SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|
For the quarterly period ended
June 30, 2009
or
o
|
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 þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer o
|
Accelerated
Filer þ
|
Non-Accelerated
Filer o (Do not check if
a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
þ
As of the
close of business on July 31, 2009, there were 19,091,005 outstanding shares of
the registrant’s Common Stock, par value $2.00 per share.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX
PART
I - FINANCIAL INFORMATION
|
Page No.
|
Item
1. Consolidated
Financial Statements:
|
|
|
|
Consolidated
Statements of Operations (Unaudited)
|
|
for the Three Months and Six
Months Ended June 30, 2009 and 2008
|
3
|
|
|
Consolidated Balance
Sheets
|
|
as of June 30, 2009 (Unaudited)
and December 31, 2008
|
4
|
|
|
Consolidated Statements of Cash
Flows (Unaudited)
|
|
for the Six Months Ended June
30, 2009 and 2008
|
5
|
|
|
Consolidated Statement of
Changes in Stockholders’ Equity (Unaudited)
|
|
for the Three Months and Six
Months Ended June 30, 2009
|
6
|
|
|
Notes to Consolidated Financial
Statements (Unaudited)
|
7
|
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and
|
|
Results
of Operations
|
24
|
|
|
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
|
38
|
|
|
Item
4. Controls and
Procedures
|
39
|
PART
II – OTHER INFORMATION
|
|
Item
1. Legal
Proceedings
|
40
|
|
|
Item
4. Submission of
Matters to a Vote of Security Holders
|
41
|
|
|
Item
6. Exhibits
|
42
|
|
|
Signatures
|
43
|
PART
I - FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL
STATEMENTS
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands, except share and per share data)
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
197,498 |
|
|
$ |
215,343 |
|
|
$ |
369,720 |
|
|
$ |
423,427 |
|
Cost
of sales
|
|
|
151,092 |
|
|
|
166,714 |
|
|
|
282,421 |
|
|
|
323,574 |
|
Gross
profit
|
|
|
46,406 |
|
|
|
48,629 |
|
|
|
87,299 |
|
|
|
99,853 |
|
Selling,
general and administrative expenses
|
|
|
36,813 |
|
|
|
42,530 |
|
|
|
72,832 |
|
|
|
86,389 |
|
Restructuring
and integration expenses
|
|
|
1,210 |
|
|
|
1,376 |
|
|
|
2,373 |
|
|
|
4,212 |
|
Operating
income
|
|
|
8,383 |
|
|
|
4,723 |
|
|
|
12,094 |
|
|
|
9,252 |
|
Other
income, net
|
|
|
3,422 |
|
|
|
10 |
|
|
|
3,527 |
|
|
|
20,372 |
|
Interest
expense
|
|
|
2,325 |
|
|
|
3,582 |
|
|
|
4,802 |
|
|
|
7,716 |
|
Earnings
from continuing operations before taxes
|
|
|
9,480 |
|
|
|
1,151 |
|
|
|
10,819 |
|
|
|
21,908 |
|
Provision
for income tax
|
|
|
3,842 |
|
|
|
1,923 |
|
|
|
4,394 |
|
|
|
9,333 |
|
Earnings
(loss) from continuing operations
|
|
|
5,638 |
|
|
|
(772 |
) |
|
|
6,425 |
|
|
|
12,575 |
|
Loss
from discontinued operations, net of income taxes
|
|
|
(322 |
) |
|
|
(323 |
) |
|
|
(582 |
) |
|
|
(649 |
) |
Net
earnings (loss)
|
|
$ |
5,316 |
|
|
$ |
(1,095 |
) |
|
$ |
5,843 |
|
|
$ |
11,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per common share – Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$ |
0.30 |
|
|
$ |
(0.04 |
) |
|
$ |
0.34 |
|
|
$ |
0.69 |
|
Discontinued
operation
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.04 |
) |
Net
earnings (loss) per common share – Basic
|
|
$ |
0.28 |
|
|
$ |
(0.06 |
) |
|
$ |
0.31 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per common share – Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$ |
0.30 |
|
|
$ |
(0.04 |
) |
|
$ |
0.34 |
|
|
$ |
0.68 |
|
Discontinued
operation
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
Net
earnings (loss) per common share – Diluted
|
|
$ |
0.28 |
|
|
$ |
(0.06 |
) |
|
$ |
0.31 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares
|
|
|
18,814,723 |
|
|
|
18,332,273 |
|
|
|
18,705,997 |
|
|
|
18,319,979 |
|
Average
number of common shares and dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares
|
|
|
20,014,439 |
|
|
|
18,384,840 |
|
|
|
18,720,479 |
|
|
|
21,157,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
|
|
June
30,
2009
|
|
|
December
31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
14,450 |
|
|
$ |
6,608 |
|
Accounts receivable, less
allowance for discounts and doubtful
|
|
|
|
|
|
|
|
|
accounts of $11,099 and $10,021
for 2009 and 2008, respectively
|
|
|
169,804 |
|
|
|
174,401 |
|
Inventories
|
|
|
197,989 |
|
|
|
232,435 |
|
Deferred income
taxes
|
|
|
19,948 |
|
|
|
20,038 |
|
Assets held for
sale
|
|
|
762 |
|
|
|
1,654 |
|
Prepaid expenses and other
current assets
|
|
|
6,609 |
|
|
|
12,459 |
|
Total current
assets
|
|
|
409,562 |
|
|
|
447,595 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
65,581 |
|
|
|
66,901 |
|
Goodwill,
net
|
|
|
1,250 |
|
|
|
1,100 |
|
Other
intangibles, net
|
|
|
14,168 |
|
|
|
15,185 |
|
Other
assets
|
|
|
47,891 |
|
|
|
44,246 |
|
Total assets
|
|
$ |
538,452 |
|
|
$ |
575,027 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$ |
90,930 |
|
|
$ |
148,931 |
|
Current portion of long-term
debt
|
|
|
32,241 |
|
|
|
44,953 |
|
Accounts payable
|
|
|
63,519 |
|
|
|
68,312 |
|
Sundry payables and accrued
expenses
|
|
|
29,696 |
|
|
|
25,745 |
|
Accrued customer
returns
|
|
|
26,644 |
|
|
|
19,664 |
|
Accrued rebates
|
|
|
21,468 |
|
|
|
18,623 |
|
Payroll and
commissions
|
|
|
24,008 |
|
|
|
16,768 |
|
Total current
liabilities
|
|
|
288,506 |
|
|
|
342,996 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
12,859 |
|
|
|
273 |
|
Postretirement
medical benefits and other accrued liabilities
|
|
|
42,892 |
|
|
|
44,455 |
|
Accrued
asbestos liabilities
|
|
|
24,399 |
|
|
|
23,758 |
|
Total liabilities
|
|
|
368,656 |
|
|
|
411,482 |
|
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
|
|
|
56,226 |
|
|
|
58,841 |
|
Retained earnings
|
|
|
82,443 |
|
|
|
76,600 |
|
Accumulated other comprehensive
income
|
|
|
7,331 |
|
|
|
7,799 |
|
Treasury stock – at cost
1,598,591 and 1,923,491 shares in
|
|
|
|
|
|
|
|
|
2009 and 2008,
respectively
|
|
|
(17,176 |
) |
|
|
(20,667 |
) |
Total stockholders’
equity
|
|
|
169,796 |
|
|
|
163,545 |
|
Total liabilities and
stockholders’ equity
|
|
$ |
538,452 |
|
|
$ |
575,027 |
|
See
accompanying notes to consolidated financial statements.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Six
Months Ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
5,843 |
|
|
$ |
11,926 |
|
Adjustments
to reconcile net earnings to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,263 |
|
|
|
6,958 |
|
Increase
in allowance for doubtful accounts
|
|
|
865 |
|
|
|
407 |
|
Increase
in inventory reserves
|
|
|
2,993 |
|
|
|
1,379 |
|
Gain
on sale of building
|
|
|
(524 |
) |
|
|
(21,321 |
) |
Loss
on disposal of property, plant and equipment
|
|
─
|
|
|
|
112 |
|
Loss
on defeasance of mortgage loan
|
|
─
|
|
|
|
1,444 |
|
Gain
on sale of investment
|
|
|
(2,336 |
) |
|
─
|
|
Equity
(income) loss from joint ventures
|
|
|
(14 |
) |
|
|
128 |
|
Loss
on impairment of assets
|
|
─
|
|
|
|
355 |
|
Employee
stock ownership plan allocation
|
|
