FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly Period Ended June 30, 1999 ------------- [ ] 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) None --------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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 ------------------ July 31, 1999 value $2.00 per share 13,169,922 ------------- --------------------- ----------
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL AND OTHER INFORMATION JUNE 30, 1999 PART 1 - FINANCIAL INFORMATION Item 1 Page No. - ------ -------- CONSOLIDATED BALANCE SHEETS June 30, 1999 and December 31, 1998 3 & 4 CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS for the Three-Month and Six-Month periods ended June 30, 1999 and 1998 5 CONSOLIDATED STATEMENTS OF CASH FLOWS for the Six-Month periods ended June 30, 1999 and 1998 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 11 Item 2 - ------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 17 PART II - OTHER INFORMATION --------------------------- Item 4 - ------ Submission of matters to a vote of Security Holders 18 Item 6 - ------ Exhibits and Reports on Form 8-K 18 - 20 Signature 20 -2-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) <TABLE> <CAPTION> ASSETS ------ June 30, December 31, 1999 1998 - --------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 960 $ 23,457 Accounts receivable, less allowances for discounts and doubtful accounts of $8,028 (1998 - $4,525)(Note 10) 247,522 122,008 Inventories (Note 2) 186,991 174,092 Deferred income taxes 11,723 11,723 Prepaid expenses and other current assets 11,500 11,231 -------- -------- Total current assets 458,696 342,511 Property, plant and equipment, net(Note 3) 111,955 109,404 Goodwill, net 41,662 39,232 Other assets (Note 8) 29,093 30,409 -------- -------- Total assets $641,406 $521,556 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 3
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for shares and per share data) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ <TABLE> <CAPTION> June 30, December 31, 1999 1998 - ------------------------------------------------------------------------------ (Unaudited) <S> <C> <C> Current liabilities: Notes payable - banks $ 73,077 $ 3,555 Current portion of long-term debt (Note 6) 27,770 22,404 Accounts payable 65,681 48,414 Sundry payables and accrued expenses 72,623 60,905 Accrued customer returns 27,329 16,296 Payroll and commissions 11,879 12,613 --------- --------- Total current liabilities 278,359 164,187 Long-term debt (Note 6) 122,831 133,749 Postretirement benefits other than pensions and other accrued liabilities 19,095 18,595 --------- --------- Total liabilities 420,285 316,531 Commitments and contingencies (Note 6) Stockholders' equity (Notes 5 and 6): Common stock-par value $2.00 per share: Authorized - 30,000,000 shares Issued - 13,324,476 shares in 1999 and 1998 (including 179,396 and 268,126 shares held as treasury shares in 1999 and 1998, respectively) 26,649 26,649 Capital in excess of par value 2,702 2,951 Retained earnings 195,258 181,679 Accumulated other comprehensive income (loss) 447 (516) --------- --------- 225,056 210,763 Less: treasury stock-at cost 3,935 5,738 --------- --------- Total stockholders' equity 221,121 205,025 --------- --------- Total liabilities and stockholders' equity $ 641,406 $ 521,556 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 4
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (Dollars in thousands, except for shares and per share data) (Unaudited) <TABLE> <CAPTION> For the Three-Months Ended For the Six-Months Ended June 30, June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------- ------------ -------------- <S> <C> <C> <C> <C> Net sales $ 205,714 $ 208,766 $ 382,503 $ 334,811 Cost of sales 140,625 145,694 264,194 227,949 ------------ ------------ ------------ ------------ Gross profit 65,089 63,072 118,309 106,862 Selling, general and administrative expenses 42,929 48,175 87,361 85,680 ------------ ------------ ------------ ------------ Operating income 22,160 14,897 30,948 21,182 Other income (expense) - net (516) 115 (829) 347 ------------ ------------ ------------ ------------ Earnings before interest, taxes and minority interest 21,644 15,012 30,119 21,529 Interest expense 4,802 5,105 8,243 8,480 ------------ ------------ ------------ ------------ Earnings before taxes and minority interest 16,842 9,907 21,876 13,049 Minority interest (41) (17) (179) (135) Income taxes (Note 4) 4,768 1,251 6,016 1,622 ------------ ------------ ------------ ------------ NET EARNINGS 12,033 8,639 15,681 11,292 ------------ ------------ ------------ ------------ Retained earnings at beginning of period 184,276 164,167 181,679 161,514 ------------ ------------ ------------ ------------ 196,309 172,806 197,360 172,806 Less: cash dividends for period 1,051 0 2,102 0 ------------ ------------ ------------ ------------ Retained earnings at end of period $ 195,258 $ 172,806 $ 195,258 $ 172,806 ============ ============ ============ ============ PER COMMON SHARE DATA: - ---------------------- Net earnings per common share: Basic $ 0.92 $ 0.66 $ 1.20 $ 0.86 Diluted 0.91 0.65 1.19 0.86 Dividends per common share $ 0.08 $ 0.00 $ 0.16 $ 0.00 Average number of common shares 13,136,458 13,102,469 13,112,189 13,089,653 ------------ ------------ ------------ ------------ Average number of common and dilutive common shares 13,238,017 13,211,406 13,210,327 13,168,063 ------------ ------------ ------------ ------------ </TABLE> See accompanying notes to consolidated financial statements. 5
