additional valuation
allowance which could materially impact our 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: (a) significant underperformance relative to
expected historical or projected future operating results; (b) significant
changes in the manner of our use of the acquired assets or the strategy for our
overall business; and (c) significant negative industry or economic trends. 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 POST-RETIREMENT MEDICAL BENEFITS. Each year, we calculate the
costs of providing retiree benefits under the provisions of SFAS 87, Employers'
Accounting for Pensions, and SFAS 106, Employers' Accounting for Post-retirement
Benefits Other than Pensions. The key assumptions used in making these
calculations are disclosed in notes 13 and 14 of the notes to our consolidated
financial statements. 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 FASB Staff Position ("FSP") No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," 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, in September 2005 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.
33
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 $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 are estimated to range from $16 to $20 million during the
same period. We plan on performing a similar 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.
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 FSP No. FAS 106-2. 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 decreased 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.
34
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. 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 123R. SAB 107 contains interpretive guidance related to the interaction
between SFAS 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.
We have adopted SFAS 123R effective January 1, 2006 using the Black-Scholes
option pricing model under the modified prospective application method. Under
this method, SFAS 123R is applied to new awards and to awards modified,
repurchased or canceled after the effective date. Additionally, compensation
cost for the portion of the awards for which the requisite service has not been
rendered (such as unvested options) that are outstanding as of the date of
adoption shall be recognized as the remaining requisite services are rendered.
The compensation cost relating to unvested awards at the date of adoption shall
be based on the fair value at the date of grant of those awards as calculated
for pro forma disclosures under the original SFAS No. 123. We do not expect that
the initial adoption of SFAS 123R will have a significant impact on our
consolidated results of operations and (loss) earnings per share as we expect
that it will impact our financial results in a manner similar to our pro forma
disclosure in note 1 to the notes of our consolidated financial statements.
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.
35
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
half of 2006.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
EXCHANGE RATE RISK
We have exchange rate exposure primarily with respect to the Canadian dollar,
the British pound, the Euro, the Japanese Yen and the Hong Kong dollar. Based on
our net losses in 2005, the portion of our consolidated results 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.
INTEREST RATE RISK
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.
In October 2003, we entered into an 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. If, at any time, the swap
is determined to be ineffective, in whole or in part, due to changes in the
interest rate swap agreement, the fair value of the portion of the interest rate
swap determined to be ineffective will be recognized as gain or loss in the
statement of operations for the applicable period.
At December 31, 2005, we had approximately $248.3 million in loans and financing
outstanding, of which approximately $99.1 million bear interest at fixed
interest rates and approximately $149.2 million bear interest at variable rates
of interest. We invest our excess cash in highly liquid short-term investments.
Our percentage of variable rate debt to total debt was 60% and 49% at December
31, 2005 and 2004, respectively. Depending upon the level of borrowings under
our revolving credit facility and our excess cash, the effect of a hypothetical,
instantaneous and unfavorable change of 100 basis points in the interest rate
may have approximately $1.6 million negative impact on our earnings or cash
flows.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
--------
Management's Report on Internal Control over Financial Reporting...........38
Report of Independent Registered Public Accounting Firm--Internal
Control Over Financial Reporting (Grant Thornton LLP)...................40
Report of Independent Registered Public Accounting Firm--Consolidated
Financial Statements (Grant Thornton LLP)................................42
Report of Independent Registered Public Accounting Firm--Consolidated
Financial Statements (KPMG LLP)..........................................43
Consolidated Statements of Operations for the years ended December 31,
2005, 2004 and 2003......................................................44
Consolidated Balance Sheets as of December 31, 2005 and 2004...............45
Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003 .....................................................46
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2005, 2004 and 2003.............................47
Notes to Consolidated Financial Statements.................................48
37
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Stockholders
Standard Motor Products, Inc.:
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of
the Exchange Act). Our internal control system was designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Because of these inherent limitations, internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and presentation, and may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
We assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2005. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on our
assessment using those criteria, we concluded that, as of December 31, 2005, our
internal control over financial reporting is effective.
Our independent registered public accounting firm, Grant Thornton LLP, has
audited our consolidated financial statements for 2005 and has issued an
attestation report concurring with management's assessment of our internal
control over financial reporting. Grant Thornton's report appears on the
following pages of this "Item 8. Financial Statements and Supplementary Data."
REMEDIATION OF PRIOR YEAR MATERIAL WEAKNESSES. A material weakness is a
significant deficiency (as defined in PCAOB Auditing Standard No. 2), or
combination of significant deficiencies, that results in there being more than a
remote likelihood that a material misstatement in financial statements will not
be prevented or detected on a timely basis by employees in the normal course of
their work.
As of December 31, 2004, we had identified certain material weaknesses in our
internal controls, relating to (a) insufficient personnel resources within the
accounting and financial reporting function, (b) deficiencies in our information
technology function which, when considered in the aggregate, constituted a
material weakness over financial reporting, and (c) deficiencies in the analysis
and reconciliation of general ledger accounts which were indicative of a
material weakness in controls over closing procedures. However, these material
weaknesses did not have an effect on our reported financial results. We
disclosed these material weaknesses in each of the first three quarters of 2005
and took steps to remediate these material weaknesses throughout 2005.
In 2005, we took various actions to strengthen our internal control over
financial reporting beyond what has existed in prior years. We remediated the
material weaknesses in our internal control over financial reporting by taking
the following actions:
(1) We hired additional senior level accounting staff, including a
Corporate Controller/Chief Accounting Officer, and re-allocated
resources to our accounting and finance department to strengthen our
accounting function, particularly in our Engine Management division.
In addition, we hired a Financial Compliance Manager to help drive
our Sarbanes-Oxley Act compliance efforts.
(2) We utilized an independent third party consulting firm to assist us
with our preparation, documentation and testing of our compliance
efforts with Section 404 of the Sarbanes-Oxley Act.
38
(3) We strengthened our documentation and established rigorous
procedures relating to controls of our key accounts.
(4) We improved our IT function by:
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 user access, application
access, 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.
With the implementation of the above measures, we believe that we have
significantly improved our internal control over financial reporting. We have
therefore concluded that the above-referenced material weaknesses in our
internal control over financial reporting have been fully corrected as of
December 31, 2005. However, we cannot assure you that neither we nor our
independent auditors will in the future identify further material weaknesses in
our internal control over financial reporting that we have not discovered to
date.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
INTERNAL CONTROL OVER REPORTING
The Board of Directors and Shareholders
Standard Motor Products, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report On Internal Control Over Financial Reporting, that Standard
Motor Products, Inc. (a New York corporation) maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Standard Motor
Products, Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Standard Motor Products, Inc.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on the COSO criteria.
40
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Standard Motor Products, Inc. as of December 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2005, and our report
dated March 15, 2006 expressed an unqualified opinion on those consolidated
financial statements.
GRANT THORNTON LLP
New York, New York
March 15, 2006
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited the accompanying consolidated balance sheets of Standard Motor
Products, Inc. and Subsidiaries (a New York corporation) as of December 31, 2005
and 2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Standard Motor
Products, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 1 to the financial statements for the year ended December
31, 2004, the Company changed its method of accounting for customer acquisition
costs as of October 1, 2004.
We also have audited, in accordance with the standards of the Public Company
Oversight Board (United States), the effectiveness of Standard Motor Products,
Inc. and Subsidiaries' internal control over financial reporting as of December
31, 2005, based on criteria established in INTERNAL CONTROL - INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2006 expressed an unqualified
opinion thereon.
GRANT THORNTON LLP
New York, New York
March 15, 2006
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity, and cash flows of Standard Motor Products, Inc. and
subsidiaries for the year ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of their operations and their cash
flows of Standard Motor Products, Inc. and subsidiaries for the year ended
December 31, 2003 in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
March 26, 2004
43
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2005 2004 2003
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
Net sales ....................................................... $ 830,413 $ 824,283 $ 678,783
Cost of sales ................................................... 644,433 629,290 504,011
------------ ------------ ------------
Gross profit .................................................. 185,980 194,993 174,772
Selling, general and administrative expenses .................... 166,556 178,852 153,303
Restructuring expenses .......................................... 5,342 11,449 5,654
Goodwill impairment charge ...................................... -- 6,429 --
------------ ------------ ------------
Operating income (loss) ....................................... 14,082 (1,737) 15,815
Other income (expense), net ..................................... 2,648 2,861 (477)
Interest expense ................................................ 17,077 13,710 13,907
------------ ------------ ------------
(Loss) earnings from continuing operations before taxes ......... (347) (12,586) 1,431
Provision (benefit) for income taxes ............................ 1,423 (3,679) 1,207
------------ ------------ ------------
(Loss) earnings from continuing operations ...................... (1,770) (8,907) 224
Loss from discontinued operation, net of tax of $1,118,
$2,606 and $581$581 ........................................... (1,775) (3,909) (1,742)
------------ ------------ ------------
Loss before cumulative effect of accounting change ............ (3,545) (12,816) (1,518)
Cumulative effect of accounting change, net of tax
of $1,043 for 2004 ............................................ -- (1,564) --
------------ ------------ ------------
Net loss ...................................................... $ (3,545) $ (14,380) $ (1,518)
============ ============ ============
Net (loss) earnings per common share - Basic:
(Loss) earnings from continuing operations ................. $ (0.09) $ (0.46) $ 0.01
Discontinued operation ..................................... (0.09) (0.20) (0.11)
Cumulative effect of accounting change ..................... -- (0.08) --
------------ ------------ ------------
Net loss per common share - Basic ............................... $ (0.18) $ (0.74) $ (0.10)
============ ============ ============
Net (loss) earnings per common share - Diluted:
(Loss) earnings from continuing operations ................. $ (0.09) $ (0.46) $ 0.01
Discontinued operation ..................................... (0.09) (0.20) (0.11)
Cumulative effect of accounting change ..................... -- (0.08) --
------------ ------------ ------------
Net loss per common share - Diluted ............................. $ (0.18) $ (0.74) $ (0.10)
============ ============ ============
Average number of common shares ................................. 19,507,818 19,331,358 15,744,930
============ ============ ============
Average number of common shares and dilutive common shares ...... 19,507,818 19,331,358 15,793,008
============ ============ ============
See accompanying notes to consolidated financial statements.
44
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
2005 2004
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 14,046 $ 14,934
Accounts receivable, less allowances for discounts and doubtful accounts
of $9,574 and $9,354 in 2005 and 2004, respectively .................. 176,294 151,352
Inventories ............................................................ 243,297 258,641
Deferred income taxes .................................................. 14,081 14,809
Prepaid expenses and other current assets .............................. 7,972 7,480
---------- ----------
Total current assets ....................................... 455,690 447,216
Property, plant and equipment, net ........................................... 85,805 97,425
Goodwill and other intangibles, net .......................................... 67,402 69,911
Other assets ................................................................. 44,147 42,017
----------
Total assets ............................................... $ 653,044 $ 656,569
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable .......................................................... $ 149,236 $ 109,416
Current portion of long-term debt ...................................... 542 534
Accounts payable ....................................................... 52,535 46,487
Sundry payables and accrued expenses ................................... 24,466 31,241
Accrued customer returns ............................................... 22,346 23,127
Restructuring accrual .................................................. 1,286 6,999
Accrued rebates ........................................................ 24,017 24,210
Payroll and commissions ................................................ 11,494 10,442
---------- ----------
Total current liabilities ............................ 285,922 252,456
Long-term debt ............................................................... 98,549 114,236
Post-retirement medical benefits and other accrued liabilities ............... 45,962 44,111
Restructuring accrual ........................................................ 11,348 12,394
Accrued asbestos liabilities ................................................. 25,556 26,060
---------- ----------
Total liabilities .................................... 467,337 449,257
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common Stock - par value $2.00 per share:
Authorized 30,000,000 shares, issued 20,486,036 shares .............. 40,972 40,972
Capital in excess of par value ......................................... 56,966 57,424
Retained earnings ...................................................... 109,649 120,218
Accumulated other comprehensive income ................................. 4,158 4,805
Treasury stock - at cost (2,315,645 and 1,067,308 shares in 2005
and 2004, respectively) ............................................. (26,038) (16,107)
---------- ----------
Total stockholders' equity ........................... 185,707 207,312
---------- ----------
Total liabilities and stockholders' equity ........... $ 653,044 $ 656,569
========== ==========
See accompanying notes to consolidated financial statements.
