================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NUMBER 1-4743 STANDARD MOTOR PRODUCTS, INC. (Exact name of registrant as specified in its charter) NEW YORK 11-1362020 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101 (Address of principal executive offices) (Zip Code) (718) 392-0200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: DATE CLASS SHARES OUTSTANDING COMMON STOCK, PAR APRIL 30, 2002 VALUE $2.00 PER SHARE 12,524,519 - -------------- --------------------- ----------
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL AND OTHER INFORMATION MARCH 31, 2002 PART 1 - FINANCIAL INFORMATION ITEM 1 PAGE NO. - ------ -------- CONSOLIDATED BALANCE SHEETS March 31, 2002 and December 31, 2001 3 & 4 CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS for the three-month periods ended March 31, 2002 and 2001 5 CONSOLIDATED STATEMENTS OF CASH FLOWS for the three-month periods ended March 31, 2002 and 2001 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 - 16 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS 17 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 18 SIGNATURE 18 -2-
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS March 31, 2002 December 31, (Unaudited) 2001 - -------------------------------------------------------------------------------- Current assets: <S> <C> <C> Cash and cash equivalents $ 2,520 $ 7,496 Accounts and notes receivable, net of allowance for doubtful accounts and discounts of $5,131 (2001 - $4,362) (Note 6) 147,580 117,965 Inventories (Notes 4 and 6) 187,391 177,291 Deferred income taxes 12,668 12,316 Prepaid expenses and other current assets 15,054 13,881 -------- -------- Total current assets 365,213 328,949 -------- -------- Property, plant and equipment, net of accumulated depreciation (Notes 5 and 6) 100,224 101,646 Goodwill, net (Note 3) 20,017 38,040 Other assets 37,597 40,794 -------- -------- Total assets $523,051 $509,429 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. -3-
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for shares and per share data) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2002 December 31, (Unaudited) 2001 - ----------------------------------------------------------------------------------------- Current liabilities: <S> <C> <C> Notes payable $ 826 $ 4,075 Current portion of long-term debt (Note 6) 1,766 1,784 Accounts payable 43,785 26,110 Sundry payables and accrued expenses 39,005 41,968 Accrued customer returns 18,486 18,167 Payroll and commissions 8,303 8,489 --------- --------- Total current liabilities 112,171 100,593 --------- --------- Long-term debt (Note 6) 220,260 200,066 Postretirement benefits other than pensions and other accrued liabilities 23,369 23,083 --------- --------- Total liabilities 355,800 323,742 --------- --------- Commitments and contingencies (Notes 6,7,10,12 and 14) Stockholders' equity (Notes 6,7,9,10,11 and 12 ): Common stock - par value $2.00 per share: Authorized - 30,000,000 shares, issued and outstanding 11,832,015 and 11,823,650 shares in 2002 and 2001, respectively) 26,649 26,649 Capital in excess of par value 1,830 1,877 Retained earnings 164,243 183,532 Accumulated other comprehensive loss (2,943) (3,722) --------- --------- 189,779 208,336 Less:Treasury stock - at cost (1,492,461 and 1,500,826 shares in 2002 and 2001, respectively) 22,528 22,649 --------- --------- Total stockholders' equity 167,251 185,687 --------- --------- Total liabilities and stockholders' equity $ 523,051 $ 509,429 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. -4-
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Dollars in thousands, except for shares and per share data) (Unaudited) For Three-Months Ended March 31, 2002 2001 ---- ---- <S> <C> <C> Net sales (Note 2) $ 126,080 $ 153,960 Cost of sales (Note 2) 95,345 117,032 ------------ ------------ Gross profit 30,735 36,928 Selling, general and administrative expenses (Note 2) 31,053 32,492 ------------ ------------ Operating income(loss) (318) 4,436 Other income (expense) - net 668 597 Interest expense 3,462 4,127 ------------ ------------ Earnings (loss) before taxes and cumulative effect of accounting change (3,112) 906 Income tax expense (benefit) (872) 287 ------------ ------------ Earnings (loss) before cumulative effect of accounting change (2,240) 619 Cumulative effect of accounting change, net of tax (Note 3) (15,985) -- ------------ ------------ Net earnings(loss) (18,225) 619 Retained earnings at beginning of period 183,532 190,253 ------------ ------------ 165,307 190,872 Less: cash dividends for period 1,064 1,052 ------------ ------------ Retained earnings at end of period $ 164,243 $ 189,820 ============ ============ PER SHARE DATA: Net earnings(loss) per common share - basic: Earnings(loss) per share before cumulative effect of accounting change $ (0.19) $ 0.05 Cumulative effect of accounting change (1.35) -- ------------ ------------ Net earnings(loss) per common share - basic $ (1.54) $ 0.05 ============ ============ Net earnings(loss) per common share - diluted: Earnings(loss) per share before cumulative effect of accounting change $ (0.19) $ 0.05 Cumulative effect of accounting change (1.35) -- ------------ ------------ Net earnings(loss) per common share - diluted $ (1.54) $ 0.05 ============ ============ Average number of common shares 11,827,636 11,714,346 ============ ============ Average number of common and dilutive shares 11,827,636 11,728,569 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. -5-