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> For Six-Months Ended June 30, ---------------------- 1999 1998 --------- --------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 15,681 $ 11,292 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 8,729 9,722 Loss on disposal of property, plant and equipment -- 55 Change in assets and liabilities, net of effects from acquisitions: (Increase) decrease in accounts receivable, net (117,236) (65,181) (Increase) decrease in inventories (4,758) 36,584 (Increase) decrease in other assets 1,960 2,824 Increase (decrease) in accounts payable 13,564 11,870 Increase (decrease) in other current assets and liabilities 76 98 Increase (decrease)in sundry payables and accrued expense 21,762 16,463 --------- --------- Net cash provided by (used in) operating activities (60,222) 23,727 Cash flows from investing activities Capital expenditures, net of effects from acquisitions (7,288) (8,422) Payments for acquisitions, net of cash acquired (17,381) -- --------- --------- Net cash(used in) investing activities (24,669) (8,422) Cash flows from financing activities: Net borrowings (repayments) under line-of-credit agreements 69,702 (29,068) Proceeds from issuance of long-term debt -- 700 Principal payments of long-term debt (5,652) (3,610) Reduction of loan to ESOP -- 1,665 Proceeds from exercise of employee stock options 1,311 1,040 Purchase of treasury stock (1,495) (451) Dividends paid (2,102) -- --------- --------- Net cash provided by (used in) financing activities 61,764 (29,724) Effect of exchange rate changes on cash 630 421 --------- --------- Net (decrease) in cash (22,497) (13,988) Cash and cash equivalents at beginning of the period 23,457 16,809 --------- --------- Cash and cash equivalents at end of the period $ 960 $ 2,811 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 7,995 $ 7,292 Income taxes $ 76 $ (246) </TABLE> See accompanying notes to consolidated financial statements. 6
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 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, 1998. 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. Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments considered necessary, in the opinion of management, for a fair statement of the results of interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year. NOTE 2 INVENTORIES ----------- (Dollars in thousands) June 30, December 31, 1999 1998 --------- ------------ (Unaudited) Finished goods $ 119,988 $ 120,108 Work in process 6,523 4,867 Raw materials 60,480 49,117 --------- --------- Total inventories $ 186,991 $ 174,092 ========= ========= NOTE 3 PROPERTY, PLANT AND EQUIPMENT ----------------------------- (Dollars in thousands) June 30, December 31, 1999 1998 --------- ------------ (Unaudited) Land, buildings and improvements $ 65,630 $ 64,080 Machinery and equipment 92,171 88,282 Tools, dies and auxiliary equipment 9,581 8,412 Furniture and fixtures 23,088 21,542 Leasehold improvements 5,769 5,130 Construction in progress 20,423 18,068 ----------- ---------- 216,662 205,514 Less accumulated depreciation 104,707 96,110 ----------- ---------- Total property, plant and equipment - net $ 111,955 $ 109,404 =========== ========== 7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 The provision for taxes is less than the normal statutory rate primarily because earnings of a subsidiary operating in Puerto Rico, amounting to approximately $4,243,000 and $4,109,000 for the six-months ended June 30, 1999 and 1998, respectively, are exempt from United States income taxes and are partially exempt from Puerto Rican income taxes. NOTE 5 During the six-month period ended June 30, 1999, the Company granted options to purchase 136,000 shares of common stock. The exercise price of each option granted is equal to, or greater than, the fair value of the Company's common stock on the date of grant. At June 30, 1999, 894,000 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans, of which 848,000 shares were subject to outstanding options. 