45
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................. $ (3,545) $ (14,380) $ (1,518)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization ....................................... 17,356 19,013 17,092
Increase to allowance for doubtful accounts ......................... 655 404 813
Increase to inventory reserves ...................................... 5,286 1,487 5,613
Loss on disposal of property, plant and equipment ................... 2,940 1,379 1,001
Gain on retirement of debt .......................................... (1,258) -- --
Equity income from joint ventures ................................... (955) (752) (27)
Employee stock ownership plan allocation ............................ 1,341 1,643 938
Increase in deferred income taxes ................................... (4,760) (6,243) (3,173)
(Increase) decrease in tax valuation allowance ...................... 3,074 (182) 1,541
Cumulative effect of accounting change .............................. -- 1,564 --
Loss from discontinued operation, net of taxes ...................... 1,775 3,909 1,742
Goodwill impairment charge .......................................... -- 6,429 --
Change in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accounts receivable .......................... (25,597) 21,833 7,770
Decrease (increase) in inventories .................................. 10,058 (5,350) (2,102)
(Increase) decrease in prepaid expenses and other current assets .... (491) (82) 446
Decrease in other assets ............................................ 1,237 3,662 1,802
Increase (decrease) in accounts payable ............................. 2,760 (12,376) (9,471)
(Decrease) increase in sundry payables and accrued expenses ........ (6,968) (5,969) 7,045
Decrease in restructuring accrual ................................... (5,516) (12,222) (2,085)
Increase (decrease) in other liabilities ............................ 370 (301) 4,036
---------- ---------- ----------
Net cash (used in) provided by operating activities ........... (2,238) 3,466 31,463
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment ................... 2,164 1,734 87
Capital expenditures, net of effects from acquisitions .................... (9,957) (9,774) (8,926)
Maturity of investments ................................................... -- -- 7,200
Payments for acquisitions, net of cash acquired ........................... -- (2,906) (100,249)
---------- ---------- ----------
Net cash used in investing activities ......................... (7,793) (10,946) (101,888)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreements ............................ 39,820 9,717 20,081
Principal payments and retirement of long-term debt ....................... (14,655) (3,341) (4,313)
Borrowings under new long-term debt ....................................... -- -- 10,000
Proceeds from issuance of common stock, net of issuance costs ............. -- -- 55,744
Increase in overdraft balances ............................................ 3,288 834 1,509
Debt issuance costs ....................................................... -- -- (2,460)
Repurchase of shares held by Dana Corporation ............................. (11,899) -- --
Proceeds from exercise of employee stock options .......................... 169 972 91
Dividends paid ............................................................ (7,024) (6,955) (5,615)
---------- ---------- ----------
Net cash provided by financing activities ..................... 9,699 1,227 75,037
---------- ---------- ----------
Effect of exchange rate changes on cash ................................... (556) 1,540 5,345
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents ...................... (888) (4,713) 9,957
CASH AND CASH EQUIVALENTS at beginning of year ............................ 14,934 19,647 9,690
---------- ---------- ----------
CASH AND CASH EQUIVALENTS at end of year .................................. $ 14,046 $ 14,934 $ 19,647
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ...................................................... $ 17,227 $ 13,741 $ 13,641
========== ========== ==========
Income taxes .................................................. $ 3,456 $ 2,582 $ 2,815
========== ========== ==========
Non-cash investing and financing activities:
Common stock issued to seller for acquisition ....................... $ -- $ -- $ 15,125
========== ========== ==========
Issuance of long-term debt to seller for acquisition ................ $ -- $ -- $ 15,125
========== ========== ==========
See accompanying notes to consolidated financial statements.
46
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2005, 2004 AND 2003
CAPITAL ACCUMULATED
IN EXCESS OTHER
COMMON OF PAR RETAINED COMPREHENSIVE TREASURY
STOCK VALUE EARNINGS INCOME (LOSS) STOCK TOTAL
----- ----- -------- ------------- ----- -----
(In thousands)
BALANCE AT DECEMBER 31, 2002 ..................... $ 26,649 $ 1,764 $ 148,686 $ (2,581) $ (20,637) $ 153,881
Comprehensive Loss:
Net loss ................................... (1,518) (1,518)
Foreign currency translation adjustment .... 6,162 6,162
Unrealized gain on interest rate swap
agreements, net of tax of $439 .......... 1,317 1,317
Minimum pension liability adjustment ....... (84) (84)
----------
Total comprehensive loss ................... 5,877
Cash dividends paid .............................. (5,615) (5,615)
Issuance of common stock related to acquisition .. 14,323 56,546 70,869
Exercise of employee stock options ............... (30) 121 91
Employee Stock Ownership Plan .................... (194) 1,132 938
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2003 ..................... 40,972 58,086 141,553 4,814 (19,384) 226,041
Comprehensive Loss:
Net loss ................................... (14,380) (14,380)
Foreign currency translation adjustment .... 2,242 2,242
Unrealized gain on interest rate swap
agreements, net of tax of $127 ........... 383 383
Minimum pension liability adjustment ....... (2,634) (2,634)
----------
Total comprehensive loss ................... (14,389)
Cash dividends paid .............................. (6,955) (6,955)
Exercise of employee stock options ............... (645) 1,617 972
Employee Stock Ownership Plan .................... (17) 1,660 1,643
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2004 ..................... 40,972 57,424 120,218 4,805 (16,107) 207,312
Comprehensive Loss:
Net loss ................................... (3,545) (3,545)
Foreign currency translation adjustment .... (940) (940)
Unrealized gain on interest rate swap
agreements, net of tax of $108 ........... 26 26
Minimum pension liability adjustment ....... 267 267
----------
Total comprehensive loss ................... (4,192)
Cash dividends paid .............................. (7,024) (7,024)
Exercise of employee stock options ............... (71) 240 169
Employee Stock Ownership Plan .................... (387) 1,728 1,341
Repurchase of shares held by Dana Corporation .... (11,899) (11,899)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2005 ..................... $ 40,972 $ 56,966 $ 109,649 $ 4,158 $ (26,038) $ 185,707
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements
47
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as "we," "us" or "our") is engaged in the
manufacture and distribution of replacement parts for motor vehicles in the
automotive aftermarket industry. The consolidated financial statements include
our accounts and all subsidiaries in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant intercompany items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have made a
number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Some of the more
significant estimates include allowances for doubtful accounts, realizability of
inventory, goodwill and other intangible assets, depreciation and amortization
of long-lived assets, product liability, pensions and other post-retirement
benefits, asbestos and litigation matters, deferred tax asset valuation
allowance and sales return allowances. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Where appropriate, certain amounts in 2004 and 2003 have been reclassified to
conform with the 2005 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
The Company does not generally require collateral for its trade accounts
receivable. Accounts receivable have been reduced by an allowance for amounts
that may become uncollectible in the future. These allowances are established
based on a combination of write-off history, aging analysis, and specific
account evaluations. When a receivable balance is known to be uncollectible, it
is written off against the allowance for doubtful accounts. Cash discounts are
provided based on an overall average experience rate applied to qualifying
accounts receivable balances.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market. Inventories are reduced by an allowance
for excess and obsolete inventories, based on the Company's review of on-hand
inventories. We provided for an inventory reserve of $39.1 million and $39.6
million as of December 31, 2005 and 2004, respectively.
We use cores (used parts) in our remanufacturing processes for air conditioning
compressors. The production of air conditioning compressors involves the
rebuilding of used cores, which we acquire either in outright purchases from
used parts brokers, or from returns pursuant to an exchange program with
customers. Under such exchange programs, we reduce our inventory, through a
charge to cost of sales, when we sell a finished good compressor, and put back
to inventory at standard cost through a credit to cost of sales the used core
exchanged when it is actually received from the customer.
48
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes derivatives as either an asset or liability measured at
its fair value. For derivatives that have been formally designated as a cash
flow hedge (interest rate swap agreements), the effective portion of changes in
the fair value of the derivatives are recorded in "accumulated other
comprehensive income (loss)." Amounts in "accumulated other comprehensive income
(loss)" are reclassified into earnings in the "interest expense" caption when
interest expense on the underlying borrowings are recognized.
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at cost and are depreciated using the straight-line
method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE
--------------------------------------
Buildings and improvements............ 25 to 33-1/2 years
Building refurbishments............... 10 years
Machinery and equipment............... 7 to 12 years
Tools, dies and auxiliary equipment... 3 to 8 years
Furniture and fixtures................ 3 to 12 years
Leasehold improvements................ Shorter of life of asset or lease term
Major renewals and improvements of property, plant and equipment are
capitalized, and repairs and maintenance costs are expensed as incurred.
GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases.
Goodwill and certain other intangible assets having indefinite lives are not
amortized to earnings, but instead are subject to periodic testing for
impairment. Intangible assets determined to have definite lives are amortized
over their remaining useful lives.
Goodwill of a reporting unit is tested for impairment on an annual basis or
between annual tests if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying amount. To the
extent the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, we are required to perform a second step, as this is an
indication that the reporting unit goodwill may be impaired. In this step, we
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, we compare the carrying value of such
assets with finite lives to the estimated undiscounted future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair
value and their carrying value.
49
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which we incur
change-over-costs to induce a new or existing customer to switch from a
competitor's brand. In addition, change-over-costs include the costs related to
removing the new customer's inventory and replacing it with 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 $1.6
million, net of tax effects, and recorded the accounting change as if it had
taken effect on October 1, 2004. Accordingly, the effect of the change is
recorded in the 2004 quarterly data presented in Note 3.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year-end exchange
rates and revenues and expenses are translated at average exchange rates during
the year. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income (loss) and remains there
until the underlying foreign operation is liquidated or substantially disposed
of. Where the U.S. dollar is the functional currency, transaction gains or
losses arising from the remeasurement of financial statements are recorded in
the statement of operations under the caption "other income (expense)."
REVENUE RECOGNITION
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. For some of our sales of remanufactured products, we also
charge our customers a deposit for the return of a used core component which we
can use in our future remanufacturing activities. Such deposit is not recognized
as revenue but rather carried as a core liability. The liability is extinguished
when a core is actually returned to us. We estimate and record provisions for
cash discounts, quantity rebates, sales returns and warranties in the period the
sale is recorded, based upon our prior experience and current trends.
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Selling, general and administration expenses includes shipping costs and
advertising, which is expensed as incurred. Shipping and handling charges, as
well as freight to customers, are included in distribution expenses as part of
selling, general and administration expenses.
DEFERRED FINANCING COSTS
We have incurred costs in obtaining financing. These costs of $9.9 million as of
2005 and $9.7 million as of 2004 were capitalized in other assets and are being
amortized over the life of the related financing arrangements through 2009. At
December 31, 2005 and 2004, total accumulated amortization was $5.4 million and
$5 million, respectively.
50
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net post-retirement benefit liability and related expense under our
benefit plans are determined on an actuarial basis. Benefits are determined
primarily based upon employees' length of service.
INCOME TAXES
Income taxes are calculated using the asset and liability method in accordance
with the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities, as measured by the current enacted tax rates. The Company
establishes valuation allowances against deferred tax assets when it is more
likely than not that some portion or all of those deferred assets will not be
realized. The valuation allowance is intended in part to provide for the
uncertainty regarding the ultimate utilization of the Company's U.S. net
operating loss carry forwards, U.S. capital loss carryovers, U.S. foreign tax
credit carryovers, and foreign net operating loss carry forwards. Deferred tax
expense (benefit) is the result of changes in the deferred tax asset and
liability.
REPORTING OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes (a) net income, (b) the cumulative effect
of translating balance sheets of foreign subsidiaries to U.S. dollars, (c) the
effect of adjusting interest rate swaps to market, and (d) the recognition of
minimum pension liabilities. The last three are not included in the income
statement and are reflected as adjustments to shareholder's equity.