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) For the Three-Months Ended March 31, -------------------------- 2002 2001 ------------- ----------- <S> <C> <C> Cash flows from operating activities: Net earnings (loss) $(18,225) $ 619 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 3,898 4,828 Gain on sale of property, plant & equipment (140) -- Equity income from joint ventures (113) (120) Employee stock ownership plan allocation 163 133 Cumulative effect of accounting change, net of tax 15,985 -- Change in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable, net (29,615) (44,020) Decrease (Increase) in inventories (6,100) 13,369 Increase in prepaid expenses and other current assets (1,335) (767) Decrease in other assets 5,748 369 (Decrease) Increase in accounts payable 17,675 (6,741) Decrease in sundry payables and accrued expenses (1,978) (3,351) (Decrease) Increase in other liabilities 433 (401) -------- -------- Net cash used in operating activities (13,604) (36,082) -------- -------- Cash flows from investing activities: Proceeds from the sale of property, plant & equipment 513 -- Capital expenditures (2,508) (3,430) Payments for acquisitions, net of cash acquired (4,831) (796) -------- -------- Net cash used in investing activities (6,826) (4,226) -------- -------- Cash flows from financing activities: Net borrowings under line-of-credit agreements 17,215 50,151 Principal payments and retirement of long-term debt (288) (11,515) Proceeds from exercise of employee stock options 74 -- Dividends paid (1,064) (1,052) -------- -------- Net cash provided by financing activities 15,937 37,584 -------- -------- Effect of exchange rate changes on cash (483) (759) Net decrease in cash and cash equivalents (4,976) (3,483) Cash and cash equivalents at beginning of the period 7,496 7,699 -------- -------- Cash and cash equivalents at end of the period $ 2,520 $ 4,216 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 4,971 $ 4,640 ======== ======== Income taxes $ 121 $ 170 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. -6-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 Standard Motor Products, Inc. (the "Company") is engaged in the manufacturing and distribution of replacement parts for motor vehicles in the automotive aftermarket industry. The accompanying unaudited financial information should be read in conjunction with the consolidated financial statements, including the notes thereto, for the year ended December 31, 2001. The consolidated financial statements include the accounts of the Company and all domestic and international companies in which the Company has more than a 50% equity ownership. The Company's investments in unconsolidated affiliates are accounted for on the equity method. All significant inter-company items have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year. Where appropriate, certain amounts in 2001 have been reclassified to conform with the 2002 presentation. NOTE 2 On January 1, 2002, the Company adopted the guidelines of the Emerging Issues Task Force (EITF) entitled "Accounting for Certain Sales Incentives" and "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products." These guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. Historically, the Company has provided certain consideration, including rebates, product and discounts to customers and treated such costs as advertising, marketing and sales force expenses. Beginning with the first quarter of 2002, such costs are now treated as a reduction of revenue or as cost of sales. As a result, certain costs have been reclassified in the first quarter of 2001 from selling, general and administrative expenses, of approximately $7.5 million. These reclassifications have no effect on net earnings. NOTE 3 Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS No. 142). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. Using the discounted cash flows method, based on the Company's weighted average cost of capital and market multiples, the Company reviewed the fair values of each of its reporting units. The recent decline in economic and market conditions, higher integration costs than anticipated and the general softness in the automotive aftermarket has caused a decrease in the fair values of certain of the Company's reporting units. As a result, the Company recorded an impairment loss on goodwill as a cumulative effect of accounting change of $16 million, net of tax, or $1.35 per diluted share during the first quarter of 2002. The impairment loss relates to goodwill pertaining to certain of the Company's reporting units within its European Operations (classified as "All Other") for segment reporting and within its Temperature Control Segment and recorded a charge of $8.6 million and $7.4 million, respectively. -7-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Upon adoption of SFAS No. 142, the Company's earnings (loss) before cumulative effect of accounting change and basic and diluted earnings (loss) per share before cumulative effect of accounting change adjusted to exclude goodwill amortization expense (net of taxes) is as follows: <TABLE> <CAPTION> For Three-Months Ended March 31, (In thousands, except per share amounts) 2002 2001 ---------- ------------ <S> <C> <C> Reported earnings (loss) before cumulative effect of accounting change $ (2,240) $ 619 Add back: goodwill amortization expense, net of tax -- 608 --------- --------- Adjusted earnings (loss) before cumulative effect of accounting change $ (2,240) $ 1,227 ========= ========= Basic earnings (loss) per share: Reported basic earnings (loss) per share before cumulative effect of accounting change $ (0.19) $ 0.05 Add back: goodwill amortization expense, net of tax -- 0.05 --------- --------- Adjusted basic earnings (loss) per share before cumulative effect of accounting change $ (0.19) $ 0.10 ========= ========= Diluted earnings (loss) per share: Reported diluted earnings (loss) per share before cumulative effect of accounting change $ (0.19) $ 0.05 Add back: goodwill amortization expense, net of tax -- 0.05 --------- --------- Adjusted diluted earnings (loss) per share before cumulative effect of accounting change $ (0.19) $ 0.10 ========= ========= </TABLE> NOTE 4 INVENTORIES ----------- (Dollars in Thousands) March 31, 2002 December 31, 2001 (unaudited) --------------- ------------------ Finished Goods $ 150,583 $ 141,799 Work in Process 2,929 3,155 Raw Materials 33,879 32,337 --------------- ------------------ Total inventories $ 187,391 $ 177,291 =============== ================== -8-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 PROPERTY, PLANT AND EQUIPMENT (Dollars in thousands) <TABLE> <CAPTION> March 31, 2002 December 31, 2001 (unaudited) ------------- -------------- <S> <C> <C> Land, buildings and improvements $ 60,321 $ 60,665 Machinery and equipment 110,506 109,617 Tools, dies and auxiliary equipment 18,530 17,815 Furniture and fixtures 27,784 27,643 Computer software 10,309 10,231 Leasehold improvements 7,457 7,450 Construction in progress 7,510 6,440 ------------- -------------- 242,417 239,861 Less: accumulated depreciation and amortization 142,193 138,215 ------------- -------------- Total property, plant and equipment - net $ 100,224 $ 101,646 ============= ============== </TABLE> NOTE 6 LONG-TERM DEBT (Dollars in thousands) <TABLE> <CAPTION> March 31, 2002 December 31, 2001 (unaudited) ------------ -------------- Long Term Debt Consists of: <C> <C> <C> 6.75% convertible subordinated debentures $ 90,000 $ 90,000 Revolving credit facility 127,254 106,790 Other 4,772 5,060 ------------ -------------- 222,026 201,850 Less: current portion 1,766 1,784 ------------ -------------- Total non-current portion of Long-term debt $ 220,260 $ 200,066 ============ ============== </TABLE> The Company, effective April 27, 2001 entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new secured revolving credit facility. The term of the new credit agreement is for a period of five years and provides for a line of credit up to $225 million. The initial proceeds were used to refinance approximately $97 million of the outstanding indebtedness under the Company's former bank line of credit, a senior note of $52 million, a $25 million accounts receivable sale arrangement and a Canadian Credit Facility of $5 million. The Company recorded an extraordinary loss of approximately $2.8 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. Direct borrowings bear interest at the Prime Rate plus the applicable margin (as defined) or the LIBOR Rate plus the applicable margin (as defined), at the option of the Company. Borrowings are collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, capital expenditures, liens and acquisitions. On July 26, 1999, the Company completed a public offering of convertible subordinated debentures amounting to $90 million. The Convertible Debentures carry an interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009. The Debentures are convertible into 2,796,000 shares of the Company's common stock. -9-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 The Company does not enter into financial instruments for trading or speculative purposes. The principal financial instruments used for cash flow hedging purposes are interest rate swaps. In July 2001, the Company entered into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively convert a portion of the Company's variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional principal amounts. At March 31, 2002, the Company had two outstanding interest rate swap agreements maturing in January 2003 and 2004, with aggregate notional principal amounts of $75 million. Under these agreements the Company receives a floating rate based on the LIBOR interest rate, and pays a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million. If, at any time, the swaps are determined to be ineffective, in all or in part, due to changes in the interest rate swap agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations in the period. NOTE 8 The Company sold certain accounts receivable to an independent financial institution, through its wholly owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three year agreement whereby it can sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement was terminated in the second quarter of 2001 as part of the new credit facility described in Note 6. At March 31, 2001, net account receivables amounting to $25 million had been sold under this agreement. These sales were reflected as reductions of trade accounts receivable and the related fees and discounting expense were recorded as other expense. NOTE 9 Total comprehensive loss was $17,446,000 and $320,000 for the three-month periods ended March 31, 2002 and 2001, respectively. NOTE 10 At March 31 2002, in aggregate 1,312,276 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans. NOTE 11 Following are reconciliations of the earnings available to common stockholders and the shares used in calculating basic and dilutive net earnings (loss) per common share: <TABLE> <CAPTION> For Three-Months Ended March 31, ------------------------------ 2002 2001 ---- ---- <S> <C> <C> Earnings (loss) before cumulative effect of accounting change $(2,240,000) $619,000 Cumulative effect of accounting