|
171 |
|
|
|
799 |
|
Stock-based
compensation
|
|
|
590 |
|
|
|
658 |
|
Decrease
in deferred income taxes
|
|
─
|
|
|
|
15,334 |
|
Loss
from discontinued operation, net of income tax
|
|
|
582 |
|
|
|
649 |
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
3,732 |
|
|
|
(75,830 |
) |
Decrease
in inventories
|
|
|
36,495 |
|
|
|
6,646 |
|
Decrease
in prepaid expenses and other current assets
|
|
|
1,351 |
|
|
|
1,592 |
|
Increase
(decrease) in accounts payable
|
|
|
(2,317 |
) |
|
|
4,100 |
|
Increase
in sundry payables and accrued expenses
|
|
|
21,016 |
|
|
|
4,683 |
|
Net
changes in other assets and liabilities
|
|
|
(6,902 |
) |
|
|
(9,212 |
) |
Net
cash provided by (used in) operating activities
|
|
|
68,808 |
|
|
|
(49,193 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of property, plant and equipment
|
|
|
4 |
|
|
|
24 |
|
Net
cash received from the sale of building
|
|
─
|
|
|
|
37,341 |
|
Divestiture
of joint ventures
|
|
|
4,000 |
|
|
─
|
|
Proceeds
from sale of preferred stock investment
|
|
|
3,896 |
|
|
─
|
|
Capital
expenditures
|
|
|
(3,935 |
) |
|
|
(5,347 |
) |
Acquisitions
of businesses and assets
|
|
|
(5,996 |
) |
|
─
|
|
Net
cash provided by (used in) investing activities
|
|
|
(2,031 |
) |
|
|
32,018 |
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments) under line-of-credit agreements
|
|
|
(58,000 |
) |
|
|
25,492 |
|
Defeasance
of mortgage loan
|
|
|
(6 |
) |
|
|
(7,755 |
) |
Net
repayment of long-term debt and capital lease obligations
|
|
|
(502 |
) |
|
|
(256 |
) |
Increase
(decrease) in overdraft balances
|
|
|
(2,476 |
) |
|
|
3,121 |
|
Dividends
paid
|
|
─
|
|
|
|
(3,313 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(60,984 |
) |
|
|
17,289 |
|
Effect
of exchange rate changes on cash
|
|
|
2,049 |
|
|
|
(1,057 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
7,842 |
|
|
|
(943 |
) |
CASH
AND CASH EQUIVALENTS at beginning of the period
|
|
|
6,608 |
|
|
|
13,261 |
|
CASH
AND CASH EQUIVALENTS at end of the period
|
|
$ |
14,450 |
|
|
$ |
12,318 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
4,450 |
|
|
$ |
7,493 |
|
Income
taxes
|
|
$ |
1,481 |
|
|
$ |
2,014 |
|
See
accompanying notes to consolidated financial statements.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Three
Months Ended June 30, 2009
(Unaudited)
(In
thousands)
|
|
Common
Stock
|
|
|
Capital
in
Excess
of
Par Value
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2009
|
|
$ |
40,972 |
|
|
$ |
57,276 |
|
|
$ |
77,127 |
|
|
$ |
5,516 |
|
|
$ |
(18,636 |
) |
|
$ |
162,255 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
|
|
5,316 |
|
|
|
|
|
|
|
|
|
|
|
5,316 |
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,229 |
|
|
|
|
|
|
|
3,229 |
|
Pension
and retiree medical adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,414 |
) |
|
|
|
|
|
|
(1,414 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,131 |
|
Stock-based
compensation
|
|
|
|
|
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
1,460 |
|
|
|
410 |
|
Balance
at June 30, 2009
|
|
$ |
40,972 |
|
|
$ |
56,226 |
|
|
$ |
82,443 |
|
|
$ |
7,331 |
|
|
$ |
(17,176 |
) |
|
$ |
169,796 |
|
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Six
Months Ended June 30, 2009
(Unaudited)
(In
thousands)
|
|
Common
Stock
|
|
|
Capital
in
Excess
of
Par Value
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
40,972 |
|
|
$ |
58,841 |
|
|
$ |
76,600 |
|
|
$ |
7,799 |
|
|
$ |
(20,667 |
) |
|
$ |
163,545 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
|
|
5,843 |
|
|
|
|
|
|
|
|
|
|
|
5,843 |
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,049 |
|
|
|
|
|
|
|
2,049 |
|
Pension
and retiree medical adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,517 |
) |
|
|
|
|
|
|
(2,517 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,375 |
|
Stock-based
compensation
|
|
|
|
|
|
|
(931 |
) |
|
|
|
|
|
|
|
|
|
|
1,466 |
|
|
|
535 |
|
Employee
Stock Ownership Plan
|
|
|
|
|
|
|
(1,684 |
) |
|
|
|
|
|
|
|
|
|
|
2,025 |
|
|
|
341 |
|
Balance
at June 30, 2009
|
|
$ |
40,972 |
|
|
$ |
56,226 |
|
|
$ |
82,443 |
|
|
$ |
7,331 |
|
|
$ |
(17,176 |
) |
|
$ |
169,796 |
|
See
accompanying notes to consolidated financial statements.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note
1. Basis of Presentation
Standard
Motor Products, Inc. (referred to hereinafter in these notes to consolidated
financial statements as the “Company,” “we,” “us,” or “our”) is engaged in the
manufacture and distribution of replacement parts for motor vehicles in the
automotive aftermarket industry.
The
accompanying unaudited financial information should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in
our Annual Report on Form 10-K for the year ended December 31,
2008. The unaudited consolidated financial statements include our
accounts and all domestic and international companies in which we have more than
a 50% equity ownership. Our investments in unconsolidated affiliates
are accounted for on the equity method. All significant inter-company
items have been eliminated.
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the entire
year.
Subsequent
Events
We
evaluated events or transactions which occurred subsequent to the balance sheet
date but prior to August 6, 2009,
the issuance date of the financial statements, for recognition or
disclosure.
Reclassification
Certain
prior period amounts in the accompanying consolidated financial statements and
related notes have been reclassified to conform to the 2009
presentation.
Note
2. Summary
of Significant Accounting Policies
The
preparation of consolidated annual and quarterly financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities, the 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 have made a number of
estimates and assumptions in the preparation of these consolidated financial
statements. We can give no assurance that actual results will not
differ from those estimates. 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 postretirement benefits, asbestos,
environmental and litigation matters, deferred tax asset valuation allowance and
sales return allowances.
The
impact and any associated risks related to significant accounting 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. There have been
no material changes to our critical accounting policies and estimates from the
information provided in Note 1 of the notes to our consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2008.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Recently Issued Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurement. This statement applies
under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value
measurements. SFAS 157 was effective for the fiscal year beginning
after November 15, 2007, which for us is the year ending December 31,
2008. As of January 1, 2008, we adopted SFAS 157. The
adoption of SFAS 157 did not impact our consolidated financial statements in any
material respect.