NET EARNINGS PER COMMON SHARE
We present two calculations of earnings per common share. "Basic" earnings per
common share equals net income divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share equals net
income divided by the sum of weighted average common shares outstanding during
the period plus potentially dilutive common shares. Potentially dilutive common
shares that are anti-dilutive are excluded from net earnings per common share.
The following is a reconciliation of the shares used in calculating basic and
dilutive net earnings per common share.
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
Weighted average common shares.................... 19,508 19,331 15,745
Effect of potentially dilutive common shares...... -- -- 48
Weighted average common equivalent shares
outstanding assuming dilution................... 19,508 19,331 15,793
The average shares listed below were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for the
periods presented.
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
Stock options..................................... 1,249 1,192 844
Convertible debentures............................ 2,796 2,796 2,796
51
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
STOCK-BASED COMPENSATION PLANS
Under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), 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 during the years ended December 31, 2005, 2004 and 2003 were
exercisable at prices equal to the fair market value of our common stock on the
dates the options were granted; therefore, no compensation cost has been
recognized for the stock options granted.
If we accounted for stock-based compensation using the fair value method of SFAS
123, as amended by Statement No. 148, the effect on net loss and basic and
diluted loss per share would have been as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss, as reported ........................................... $ (3,545) $ (14,380) $ (1,518)
Less: Total stock-based employee compensation expense
determined under fair value method for all awards, net
of related tax effects .................................... 678 452 137
---------- ---------- ----------
Pro forma net loss .............................................. $ (4,223) $ (14,832) $ (1,655)
---------- ---------- ----------
Loss per share:
Basic - as reported ....................................... $ (0.18) $ (0.74) $ (0.10)
Basic - pro forma ......................................... $ (0.22) $ (0.77) $ (0.11)
Diluted - as reported ..................................... $ (0.18) $ (0.74) $ (0.10)
Diluted - pro forma ....................................... $ (0.22) $ (0.77) $ (0.11)
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
2005 2004 2003
---- ---- ----
Expected option life................ 3.9 years 3.9 years 3.9 years
Expected stock volatility........... 39.1% 38.6% 38.9%
Expected dividend yield............. 3.4% 2.7% 2.6%
Risk-free interest rate............. 4.0% 3.6% 2.4%
Fair value of option................ $2.72 $3.46 $3.36
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R").
SFAS 123R requires companies to expense the value of employee stock options and
similar awards. SFAS 123R is effective for interim and annual financial
statements beginning after December 15, 2005 and will apply to all outstanding
and unvested share-based payments at the time of adoption. We adopted SFAS 123R
effective January 1, 2006 using the Black-Scholes option pricing model under the
modified prospective application method.
ASBESTOS LITIGATION
In evaluating our potential asbestos-related liability, it is the accounting
policy of the Company to use an actuarial study that is prepared by a leading
actuarial firm with expertise in assessing asbestos-related liabilities. We
evaluate the estimate of the range of undiscounted liability to determine which
amount to accrue. If there is no amount within the range of settlement payments
that is more likely than any other, we record the low end of the range as the
liability associated with future settlement payments. Legal costs are expensed
as incurred.
52
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash investments and accounts receivable.
We place our cash investments with high quality financial institutions and limit
the amount of credit exposure to any one institution. Although we are directly
affected by developments in the vehicle parts industry, management does not
believe significant credit risk exists. With respect to accounts receivable,
such receivables are primarily from warehouse distributors and major retailers
in the automotive aftermarket industry located in the United States. We perform
ongoing credit evaluations of our customers' financial conditions. Our five
largest individual customers, including members of a marketing group, accounted
for 52%, 50% and 43% of consolidated net sales in 2005, 2004 and 2003,
respectively. Two individual customers accounted for 18% and 15%, respectively,
of consolidated net sales in 2005, 17% and 14%, respectively, of consolidated
net sales in 2004, and 12% and 12%, respectively, of consolidated net sales in
2003. Substantially all of the cash and cash equivalents, including foreign cash
balances, at December 31, 2005 and 2004 were uninsured. Foreign cash balances at
December 31, 2005 and 2004 were $3 million and $10 million, respectively.
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 decreased 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. Other than the aforementioned changes, the impact of the
Medicare Reform Act had been estimated to be immaterial and therefore not
included in previous actuarial evaluations.
53
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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. 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.
We adopted SFAS 123R effective January 1, 2006 using the Black-Scholes option
pricing model under the modified prospective application method. Under this
method, SFAS 123R is applied to new awards and to awards modified, repurchased
or canceled after the effective date. Additionally, compensation cost for the
portion of the awards for which the requisite service has not been rendered
(such as unvested options) that are outstanding as of the date of adoption shall
be recognized as the remaining requisite services are rendered. The compensation
cost relating to unvested awards at the date of adoption shall be based on the
fair value at the date of grant of those awards as calculated for pro forma
disclosures under the original SFAS No. 123. We do not expect that the initial
adoption of SFAS 123R will have a significant impact on our consolidated results
of operations and (loss) earnings per share as we expect that it will impact our
financial results in a manner similar to our pro forma disclosure above.
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
half of 2006.
54
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
2. ACQUISITIONS AND RESTRUCTURING COSTS
ACQUISITION OF DANA'S EMG BUSINESS
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 ("DEM"). Prior to the sale, DEM was a
leading manufacturer of aftermarket parts in the automotive industry focused
exclusively on engine management.
Under the terms of the acquisition, we paid Dana Corporation $93.2 million in
cash (includes $1.9 million paid in 2004 for final payment), issued an unsecured
promissory note of $15.1 million (as discussed more fully in Note 9), and issued
1,378,760 shares of our common stock valued at $15.1 million using an average
market price of $10.97 per share. The average market price was based on the
average closing price for a range of trading days preceding the closing date of
the acquisition. Our final purchase price was approximately $130.5 million,
which included $7.1 million of transaction costs.
In connection with the acquisition of DEM, we completed a public equity offering
of 5,750,000 shares of our common stock for net proceeds of approximately $55.7
million. The net proceeds from this equity offering were used to repay a portion
of our outstanding indebtedness under our revolving credit facility with General
Electric Capital Corporation.
Effective June 30, 2003, we also amended and restated our credit agreement with
General Electric Capital Corporation, which increased the amount available under
our revolving credit facility by $80 million, to $305 million, as discussed more
fully in Note 9. We then financed the cash portion of the acquisition purchase
price and the costs associated with the acquisition by borrowing from our
revolving credit facility.
The purchase price of the acquisition is summarized as follows (in thousands):
Value of common stock issued........................... $ 15,125
Unsecured promissory note.............................. 15,125
Cash consideration..................................... 93,172
----------
Total consideration................................. 123,422
Transaction costs...................................... 7,077
----------
Total purchase price................................... $ 130,499
==========
The acquisition purchase price was based upon the final book value of the
acquired assets of DEM less the book value of the assumed liabilities of DEM as
of the close of business on the closing date, subject to a maximum purchase
price of $125 million (not including transaction costs).
55
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table summarizes the components of the net assets acquired based
upon the final purchase accounting (in thousands):
Accounts receivable................................................ $ 65,162
Inventories........................................................ 81,693
Property, plant and equipment...................................... 17,165
Goodwill........................................................... 39,847
Intangible assets:
Customer relationships (estimated useful life of 10 years)... 10,000
Trademarks and trade names (indefinite life)................. 6,100
Other assets....................................................... 128
--------
Total assets acquired.............................................. $220,095
--------
Accounts payable................................................... $ 30,247
Sundry payables and accrued expenses............................... 32,152
Accrued customer returns........................................... 7,013
Payroll and commissions............................................ 3,984
Other liabilities.................................................. 16,200
--------
Total liabilities assumed.......................................... 89,596
--------
Net assets acquired................................................ $130,499
========
The acquisition was accounted for as a purchase transaction in accordance with
SFAS 141, and accordingly, the assets and liabilities acquired were recorded at
their fair value at the date of the acquisition, and the results of operations
of DEM is included in our results beginning on the June 30, 2003 acquisition
date.
The excess of the purchase price over the estimated fair values of the net
assets acquired was recorded as goodwill. Certain adjustments were made to
goodwill subsequent to the acquisition date and are described in Note 7.
Goodwill of $39.8 million resulting from this acquisition has been assigned to
our Engine Management reporting unit. Goodwill associated with this acquisition
will be deductible for tax purposes.
The following table represents our unaudited pro forma consolidated statement of
operations for the year ended December 31, 2003, as if the acquisition of DEM
had been completed at January 1, 2003. The pro forma information is presented
for comparative purposes only and does not purport to be indicative of what
would have occurred had the acquisition actually been made at such date, nor is
it necessarily indicative of future operating results.
YEAR ENDED
DECEMBER 31, 2003
-----------------
(IN THOUSANDS)
Net sales.................................................. $ 822,515
Loss from continuing operations............................ $ (2,246)
Loss before cumulative effect of accounting change ........ $ (3,988)
Net loss................................................... $ (3,988)
Net loss per common share:
Net loss - Basic........................................... $ (0.21)
Net loss - Diluted......................................... $ (0.21)
56
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
On December 29, 2005, we entered into an agreement with Dana in which we
repurchased the 1,378,760 shares of our common stock at a repurchase price of
$8.63 per share (or an aggregate purchase price of $11.9 million) and prepaid at
a discount the $15.1 million unsecured promissory note plus accrued and unpaid
interest for an aggregate approximate amount of $14.5 million. We recognized the
discount of $1.1 million as a gain on the repayment of the note as well as the
unrecognized deferred interest expense thereon of $0.1 million as income in
2005.
RESTRUCTURING COSTS
In connection with the acquisition, we have reviewed our operations and
implemented integration plans to restructure the operations of DEM. At the time,
we announced that we would close seven DEM facilities, which has subsequently
occurred. 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 and $32.5 million in 2005).
Such amounts were recognized as liabilities assumed in the acquisition and
included in the allocation of the cost 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 employees, individually employed throughout DEM's facilities
across a broad range of functions, including managerial, professional, clerical,
manufacturing and factory positions. During the years ended December 31, 2005
and 2004, termination benefits of $2.3 million and $9.4 million, respectively,
have been charged to the restructuring accrual. In addition, during 2005 a $1.1
million reduction was made to the workforce liability based on current
commitments, which amount has been applied as a reduction of goodwill
established on the acquisition of DEM. As of December 31, 2005, the reserve
balance was at $0.8 million. We expect to pay most of this amount for workforce
reductions in 2006 and 2007.
The restructuring accrual also includes approximately $18 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
December 31, 2005, we have lease commitments for one facility through 2021. Exit
costs of $3.2 million were paid in 2005 and a reduction of $0.1 million was made
based on current estimates, leaving the exit reserve balance at $11.8 million as
of December 31, 2005. The $0.1 million has been applied as a reduction of
goodwill established on the acquisition of DEM.