376,000 of these outstanding options were vested at June 30, 1999. NOTE 6 Long-Term Debt (Dollars in thousands) June 30, December 31, 1999 1998 -------- ------------ (Unaudited) Long-term debt consists of: 7.56% senior note payable $ 73,000 $ 73,000 8.60% senior note payable 37,143 37,143 10.22% senior note payable 21,500 21,500 Credit Facility ($10 Million Canadian) 6,822 10,960 5.0% Notes Payable - AlliedSignal 3,000 3,000 6.75% - 7.50% Facilities 5,445 6,411 5.00% - 10.5% Purchase Obligations 2,500 2,833 Other 1,191 1,306 ------- ------- 150,601 156,153 Less current portion 27,770 22,404 ------- ------- Total noncurrent portion of long-term debt $ 122,831 $ 133,749 ======= ======= Under the terms of the $73,000,000 senior note agreement, the Company is required to repay the loan in seven equal annual installments beginning in 2000. Under the terms of the $37,143,000 senior note agreement, the Company is required to repay the loan in four equal annual installments from 1999 through 2002. On July 26, 1999 the Company prepaid the entire outstanding balance of $37,143,000 plus a $1,291,000 prepayment penalty. These prepayments were funded through the use of a portion of the proceeds of the $90,000,000 Convertible Subordinated Debentures as discussed in Note 13. 8
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 (CONTINUED) Under the terms of the $21,500,000 senior note agreement, the Company is required to repay the loan in five varying annual installments beginning in 1999. Subject to certain restrictions, the Company may make prepayments without premium. Under the terms of the $10,000,000 CDN credit agreement, the Company is required to repay the loan as follows: $2,000,000 CDN in 2000 and 2001 and a final payment of $6,000,000 CDN in 2002. Subject to certain restrictions, the Company can make prepayments without premium. The credit agreement has various interest rate options. Under the terms of the unsecured $3,000,000 note agreement with AlliedSignal, the Company is required to repay $2,000,000 in September 1999 with a final payment of $1,000,000 due in 2000. The Company holds a 73.4% equity interest in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, which has various existing credit facilities which mature by 2003. The purchase obligations, due under agreements with municipalities, mature in annual installments through 2003, and are secured by certain property, plant, and equipment. The senior note agreements contain restrictive covenants which require the maintenance of defined levels of working capital, tangible net worth and earnings and limit, among other items, investments, indebtedness and distributions for the payment of dividends and the acquisition of capital stock. NOTE 7 In January 1999, the Company acquired through its European subsidiary Standard Motor Products Holdings Limited, 85% of the stock of Webcon UK Limited, and through its UK joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited. The total acquisition price amounted to approximately $3,500,000 and was funded from the Company's operating cash flow. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $13,400,000. Located in Fort Worth Texas, Eaglemotive assembles and distributes fan clutches and other cooling products to the automotive aftermarket. The acquisition was funded from short term borrowings. In April 1999, the Company acquired Lemark Auto Accessories Limited, a United Kingdom based manufacturer and distributor primarily of ignition wire and other engine management products. The acquisition price amounted to approximately $1,900,000 and was funded from short term borrowings. These acquisitions have been accounted for as purchases, and resulted in goodwill of $4,582,000 which is being amortized over its estimated useful life of 15 years. NOTE 8 Other assets primarily consist of certain held-to-maturity securities, unamortized customer supply agreements, equity in joint ventures and pension assets. 9
NOTE 9 Total comprehensive income was $12,455,000 and $8,738,000 for the three-month periods ended June 30, 1999 and 1998, respectively and $16,644,000 and $11,157,000 for the six-month periods ended June 30, 1999 and 1998 respectively. NOTE 10 The Company sells certain accounts receivable to its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In June 1999, SMP Credit Corp., entered into a new three year agreement whereby it can sell up to a $25,000,000 undivided ownership interest in a designated pool of certain of these eligible receivables. The agreement as renewed contains similar terms and conditions as our previous agreement and expires in March 2002. NOTE 11 Following is a reconciliation of the shares used in calculating basic and dilutive net income per common share: <TABLE> <CAPTION> For Three-Months Ended For Six-Months Ended June 30, June 30, ----------------------- --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Weighted average common shares outstanding 13,136,458 13,102,469 13,112,189 13,089,653 Effect of dilutive securities - options 101,559 108,937 98,138 78,410 ---------- ---------- ---------- ---------- Weighted average common equivalent shares outstanding assuming dilution 13,238,017 13,211,406 13,210,327 13,168,063 ========== ========== ========== ========== </TABLE> NOTE 