In
December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157’s effective date
for all non-financial assets and liabilities, except those items recognized or
disclosed at fair value on an annual or more frequently recurring basis, until
years beginning after November 15, 2008. Derivatives measured at fair
value under FAS 133 were not deferred under FSP FAS 157-b. As of
January 1, 2009, we adopted SFAS 157 for non-financial assets and
liabilities. The adoption of SFAS 157 as it related to certain
non-financial assets and liabilities did not impact our consolidated financial
statements in any material respect.
In April
2009, the FASB issued FSP FAS 157-4 that affirmed the exit price objective of
fair value measurements even if there has been a significant decrease in the
volume and level of activity for the asset or liability. When quoted
market prices may not be determinative of fair value, a reporting entity shall
consider the reasonableness of a range of fair value estimates. The
FSP is effective for interim and annual reporting periods ending after June 15,
2009, which for us was June 30, 2009. As of June 30, 2009, we adopted
SFAS 157 as it related to inactive markets. The adoption of SFAS 157
as it related to inactive markets did not impact our consolidated financial
statements in any material respect.
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141R”). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for the fiscal year beginning
after December 15, 2008, which for us is the fiscal year beginning January 1,
2009. As of January 1, 2009, we adopted SFAS 141R. Our
adoption of SFAS 141R will have an impact on the manner in which we account for
future acquisitions.
In April
2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies.” The FSP eliminates the distinction between
contractual and non-contractual contingencies, including the initial recognition
and measurement criteria, in SFAS 141R. Additionally, the FSP
requires an acquirer to develop a systematic and rational basis for subsequently
measuring and accounting for acquired contingencies depending on their
nature. The FSP is effective for contingent assets and liabilities
acquired in business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after
December 15, 2008, which for us is an acquisition occurring after January 1,
2009.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Non-Controlling
Interests in Consolidated Financial Statements
In
December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, which for us is the fiscal year
beginning January 1, 2009. The adoption of SFAS 160 has not had a
material impact on our consolidated financial statements.
Disclosures
about Derivative Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). This Statement requires
enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. The
effective date was clarified as prospectively for annual and interim periods
beginning on or after November 15, 2008 in FSP FAS 133-1 and FIN 45-4,
“Disclosures about Credit Derivatives No. 133 and FASB Interpretation No. 45;
and Clarification of the Effective Date of FASB Statement No.
161.” The adoption of SFAS 161 will have an impact on the manner in
which we would disclose any derivative or hedging activities, if
present.
Convertible
Debt Instruments
In May
2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion” (“FSP APB 14-1”)
which requires issuers of convertible debt that may be settled wholly or partly
in cash to account for the debt and equity components
separately. This FSP is effective for fiscal years beginning after
December 15, 2008, which for us is the fiscal year beginning January 1, 2009 and
must be applied retrospectively to all periods presented. We have
reviewed the provisions of FSP APB 14-1 and have determined that the adoption of
FSP APB 14-1 will not require a change in the manner in which we report our
convertible subordinated debentures.
Subsequent
Events
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. SFAS
165 is effective for interim or annual periods ending after June 15, 2009, which
for us was June 30, 2009. We have reviewed the provisions of SFAS 165
and adopted SFAS 165 as of June 30, 2009. In connection with the
adoption of SFAS 165 we have included a disclosure to address the date through
which we evaluated subsequent events.
Fair
Value Interim Disclosures
In April
2009, the FASB issued FSP SFAS 107-1, “Interim Disclosure about Fair Value of
Financial Instruments (“FSP 107-1”). FSP 107-1 requires interim
disclosures regarding the fair values of financial instruments that are within
the scope of FAS No. 107, “Disclosures about the Fair Value of Financial
Instruments.” These disclosures include the methods and significant
assumptions used to estimate the fair value of financial instruments on an
interim basis as well as changes of the methods and significant assumptions from
prior periods. The FSP is effective for interim and annual reporting
periods ending after June 15, 2009, which for us was June 30,
2009. As of June 30, 2009, we adopted FSP 107-1 as it related to
interim fair value disclosures. We determined that the adoption of
FAS 107-1 required additional interim disclosures but does not change the
accounting treatment for these financial instruments.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Codification
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of
SFAS No. 162” (the Codification). The Codification will be the single
source of authoritative nongovernmental U.S. GAAP, superseding existing FASB,
AICPA, EITF and related literature. The Codification eliminates the GAAP
hierarchy contained in SFAS No. 162 and establishes one level of authoritative
GAAP. All other literature is considered non-authoritative. This Statement is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009, which for us would be September 30,
2009. There will be no change to the company’s consolidated financial
statements upon adoption.
Note
3. Restructuring and Integration Costs
Selected
information relating to the aggregate restructuring and integration activities
is as follows (in thousands):
|
|
Workforce
Reduction
|
|
|
Other
Exit
Costs
|
|
|
Total
|
|
Exit
activity liability at December 31, 2008
|
|
$ |
12,751 |
|
|
$ |
2,956 |
|
|
$ |
15,707 |
|
Amounts
provided for during 2009
|
|
|
1,046 |
|
|
|
1,327 |
|
|
|
2,373 |
|
Adjustments
|
|
|
40 |
|
|
|
(944 |
) |
|
|
(904 |
) |
Cash
payments during 2009
|
|
|
(3,659 |
) |
|
|
(1,081 |
) |
|
|
(4,740 |
) |
Exit
activity liability at June 30, 2009
|
|
$ |
10,178 |
|
|
$ |
2,258 |
|
|
$ |
12,436 |
|
Restructuring
Costs
During
2008 as part of an initiative to improve the effectiveness and efficiency of
operations, and to reduce costs in light of economic conditions, we implemented
certain organizational changes and offered eligible employees a voluntary
separation package. Of the original restructuring charge of $8
million, we have $5.7 million remaining as of June 30, 2009. The
restructuring accrual relates to severance and other retiree benefit
enhancements to be paid through 2015.
Integration
Expenses
Integration
expenses relate primarily to the integration of operations to our facilities in
Mexico, the closure and consolidation of our distribution operations in Reno,
Nevada, and the closure of our production operations in Edwardsville, Kansas and
Wilson, North Carolina.
In
February 2009, we announced plans to close our production facility in Wilson,
North Carolina. The closure is targeted to be completed by the third
quarter of 2009, and we intend to market the facility for sale once
vacated.
During
the six months of 2009, we incurred integration expenses of $2.4 million
consisting of the cost of workforce reductions and other exit costs related to
production facility closures at Edwardsville, Kansas, and Wilson, North Carolina
and to the distribution center closure in Reno, Nevada, and demolition costs
incurred at our European properties held for sale.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
In
connection with the shutdown of the manufacturing operations at Long Island City
that was completed in March 2008, we incurred severance costs and costs
associated with equipment removal, capital expenditures, and environmental
clean-up. In addition, we entered into an agreement with the
International Union, United Automobile, Aerospace and Agricultural Implement
Workers of America and its Local 365 (“UAW”). As part of the
agreement, we incurred a withdrawal liability from a multi-employer
plan. The pension plan withdrawal liability is related to trust asset
under-performance in a plan that covers our former UAW employees at the Long
Island City facility and is payable in 80 quarterly payments of $0.3 million,
which commenced in December 2008. As of June 30, 2009, the reserve
balance related to the shutdown of our manufacturing operations at Long Island
City consisted of the pension withdrawal liability of $3.2 million and other
exit costs of $2.2 million for environmental clean-up costs.
Assets
Held for Sale
As of
June 30, 2009, in accordance with the requirements of FASB Statement No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” we have
reported $0.8 million as assets held for sale on our consolidated balance sheet
related to the net book value of two closed facilities in our European Segment
and our closed Reno, Nevada facility within our Engine Management
Segment. Following plant closures resulting from integration
activities, these facilities have been vacant and therefore a decision to
solicit bids has been made. We are hopeful that a negotiated sale to
a third-party will occur within the next twelve months and we will record any
resulting gain in other income as appropriate.