change (15,985,000) - --------------- ----------- Earnings (loss) available to common stockholders (18,225,000) 619,000 --------------- ----------- Net earnings (loss) available to common stockholders assuming dilution $ (18,225,000) $619,000 =============== =========== Weighted average common shares 11,827,636 11,714,346 Effect of stock options - 14,223 --------------- ----------- Weighted average common equivalent shares outstanding assuming dilution 11,827,636 11,728,569 =============== =========== </TABLE> -10-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The average shares listed below were not included in the computation of diluted earnings (loss) per share because to do so would have been anti-dilutive for the periods presented. For Three-Months Ended March 31, --------------------------- 2002 2001 ---- ---- Stock options 720,752 1,139,075 Convertible debentures 2,796,120 2,796,120 ============ ============= NOTE 12 In fiscal 2000, the Company created an employee benefits trust to which it contributed 750,000 shares of treasury stock. The Company is authorized to instruct the trustees to distribute such shares toward the satisfaction of the Company's future obligations under Employee Benefit Plans. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with its fiduciary duties. As of March 31, 2002, 75,000 shares have been released from the trust. During April of 2002, the Company committed 75,000 shares to be released leaving 600,000 shares remaining in the trust. NOTE 13 The Company's two reportable operating segments are Engine Management and Temperature Control. <TABLE> <CAPTION> Industry Segment (Dollars in thousands) For the three-months ended March 31, ------------------------------------------------------------------ 2002 2001 ------------------------------------------------------------------ OPERATING OPERATING INCOME NET SALES INCOME(LOSS) NET SALES <S> <C> <C> <C> <C> Engine Management $ 67,979 $ 7,140 $ 72,793 $ 6,724 Temperature Control 49,084 (2,148) 71,613 599 All Other 9,017 (5,310) 9,554 (2,887) ---------- -------------- ----------- ----------------- Consolidated $126,080 $ (318) $ 153,960 $ 4,436 ========== ============== =========== ================= </TABLE> All other consists of items pertaining to European and Canadian operations and the corporate headquarters function, which do not meet the criteria of a reportable operating segment. The carrying value of goodwill for the Company's segments as of March 31, 2002 were as follows: (In Thousands) Engine Management $ 10,490 Temperature Control 4,822 All Other 4,705 -------------- Goodwill, net $ 20,017 ============== NOTE 14 On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $0.5 million (formerly $19.8 million) of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In addition, this former customer seeks $10.5 million from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes that these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. -11-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 (CONTINUED) The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. One of the product liability matters involves a former Brake business of the Company. In 1986, the Company acquired the business resulting in the assumption by the Company of certain liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller. In accordance with the related purchase agreement, the Company agreed to assume the liabilities for all new claims filed after fifteen years from the date of the purchase. The ultimate exposure to the Company will depend upon the extent to which future claims are filed and the amounts paid for indemnity and defense. At March 31, 2002, approximately 240 cases were outstanding whereby the Company is now responsible for any related liabilities. Although the final outcome of this specific matter or any other litigation or product liability matter cannot be determined, based on the Company's understanding and evaluation of the relevant facts and circumstances, it is management's opinion that the final outcome of these matters will not have a material adverse effect on the Company's financial statements taken as a whole. -12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-Q. LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 2002, cash used in operations amounted to $13.6 million, as compared to $36.1 million in the same period of 2001. The decrease is primarily attributable to lower accounts receivable as a result of the decline in net sales and an increase in accounts payable. This decrease was partially offset by an increase in inventory in our Temperature Control Segment due to the seasonal nature of the business. Cash used in investing activities was $6.8 million in the first quarter of 2002, as compared to $4.2 million in the same period of 2001. The increase is primarily due to the acquisition of assets from Hartle Industries. Assets acquired consist primarily of property plant and equipment, and inventory. The purchase was financed with funds provided under the Company's line of credit. In December 2001, the Company signed a letter of intent to acquire Carol Cable Limited, a manufacturer and distributor of wire sets, based in England, for approximately $1.7 million. Assets consist primarily of property plant and equipment, and inventory. The purchase was completed in April 2002 with funds provided under the Company's line of credit. On March 20, 2002, the Company reached a definitive agreement to purchase the aftermarket fuel injector business of Sagem Inc., a subsidiary of Johnson Controls, for approximately $11.5 million. Sagem