12 The Company's two reportable operating segments, Engine Management and Temperature Control, are the areas within the automotive aftermarket in which the Company operates. The following tables contain financial information for each reportable segment. Industry Segments (Dollars in thousands) For three-months ended June 30, ------------------------------------------------------ 1999 1998 ------------------------------------------------------ Operating Operating Net Sales Income Net Sales Income Engine Management $ 84,911 $ 8,972 $ 94,741 $ 12,064 Temperature Control 117,371 16,329 110,201 12,908 Other Adjustments 3,432 (3,141) 3,824 (10,075) --------- ------- --------- -------- Consolidated $ 205,714 $22,160 $ 208,766 $ 14,897 ========= ======= ========= ======== 10
NOTE 12 (CONTINUED) For six-months ended June 30, ------------------------------------------------------ 1999 1998 ------------------------------------------------------ Operating Operating Net Sales Income Net Sales Income --------- ------ --------- ------ Engine Management $ 172,334 $16,544 $ 185,020 $ 22,862 Temperature Control 208,675 23,714 147,209 15,343 Other Adjustments 1,494 (9,310) 2,582 (17,023) --------- ------- --------- -------- Consolidated $ 382,503 $30,948 $ 334,811 $ 21,182 ========= ======= ========= ======== Other adjustments consist of items pertaining to the corporate headquarters function and a Canadian business unit that does not meet the criteria of a reportable segment. The following table reconciles the measure of profit used in the previous disclosure to the Company's consolidated Earnings Before Taxes: For Three-Months Ended For Six-Months Ended June 30, June 30, ----------------------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Operating Income $ 22,160 $ 14,897 $ 30,948 $ 21,182 Other income (expense) (516) 115 (829) 347 Interest expense 4,802 5,105 8,243 8,480 -------- -------- -------- -------- Earnings before taxes and minority interest $ 16,842 $ 9,907 $ 21,876 $ 13,049 ======== ======== ======== ======== NOTE 13 On July 26, 1999 the Company issued 6.75% Convertible Subordinated Debentures in the aggregate principal amount of $90,000,000. In addition, the underwriters of these debentures have an option for 30 days to purchase up to an additional $10,000,000 principal amount of these debentures. Each $1,000 of Convertible Debentures can be converted into 31.068 shares of the Company's common stock, which is equivalent to a conversion price of approximately $32.19 per share. The Convertible Debentures pay interest semi-annually and mature on July 15, 2009. The Company incurred underwriters' fees of 3.125% of the principal amount, or $2,812,500. The net proceeds to the Company of $87,187,500, before expenses, will be used to pay down a portion of the Company's existing indebtedness, purchase minority interests in certain subsidiaries, and for general corporate purposes, including future acquisitions. 11
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussions 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 six months of 1999, cash used in operations amounted to $60,222,000, compared to $23,727,000 of cash provided in the first six months of 1998. This decrease is due primarily to higher accounts receivable resulting from a pre-season selling program for temperature control products, that was not in effect in 1998, and higher inventories as we were unable to duplicate the significant reductions achieved in the prior year. Cash used in investing activities amounted to $24,669,000 in the first six months of 1999 and $8,422,000 for the comparable period in 1998. The increase is mainly due to the acquisitions of Eaglemotive Corporation, Webcon UK Limited and Lemark Auto Accessories Limited, as discussed below. Capital expenditures amounted to $7,288,000 during the first six months of 1999 and $8,422,000 for the comparable period in 1998. Cash provided by financing activities totaled $61,764,000 in the first six months of 1999, while in the prior year cash used in financing activities amounted to $29,724,000. This change is due to increased short term borrowings to finance the seasonal working capital needs of the Company's Temperature Control Division, which have become more significant due to the inclusion of the Cooper Industries temperature control business, which was acquired in March 1998. During the first six months of 1999, the Company paid dividends amounting to $2,102,000. No dividends were paid in the comparable period for 1998. On July 22, 1999 the Board of Directors approved an increase to the quarterly dividend from $.08 to $.09 per share, to be paid on September 1, 1999 to stockholders of record on August 13, 1999. On July 26, 1999 the Company issued 6.75% Convertible Subordinated Debentures in the aggregate principal amount of $90,000,000. In addition, the underwriters of these debentures have an option for 30 days to purchase up to an additional $10,000,000 