Note
4. Sale of Receivables
In April
2008, we began to sell undivided interests in certain of our receivables to
financial institutions. 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 $43 million and $72.8 million of receivables during the
three months and six months ended June 30, 2009, respectively. Under
the terms of the agreements, we retain no rights or interest, have no
obligations with respect to the sold receivables, and do not service the
receivables after the sale. As such, these transactions are being
accounted for as a sale in accordance with SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.” A charge in the amount of $0.6 million and $1 million
related to the sale of receivables is included in selling, general and
administrative expense in our consolidated statements of operations for the
three months and six months ended June 30, 2009, respectively.
Note
5. Inventories
Inventories,
which are stated at the lower of cost (determined by means of the first in,
first out method) or market, consist of (in thousands):
|
|
|
|
|
|
|
|
|
June
30,
2009
|
|
|
December
31,
2008
|
|
|
|
(In
thousands)
|
|
Finished
goods, net
|
|
$ |
125,413 |
|
|
$ |
152,804 |
|
Work
in process, net
|
|
|
4,502 |
|
|
|
5,031 |
|
Raw
materials, net
|
|
|
68,074 |
|
|
|
74,600 |
|
Total
inventories, net
|
|
$ |
197,989 |
|
|
$ |
232,435 |
|
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note
6. Credit Facilities and Long-Term Debt
Total
debt outstanding is summarized as follows:
|
|
|
|
|
|
|
|
|
June
30,
2009
|
|
|
December
31,
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Revolving
credit facilities (1)
|
|
$ |
90,930 |
|
|
$ |
148,931 |
|
6.75%
convertible subordinated debentures (2) (3)
|
|
|
32,080 |
|
|
|
44,865 |
|
15%
convertible subordinated debentures (2)
|
|
|
12,300 |
|
|
|
— |
|
Other
|
|
|
720 |
|
|
|
361 |
|
Total
debt
|
|
$ |
136,030 |
|
|
$ |
194,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
123,171 |
|
|
$ |
193,884 |
|
Long-term
debt
|
|
|
12,859 |
|
|
|
273 |
|
Total debt
|
|
$ |
136,030 |
|
|
$ |
194,157 |
|
|
|
|
|
|
|
|
|
|
(1)
|
Consists
of the revolving credit facility, the Canadian term loan and the European
revolving credit facilities.
|
(2)
|
In
May 2009, we exchanged $12.3 million aggregate principal amount of our
outstanding 6.75% convertible subordinated debentures due 2009 for a like
principal amount of 15% convertible subordinated debentures due
2011.
|
(3)
|
On
July 15, 2009, we settled at maturity the remaining $32.1 million
outstanding principal amount of our 6.75% convertible subordinated
debentures with funds from our revolving credit
facility. During the first six months of 2009 prior to such
settlement, we repurchased $0.5 million principal amount of the 6.75%
convertible subordinated
debentures.
|
Deferred
Financing Costs
We had
deferred financing costs of $6.8 million and $3.6 million as of June 30, 2009
and December 31, 2008, respectively. These costs relate to our
revolving credit facility, the 6.75% convertible subordinated debentures and the
15% convertible subordinated debentures. In connection with the amendments to
our revolving credit facility in May and June 2009, we incurred and capitalized
$3.2 million of costs related to bank fees, legal and other professional fees
which are being amortized through March 2013, the remaining term of the amended
revolving credit facility. In addition, we incurred and capitalized
costs of $0.7 million related to the 15% convertible subordinated debentures
issued in May 2009 which are being amortized through April 2011, the remaining
term of the 15% convertible subordinated debentures. Deferred
financing costs as of June 30, 2009 are being amortized, assuming no further
prepayments of principal, in the amount of $1 million in 2009, $2 million in
2010, $1.8 million in 2011, $1.6 million in 2012 and $0.4 million in
2013.
Revolving
Credit Facility
In March
2007, we entered into a Second Amended and Restated Credit Agreement with
General Electric Capital Corporation, as agent, and a syndicate of lenders for a
secured revolving credit facility. This restated credit agreement
replaces our prior credit facility with General Electric Capital
Corporation. The restated credit agreement (as amended in June 2009)
provides for a line of credit of up to $200 million (inclusive of the Canadian
term loan described below) and expires in March 2013. Direct borrowings under
the restated credit agreement bear interest at the LIBOR rate plus the
applicable margin (as defined), or floating at the index rate plus the
applicable margin, at our option. The interest rate may vary depending upon our
borrowing availability. The restated credit agreement is guaranteed by certain
of our subsidiaries and secured by certain of our assets.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
In May
2009, we amended our restated credit agreement to permit the May 2009 exchange
of $12.3 million principal amount of our outstanding 6.75% convertible
subordinated debentures due 2009 for a like principal amount of our 15%
convertible subordinated debentures due 2011 and to provide that, beginning
October 15, 2010 and on a monthly basis thereafter, our borrowing availability
will be reduced by approximately $2 million for the repayment, repurchase or
redemption of the aggregate outstanding amount of our newly issued 15%
convertible subordinated debentures.
In June
2009, we further amended our restated credit agreement (1) to extend the
maturity date of our credit facility to March 20, 2013, (2) to reduce the
aggregate amount of the revolving credit facility (inclusive of the Canadian
term loan described below) from $275 million to $200 million, (3) to permit the
settlement at maturity of our 6.75% convertible subordinated debentures due July
15, 2009, our 15% convertible subordinated debentures due April 15, 2011, and
our 15% unsecured promissory notes due April 15, 2011; all with funds from our
revolving credit facility subject to borrowing availability, (4) to establish a
$10 million minimum borrowing availability requirement effective on the date of
repayment of our 6.75% convertible subordinated debentures, and (5) to provide
that, beginning October 15, 2010 and on a monthly basis thereafter our borrowing
availability will be reduced by approximately $0.9 million for the repayment or
repurchase of the aggregate outstanding amount of our newly issued 15% unsecured
promissory notes due 2011. In addition, as of the date of the
amendment the margin added to the index rate increased to between 2.25% - 2.75%
and the margin added to the LIBOR rate increased to 3.75% - 4.25%, in each case
depending upon the level of excess availability as defined in the restated
credit agreement.
Borrowings
under the restated credit agreement are collateralized by substantially all of
our assets, including accounts receivable, inventory and fixed assets, and those
of certain of our subsidiaries. After taking into account outstanding borrowings
under the restated credit agreement, there was an additional $98.2 million
available for us to borrow pursuant to the formula at June 30, 2009, of which
$32.1 million was reserved for repayment, repurchase or redemption, as the case
may be, of the aggregate outstanding amount of our 6.75% convertible
subordinated debentures, and $69.3 million available for us to borrow at July
15, 2009 after the settlement of the 6.75% convertible subordinated
debentures. At June 30, 2009 and December 31, 2008, the interest rate
on our restated credit agreement was 4.8% and 4.6%, respectively. Outstanding
borrowings under the restated credit agreement (inclusive of the Canadian term
loan described below), which are classified as current liabilities, were $85.8
million and $143.2 million at June 30, 2009 and December 31, 2008,
respectively.