Selected information relating to the restructuring costs included in the
allocation of the cost to acquire DEM is as follows (in thousands):
WORKFORCE OTHER EXIT
REDUCTION COSTS TOTAL
--------- ----- -----
Restructuring liability at December 31, 2004....... $4,250 $15,143 $19,393
Cash payments during 2005.......................... 2,338 3,178 5,516
--
Adjustments during 2005............................ 1,103 140 1,243
------ ------- -------
Restructuring liability as of December 31, 2005.... $ 809 $11,825 $12,634
====== ======= =======
57
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
3. CHANGE IN ACCOUNTING PRINCIPLE
ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which we incur
change-over-costs to induce a new or existing customer to switch from a
competitor's brand. In addition, change-over-costs include the costs related to
removing the new customer's inventory and replacing it with 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 Accounting
Principles Board Opinion ("APB") 20, "Accounting Changes" and FAS 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 4TH QUARTER
(RESTATED) (RESTATED) (RESTATED)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
2004
Net sales, as reported .............................. $ 204,781 $ 235,049 $ 203,487 $ 180,966
Cumulative effect at January 1, 2004 ................ (2,605) -- -- --
Effect of change in accounting for new customer
acquisition costs, net of tax effects ............ 148 83 (220) --
New sales, as adjusted .............................. 202,324 235,132 203,267 180,966
Net loss, as reported ............................... (970) 6,692 (676) (19,426)
Cumulative effect at January 1, 2004, net of tax
effects .......................................... (1,564) -- -- --
Effect of change in accounting for new customer
acquisition costs, net of tax effects ............ 89 50 (132) --
Net loss, as adjusted ............................... (2,445) 6,742 (808) (19,426)
Basic net loss per share, as reported ............... (0.05) 0.35 (0.03) (1.00)
Cumulative effect at January 1, 2004, net of tax
effects .......................................... (0.08) -- -- --
Effect of change in accounting for new customer
acquisition costs, net of tax effects ............ -- -- (0.01) --
Basic net loss per share, as adjusted ............... (0.13) 0.35 (0.04) (1.00)
Diluted net loss per share, as reported ............. (0.05) 0.34 (0.03) (1.00)
Cumulative effect at January 1, 2004, net of tax
effects .......................................... (0.08) -- -- --
Effect of change in accounting for new customer
acquisition costs, net of tax effects ............ -- -- (0.01) --
Diluted net loss per share, as adjusted ............. (0.13) 0.34 (0.04) (1.00)
58
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
4. SALES OF RECEIVABLES
Prior to November 18, 2005, the Company entered into agreements to sell
undivided interests in certain of its receivables to factoring companies, which
in turn have the right to sell an undivided interest to a financial institution
or other third parties. We entered these agreements at our discretion when we
determined that the cost of factoring was less than the cost of servicing our
receivables with existing debt. Pursuant to these agreements, we sold $240.7
million and $194.4 million of receivables during 2005 and 2004, respectively. We
retained no rights or interest, and have no obligations, with respect to the
sold receivables. We do not service the receivables after the sale.
The sale of receivables was accounted for as a sale in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The sold receivables were removed from the
balance sheet at the time of sale. The costs incurred in relation to the sale of
receivables were $3.4 million and $2.4 million in 2005 and 2004, respectively,
and are recorded in selling, general and administrative expense. Pursuant to an
amendment to our revolving credit facility in November 2005, we are prohibited
from accepting drafts under our customer draft programs after November 18, 2005.
5. INVENTORIES
DECEMBER 31,
-------------------
2005 2004
---- ----
(IN THOUSANDS)
Finished goods, net .............................. $182,567 $192,017
Work in process, net ............................. 4,235 4,691
Raw materials, net ............................... 56,495 61,933
-------- --------
Total inventories, net ...................... $243,297 $258,641
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-------------------
2005 2004
---- ----
(IN THOUSANDS)
Land, buildings and improvements ................. $ 70,748 $ 72,284
Machinery and equipment .......................... 136,010 142,134
Tools, dies and auxiliary equipment .............. 22,447 21,563
Furniture and fixtures ........................... 28,634 28,093
Leasehold improvements ........................... 7,485 7,333
Construction in progress ......................... 6,552 5,308
-------- --------
271,876 276,715
Less accumulated depreciation .................... 186,071 179,290
-------- --------
Total property, plant and equipment, net ......... $ 85,805 $ 97,425
======== ========
Depreciation expense was $15 million, $16.8 million and $15.4 million for 2005,
2004 and 2003, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
We test for impairment of our remaining goodwill at least annually. Under SFAS
No. 142, "Goodwill and Other Intangible Assets," we completed our annual
impairment test of goodwill as of December 31, 2005 and determined that our
goodwill was not impaired.
We completed our annual impairment test of goodwill as of December 31, 2004 and
determined that the carrying amounts of two of our reporting units exceeded the
corresponding fair values, which were determined based on the discounted
estimated future cash flows of the reporting units, the Company's weighted
average cost of capital and market multiples. As a result, we recorded an
impairment loss in the fourth quarter of 2004 of our remaining goodwill in our
Temperature Control and European Segment of $4.8 million and $1.6 million,
respectively.
59
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
We completed our annual impairment test of goodwill as of December 31, 2003 and
determined that our goodwill was not impaired.
The changes in the carrying value of goodwill for our segments during the year
ended December 31, 2005 are as follows (in thousands):
ENGINE TEMPERATURE
MANAGEMENT CONTROL EUROPE TOTAL
---------- ------- ------ -----
Balance as of December 31, 2004 .................. $ 50,337 $ -- $ -- $ 50,337
Purchase accounting adjustments (Note 2) ......... (1,243) -- -- (1,243)
-------- -------- -------- --------
Balance as of December 31, 2005 .................. $ 49,094 $ -- $ -- $ 49,094
======== ======== ======== ========
In connection with the acquisition of DEM, we completed the purchase price
allocation in June 2004. As a result, goodwill was reduced by $15.3 million in
2004 comprised of $16.1 million reclassified to intangible assets based on a
fair market valuation and $0.8 million increase related to the acquired
inventory. During 2005, goodwill was reduced $1.2 million based on a reduction
in the restructuring cost estimate that had been established in purchase
accounting. (See Note 2)
OTHER INTANGIBLE ASSETS
Other intangibles assets include computer software. Computer software, net of
amortization, was $3.9 million and $4 million as of December 31, 2005 and 2004,
respectively. Computer software is amortized over its estimated useful life of 3
to 10 years. Amortization expense for computer software was $0.8 million, $1.5
million and $1.7 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets associated with the acquisition of DEM,
as of December 31, 2005, consist of (in thousands):
ACCUMULATED
GROSS AMORTIZATION NET
Customer relationships ................. $ 10,000 $ 1,667 $ 8,333
Trademarks and trade names ............. 6,100 -- 6,100
---------- ---------- ----------
$ 16,100 $ 1,667 $ 14,433
========== ========== ==========
Of the total purchase price, $16.1 million was allocated to intangible assets
consisting of customer relationships and trademarks and trade names; $10 million
was assigned to customer relationships and will be amortized on a straight-line
basis over the estimated useful life of 10 years; and the remaining $6.1 million
of acquired intangible assets was assigned to trademarks and trade names which
is not subject to amortization as they were determined to have indefinite useful
lives. Amortization expense for acquired intangible assets was $1.1 million,
$0.6 million and $0 million for the years ended December 31, 2005, 2004 and
2003, respectively.
60
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Estimated amortization expense for the next five years is $1.1 million in each
year during 2006 through 2010.
8. OTHER ASSETS
DECEMBER 31,
-----------------------
2005 2004
---- ----
(IN THOUSANDS)
Equity in joint ventures ............................ $ 2,014 $ 1,938
Deferred income taxes, net (Note 16) ................ 26,567 24,153
Deferred financing costs, net ....................... 4,558 5,211
Other ............................................... 11,008 10,715
Total other assets, net ....................... $ 44,147 $ 42,017
Included in the above caption "Other" is a preferred stock investment of $1.5
million in a customer, which is carried at cost. Net sales to this customer
amounted to $47.8 million, $65.3 million and $53 million in 2005, 2004 and 2003,
respectively.
9. CREDIT FACILITIES AND LONG-TERM DEBT
Total debt consists of (in thousands):
DECEMBER 31,
-----------------------
2005 2004
---- ----
Current
Revolving credit facilities (1) ..................... $ 149,236 $ 109,416
Current portion of mortgage loan .................... 542 534
---------- ----------
149,778 109,950
---------- ----------
Long-term Debt
6.75% convertible subordinated debentures ........... 90,000 90,000
Unsecured promissory note ........................... -- 15,125
Mortgage loan ....................................... 8,912 9,381
Other ............................................... 179 264
Less current portion of long-term debt .............. 542 534
---------- ----------
98,549 114,236
---------- ----------
Total debt ..................................... $ 248,327 $ 224,186
========== ==========
(1) Consists of the revolving credit facility, the Canadian term loan
and the European revolving credit facility.
Maturities of long-term debt during the five years ending December 31, 2006
through 2010 are $0.5 million, $0.6 million, $0.5 million $90.5 million and $0.6
million, respectively.
The Company had deferred financing cost of $4.5 million and $5.2 million as of
December 31, 2005 and 2004, respectively. These costs 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.
61
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
REVOLVING CREDIT FACILITY
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 with General Electric Capital Corporation 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. After taking into effect outstanding borrowings under the
revolving credit facility, there was an additional $52.5 million available for
us to borrow pursuant to the formula at December 31, 2005. Our credit agreement
also permits dividends and distributions by us provided specific conditions are
met.
At December 31, 2005 and 2004, the interest rate on the Company's revolving
credit facility was 6.7% and 4.4%, 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 $142.3 million and $103.6 million at
December 31, 2005 and 2004, 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 fixed charge coverage at the end of each fiscal quarter (rolling
twelve months) through 2008, and (2) to limit capital expenditure levels for
each fiscal year through 2008. At March 31, 2005, we were not in compliance with
the fixed charge coverage ratio contained in our revolving credit facility and,
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. We
received waivers of compliance of such covenants for the applicable periods.
During 2005, we amended our revolving credit facility on three occasions 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; (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; (5) the removal
of the limit on our ability to redeem the current drafts prior to the maturity
date; and (6) the prohibition of accepting drafts under our customer draft
programs after November 18, 2005.
In December 2005, we further amended our revolving credit facility to provide,
among other things, for the following: (1) the lenders' consent to the Company's
repurchase of shares of Company common stock held by Dana Corporation and the
Company's prepayment of an unsecured promissory note held by Dana; (2) the
lenders' consent for a $7 million term loan issued to the Company's Canadian
subsidiary by affiliates of the lenders; and (3) the extension of the
termination date of our revolving credit facility from February 7, 2008 to
December 31, 2008.
62
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CANADIAN TERM LOAN
In December 2005, our Canadian subsidiary entered into a credit agreement with
GE Canada Finance Holding Company, for itself and as agent for the lenders, and
GECC Capital Markets, Inc., as lead arranger and book runner. The credit
agreement provides for, among other things, a $7 million term loan, which term
loan is guaranteed and secured by us and certain of our wholly-owned
subsidiaries and which term loan is coterminous with the term of our revolving
credit facility. The $7 million term loan is part of the $305 million available
for borrowing under our revolving credit facility.
REVOLVING CREDIT FACILITY--EUROPE
Our European subsidiary of the Company has a revolving credit facility. The
amount of short-term bank borrowings outstanding under this facility was $7
million and $5.8 million at December 31, 2005 and 2004, respectively. The
weighted average interest rates on these borrowings at December 31, 2005 and
2004 were 6.5% and 6.9%, respectively.
SUBORDINATED DEBENTURES
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.
UNSECURED PROMISSORY NOTE
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. In December 2005, we prepaid at a discount the promissory note plus
accrued and unpaid interest for an aggregate approximate amount of $14.5
million. We recognized the discount of $1.1 million as a gain on the repayment
of the note as well as the unrecognized deferred interest expense thereon of
$0.2 million as income in 2005.
MORTGAGE LOAN AGREEMENT
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.
63
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
10. INTEREST RATE SWAP AGREEMENTS
We do not enter into financial instruments for trading or speculative purposes.
The principal financial instruments used for cash flow hedging purposes are
interest rate swaps. We enter into interest rate swap agreements to manage our
exposure to interest rate changes. The swaps effectively convert a portion of
our variable rate debt under the revolving credit facility to a fixed rate,
without exchanging the notional principal amounts.
In October 2003, we entered into an 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. We have recorded an asset
of $496,000 to recognize the fair value of interest derivatives, and we have
also recorded a tax liability of $198,000 associated therewith. The net offset
is recorded in accumulated other comprehensive income.
If, at any time, the swaps are determined to be ineffective, in whole or in
part, due to changes in the interest rate swap or underlying debt agreements,
the fair value of the portion of the interest rate swap determined to be
ineffective will be recognized as gain or loss in the statement of operations in
the "interest expense" caption for the applicable period. It is not expected
that any gain or loss will be reported in the statement of operations during the
year ending December 31, 2006 nor has any been recorded in 2005, 2004 or 2003.
11. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par value, and
our Board of Directors is vested with the authority to establish and designate
series of preferred, to fix the number of shares therein and the variations in
relative rights as between series. On December 18, 1995, our Board of Directors
established a new series of preferred shares designated as Series A
Participating Preferred Stock. The number of shares constituting the Series A
Preferred Stock is 30,000. The Series A Preferred Stock is designed to
participate in dividends, ranks senior to our common stock as to dividends and
liquidation rights and has voting rights. Each share of the Series A Preferred
Stock shall entitle the holder to one thousand votes on all matters submitted to
a vote of the stockholders of the Company. No such shares were outstanding at
December 31, 2005.
On January 17, 1996, our Board of Directors adopted a Shareholder Rights Plan
("Rights Plan"). Under the Rights Plan, the Board declared a dividend of one
Preferred Share Purchase Right ("Right") for each of our outstanding common
shares. The dividend was payable on March 1, 1996 to the shareholders of record
as of February 15, 1996. The Rights are attached to and automatically trade with
the outstanding shares of our common stock.
The Rights will become exercisable only in the event that any person or group of
affiliated persons becomes a holder of 20% or more of our outstanding common
shares, or commences a tender or exchange offer which, if consummated, would
result in that person or group of affiliated persons owning at least 20% of our
outstanding common shares. Once the rights become exercisable, they entitle all
other shareholders to purchase, by payment of an $80.00 exercise price, one
one-thousandth of a share of Series A Participating Preferred Stock, subject to
adjustment, with a value of twice the exercise price. In addition, at any time
after a 20% position is acquired and prior to the acquisition of a 50% position,
our Board of Directors may require, in whole or in part, each outstanding Right
(other than Rights held by the acquiring person or group of affiliated persons)
to be exchanged for one share of common stock or one one-thousandth of a share
of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per
Right at any time prior to their expiration on February 28, 2006. On February
28, 2006, the Rights Plan expired according to its stated terms.
64
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
As of December 31, 2005, we have Board authorization to repurchase additional
shares at a maximum cost of $1.7 million. During 2005, we did not repurchase any
shares of our common stock, other then the shares repurchased from Dana in
December 2005 as previously discussed.
Accumulated other comprehensive income (loss) is comprised of the following (in
thousands):
DECEMBER 31,
--------------------
2005 2004
---- ----
Foreign currency translation adjustments ............................... $ 7,082 $ 8,022
Unrealized gain on interest rate swap agreement, net of tax of $198 .... 298 272
Minimum pension liability .............................................. (3,222) (3,489)
-------- --------
Total accumulated other comprehensive income (loss) .................... $ 4,158 $ 4,805
======== ========
12. STOCK-BASED COMPENSATION PLANS
We have principally four fixed stock-based compensation plans. Under the 1994
Omnibus Stock Option Plan, as amended, which terminated as of May 25, 2004, we
were authorized to issue 1,500,000 stock options. The options become exercisable
over a three to five year period and expire at the end of five years following
the date they become exercisable. Under the 2004 Omnibus Stock Plan, which
terminates as of May 20, 2014, we are authorized to issue 500,000 stock options.
The options become exercisable over a three to five year period and expire at
the end of ten years following the date of grant. Under the 1996 Independent
Directors' Stock Option Plan and the 2004 Independent Directors' Stock Option
Plan, we are authorized to issue 50,000 stock options under each plan. The
options become exercisable one year after the date of grant and expire at the
end of ten years following the date of grant. Options forfeited under the stock
option plans are eligible to be granted again with respect to the options so
forfeited. At December 30, 2005, under our stock option plans, there were an
aggregate of (a) 1,286,851 shares of common stock authorized for grants, (b)
1,249,226 shares of common stock granted, and (c) 37,625 shares of common stock
available for future grants.
A summary of the status of our stock option plans follow (shares in thousands):
2005 2004 2003
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year ....... 1,192 $ 16.20 1,163 $ 16.33 910 $ 17.14
Granted ................................ 280 11.06 251 14.21 346 14.69
Exercised .............................. (5) 10.79 (101) 8.77 (3) 9.79
Forfeited .............................. (218) 19.91 (121) 19.33 (90) 18.29
-------- -------- -------- -------- -------- --------
Outstanding at end of year ............. 1,249 $ 14.42 1,192 $ 16.20 1,163 $ 16.33
-------- -------- -------- -------- -------- --------
Options exercisable at end of year ..... 755 729 800
-------- -------- --------
65
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
STOCK OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------
SHARES WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/05 LIFE (YEARS) EXERCISE PRICE
- --------------------------------------------------------------------------------
$ 9.29 - $11.61 494 6.1 $10.84
$12.10 - $16.94 566 5.9 $14.48
$22.46 - $24.84 189 0.7 $23.56
-----
1,249
=====
STOCK OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
RANGE OF SHARES EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/05 EXERCISE PRICE
- --------------------------------------------------------------------------------
$ 9.29 - $11.29 215 $10.55
$12.10 - $16.94 351 $13.97
$22.46 - $24.84 189 $23.56
---
755
===
13. RETIREMENT BENEFIT PLANS
We had a defined benefit pension plan covering certain former employees of our
former Brake business. During 2002, a partial settlement of the plan occurred in
conjunction with the purchase of non-participating annuity contracts for plan
members. The final settlement under the plan will occur when the remaining
assets under the plan are distributed. All pension benefit obligations have been
satisfied and the projected benefit obligation under the plan is $0.
The following table represents a reconciliation of the beginning and ending
benefit obligation, the fair value of plan assets and the funded status of the
plan (in thousands):
DECEMBER 31,
--------------------
2005 2004
---- ----
Benefit obligation at beginning of year ............... $ -- $ --
Interest cost ......................................... -- --
Actuarial loss ........................................ -- --
Settlement ............................................ -- --
Benefits paid ......................................... -- --
-------- --------
Benefit obligation at end of year ..................... $ -- $ --
======== ========
Fair value of plan assets at beginning of year ........ $ 594 $ 721
Settlement ............................................ -- --
Actual return on plan assets .......................... (7) (21)
Benefits paid ......................................... -- (106)
-------- --------
Fair value of plan assets at end of year .............. $ 587 $ 594
-------- --------
Funded status ......................................... $ 587 $ 594
Unrecognized net actuarial loss ....................... 66 92
-------- --------
Prepaid benefit cost .................................. $ 653 $ 686
======== ========
66
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Weighted average assumptions are as follows (in thousands):
DECEMBER 31,
----------------------
2005 2004 2003
---- ---- ----
Discount rates......................................... N/A N/A N/A
Expected long-term rate of return on assets............ N/A N/A N/A
Components of net periodic (benefit) cost follow (in thousands):
DECEMBER 31,
------------------------
2005 2004 2003
---- ---- ----
Interest cost ..................................... $ -- $ -- $ --
Return on assets .................................. -- -- (8)
Settlement ........................................ -- -- --
Recognized actuarial (gain) loss .................. 33 116 8
------ ------ -----
Net periodic (benefit) cost ....................... $ 33 $ 116 $ --
====== ====== =====
In addition, we participate in several multi-employer plans which provide
defined benefits to substantially all unionized workers. The Multi-employer
Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers
associated with multi-employer plans. The plan is administered by the Company,
and contributions are determined in accordance with the provisions of a
negotiated labor contract. We have not received information from the plans'
administrators to determine our share, if any, of unfunded vested benefits.
We and certain of our subsidiaries also maintain various defined contribution
plans, which include profit sharing and provide retirement benefits for other
eligible employees. The provisions for retirement expense in connection with the
plans are as follows (in thousands):
MULTI- DEFINED CONTRIBUTION
EMPLOYER PLANS AND OTHER PLANS
-------------- ---------------
Year ended December 31,
2005.................................... $434 $ 3,759
2004.................................... 454 3,980
2003.................................... 325 3,518
We have an Employee Stock Ownership Plan and Trust ("ESOP") for employees who
are not covered by a collective bargaining agreement. Employees were granted
114,500 shares, 110,000 shares and 75,000 shares during 2005, 2004 and 2003,
respectively, under the terms of the ESOP. These shares were issued directly
from treasury stock.
In fiscal 2000, we created an employee benefits trust to which we contributed
750,000 shares of treasury stock. We are authorized to instruct the trustees to
distribute such shares toward the satisfaction of our future obligations under
employee benefit plans. The shares held in trust are not considered outstanding
for purposes of calculating earnings per share until they are committed to be
released. The trustees will vote the shares in accordance with its fiduciary
duties. During 2005, we committed 114,500 shares to be released leaving 300,500
shares remaining in the trust. The provision for expense in connection with the
ESOP was approximately $1.3 million in 2005, $1.6 million in 2004, and $0.9
million in 2003.
67
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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. Such contributions
were $69,000, $79,000 and $99,000 in 2005, 2004 and 2003, respectively.
On October 1, 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.
DECEMBER 31,
--------------------
2005 2004
---- ----
(IN THOUSANDS)
Benefit obligation at beginning of year ............... $ 4,599 $ 4,253
Service cost .......................................... 394 356
Interest cost ......................................... 255 232
Actuarial loss (gain) ................................. 247 (242)
-------- --------
Benefit obligation at end of year ..................... $ 5,495 $ 4,599
======== ========
Funded status ......................................... (5,495) (4,599)
Unrecognized prior service cost ....................... 801 911
Additional minimum pension liability .................. (1,435) (1,455)
Unrecognized net actuarial loss ....................... 1,559 1,430
-------- --------
Accrued benefit cost .................................. $ (4,570) $ (3,713)
======== ========
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
--------------------
2005 2004
---- ----
Service cost .......................................... $ 394 $ 355
Interest cost ......................................... 255 232
Amortization of prior service cost .................... 110 111
Amortization of unrecognized loss ..................... 118 128
-------- --------
Net periodic benefit cost ............................. $ 877 $ 826
======== ========
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
--------------------
2005 2004
---- ----
Discount rates ........................................ 5.50% 5.75%
Salary increase ....................................... 4% 4%
68
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following benefit payments are expected to be paid (in thousands):
BENEFITS
--------
2006................................................... $ --
2007................................................... --
2008................................................... 370
2009................................................... 370
2010................................................... 370
Years 2011 - 2015 ..................................... 1,850
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of our UK defined benefit plan:
DECEMBER 31,
------------------------
2005 2004
---- ----
(IN THOUSANDS)
Benefit obligation at beginning of year ........... $ 3,412 $ 2,966
Service cost ...................................... -- --
Interest cost ..................................... 157 171
Actuarial loss .................................... (216) 75
Benefits paid ..................................... (121) (58)
Translation adjustment ............................ (346) 258
---------- ----------
Benefit obligation at end of year ................. $ 2,886 $ 3,412
---------- ----------
Fair value of plan assets at beginning of year .... $ 2,353 $ 1,938
Settlement ........................................ 109 177
Actual return on plan assets ...................... 587 127
Benefits paid ..................................... (121) (58)
Expenses .......................................... (12) --
Translation adjustment ............................ (238) 169
---------- ----------
Fair value of plan assets at end of year .......... $ 2,678 $ 2,353
---------- ----------
Funded status ..................................... (208) (1,059)
Unrecognized prior service cost ................... -- --
Additional minimum pension liability .............. (2,380) (1,884)
Unrecognized net actuarial loss ................... -- --
---------- ----------
Accrued benefit cost .............................. $ (2,588) $ (2,943)
========== ==========
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
------------------------
2005 2004
---- ----
Service cost ...................................... $ -- $ --
Interest cost ..................................... 157 171
Amortization of transition obligation ............. -- --
Amortization of prior service cost ................ -- --
Amortization of net actuarial loss ................ -- --
Recognized actuarial (gain) loss .................. (145) (150)
---------- ----------
Net periodic benefit cost ......................... $ 12 $ 21
========== ==========
69
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
-----------------------
2005 2004
---- ----
Discount rates..................................... 5.23% 5.23%
Current medical cost trend......................... 3.00% 2.97%
Current dental cost trend.......................... 3.00% 2.97%
Ultimate medical cost trend........................ 3.00% 2.97%
Year end rate declines to ultimate................. -- --
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
PENSION
BENEFITS
--------
2006......................................... $ 87
2007......................................... 104
2008......................................... 121
2009......................................... 138
2010......................................... 156
Years 2011 - 2015 ........................... 1,038
14. POST-RETIREMENT MEDICAL BENEFITS
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.