Inc. is a basic manufacturer of fuel injectors, a product line which prior to the acquisition, the Company has been purchasing. Assets to be acquired consist primarily of property, plant and equipment, and inventory. The purchase which is expected to close in May will be partially financed by the seller (approximately $7 million to be paid over a two year period), with the remaining funds being provided under the Company's line of credit. Cash provided by financing activities was $15.9 million in the first quarter of 2002, as compared to $37.6 million in the same period of 2001. The change is primarily due to decreased borrowings under the Company's line of credit which reflects the Company's focus on reducing capital employed in the business. The Company, effective April 27, 2001 entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new secured revolving credit facility. The former unsecured revolving credit facility was set to expire on November 30, 2001. The term of the new credit agreement is for a period of five years and provides for a line of credit up to $225 million. The initial proceeds have been used to refinance approximately $97 million of the outstanding indebtedness under the Company's former bank line of credit, the 7.56% senior note of $52 million, a $25 million accounts receivable sale arrangement and the Canadian Credit Facility of $5 million. The Company recorded an extraordinary loss of approximately $2.8 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. Direct borrowings bear interest at the Prime Rate plus the applicable margin (as defined) or the LIBOR Rate plus the applicable margin (as defined), at the option of the Company. Borrowings are collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, capital expenditures, liens and acquisitions. The Company's profitability and its working capital requirements have become more seasonal with the sales mix of temperature control products. Working capital requirements usually peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales begin to be received. These increased working capital requirements are funded by borrowings from our lines of credit. The Company anticipates that its present sources of funds will continue to be adequate to meet its near term needs. During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which the Company could repurchase shares of its common stock. During such years, $26.7 million (in the aggregate) of common stock has been repurchased to meet present and future requirements of the Company's stock option programs and to fund the Company's ESOP. As of March 31, 2002, the Company has Board authorization to repurchase additional shares at a maximum cost of $1.7 million. During the first quarters of 2002 and 2001, the Company did not repurchase any shares of its common stock. -13-
INTERIM RESULTS OF OPERATIONS COMPARISON OF THE THREE-MONTHS ENDED MARCH 31, 2002 TO THE THREE-MONTHS ENDED MARCH 31, 2001 - -------------------------------------------------------------------------------- On a consolidated basis, net sales in the first quarter of 2002 were $126.1 million, a decrease of $27.9 million, or 18%, as compared to the first quarter of 2001. The sales shortfall was primarily in Temperature Control products. In the first quarter of 2001, there was a large opening order to a new retail account not repeated in 2002; there was a partial loss of business at another major retailer; and some shortfall in other pre-season orders as distributors continue to work off inventories carried forward from previous cool summers. Engine Management net sales were slightly below the first quarter of 2001 and are anticipated to recover in the second quarter as the Company begins shipping new business estimated between $15 to $20 million on an annualized basis. Reported gross margins for the quarter reflected only a slight improvement from 24% to 24.4%. Excluding the impact of certain reclassifications required under the guidelines of the Emerging Issues Task Force (See Note 2 in the Notes to the Consolidated Financial Statements) gross margins improved approximately 1.3 percentage points over 2001 as a result of price increases and higher production levels. Gross margins should continue to improve as production levels are more closely aligned to shipping levels as compared to the significant inventory reduction program in 2001. Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS No. 142). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. Using the discounted cash flows method, based on the Company's weighted average cost of capital and market multiples, the Company reviewed the fair values of each of its reporting units. The recent decline in economic and market conditions, higher integration costs than anticipated and the general softness in the automotive aftermarket has caused a decrease in the fair values of certain of the Company's reporting units. As a result, the Company recorded an impairment loss on goodwill as a cumulative effect of accounting change of $16 million, net of tax, or $1.35 per diluted share during the first quarter of 2002. The impairment loss relates to goodwill pertaining to certain of the Company's reporting units within its European Operations (classified as "All Other") for segment reporting and within its Temperature Control Segment and recorded a charge of $8.6 million and $7.4 million, respectively. Selling, general and administrative expenses decreased by $1.4 million to $31.1 million in the first quarter of 2002, as compared to $32.5 million in the first quarter of 2001. This decrease is primarily due