At any
time that our average borrowing availability over the previous thirty days is
less than $30 million or if our borrowing availability is $20 million or less,
and until such time that we have maintained an average borrowing availability of
$30 million or greater for a continuous period of ninety days, the terms of our
restated credit agreement 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), and (2) to limit capital expenditure levels. As of June 30,
2009, we were not subject to these covenants. Availability under our
restated credit agreement is based on a formula of eligible accounts receivable,
eligible inventory and eligible fixed assets. Our restated credit
agreement also permits dividends and distributions by us provided specific
conditions are met.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Canadian
Term Loan
In June
2009, we amended our credit agreement with GE Canada Finance Holding Company,
for itself and as agent for the lenders. The amended credit agreement provides
for a line of credit of up to $10 million, of which $7 million is currently
outstanding and which amount is part of the $200 million available for borrowing
under our restated credit agreement with General Electric Capital Corporation
(described above). The amended credit agreement is guaranteed and secured by us
and certain of our wholly-owned subsidiaries and expires in March
2013. Direct borrowings under the amended credit agreement bear
interest at the same rate as our restated credit agreement with General Electric
Capital Corporation (described above).
Revolving
Credit Facilities—Europe
Our
European subsidiary has revolving credit facilities which, at June 30, 2009,
provide for aggregate lines of credit up to $8.1 million. The amount of
short-term bank borrowings outstanding under these facilities was $5.2 million
on June 30, 2009 and $5.8 million on December 31, 2008. The weighted average
interest rate on these borrowings on June 30, 2009 and December 31, 2008 was
6.4% and 6.2%, respectively.
Subordinated
Debentures
In July
1999, we completed a public offering of 6.75% convertible subordinated
debentures amounting to $90 million. The 6.75% convertible subordinated
debentures carry an interest rate of 6.75%, payable semi-annually, and matured
on July 15, 2009. The $90 million principal amount of the 6.75% convertible
subordinated debentures was convertible into 2,796,120 shares of our common
stock at the option of the holder.
From time
to time, we repurchased the debentures in open market transactions, on terms
that we believed to be favorable with any gains or losses as a result of the
difference between the net carrying amount and the reacquisition price recognized in the
period of repurchase. During the first six months of 2009, we
repurchased $0.5 million principal amount of the 6.75% convertible subordinated
debentures. In 2008, we repurchased $45.1 million principal amount of
the debentures resulting in a gain on the repurchase of $3.8
million. In May 2009, we exchanged $12.3 million aggregate principal
amount of our outstanding 6.75% convertible subordinated debentures due 2009 for
a like principal amount of newly issued 15% convertible subordinated debentures
due 2011. The 15% convertible subordinated debentures carry an
interest rate of 15%, payable semi-annually, and will mature on April 15,
2011.
As of
June 30, 2009, the remaining outstanding $32.1 million principal amount of the
6.75% convertible subordinated debentures was convertible into 996,661 shares of
our common stock and the $12.3 million principal amount of the 15% convertible
subordinated debentures is convertible into 820,000 shares of our common stock;
each at the option of the holder. The convertible subordinated
debentures are subordinated in right of payment to all of our existing and
future senior indebtedness. 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 subordinated debentures at a purchase price equal to
101% of their aggregate principal amount, plus accrued interest.
On July
15, 2009, we settled at maturity the remaining $32.1 million outstanding
principal amount of the 6.75% convertible subordinated debentures with funds
from our revolving credit facility.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Unsecured
Notes
In July
2009, we issued $5.4 million aggregate principal amount of 15% unsecured
promissory notes to certain directors and executive officers and to the
trustees of our Supplemental Executive Retirement Plan on behalf of the plan
participants. The 15% unsecured promissory notes will mature on April
15, 2011 and carry an interest rate of 15%, payable semi-annually and are not
convertible into common stock. The 15% unsecured promissory notes are
subordinated in right of payment to all of our existing and future senior
indebtedness.
Capital
Leases
During
2009, we entered into capital lease obligations related to certain equipment for
use in our operations totaling $0.4 million. Assets held under
capitalized leases are included in property, plant and equipment and depreciated
over the lives of the respective leases or over their economic useful lives,
whichever is less.
Note
7. Stock-Based Compensation Plans
We
account for our five stock-based compensation plans in accordance with the
provisions of FASB Statement No. 123R, “Share-Based Payment” (“FAS 123R”), which
requires that a company 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. That cost is recognized in the statement of operations over the
period during which an employee is required to provide service in exchange for
the award.
Stock Option
Grants
At June
30, 2009, under all of our option plans there were options to purchase an
aggregate of 430,052 shares of common stock, with no shares of common stock
available for future grants. There were no stock options granted in
the six months ended June 30, 2009. In addition, there was no stock
option-based compensation expense in the six months ended June 30, 2009 and we
have no unrecognized compensation cost related to stock options and non-vested
stock options as of June 30, 2009.
The
following is a summary of the changes in outstanding stock options for the six
months ended June 30, 2009:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Outstanding
at December 31, 2008
|
|
|
515,823 |
|
|
$ |
13.40 |
|
|
|
4.1 |
|
Expired
|
|
|
(61,071 |
) |
|
$ |
14.31 |
|
|
|
— |
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeited,
other
|
|
|
(24,700 |
) |
|
$ |
13.46 |
|
|
|
4.2 |
|
Outstanding
at June 30, 2009
|
|
|
430,052 |
|
|
$ |
13.26 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at June 30, 2009
|
|
|
430,052 |
|
|
$ |
13.26 |
|
|
|
4.2 |
|
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
There was
no aggregate intrinsic value of all outstanding stock options as of June 30,
2009. All outstanding stock options as of June 30, 2009 are fully
vested and exercisable. There were no options exercised in
2009.
Restricted and Performance
Stock Grants
As part
of our 2006 Omnibus Incentive Plan, we currently grant shares of restricted
and/or performance-based stock to eligible employees and
directors. Selected executives and other key personnel are granted
performance awards whose vesting is contingent upon meeting various performance
measures with a retention feature. This component of compensation is
designed to encourage the long-term retention of key executives and to tie
executive compensation directly to Company performance and the long-term
enhancement of shareholder value. Performance-based shares are
subject to a three year measuring period and the achievement of performance
targets and, depending upon the achievement of such performance targets, they
may become vested on the third anniversary of the date of grant. Each
period we evaluate the probability of achieving the applicable targets, and we
adjust our accrual accordingly. Restricted shares become fully vested
upon the third and first anniversary of the date of grant for employees and
directors, respectively.
In
determining the grant date fair value, the stock price on the date of grant, as
quoted on the New York Stock Exchange, was reduced by the present value of
dividends expected to be paid on the shares issued and outstanding during the
requisite service period, discounted at a risk-free interest
rate. The risk-free interest rate is based on the U.S. Treasury rates
at the date of grant with maturity dates approximately equal to the restriction
or vesting period at the grant date. The fair value of the shares at the date of
grant is amortized to expense ratably over the restriction period. An
evaluation of our historical forfeiture experience during the six months ended
June 30, 2009 indicated that our current estimated forfeiture rates should be
adjusted upward from 2% to 5% for employees and remains at 0% for executives and
directors. The impact of the change in our estimated forfeitures
recorded to compensation expense and accumulated comprehensive income is not
material.
Our
restricted and performance-based share activity was as follows for the six
months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
Per Share
|
|
Balance
at December 31, 2008
|
|
|
280,775 |
|
|
$ |
6.88 |
|
Granted
|
|
|
6,575 |
|
|
$ |
4.86 |
|
Vested
|
|
|
(55,350 |
) |
|
$ |
7.24 |
|
Forfeited
|
|
|
(36,625 |
) |
|
$ |
7.23 |
|
Balance
at June 30, 2009
|
|
|
195,375 |
|
|
$ |
6.65 |
|
We
recorded compensation expense related to restricted shares and performance-based
shares of $207,200 ($123,050 net of tax) and $223,550 ($128,319 net of tax) for
the six months ended June 30, 2009 and 2008, respectively. The unamortized
compensation expense related to our restricted and performance-based shares was
$0.7 million at June 30, 2009, and is expected to be recognized as they vest
over a weighted average period of 1.7 and 0.8 years for employees and directors,
respectively.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note
8. Employee Benefits
In 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 2009, we contributed to the trust an additional
200,000 shares from our treasury and released 188,461 shares from the trust
leaving 12,068 shares remaining in the trust as of June 30, 2009.