In December 2003, the Medicare Reform Act was signed into law. The Medicare
Reform Act expanded Medicare to include, for the first time, coverage for
prescription drugs. In connection with the Medicare Reform Act, the FASB issued
FSP No. FAS 106-2, which 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. 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 decreased by $9.3 million. As a result, our 2005 post-retirement benefit
cost decreased by approximately $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. Other than the aforementioned changes,
the impact of the Medicare Reform Act had been estimated to be immaterial and
therefore not included in previous actuarial evaluations.
Effective September 1, 2005, we restricted the eligibility requirements of
employees who can participate in this program, whereby all active participants
hired after 1995 are no longer eligible. 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.
70
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of the plan (in thousands):
DECEMBER 31,
------------
2005 2004
---- ----
Benefit obligation at beginning of year ............... $ 46,960 $ 32,193
Service cost .......................................... 2,924 3,486
Interest cost ......................................... 2,330 2,389
Amendments ............................................ (20,667) --
Actuarial loss ........................................ 4,749 9,928
Benefits paid ......................................... (994) (1,036)
-------- --------
Benefit obligation at end of year ..................... $ 35,302 $ 46,960
-------- --------
Funded status ......................................... $(35,302) $(46,960)
Unrecognized transition obligation .................... 34 401
Unrecognized prior service costs ...................... (14,334) 542
Unrecognized net actuarial loss ....................... 15,114 11,903
-------- --------
Accrued benefit cost .................................. $(34,488) $(34,114)
-------- --------
Components of net periodic benefit cost following (in thousands):
DECEMBER 31
-----------
2005 2004 2003
---- ---- ----
Service cost ................................ $ 2,924 $ 3,486 $ 2,618
Interest cost ............................... 2,330 2,389 1,705
Amortization of transition obligation ....... 30 42 38
Amortization of prior service cost .......... (1,190) 124 124
Amortization of net actuarial loss .......... 6 5 --
Recognized actuarial (gain) loss ............ 1,056 663 41
-------- -------- --------
Net periodic benefit cost ................... $ 5,156 $ 6,709 $ 4,526
SFAS 106 curtailment gain ................... (3,842) -- --
-------- -------- --------
Total benefit cost .................... $ 1,314 $ 6,709 $ 4,526
======== ======== ========
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
------------
2005 2004 2003
---- ---- ----
Discount rate.................................. 5.50% 5.75% 6.0%-6.5%
Current medical cost trend rate ............... 9% 10% 12%
Current dental cost trend...................... 5% 5% 5%
Ultimate medical cost trend rate............... 5% 5% 5%
Year trend rate declines to ultimate........... 2010 2009 2005
Our measurement date for this plan is December 31.
71
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following benefit payments which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
NET POST-RETIREMENT
BENEFITS
-------------------
2006.......................... $883
2007.......................... 965
2008.......................... 1,045
2009.......................... 1,147
2010.......................... 1,242
Years 2011 - 2015............. 8,098
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for 2005 (in
thousands):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components.... $ 1,058 $ (844)
Effect on post retirement benefit obligation............... 6,455 (5,222)
15. OTHER INCOME (EXPENSE), NET
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
Interest and dividend income.................................... $ 311 $ 615 $ 446
Gain on early retirement of debt................................ 1,258 -- --
Income from joint ventures...................................... 956 753 27
Gain (loss) on disposal of property, plant and equipment........ 160 -- (301)
(Loss) gain on foreign exchange................................. (768) 731 (1,357)
Other income - net.............................................. 731 762 708
-------- -------- --------
Total other income (expense), net......................... $ 2,648 $ 2,861 $ (477)
======== ======== ========
72
16. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2005 2004 2003
---- ---- ----
Current:
Domestic ............................... $ 233 $ (2,476) $ 804
Foreign ................................ 2,137 4,022 2,035
-------- -------- --------
Total Current ............................. 2,370 1,546 2,839
Deferred:
Domestic .............................. (1,074) (4,558) (1,617)
Foreign ................................ 127 (667) (15)
-------- -------- --------
Total Deferred ............................ (947) (5,225) (1,632)
-------- -------- --------
Total income tax provision (benefit) ...... $ 1,423 $ (3,679) $ 1,207
-------- -------- --------
We have not provided for U.S. income taxes on the undistributed earnings of our
foreign subsidiaries that are deferred from U.S. income taxation and that we
intend to be permanently reinvested. The Company has provided for U.S. income
tax regarding those undistributed earnings of our foreign subsidiaries subject
to current taxation under Subpart F of the Internal Revenue Code. Cumulative
undistributed earnings of foreign subsidiaries on which no U.S. income tax has
been provided were $36.1 million at the end of 2005, $28.8 million at the end of
2004 and $43.2 million at the end of 2003.
Earnings before income taxes for foreign operations (excluding Puerto Rico)
amounted to approximately $6.8 million, $6.8 million and $1.5 million in 2005,
2004 and 2003, respectively. U.S. income taxes on the earnings of the Puerto
Rican subsidiary are largely eligible for tax credits against such U.S. income
taxes (phased out effective at the end of 2005) and are partially exempt from
Puerto Rican income taxes under a tax exemption grant expiring in 2016.
Reconciliations between taxes at the United States federal income tax rate and
taxes at our effective income tax rate on earnings from continuing operations
before income taxes are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2005 2004 2003
---- ---- ----
U.S. federal income tax rate of 35% .................................... $ (121) $ (4,405) $ 501
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal income tax benefit ..... (121) (361) (103)
State tax credits ................................................... (535) -- --
Non-deductible items, net ........................................... 241 174 857
Income (benefit) taxes attributable to foreign income ............... (1,115) 1,095 (1,589)
Change in valuation allowance ....................................... 3,074 (182) 1,541
-------- -------- --------
Provision (benefit) for income taxes ................................ $ 1,423 $ (3,679) $ 1,207
======== ======== ========
73
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following is a summary of the components of the net deferred tax assets and
liabilities recognized in the accompanying consolidated balance sheets (in
thousands):
DECEMBER 31,
--------------------
2005 2004
---- ----
Deferred tax assets:
Inventories ........................................ $ 8,701 $ 5,548
Allowance for customer returns ..................... 8,298 6,963
Post-retirement benefits ........................... 12,889 13,133
Allowance for doubtful accounts .................... 3,375 3,594
Accrued salaries and benefits ...................... 5,596 3,235
Net operating loss and tax credit carry forwards ... 24,928 21,688
Goodwill ........................................... 2,458 3,499
Accrued asbestos liabilities ....................... 10,703 11,141
Other .............................................. 7,142 5,823
-------- --------
84,090 74,624
-------- --------
Valuation allowance ................................ (26,131) (23,057)
-------- --------
Total .............................................. $ 57,959 $ 51,567
======== ========
Deferred tax liabilities:
Depreciation ....................................... $ 7,270 $ 8,703
Promotional costs .................................. 233 578
Goodwill ........................................... 444 1,603
Restructuring costs ................................ 7,659 --
Other .............................................. 1,705 1,721
-------- --------
Total .............................................. 17,311 12,605
-------- --------
Net deferred tax assets ............................... $ 40,648 $ 38,962
======== ========
The current net deferred tax assets are $14.1 million and $14.8 million for 2005
and 2004, respectively. The non-current net deferred tax assets are $26.6
million and $24.2 million for 2005 and 2004, respectively. The tax valuation
allowance was allocated to the current deferred tax assets in the amounts of
$9.1 million and $5.4 million in 2005 and 2004, respectively. The long term tax
deferred assets had a valuation allowance of $17.1 million and $17.6 million in
2005 and 2004, respectively.
During 2005, we performed an assessment regarding the realization of the net
deferred tax assets, which includes projecting future taxable income, and have
increased the valuation allowance by $3.1 million. The valuation allowance is
intended in part to provide for the uncertainty regarding the ultimate
utilization of the Company's U.S. capital loss, state tax credits carryovers,
U.S. foreign tax credit carryovers, foreign net operating loss carry forwards,
and certain long lived deferred tax assets stemming mainly from accrued asbestos
liabilities and post-retirement benefit obligations. Approximately $22 million
of the valuation allowance relates to US tax assets of $62 million.
Approximately $110 million of taxable income will need to be generated to
realize the deferred tax asset. We believe it is more likely than not that we
will be able to generate this level of taxable income within 6 years based on
the following assumptions: that our Puerto Rico profits will create US taxable
income following the expiration of Section 936 of the Internal Revenue Code and
that our US based Engine Management Segment will gradually return to the levels
of profitability enjoyed prior to the DEM acquisition. Our US net operating
losses carried forward of $37.3 million expire between 2021 and 2025, and we
also have alternative minimum tax credit carry forwards of approximately $6
million for which there is no expiration date. All other tax attributes have no
carry forward limitation.
74
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
With regard to the remaining net deferred tax assets, we have determined that it
is more likely than not that the results of future operations will generate
sufficient taxable income to realize the related benefits. However, if we are
unable to generate sufficient taxable income in the future through our
operations, increases in the valuation allowance may be required.
At December 31, 2005, we have approximately $47.1 million of domestic and
foreign net operating loss carry forwards, of which $37.3 million will expire
between 2021 and 2025, with the remainder (foreign) having an indefinite carry
forward period. We also have foreign tax credit carry forwards of approximately
$1.1 million that will expire between 2010 and 2012 and an alternative minimum
tax credit carry forward of approximately $6 million, which has no expiration
date.
17. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of Statement of Financial Accounting Standards SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), we have three reportable operating segments, which are the major
product areas of the automotive aftermarket in which we compete. Engine
Management consists primarily of ignition and emission parts, wire and cable,
and fuel system parts. Temperature Control consists primarily of compressors,
other air conditioning parts and heater parts. The third reportable operating
segment is Europe, which consists of both Engine Management and Temperature
Control reporting units.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). The following tables
contain financial information for each reportable segment (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
---- ---- ----
Net sales:
Engine Management ................. $ 547,008 $ 562,769 $ 414,375
Temperature Control ............... 229,226 210,094 219,576
Europe ............................ 43,423 40,651 40,141
Other ............................. 10,756 10,769 4,691
---------- ---------- ----------
Total .......................... $ 830,413 $ 824,283 $ 678,783
========== ========== ==========
Depreciation and amortization:
Engine Management ................. $ 9,992 $ 10,921 $ 9,362
Temperature Control ............... 4,717 5,640 5,688
Europe ............................ 1,415 1,444 1,046
Other ............................. 1,232 1,008 996
---------- ---------- ----------
Total .......................... $ 17,356 $ 19,013 $ 17,092
========== ========== ==========
Operating profit (loss):
Engine Management ................. $ 19,338 $ 24,549 $ 31,871
Temperature Control ............... 11,936 (2,114) 4,702
Europe ............................ (572) (2,034) (3,605)
Other ............................. (16,620) (22,138) (17,153)
---------- ---------- ----------
Total .......................... $ 14,082 $ (1,737) $ 15,815
========== ========== ==========
75
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
---- ---- ----
Investment in equity affiliates:
Engine Management .................. $ -- $ -- $ --
Temperature Control ................ -- -- --
Europe ............................. (202) (322) 42
Other .............................. 2,216 2,260 2,280
---------- ---------- ----------
Total ........................... $ 2,014 $ 1,938 $ 2,322
========== ========== ==========
Capital expenditures:
Engine Management .................. $ 7,511 $ 7,513 $ 5,473
Temperature Control ................ 1,813 1,383 2,438
Europe ............................. 623 793 1,015
Other .............................. 10 85 --
---------- ---------- ----------
Total ........................... $ 9,957 $ 9,774 $ 8,926
========== ========== ==========
Total assets:
Engine Management .................. $ 438,116 $ 429,631 448,687
Temperature Control ................ 114,441 125,656 150,248
Europe ............................. 28,217 30,936 31,188
Other .............................. 72,270 70,346 64,402
---------- ---------- ----------
Total ........................... $ 653,044 $ 656,569 $ 694,525
========== ========== ==========
Reconciliation of segment operating profit (loss) to net income (loss):
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
---- ---- ----
Operating profit (loss) ............................... $ 14,082 $ (1,737) $ 15,815
Interest income (expense) ............................. 2,648 2,861 (477)
Interest expense ...................................... 17,077 13,710 13,907
-------- -------- --------
Earnings from continuing operations
before taxes ...................................... (347) (12,586) 1,431
Income tax expense (benefit) .......................... 1,423 (3,679) 1,207
-------- -------- --------
Earnings from continuing operations ................... (1,770) (8,907) 224
Discontinued operation, net of tax .................... (1,775) (3,909) (1,742)
Cumulative effect of accounting change, net of tax .... -- (1,564) --
-------- -------- --------
Net earnings (loss) ................................... $ (3,545) $(14,380) $ (1,518)
======== ======== ========
Our five largest individual customers, including members of a marketing group,
accounted for 52%, 50% and 43% of consolidated net sales in 2005, 2004 and 2003,
respectively. These net sales were generated from our Engine Management and
Temperature Control Segments.