principal amount of these debentures. Each $1,000 of Convertible Debentures can be converted into 31.068 shares of the Company's common stock, which is equivalent to a conversion price of approximately $32.19 per share. The Convertible Debentures pay interest semi-annually and mature on July 15, 2009. The proceeds from the Convertible Debentures will be used to pay down a portion of the Company's existing indebtedness, purchase minority interests in certain subsidiaries and for general corporate purposes, including future acquisitions. On July 26, 1999 the Company prepaid the 8.60% senior note payable in the amount of $37,143,000 plus a $1,291,000 prepayment penalty. On November 30, 1998, the Company entered into a new three year revolving credit facility. The facility, with eight lending institutions, provides a $110,000,000 unsecured line of credit, subject to a borrowing base. The facility allows the Company to select from two interest rate options, one a function of LIBOR, and the other a function of the U.S. prime rate. The spread above each interest rate option is determined by the Company's ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization. The interest rates available to the Company under this facility should compare favorably with the short term interest rates obtained by the Company during most of 1998 and should result in lower a lower effective interest rate in 1999 compared to 1998. 12
LIQUIDITY AND CAPITAL RESOURCES (Continued) - ------------------------------------------- In June of 1999 the Company renewed its agreement to sell certain of its accounts receivable. The Company presently has $25,000,000 of accounts receivable sold under this agreement, which expires March 31, 2002. As of June 30, 1999 the Company had stockholders' equity of $221,121,000 and working capital of $180,337,000. Capital expenditures, primarily for new machinery and equipment, are expected to be approximately $10 million for the remainder of 1999. In January 1999, the Company acquired, through its European subsidiary Standard Motor Products Holdings Limited, 85% of the stock of Webcon UK Limited. The Company also acquired through its United Kingdom joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited. The total acquisition price amounted to approximately $3,500,000 and was funded from the Company's operating cash flow. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $13,400,000. Located in Fort Worth Texas, Eaglemotive assembles and distributes fan clutches and other cooling products to the automotive aftermarket. The acquisition was funded from short term borrowings. In April 1999, the Company acquired Lemark Auto Accessories Limited, a United Kingdom based manufacturer and distributor primarily of ignition wire and other engine management products. The acquisition price amounted to approximately $1,900,000 and was funded from short term borrowings. INTERIM RESULTS OF OPERATIONS - ----------------------------- COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS ENDED - ---------------------------------------------------------------------------- JUNE 30, 1998 - ------------- Net sales for the current quarter decreased by $3,052,000 or 1.5% from the comparable period in 1998. Excluding revenues from acquisitions not present in the second quarter of last year, revenues decreased by approximately $14 million or 6.8%. This sales decrease, excluding acquisitions, is primarily due to lower sales of engine management products resulting from the sale of the fuel pump business in the third quarter of 1998 and reduced orders from a major customer, as they absorbed inventory acquired from APS Holding Corporation. Although sales decreased in the second quarter of 1999, gross profit increased by $2,017,000 or 3.2% from the comparable period in 1998, reflecting synergies obtained from the acquisition of the Cooper Industries temperature control business. Gross margin as a percent of net sales increased to 31.6% in the second quarter of 1999 from 30.2% in the second quarter of 1998. This increase is attributable to improvements primarily in the temperature control business, resulting from efficiencies achieved from consolidating the Cooper Industries temperature control business with the Company's existing Temperature Control Division. Selling, general and administrative (S.G. & A.) expenses decreased by $5,246,000 or 10.9% over the comparable quarter in 1998, reflecting reduced administrative expenses and lower customer acquisition costs. As a percent of net sales S.G. & A. expenses decreased by 2.2 percentage points (20.9% in 1999 versus 23.1% in 1998). This percentage improvement is primarily due to the Company's cost reduction program initiated in early 1998 and from synergies which were realized from the consolidation of the Cooper Industries temperature control business. Additional cost reductions from the consolidation of the Cooper Industries temperature control business will continue, with the full implementation scheduled to be completed early in the year 2000. 13