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. In March 2008,
contributions of $113,500 were made related to calendar year 2007. No
contribution has been made in 2009 related to calendar year 2008. We
anticipate making the calendar year 2008 contribution in the third quarter of
2009.
In
October 2001, we adopted a second unfunded SERP. The SERP, as amended, is a
defined benefit plan pursuant to which we will pay supplemental pension benefits
to certain key employees upon the attainment of a contractual participant’s
payment date based upon the employees’ years of service and
compensation. We use a December 31 measurement date for this
plan.
Our UK
pension plan is comprised of a defined benefit plan and a defined contribution
plan. The defined benefit plan is closed to new entrants and existing
active members ceased accruing any further benefits.
We participate in a multi-employer plan
which provides defined benefits to unionized workers at one of our manufacturing
facilities. Contributions to the plans are determined in accordance
with the provisions of a negotiated labor contract.
In
December 2007, we entered into an agreement with the International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America and its
Local 365 regarding the shut down of our manufacturing operations at Long Island
City, New York, which operations were transferred to certain of our other
facilities. As part of the agreement, effective January 5, 2008, we agreed to
withdraw from the multi-employer pension plan covering our UAW employees at the
Long Island City facility. In December 2007, we recorded a charge of
$3.3 million related to the present value of the undiscounted $5.6 million
withdrawal liability discounted over 80 quarterly payments using a
credit-adjusted, risk-free rate. In accordance with the terms of the
agreement, we commenced with quarterly payments of $0.3 million in December
2008.
We
provide certain medical and dental care benefits to eligible retired
employees. Eligibility of employees who can participate in this
program is limited to employees hired before 1996. In May 2008, we
announced that, in lieu of the then current retiree medical and dental plans
previously funded on a pay-as-you-go basis, a Health Reimbursement Account
(“HRA”) will be established beginning January 1, 2009 for each qualified U.S.
retiree. The plan amendment effectively reduced benefits attributed
to employee services already rendered and instead credited a fixed amount into
an HRA to cover both medical and dental costs for all current and future
eligible retirees. The remeasurement of the postretirement welfare
benefit plan as a result of these benefit modifications generated a $24.5
million reduction in the accumulated postretirement benefit obligation on June
1, 2008, which will be amortized on a straight-line basis and recognized as a
reduction in benefit costs over the remaining service to full eligibility (3.8
years).
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The
components of net periodic benefit cost for our North American and European
defined benefit plans and postretirement benefit plans for the three months and
six months ended June 30, 2009 and 2008 were as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Pension
Benefits
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
22 |
|
|
$ |
(61 |
) |
|
$ |
43 |
|
|
$ |
46 |
|
Interest
cost
|
|
|
72 |
|
|
|
144 |
|
|
|
144 |
|
|
|
279 |
|
Amortization
of prior service cost
|
|
|
28 |
|
|
|
27 |
|
|
|
55 |
|
|
|
55 |
|
Actuarial
net (gain) loss
|
|
|
(33 |
) |
|
|
521 |
|
|
|
(65 |
) |
|
|
525 |
|
Net
periodic benefit cost
|
|
$ |
89 |
|
|
$ |
631 |
|
|
$ |
177 |
|
|
$ |
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
74 |
|
|
$ |
188 |
|
|
$ |
149 |
|
|
$ |
400 |
|
Interest
cost
|
|
|
273 |
|
|
|
551 |
|
|
|
547 |
|
|
|
1,135 |
|
Amortization
of prior service cost
|
|
|
(2,317 |
) |
|
|
(1,246 |
) |
|
|
(4,634 |
) |
|
|
(1,959 |
) |
Amortization
of transition obligation
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
Actuarial
net loss
|
|
|
383 |
|
|
|
405 |
|
|
|
767 |
|
|
|
698 |
|
Net
periodic benefit cost
|
|
$ |
(1,586 |
) |
|
$ |
(101 |
) |
|
$ |
(3,169 |
) |
|
$ |
276 |
|
Note
9. Earnings Per Share
The
following are reconciliations of the earnings available to common stockholders
and the shares used in calculating basic and dilutive net earnings per common
share (in thousands, except per share data):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic
Net Earnings (Loss) per Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$ |
5,638 |
|
|
$ |
(772 |
) |
|
$ |
6,425 |
|
|
$ |
12,575 |
|
Loss
from discontinued operation
|
|
|
(322 |
) |
|
|
(323 |
) |
|
|
(582 |
) |
|
|
(649 |
) |
Net
earnings (loss) available to common stockholders
|
|
$ |
5,316 |
|
|
$ |
(1,095 |
) |
|
$ |
5,843 |
|
|
$ |
11,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
18,815 |
|
|
|
18,332 |
|
|
|
18,706 |
|
|
|
18,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operation per common
share
|
|
$ |
0.30 |
|
|
$ |
(0.04 |
) |
|
$ |
0.34 |
|
|
$ |
0.69 |
|
Loss
from discontinued operation per common share
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.04 |
) |
Basic
net earnings (loss) per common share
|
|
$ |
0.28 |
|
|
$ |
(0.06 |
) |
|
$ |
0.31 |
|
|
$ |
0.65 |
|
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Diluted
Net Earnings (Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$ |
5,638 |
|
|
$ |
(772 |
) |
|
$ |
6,425 |
|
|
$ |
12,575 |
|
Interest
income on debenture conversions (net of income tax
expense)
|
|
|
280 |
|
|
|
– |
|
|
|
– |
|
|
|
1,822 |
|
Earnings
(loss) from continuing operations plus assumed conversions
|
|
|
5,918 |
|
|
|
(772 |
) |
|
|
6,425 |
|
|
|
14,397 |
|
Loss
from discontinued operation
|
|
|
(322 |
) |
|
|
(323 |
) |
|
|
(582 |
) |
|
|
(649 |
) |
Net
earnings (loss) available to common stockholders plus assumed
conversions
|
|
$ |
5,596 |
|
|
$ |
(1,095 |
) |
|
$ |
5,843 |
|
|
$ |
13,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
18,815 |
|
|
|
18,332 |
|
|
|
18,706 |
|
|
|
18,320 |
|
Plus
incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of restricted stock
|
|
|
52 |
|
|
|
53 |
|
|
|
14 |
|
|
|
42 |
|
Dilutive
effect of stock options
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Dilutive
effect of convertible debentures
|
|
|
1,147 |
|
|
|
– |
|
|
|
– |
|
|
|
2,796 |
|
Weighted
average common shares outstanding – Diluted
|
|
|
20,014 |
|
|
|
18,385 |
|
|
|
18,720 |
|
|
|
21,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations per common
share
|
|
$ |
0.30 |
|
|
$ |
(0.04 |
) |
|
$ |
0.34 |
|
|
$ |
0.68 |
|
Loss
from discontinued operation per common share
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
Diluted
net earnings (loss) per common share
|
|
$ |
0.28 |
|
|
$ |
(0.06 |
) |
|
$ |
0.31 |
|
|
$ |
0.65 |
|
The
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
or because they were excluded under the treasury method (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Stock
options
|
|
|
430 |
|
|
|
567 |
|
|
|
430 |
|
|
|
567 |
|
Restricted
shares
|
|
|
110 |
|
|
|
83 |
|
|
|
162 |
|
|
|
94 |
|
6.75%
convertible subordinated debentures
|
|
|
– |
|
|
|
2,796 |
|
|
|
1,270 |
|
|
|
– |
|
15%
convertible subordinated debentures
|
|
|
505 |
|
|
|
– |
|
|
|
254 |
|
|
|
– |
|
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note
10. Comprehensive Income (Loss)
Comprehensive
income (loss), net of income tax expense is as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
earnings (loss) as reported
|
|
$ |
5,316 |
|
|
$ |
(1,095 |
) |
|
$ |
5,843 |
|
|
$ |
11,926 |
|
Foreign
currency translation adjustment
|
|
|
3,229 |
|
|
|
(238 |
) |
|
|
2,049 |
|
|
|
(798 |
) |