Other Adjustments consist of items pertaining to our corporate headquarters
function, as well as our Canadian business unit that does not meet the criteria
of a reportable operating segment under SFAS 131.
76
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-9CONTINUED)
REVENUE
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
United States ................................ $716,358 $714,955 $584,853
Canada ....................................... 46,353 45,115 38,187
Europe ....................................... 43,423 40,651 40,141
Other Foreign ................................ 24,279 23,562 15,602
-------- -------- --------
Total ..................................... $830,413 $824,283 $678,783
======== ======== ========
LONG LIVED ASSETS
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
United States ................................ $161,451 $174,056 $192,574
Europe ....................................... 4,682 6,214 8,905
Canada ....................................... 3,900 4,144 4,488
Other Foreign ................................ 754 785 998
-------- -------- --------
Total ..................................... $170,787 $185,199 $206,965
======== ======== ========
Revenues are attributed to countries based upon the location of the customer.
Long lived assets are attributed to countries based upon the location of the
assets.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments.
TRADE ACCOUNTS RECEIVABLE
The carrying amount of trade receivables approximates fair value because of
their short outstanding terms.
TRADE ACCOUNTS PAYABLE
The carrying amount of trade payables approximates fair value because of their
short outstanding terms.
SHORT TERM BORROWINGS
The carrying value of these borrowings equals fair market value because their
interest rate reflects current market rates.
77
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted market prices
or current rates offered to us for debt of the same remaining maturities.
INTEREST RATE SWAPS
The fair value of our financial instruments is based on market quotes and
represents the net amount required to terminate the position, taking into
consideration market rates and counterparty credit risk.
The estimated fair values of our financial instruments are as follows (in
thousands):
CARRYING FAIR
AMOUNT VALUE
------ -----
DECEMBER 31, 2005
Cash and cash equivalents ............................... $ 14,046 $ 14,046
Trade accounts receivable ............................... 176,294 176,294
Trade accounts payable .................................. 52,535 52,535
Short term borrowings ................................... 149,236 149,236
Long-term debt .......................................... 99,091 97,847
Interest rate swaps ..................................... 496 496
DECEMBER 31, 2004
Cash and cash equivalents ............................... $ 14,934 $ 14,934
Trade accounts receivable ............................... 151,352 151,352
Trade accounts payable .................................. 46,487 46,487
Short term borrowings ................................... 109,416 109,416
Long-term debt .......................................... 114,770 113,554
Interest rate ........................................... 362 362
swaps
19. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three years ended December 31, 2005 was as follows
(in thousands):
TOTAL REAL ESTATE OTHER
----- ----------- -----
2005............................................ $9,928 $6,970 $ 2,958
2004............................................ 11,858 7,686 4,172
2003............................................ 12,286 9,143 3,143
At December 31, 2005, we are obligated to make minimum rental payments through
2021, under operating leases, which are as follows (in thousands):
2006............................................................... $ 8,163
2007............................................................... 7,061
2008............................................................... 5,872
2009............................................................... 4,462
2010............................................................... 2,397
Thereafter......................................................... 21,603
--------
Total.............................................................. $ 49,558
========
78
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
We also have lease and sub-lease agreements in place for various properties
under our control. We expect to receive operating lease payments from lessees
during the five years ending December 31, 2006 through 2010 of $0.9 million,
$1.1 million, $1 million, $0.8 million, and $0.7 million, respectively.
We generally warrant our products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time of
the product depending on the nature of the product. As of December 31, 2005 and
2004, we have accrued $12.7 million and $13.2 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 each of the years 2005, 2004 and
2003 were $50.3 million, $47.8 million and $46.6 million, respectively.
The following table provides the changes in our product warranties (in
thousands):
DECEMBER 31,
--------------------
2005 2004
---- ----
Balance, beginning of period .......................... $ 13,194 $ 13,987
Liabilities accrued for current year sales ............ 50,273 47,811
Settlements of warranty claims ........................ (50,766) (48,604)
-------- --------
Balance, end of period ................................ $ 12,701 $ 13,194
======== ========
LETTERS OF CREDIT. At December 31, 2005, we had outstanding letters of credit
with certain vendors aggregating approximately $7.8 million. The contract amount
of the letters of credit is a reasonable estimate of their value as the value
for each is fixed over the life of the commitment.
CHANGE OF CONTROL ARRANGEMENTS. We entered into Change in Control arrangements
with two key officers. In the event of a Change of Control (as defined in the
agreement), each executive will receive severance payments (as defined in the
agreement) and certain other benefits.
ASBESTOS. In 1986, we acquired a brake business, which we subsequently sold in
March 1998 and which is accounted for as a discontinued operation. When we
originally acquired this brake business, we assumed future liabilities relating
to any alleged exposure to asbestos-containing products manufactured by the
seller of the acquired brake business. In accordance with the related purchase
agreement, we agreed to assume the liabilities for all new claims filed on or
after September 1, 2001. Our ultimate exposure will depend upon the number of
claims filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense thereof. At December 31, 2005, approximately 4,500 cases
were outstanding for which we were responsible for any related liabilities. In
early 2006, we settled a significant number of cases. We expect the outstanding
cases to increase gradually due to recent legislation in certain states
mandating minimum medical criteria before a case can be heard. Since inception
in September 2001 through February 28, 2006, the amounts paid for settled claims
are $3.9 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.
79
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(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 evaluation over the prior three
years, we decided to maintain a 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 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.
ANTITRUST LITIGATION. 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, following which the plaintiff filed an
amended complaint dropping, among other things, all claims under the Sherman
Act. The remaining claims allege violations of the Robinson-Patman Act. Motions
to dismiss those claims were filed by us in February 2006, and we are awaiting a
decision from the court regarding these motions. Although we cannot predict the
ultimate outcome of this case or estimate the range of any potential loss that
may be incurred in the litigation, we believe that the lawsuit is without merit,
deny all of the plaintiff's allegations of wrongdoing and believe we have
meritorious defenses to the plaintiff's claims. We intend to defend vigorously
this lawsuit.
OTHER LITIGATION. We are involved in various other litigation and product
liability matters arising in the ordinary course of business. Although the final
outcome of any asbestos-related matters or any other litigation or product
liability matter cannot be determined, based on our understanding and evaluation
of the relevant facts and circumstances, it is our opinion that the final
outcome of these matters will not have a material adverse effect on our
business, financial condition or results of operations.
80
20. QUARTERLY FINANCIAL DATA UNIT (UNAUDITED)
2005: DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
QUARTER ENDED 2005 2005 2005 2005
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ............................................... $ 172,137 $ 224,438 $ 226,512 $ 207,326
---------- ---------- ---------- ----------
Gross profit ............................................ 39,498 49,137 48,910 48,435
---------- ---------- ---------- ----------
(Loss) earnings from continuing operations .............. (5,705) 4,163 (1,281) 1,053
---------- ---------- ---------- ----------
Loss from discontinued operation, net of taxes .......... (535) (449) (384) (407)
---------- ---------- ---------- ----------
Net (loss) earnings ..................................... $ (6,240) $ 3,714 $ (1,665) $ 646
---------- ---------- ---------- ----------
Net (loss) earnings from continuing operations
per common share:
Basic .............................................. $ (0.29) $ 0.21 $ (0.07) $ 0.05
Diluted ............................................ $ (0.29) $ 0.21 $ (0.07) $ 0.05
---------- ---------- ---------- ----------
Net (loss) earnings per common share:
Basic .............................................. $ (0.32) $ 0.19 $ (0.09) $ 0.03
Diluted ............................................ $ (0.32) $ 0.19 $ ( 0.09) $ 0.03
---------- ---------- ---------- ----------
2004: DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
QUARTER ENDED 2004 2004 2004 2004
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ............................................... $ 180,966 $ 203,487 $ 235,049 $ 204,781
---------- ---------- ---------- ----------
Gross profit ............................................ 29,223 52,542 62,268 50,960
---------- ---------- ---------- ----------
(Loss) earnings from continuing operations .............. (17,245) 1,340 7,543 (545)
---------- ---------- ---------- ----------
Loss from discontinued operation, net of taxes .......... (617) (2,016) (851) (425)
---------- ---------- ---------- ----------
Cumulative effect on accounting change, net of taxes .... (1,564) -- -- --
---------- ---------- ---------- ----------
Net (loss) earnings ..................................... $ (19,426) $ (676) $ 6,692 $ (970)
---------- ---------- ---------- ----------
Net (loss) earnings from continuing operations
per common share:
Basic .............................................. $ (0.89) $ 0.07 $ 0.39 $ (0.03)
Diluted ............................................ $ (0.89) $ 0.07 $ 0.38 $ (0.03)
---------- ---------- ---------- ----------
Net (loss) earnings per common share:
Basic .............................................. $ (1.00) $ (0.03) $ 0.35 $ (0.05)
Diluted ............................................ $ (1.00) $ (0.03) $ 0.34 $ (0.05)
---------- ---------- ---------- ----------
81
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In the fourth quarter of 2004, we determined that it was a preferable accounting
method to reflect new customer acquisition costs as a reduction to revenue when
incurred. Accordingly, 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 accounting change as if it had taken effect on
October 1, 2004. In addition, in the fourth quarter of 2004, Engine Management
gross margins were negatively impacted primarily due to one-time charges related
to inefficiencies and reducing inventories. In addition, in the fourth quarter
of 2004, we recorded an impairment loss on goodwill of $6.4 million, which
impairment loss related to our Temperature Control and European Segments for
which we recorded a charge of $4.8 million and $1.6 million, respectively.
82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as
of the end of the period covered by this Report. 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.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this Report.
REMEDIATION OF PRIOR YEAR MATERIAL WEAKNESSES. As of December 31, 2004, we had
identified certain material weaknesses in our internal controls, relating to (a)
insufficient personnel resources within the accounting and financial reporting
function, (b) deficiencies in our information technology function which, when
considered in the aggregate, constituted a material weakness over financial
reporting, and (c) deficiencies in the analysis and reconciliation of general
ledger accounts which were indicative of a material weakness in controls over
closing procedures. While these material weaknesses did not have an effect on
our reported financial results, they nevertheless constituted deficiencies in
our disclosure controls. We disclosed these material weaknesses in each of the
first three quarters of 2005 and took steps to remediate these material
weaknesses throughout 2005.
In 2005, we took various actions to strengthen our internal control over
financial reporting beyond what has existed in prior years. We improved our
disclosure controls and procedures and remediated our material weaknesses in our
internal control over financial reporting by taking the following actions:
(1) We hired additional senior level accounting staff, including a
Corporate Controller/Chief Accounting Officer, and re-allocated
resources to our accounting and finance department to strengthen our
accounting function, particularly in our Engine Management division.
In addition, we hired a Financial Compliance Manager to help drive
our Sarbanes-Oxley Act compliance efforts.
(2) We utilized an independent third party consulting firm to assist us
with our preparation, documentation and testing of our compliance
efforts with Section 404 of the Sarbanes-Oxley Act.
(3) We strengthened our documentation and established rigorous
procedures relating to controls of our key accounts.