INTERIM RESULTS OF OPERATIONS (Continued) - ----------------------------------------- COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS ENDED - ---------------------------------------------------------------------------- JUNE 30, 1998 - ------------- Operating income increased by $7,263,000 or 48.8% over the comparable quarter in 1998, as the second quarter of 1998 was negatively impacted by the write down of various assets of the Company's OE, China and fuel pump businesses. In addition, the Company benefited in 1999 from the operating synergies and cost reduction programs previously discussed. As a percentage of net sales, operating income increased to 10.8% in 1999 from 7.1% in 1998. The Engine Management Division, as compared to a year ago, reflected a reduction in operating income of $3,092,000 as a result of lower sales, shifts in sales mix and changes in overhead absorption. The sales decline was primarily the result of the divestiture of the fuel pump business which occurred in the third quarter of 1998 and lower orders from a major customer as they absorbed inventory acquired from APS Holding Corporation. The underabsorption of overhead experienced at certain facilities was a result of the divestiture of the Service Line business, which shared these facilities. Plans are currently being developed which should reduce these costs. The Temperature Control Division improved operating income by $3,421,000, compared to a year ago, primarily due to efficiencies achieved from consolidating the Cooper Industries Temperature Control business with the Company's existing Temperature Control Division. The synergies achieved impacted both gross margin and S.G. & A. expenses. Other income - net for the second quarter of 1999 decreased by $631,000, primarily due to losses recognized in connection with the Company's continuing original equipment ventures. These losses were attributed to costs incurred in developing and launching these projects. Interest expense for the second quarter attributable to continuing operations decreased by $303,000 as compared to 1998. Including amounts related to discontinued operations in 1998, interest expense decreased by $594,000 in 1999, as lower average interest rates were partially offset by higher short term borrowings. Taxes based on earnings increased by $3,517,000 primarily due to improved pre-tax earnings. At December 31, 1998, the Company had a $14,171,000 deferred tax asset valuation allowance. Due to the seasonal nature of the Company's business, no adjustments to this valuation allowance were deemed necessary during the three month period ended June 30, 1999. However, management is continuing to evaluate the likelihood of achieving sufficient future profitability that would enable the Company to utilize all or a portion of these deferred tax assets. If management determines, based upon these evaluations, that it is more likely than not that the deferred tax assets will be realized, then the valuation allowance will be adjusted. INTERIM RESULTS OF OPERATIONS - ----------------------------- COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED - ------------------------------------------------------------------------ JUNE 30, 1998 - ------------- Net sales for the six month period increased by $47,692,000 or 14.2% from the comparable period in 1998. Excluding revenues from acquisitions not present in the first half of last year, revenues remained flat, as increased temperature control sales, excluding acquisitions, were offset by a decrease in Engine Management sales. 14
INTERIM RESULTS OF OPERATIONS (Continued) - ----------------------------------------- COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED - ------------------------------------------------------------------------ JUNE 30, 1998 - ------------- Gross profit for the first six months of 1999 increased by $11,447,000 or 10.7% from the comparable period in 1998, reflecting increased sales from the acquisition of the Cooper Industries temperature control product business. The gross margin as a percent of net sales, however, declined from 31.9% in the first six months of 1998 to 30.9% in the first six months of 1999. The decline in the gross margin percent was primarily due to the higher mix of temperature control product sales in relation to the Company's total sales. Temperature control products have lower average gross margins than products sold by the Engine Management Division and therefore result in a lower margin percentage for the Company. The gross margin percentage also was negatively impacted by discounts related to the pre-season selling program at the Temperature Control Division, which were not present in 1998. Selling, general and administrative (S.G. & A.) expenses increased by $1,681,000 or 2.0% over the comparable period in 1998, reflecting higher expenses to support the