to the elimination of goodwill amortization expense in the first quarter of 2002 of approximately $0.9 million. Also contributing to the decrease are reduced costs associated with lower shipping levels and the Company's focus on cost reduction. Operating income decreased by $4.8 million in the first quarter of 2002, as compared to the first quarter of 2001, primarily due to the decline in net sales, as discussed above. Other income, net, increased slightly in the first quarter of 2002 due to the elimination of fees related to the sale of accounts receivable agreement. Interest expense decreased by 0.7 million in the first quarter 2002 as compared to the same period in 2001, due to lower average borrowings and lower interest rates. The effective tax rate decreased from 32% in the first quarter of 2001 to 28% in first quarter of 2002, due to a decrease in earnings from the Company's domestic subsidiaries. The 28% current effective tax rate reflects the Company's anticipated tax rate for the balance of the year. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Note that our preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. -14-
CRITICAL ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION. We derive our revenue from primarily sales which include replacement parts for motor vehicles, from both our Engine Management and Temperature Control Divisions. The Company recognizes revenue from product sales upon shipment to customers. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Specifically, our management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Similarly, our management must make estimates of the uncollectability of our accounts receivables. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At March 31, 2002, the Company has a valuation allowance of $14.2 million, due to uncertainties related to our ability to utilize some of our deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends. OTHER LOSS RESERVES. We have numerous other loss exposures, such as environmental claims, product liability (including asbestos matters) and litigation. Establishing loss reserves for these matters requires the use of estimates and judgment in regards to risk exposure and ultimate liability. We estimate losses using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded liabilities for loss. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. -15-
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED) The Company is required and plans to adopt the provisions of Statement No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. The Company has exchange rate exposure primarily with respect to the Canadian Dollar and the British Pound. The Company's exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than a subsidiary's functional currency. Similarly, the Company is exposed to market risk as the result of changes in interest rates which may affect the cost of its financing. It is the Company's policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company manages its exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in its debt portfolio. To manage a portion of its exposure to interest rate changes, the Company has entered into interest rate swap agreements, see Note 7 of Notes to Consolidated Financial Statements. The Company invests its excess cash in highly liquid short-term investments. As a result of the Company's refinancing agreement during the second quarter 2001, as described in Note 6 of Notes to Consolidated Financial Statements, the Company's percentage of variable rate debt to total debt is 56% at December 31, 2001 and 59% at March 31, 2002. Other than the aforementioned, there have been no significant changes to the information presented in Item 7A (Market Risk) of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. -16-
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $0.5 million (formerly $19.8 million) of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In addition, this former customer seeks $10.5 million from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes that these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. One of the product liability matters involves a former Brake business of the Company. In 1986, the Company acquired the business resulting in the assumption by the Company of certain liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller. In accordance with the related purchase agreement, the Company agreed to assume the liabilities for all new claims filed after fifteen years from the date of the purchase. The ultimate exposure to the Company will depend upon the extent to which future claims are filed and the amounts paid for indemnity and defense. At March 31, 2002, approximately 240 cases were outstanding whereby the Company is now responsible for any related liabilities. Although the final outcome of this specific matter or any other litigation or product liability matter cannot be determined, based on the Company's understanding and evaluation of the relevant facts and circumstances, it is management's opinion that the final outcome of these matters will not have a material adverse effect on the Company's financial statements taken as a whole. -17-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT(S) ---------- None (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed for this period. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANDARD MOTOR PRODUCTS, INC. ----------------------------- (Registrant) MAY 14, 2002 JAMES J. BURKE - ------------ --------------------------- (Date) Vice President Finance, Chief Financial Officer -18-