(4) We improved our IT function by:
a. 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;
b. Establishing a plan for uniform upgrades of workstations and
software, including virus protection and software fixes;
83
c. Establishing a formal policy and procedure to address the
overall security framework, including user access, application
access, password usage, intrusion detection and system
security monitoring;
d. Improving our security measures to safeguard our data,
including enhancing our disaster recovery procedures;
e. Improving our policies and procedures for system maintenance
and handling back-up and recovery tapes; and
f. 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.
With the implementation of the above measures, we believe that we have
significantly improved our internal control over financial reporting. We have
therefore concluded that the above-referenced material weaknesses in our
internal control over financial reporting have been fully corrected as of
December 31, 2005.
Although our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their desired control objectives, 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 in
our internal control over financial reporting that we have not discovered to
date.
(b) Management's Report on Internal Control Over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act, as part of this Report we
have furnished a report regarding our internal control over financial report as
of December 31, 2005. The report is under the caption "Management's Report on
Internal Control Over Financial Reporting" in "Item 8. Financial Statements and
Supplementary Data", which report is incorporated herein by reference.
(c) Attestation Report of Independent Registered Public Accounting Firm.
Grant Thornton, our independent registered public accounting firm, has issued an
opinion as to management's assessment and as to the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005. The
opinion is under the caption "Report of Independent Registered Public Accounting
Firm-Internal Control Over Financial Reporting" in "Item 8. Financial Statements
and Supplementary Data" for this attestation report, which is incorporated
herein by reference.
(d) Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2005 and subsequent to that date, we made
and continue to make changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting, including the following:
o Hired additional accounting staff and changed reporting
relationships to emphasize segregation of duties and review
processes;
o Increased employee training on compliance with Section 404 of the
Sarbanes-Oxley Act at our various facilities;
84
o Continued 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;
o Improved the documentation of our significant accounting and IT
policies, and strengthened the integrity and access controls of our
systems; and
o Implemented increased levels of review and approval relative to
complex and judgmental accounting and tax issues.
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.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
information in our Definitive Proxy Statement to be filed with the SEC in
connection with our 2006 Annual Meeting of Stockholders (the "2006 Proxy
Statement") set forth under the captions "Election of Directors," "Management
Information," "Corporate Governance" and "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information in our 2006 Proxy Statement set forth under captions "Management
Information," "Corporate Governance," "Report of the Compensation and Management
Development Committee," "Stock Performance Graph" and "Certain Relationships and
Related Party Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the
information in our 2006 Proxy Statement set forth under the captions "Management
Information" and "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information in our 2006 Proxy Statement set forth under the captions "Certain
Relationships and Related Party Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the
information in our 2006 Proxy Statement set forth under the captions "Audit and
Non-Audit Fees."
85
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The Index to Consolidated Financial Statements of the
Registrant Financial Statements under Item 8 of this Report is
incorporated herein by reference as the list of Financial
Statements required as part of this Report.
(2) The following financial schedule and related report for the
years 2005, 2004 and 2003 is submitted herewith:
Report of Independent Registered Public Accounting Firm on
Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
not applicable or the information is included in the financial
statements or notes thereto.
(3) Exhibits.
The exhibit list in the Exhibit Index is incorporated by
reference as the list of exhibits required as part of this
Report.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
/s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and Chief Financial Officer
New York, New York
March 16, 2006
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lawrence I. Sills and James J. Burke, jointly and
severally, as his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 16, 2006 /s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
March 16, 2006 /s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
March 16, 2006 /s/ Luc Gregoire
----------------
Luc Gregoire
Corporate Controller and
Chief Accounting Officer
87
March 16, 2006 /s/ Robert M. Gerrity
---------------------
Robert M. Gerrity, Director
March 16, 2006 /s/ Kenneth A. Lehman
---------------------
Kenneth A. Lehman, Director
March 16, 2006 /s/ Arthur S. Sills
-------------------
Arthur S. Sills, Director
March 16, 2006 /s/ Peter J. Sills
------------------
Peter J. Sills, Director
March 16, 2006 /s/ Frederick D. Sturdivant
---------------------------
Frederick D. Sturdivant, Director
March 16, 2006 /s/ William H. Turner
---------------------
William H. Turner, Director
March 16, 2006 /s/ Richard S. Ward
-------------------
Richard S. Ward, Director
March 16, 2006 /s/ Roger M. Widmann
--------------------
Roger M. Widmann, Director
88
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
2.1 Asset Purchase Agreement, dated as of February 7, 2003, by and among Dana
Corporation, Automotive Controls Corp., BWD Automotive Corporation, Pacer
Industries, Inc., Ristance Corporation, Engine Controls Distribution
Services, Inc., as Sellers, and Standard Motor Products, Inc., as Buyer
(incorporated by reference to the Company's Current Report on Form 8-K,
filed on February 10, 2003).
3.1 Restated By-Laws, dated May 23, 1996, filed as an Exhibit of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as an
Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
3.3 Certificate of Amendment of the Certificate of Incorporation, dated
February 15, 1996, filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996.
4.1 Form of Subordinated Debenture Indenture (including form of convertible
debenture) (incorporated by reference to Exhibit 4.1 to the Company's
Amendment No. 2 to its Registration Statement on Form S-3 (Registration
No. 333-79177), filed on July 20, 1999).
10.1 Employee Stock Ownership Plan and Trust, dated January 1, 1989
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989).
10.2 Supplemental Executive Retirement Plan, dated August 15, 1994
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
10.3 1996 Independent Outside Directors Stock Option Plan of Standard Motors
Products, Inc. (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.4 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended (incorporated by reference to the Company's Registration Statement
on Form S-8 (Registration No. 33-51565), filed on May 1, 1998).
10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended and restated, (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 333-59524), filed on
April 25, 2001).
10.6 Supplemental Compensation Plan effective October 1, 2001 (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.7 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and John Gethin (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
89
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
10.8 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and James Burke (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
10.9 Amended and Restated Credit Agreement, dated as of February 7, 2003, among
Standard Motor Products, Inc., as Borrower and General Electric Capital
Corp. and Bank of America, as Lenders (incorporated by reference to the
Company's Current Report on Form 8-K filed on February 10, 2003).
10.10 Amendment No. 1 to Amended and Restated Credit Agreement, dated June 27,
2003, among Standard Motor Products, Inc., as Borrower and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003).
10.11 Amendment No. 2 to Amended and Restated Credit Agreement, dated March 11,
2004, among Standard Motor Products, Inc., as Borrower, and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Quarterly Report in Form 10-Q for the quarter
ended March 31, 2004).
10.12 Amendment No. 3 to Amended and Restated Credit Agreement, dated August 11,
2004, among Standard Motor Products, Inc., as Borrower, and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Quarterly Report in Form 10-Q for the quarter
ended September 30, 2004).
10.13 Waiver and Amendment No. 4 to Amended and Restated Credit Agreement, dated
as of March 31, 2005, among Standard Motor Products, Inc., as Borrower,
and General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Annual Report in Form 10-K for
the year ended December 31, 2004).
10.14 Waiver and Amendment No. 5 to Amended and Restated Credit Agreement, dated
as of May 9, 2005, among Standard Motor Products, Inc., as Borrower, and
General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Quarterly Report in Form 10-Q
for the quarter ended March 31, 2005).
10.15 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
(incorporated by reference to the Company's Quarterly Report in Form 10-Q
for the quarter ended September 30, 2005).
10.16 Consent and Amendment No. 7 to Amended and Restated Credit Agreement,
dated as of December 29, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Current Report on Form
8-K filed on January 3, 2006).
90
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
10.17 Credit Agreement, dated as of December 29, 2005, among SMP Motor Products,
Ltd., as Borrower, GE Canada Finance Holding Company, for itself and as
agent for the lenders, and GECC Capital Markets, Inc., as lead arranger
and book runner (incorporated by reference to the Company's Current Report
on Form 8-K filed on January 3, 2006).
10.18 Repurchase and Prepayment Agreement, dated as of December 29, 2005,
between Standard Motor Products, Inc., and Dana Corporation (incorporated
by reference to the Company's Current Report on Form 8-K filed on January
3, 2006).
21 List of Subsidiaries of Standard Motor Products, Inc.
23.1 Consent of Independent Registered Public Accounting Firm - Grant Thornton
LLP.
23.2 Consent of Independent Registered Public Accounting Firm - KPMG LLP.
24 Power of Attorney (see signature page to Annual Report on Form 10-K).
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.
91
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON SCHEDULE
To the Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial statements
of Standard Motor Products, Inc. and Subsidiaries as of December 31, 2005 and
2004, referred to in our report dated March 15, 2006, which is included in the
annual report to security holders and incorporated by reference in Part II of
this form. Our audit was conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Schedule II is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
GRANT THORNTON LLP
New York, New York
March 15, 2006
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Standard Motor Products, Inc.:
Under date of March 26, 2004, we reported on the consolidated statements of
operations, changes in stockholders' equity, and cash flows for year ended
December 31, 2003, as contained in the annual report on Form 10-K for the year
ended December 31, 2005. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule as listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
March 26, 2004
93
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2005, 2004 and 2003
Additions
---------
Balance at Charged to
beginning costs and Balance at
Description of year expenses Other Deductions end of year
Year ended December 31, 2005:
Allowance for doubtful accounts .... $ 7,422,000 $ 655,000 $ -- $ 550,000 $ 7,527,000
Allowance for discounts ............ 1,932,000 11,708,000 -- 11,593,000 2,047,000
------------ ------------ ------------ ------------ ------------
$ 9,354,000 $ 12,363,000 $ -- $ 12,143,000 $ 9,574,000
============ ============ ============ ============ ============
Allowance for sales returns .......... $ 23,127,000 $ 83,872,000 $ -- $ 84,653,000 $ 22,346,000
============ ============ ============ ============ ============
Allowance for inventory valuation .... $ 39,638,000 $ 5,286,000 $ -- $ 5,863,000 $ 39,061,000
============ ============ ============ ============ ============
Year ended December 31, 2004:
Allowance for doubtful accounts .... $ 3,009,000 $ 404,000 $ 5,163,000(1) $ 1,154,000 $ 7,422,000
Allowance for discounts ............ 2,000,000 12,319,000 -- 12,387,000 1,932,000
------------ ------------ ------------ ------------ ------------
$ 5,009,000 $ 12,723,000 $ 5,163,000 $ 13,541,000 $ 9,354,000
============ ============ ============ ============ ============
Allowance for sales returns .......... $ 24,115,000 $ 86,452,000 $ 194,000(2) $ 87,634,000 $ 23,127,000
============ ============ ============ ============ ============
Allowance for inventory valuation .... $ 41,803,000 $ 1,487,000 $ 430,000(2) $ 4,082,000 $ 39,638,000
============ ============ ============ ============ ============
Year ended December 31, 2003:
Allowance for doubtful accounts .... $ 3,568,000 $ 813,000 $ 330,000(2) $ 1,702,000 $ 3,009,000
Allowance for discounts ............ 1,314,000 9,615,000 800,000(2) 9,729,000 2,000,000
------------ ------------ ------------ ------------ ------------
$ 4,882,000 $ 10,428,000 $ 1,130,000 $ 11,431,000 $ 5,009,000
============ ============ ============ ============ ============
Allowance for sales returns .......... $ 16,341,000 $ 83,087,000 $ 7,013,000(2) $ 82,326,000 $ 24,115,000
============ ============ ============ ============ ============
Allowance for inventory valuation .... $ 14,291,000 $ 5,613,000 $ 27,442,000(2) $ 5,543,000 $ 41,803,000
============ ============ ============ ============ ============
<FN>
(1) The Company previously presented the reserve for accounts receivable
balances over 90 days past due as a reduction to the gross
receivable balance instead of as part of the allowance for doubtful
accounts. In the fourth quarter of 2004, the Company decided to
record the $5,163,000 of accounts receivable over 90 days past due
as part of gross accounts receivable instead of as an offset to the
allowance for doubtful accounts. There was no impact on the net
accounts receivable recorded on the consolidated balance sheets.
(2) Allowances acquired through acquisitions.
</FN>
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