growth within the Temperature Control Division. However, as a percent of net sales S.G. & A. expenses decreased by 2.8 percentage points (22.8% in 1999 versus 25.6% in 1998). This percentage improvement is primarily due to the leverage achieved from higher sales and synergies which were realized from the consolidation of the Cooper Industries temperature control business, and to lower customer acquisition and overhead expenses resulting from the Company's restructuring and cost reduction programs implemented in 1998. Additional cost reductions from the consolidation of the Cooper Industries temperature control business are expected to continue, with the full implementation scheduled to be completed early in the year 2000. Operating income increased by $9,766,000 or 46.1% over the comparable period in 1998. While the Company began to realize the benefits of the aforementioned operating synergies and cost reduction programs during the first half of 1999, operating income during the comparable period in 1998 was negatively impacted by the write down of various assets of the Company's OE, China and fuel pump businesses. As a percentage of net sales, operating income improved during the first six months of the year to 8.1% in 1999 from 6.3% in 1998. The Engine Management Division, as compared to a year ago, reflected a reduction in operating income of $6,318,000 as a result of lower sales, shifts in sales mix and changes in overhead absorption. The sales decline was primarily the result of the divestiture of the fuel pump business which occurred in the third quarter of 1998 and lower orders from a major customer as they absorbed inventory acquired from APS Holding Corporation. The underabsorption of overhead experienced at certain facilities was a result of the divestiture of the Service Line business, which shared these facilities. Plans are currently being developed which should reduce these costs. The Temperature Control Division improved operating income by $8,371,000, compared to a year ago, primarily due to incremental sales volume of $61,466,000. The increased sales resulted from the Cooper Temperature control business, the increases in unit volume as a result of the pre-season selling program, and, to a lesser extent, the acquisition of Eaglemotive Corporation. Efficiencies achieved from consolidating the Cooper Temperature Control business also improved income. The first quarter of 1998 did not reflect the results of the Cooper Temperature Control business, which was acquired on March 28, 1998. 15
INTERIM RESULTS OF OPERATIONS (continued) - ----------------------------------------- COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED - ------------------------------------------------------------------------ JUNE 30, 1998 - ------------- Other income - net for the first six months of 1999 decreased by $1,176,000, primarily due to losses recognized in connection with the Company's continuing original equipment ventures, and, to a lesser extent, reduced interest income. The losses pertaining to the original equipment ventures were attributed to costs incurred in developing and launching these projects. Interest expense attributable to continuing operations decreased by $237,000 compared to 1998. Including amounts related to discontinued operations in 1998, interest expense decreased by $1,823,000 in 1999. Taxes based on earnings increased by $4,394,000 primarily due to improved pre-tax earnings. At December 31, 1998, the Company had a $14,171,000 deferred tax asset valuation allowance. Due to the seasonal nature of the Company's business, no adjustments to this valuation allowance were deemed necessary during the six month period ended June 30, 1999. However, management is continuing to evaluate the likelihood of achieving sufficient future profitability that would enable the Company to utilize all or a portion of these deferred tax assets. If management determines, based upon these evaluations, that it is more likely than not that the deferred tax assets will be realized, then the valuation allowance will be adjusted. YEAR 2000 - --------- The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the Year 1900 rather than the Year 2000, which could result in miscalculations or system failures. The Company has established a comprehensive response to its Year 2000 exposure. Generally, the Company has Year 2000 exposure in two areas: (i) its information technology("IT") systems and (ii) its non-IT systems. At June 1998, the Company had completed an inventory of its internal IT systems and made a preliminary determination of which programs were or were not Year 2000 compliant. During the period ending December 1998, the Company tested each significant IT system which is believed to be Year 2000 compliant. In some cases, Year 2000 issues will be corrected in the development of new programs, which enhance or provide new functionality to these financial and management operating systems. The