Postretirement
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
amendment adjustment
|
|
|
– |
|
|
|
14,708 |
|
|
|
– |
|
|
|
14,708 |
|
Reclassification
adjustment for recognition of prior
period amounts
|
|
|
(1,624 |
) |
|
|
(318 |
) |
|
|
(2,937 |
) |
|
|
(336 |
) |
Unrecognized
amounts
|
|
|
210 |
|
|
|
(511 |
) |
|
|
420 |
|
|
|
(511 |
) |
Total
comprehensive income (loss)
|
|
$ |
7,131 |
|
|
$ |
12,546 |
|
|
$ |
5,375 |
|
|
$ |
24,989 |
|
Note
11. Industry Segments
The
following tables show our net sales and operating income by our operating
segments (in thousands):
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Operating
Income
(Loss)
|
|
|
Net Sales
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
Engine
Management
|
|
$ |
121,870 |
|
|
$ |
8,981 |
|
|
$ |
138,482 |
|
|
$ |
4,024 |
|
Temperature
Control
|
|
|
65,661 |
|
|
|
2,967 |
|
|
|
61,489 |
|
|
|
3,172 |
|
Europe
|
|
|
7,877 |
|
|
|
(1,046 |
) |
|
|
12,563 |
|
|
|
373 |
|
All
Other
|
|
|
2,090 |
|
|
|
(2,519 |
) |
|
|
2,809 |
|
|
|
(2,846 |
) |
Consolidated
|
|
$ |
197,498 |
|
|
$ |
8,383 |
|
|
$ |
215,343 |
|
|
$ |
4,723 |
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Operating
Income
(Loss)
|
|
|
Net Sales
|
|
|
Operating
Income
(Loss)
|
|
|
|
|
|
Engine
Management
|
|
$ |
244,757 |
|
|
$ |
16,618 |
|
|
$ |
281,844 |
|
|
$ |
13,222 |
|
Temperature
Control
|
|
|
105,921 |
|
|
|
1,638 |
|
|
|
111,062 |
|
|
|
2,368 |
|
Europe
|
|
|
15,417 |
|
|
|
(886 |
) |
|
|
23,807 |
|
|
|
869 |
|
All
Other
|
|
|
3,625 |
|
|
|
(5,276 |
) |
|
|
6,714 |
|
|
|
(7,207 |
) |
Consolidated
|
|
$ |
369,720 |
|
|
$ |
12,094 |
|
|
$ |
423,427 |
|
|
$ |
9,252 |
|
Note
12. 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.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Trade
Accounts Receivable
The
carrying amount of trade receivables reflects net recovery value and
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 our revolving credit facilities equals fair market value
because the interest rate reflects current market rates. The maturity
value of our 6.75% convertible subordinated debentures approximates fair value
at June 30, 2009 due to the short period to redemption.
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.
The
estimated fair values of our financial instruments are as follows (in
thousands):
June 30, 2009 |
|
Carrying
Amount
|
|
|
Fair Value
|
|
Cash
and cash equivalents
|
|
$ |
14,450 |
|
|
$ |
14,450 |
|
Trade
accounts receivable
|
|
|
169,804 |
|
|
|
169,804 |
|
Trade
accounts payable
|
|
|
63,519 |
|
|
|
63,519 |
|
Short
term borrowings
|
|
|
123,171 |
|
|
|
123,171 |
|
Long-term
debt
|
|
|
12,859 |
|
|
|
12,859 |
|
Note
13. Commitments and Contingencies
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 June 30, 2009, approximately 3,670 cases were outstanding
for which we were responsible for any related liabilities. We expect the
outstanding cases to increase gradually due to legislation in certain states
mandating minimum medical criteria before a case can be heard. Since inception
in September 2001 through June 30, 2009, the amounts paid for settled claims are
approximately $8.1 million. In September 2007, we entered into an agreement with
an insurance carrier to provide us with limited insurance coverage for the
defense and indemnity costs associated with certain asbestos-related claims. We
have submitted various asbestos-related claims to the insurance carrier for
coverage under this agreement, and the insurance carrier reimbursed us $2.4
million for settlement claims and defense costs. We have submitted
additional asbestos-related claims to the insurance carrier for
coverage.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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.
As is our accounting policy, we engage actuarial consultants with experience in
assessing asbestos-related liabilities 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 into the future; (3) an analysis of our currently pending
claims; and (4) an analysis of our settlements to date in order to develop
average settlement values.
The most
recent actuarial study was performed as of August 31, 2008. The
updated study has estimated an undiscounted liability for settlement payments,
excluding legal costs and any potential recovery from insurance carriers,
ranging from $25.3 million to $69.2 million for the period through 2059. The
change from the prior year study was a $1.5 million increase for the low end of
the range and a $14 million increase for the high end of the
range. Based on the information contained in the actuarial study and
all other available information considered by us, 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 2059 in our consolidated financial
statements. Accordingly, an incremental $2.1 million provision in our
discontinued operation was added to the asbestos accrual in September 2008
increasing the reserve to approximately $25.3 million. According to the updated
study, legal costs, which are expensed as incurred and reported in earnings
(loss) from discontinued operation in the accompanying statement of operations,
are estimated to range from $19.1 million to $32.1 million during the same
period.
We plan
to perform an annual actuarial evaluation 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. We 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. In November 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 us 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. Plaintiff filed
opposition to our motions, and we subsequently filed replies in June
2006. Oral arguments were originally scheduled for September 2006,
however the court adjourned these proceedings until a later date to be
determined. Subsequently, the judge initially assigned to the case recused
himself, and a new judge has been assigned before whom further preliminary
proceedings have been held. 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
this lawsuit vigorously.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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.
Warranties. 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 June 30, 2009 and 2008, we have
accrued $12 million and $13.1 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.
The
following table provides the changes in our product warranties (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Balance,
beginning of period
|
|
$ |
10,523 |
|
|
$ |
11,141 |
|
|
$ |
10,162 |
|
|
$ |
11,317 |
|
Liabilities
accrued for current year sales
|
|
|
12,168 |
|
|
|
13,372 |
|
|
|
22,444 |
|
|
|
23,914 |
|
Settlements
of warranty claims
|
|
|
(10,686 |
) |
|
|
(11,398 |
) |
|
|
(20,601 |
) |
|
|
(22,116 |
) |
Balance,
end of period
|
|
$ |
12,005 |
|
|
$ |
13,115 |
|
|
$ |
12,005 |
|
|
$ |
13,115 |
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
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, our substantial leverage; economic
and market conditions (including access to credit and financial markets); 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; our
ability to achieve cost savings from our restructuring
initiatives; product liability and environmental matters (including,
without limitation, those related to asbestos-related contingent liabilities and
remediation costs at certain properties); as well as other risks and
uncertainties, such as those described under Quantitative and Qualitative
Disclosures About Market Risk and those detailed herein and from time to time in
the filings of the Company with the 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. The
following discussion should be read in conjunction with the unaudited
consolidated financial statements, including the notes thereto, included
elsewhere in this Report.