Company estimates the cost of this effort to be approximately $1.4 million, which includes capital costs for new computers and related equipment. The Company substantially completed Year 2000 testing and remediation on its critical information technology systems in June 1999 and expects to substantially complete Year 2000 testing and remediation on its non-critical information technology systems and non-information technology systems in October 1999. As of June 30, 1999, the Company has conducted interviews with suppliers, customers, financial institutions and others with which it conducts business to determine the extent to which the Company would be vulnerable to these third parties' failure to remediate their own potential Year 2000 problems. The inability of these other significant business partners to adequately address the Year 2000 issues could cause disruption of the Company's operations. The Company does not believe there will be a material risk of disruption from third party failures. 16
YEAR 2000 (continued) - --------------------- The Company does not presently anticipate that the cost to address the Year 2000 issue will have a material adverse effect on the Company's financial condition, results of operations or liquidity. Although the Company expects its internal IT and non-IT systems to be Year 2000 compliant as described above, the Company intends to prepare a contingency plan that will specify what it plans to do if it or important external companies are not Year 2000 compliant in a timely manner. These contingency plans will address the most likely worst case Year 2000 scenarios. These plans are expected to be finalized by October of 1999. 17
PART II - OTHER INFORMATION - --------------------------- Item 4. Submission of matters to a vote of Security Holders - ------- --------------------------------------------------- (a) May 20, 1999, Annual Meeting (b) Directors Elected -- Nathaniel L. Sills Lawrence I. Sills Arthur D. Davis Susan F. Davis William H. Turner John L. Kelsey Robert J. Swartz Marilyn F. Cragin Arthur S. Sills Robert M. Gerrity Andrew M. Massimilla (c) Proposals voted upon: (I) Election of Directors: Votes For Votes Withheld --------- -------------- Nathaniel L. Sills 10,554,296 57,880 Lawrence I. Sills 10,557,700 54,476 Arthur D. Davis 10,557,712 54,464 Susan F. Davis 10,558,139 54,037 William H. Turner 10,558,509 53,667 John L. Kelsey 10,558,473 53,703 Robert J. Swartz 10,558,187 53,989 Marilyn F. Cragin 10,558,102 54,074 Arthur S. Sills 10,557,497 54,679 Robert M. Gerrity 10,558,559 53,617 Andrew M. Massimilla 10,558,558 53,618 Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibit(s) ---------- Number Description Method of Filing ------ ----------- ---------------- 4.1 Form of Subordinated Debenture Indenture (including form of convertible debenture) (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) * 18
Number Description Method of Filing ------ ----------- ---------------- 10.14 Form of First Amendment, dated as of December 8, 1998 to the Credit Agreement, dated as of November 30, 1998, among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce (incorporated by reference to Exhibit 10.14 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) * 10.15 Form of Second Amendment, dated as of July 16, 1999 to the Credit Agreement, dated as of November 30, 1998, among Standard Motor Products, Inc., Lenders party thereto, The Chase Manhattan Bank and Canadian Imperial Bank of Commerce (incorporated by reference to Exhibit 10.15 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) * 10.16 Credit Agreement of March 31, 1998, as amended & restated as at November 30, 1998, between the Registrant and Canadian Imperial Bank of Commerce ("CIBC") is included as Exhibit 10.16 10.16 23.1 Consent of KPMG LLP, Independent Auditors (incorporated by reference to Exhibit 23.1 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) * 23.2 Consent of KPMG LLP, Independent Auditors (incorporated by reference to Exhibit 23.1 to the Registration Statement on Form S-3 (333-83339) filed on July 21, 1999.) * 23.3 Consent of Kelley Drye & Warren LLP (incorporated by reference to Exhibit 23.2 to Amendment No. 2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) * 23.4 Consent of Kelley Drye & Warren LLP (incorporated by reference to Exhibit 23.2 to the Registration Statement on Form S-3 (333-79177) filed on July 20, 1999.) * 24 Powers of Attorney of Directors and Certain Officers of Standard Motor Products, Inc. (incorporated by reference to Exhibit 24 to the Registration Statement on Form S-3 (333-79177) filed on May 24, 1999.) * 27 Financial Data Schedule Filed with this Document * Incorporated by reference 19 (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. /s/ STANDARD MOTOR PRODUCTS, INC. --------------------------------- (Registrant) August 12, 1999 /s/James J. Burke - --------------- ----------------- (Date) Director of Finance, Chief Accounting Officer 20