Business
Overview
We are a
leading independent manufacturer, distributor and marketer of replacement parts
for motor vehicles in the automotive aftermarket industry, with an increasing
focus on the original equipment and original equipment service markets. 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, ignition wires, battery cables and fuel system parts. Our
Temperature Control Segment manufactures and remanufactures air conditioning
compressors, air conditioning and heating parts, engine cooling system parts,
power window accessories, and windshield washer system parts. We also sell our
products in Europe through our European Segment.
We place
significant emphasis on improving our financial performance by achieving
operating efficiencies and improving asset utilization. We intend to
continue to improve our operating efficiency, customer satisfaction and cost
position by focusing on company-wide overhead and operating expense cost
reduction programs, such as closing excess facilities and consolidating
redundant functions.
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 typically 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.
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. We accrue for overstock
returns as a percentage of sales, after giving consideration to recent returns
history.
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, which are our most significant customer
product warranty returns, we established procedures whereby a warranty will be
voided if a customer does not provide acceptable proof that complete air
conditioning system repair was performed.
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
discount terms of the invoice. 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.
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. We account for these discounts and allowances as a reduction
to revenues, and record them when sales are recorded.
Interim Results of
Operations:
Comparison
of Three Months Ended June 30, 2009 to Three Months Ended June 30,
2008
Sales. Consolidated net
sales for the three months ended June 30, 2009 were $197.5 million, a decrease
of $17.8 million, or 8.3%, compared to $215.3 million in the same period of
2008. The decrease in consolidated net sales resulted from decreases in net
sales of $16.6 million, or 12.0%, in our Engine Management Segment, and $4.7
million, or 37.3%, in our European Segment offset by an increase of $4.2
million, or 6.8%, in our Temperature Control Segment. The Engine
Management decrease in net sales is the result of lower sales volumes in our
traditional markets as customers continued to maintain lower inventory levels in
response to the economic environment and a decline in our OE / OES sales
volumes. The reduction in sales in our European Segment is the result
of a decrease in original equipment sales volumes and an unfavorable change in
foreign currency exchange rates. The Temperature Control Segment
increase in net sales is the result of incremental new customer sales volumes
within our retail markets
Gross
margins. Gross margins, as a percentage of consolidated net
sales, increased to 23.5% in the second quarter of 2009, compared to 22.6% in
the second quarter of 2008. The increase resulted primarily from an increase in
Engine Management margins of 3.8 percentage points while margins in our
Temperature Control Segment and European Segment decreased 2.3 percentage points
and 0.9 percentage points, respectively. The increase in the Engine
Management margins was primarily due to a reduction in our fixed overhead costs
as a result of our cost reduction programs and the negative impact on prior year
margins of unabsorbed overhead during our closure of two manufacturing
facilities and start up and training costs at our new Mexico
facility. Temperature Control’s gross margin decrease resulted
primarily from changes in product mix where sales of lower margin products have
increased. The European Segment’s decrease resulted primarily from
lower sales volumes and a change in product mix with an increase in sales
incentives offered.
Selling, general
and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased by $5.7 million to $36.8 million or
18.6% of consolidated net sales, in the second quarter of 2009, as compared to
$42.5 million, or 19.7% of consolidated net sales in the second quarter of
2008. The decrease in SG&A expenses is due primarily to lower
selling, marketing and distribution expenses, and the benefit recognized from
the postretirement benefit plan amendment announced in May 2008.
Restructuring and
integration expenses. Restructuring and integration expenses
decreased to $1.2 million in the second quarter of 2009, compared to $1.4
million in the second quarter of 2008. The 2009 expense related
primarily to demolition costs incurred at our European properties held for sale
and other exit costs incurred in connection with the closure of our
Edwardsville, Kansas manufacturing operations and Wilson, North Carolina
facility. The 2008 expenses related primarily to charges incurred for
severance and related costs in connection with the shutdown of our Long Island
City, New York manufacturing operations.
Operating
income. Operating income was $8.4 million in the second
quarter of 2009, compared to $4.7 million in the second quarter of
2008. The increase of $3.7 million was due primarily to the positive
impact of an increase in gross margins of our Engine Management Segment and
lower SG&A expenses reflecting the impact of our postretirement benefit
amendment and cost reduction programs implemented in the second half of
2008.
Other income,
net. Other income, net was $3.4 million in the second quarter of
2009. In the second quarter, we redeemed our investment in the
preferred stock of a third party issuer resulting in a pretax gain of $2.3
million.
Interest
expense. Interest expense decreased by $1.3 million to $2.3
million in the second quarter of 2009 compared to $3.6 million in the same
period in 2008 due to a reduction in average borrowing costs as a result of our
debt reduction efforts which produced lower borrowings on our revolving credit
facility and the repurchase of $45.1 million principal amount of our 6.75%
convertible subordinated debentures during the final six months of
2008.
Income tax
provision. The income tax provision
in the second quarter of 2009 was $3.8 million compared to $1.9 million in the
same period in 2008. The effective tax rate in the second quarter of
2009 was 40.5%. The income tax provision in the second quarter of
2008 includes the tax impact of the non-deductibility of a portion of the $5
million distribution to a participant in the unfunded supplemental executive
retirement plan and a tollgate tax on our operations in Puerto
Rico.
Loss from
discontinued operation. Loss from discontinued operation, net
of tax, reflects legal expenses associated with our asbestos related liability.
We recorded $0.3 million as a loss from discontinued operation for the second
quarter of 2009 and 2008. As discussed more fully in Note 13 in the
notes to our consolidated financial statements, we are responsible for certain
future liabilities relating to alleged exposure to asbestos containing
products.
Comparison
of Six Months Ended June 30, 2009 to Six Months Ended June 30, 2008
Sales. Consolidated net
sales for the six months ended June 30, 2009 were $369.7 million, a decrease of
$53.7 million, or 12.7%, compared to $423.4 million in the same period of 2008.
The decrease in consolidated net sales resulted from declines in Engine
Management net sales of $37.1 million or 13.2%, Temperature Control net sales of
$5.1 million, or 4.6%, European Segment net sales of $8.4 million and $3.0
million of net sales in our Other Operating Segment, which consists primarily of
our Canadian operations. The Engine Management decrease in net sales
compared to the first six months of 2008 is the result of lower sales volumes in
our traditional markets as a single large customer changed brands to a
competitor and as customers have reduced and maintained lower inventory levels
in response to the economic environment, and a decline in our OE / OES sales
volumes. The decline in Temperature Control net sales is the result
of a decline in volumes in our traditional market and an increase in cash
discounts to encourage early payment. The reduction in sales in our
European Segment resulted from a decrease in OES sales volumes and an
unfavorable change in foreign currency exchange rates.
Gross
margins. Gross margins, as a percentage of consolidated net
sales, for the six months ended June 30, 2009 has held consistent at 23.6%
compared to the same period of 2008, as a 1.6 percentage point increase in
Engine Management margins was offset by a decrease in Temperature Control
margins of 1.2 percentage points and a 2.2 percentage point decrease in margins
in our European Segment. The increase in the Engine Management
margins was primarily due to a reduction in our fixed overhead costs as a result
of our cost reduction programs and the negative impact on prior year margins of
unabsorbed overhead during our closure of two manufacturing facilities and start
up and training costs at our new Mexico facility. Temperature
Control’s gross margin decrease resulted primarily from unfavorable
manufacturing variances as inventory levels were reduced. The
European Segment’s decrease resulted from lower sales volumes and an increase in
sales incentives offered in our traditional markets.
Selling, general
and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased by $13.6 million to $72.8 million
or 19.7% of consolidated net sales, in the six months ended June 30, 2009, as
compared to $86.4 million, or 20.4% of consolidated net sales in the second
quarter of 2008. The decrease in SG&A expenses is due primarily
to lower selling, marketing and distribution expenses, and the benefit
recognized from the postretirement benefit plan amendment announced in May
2008.
Restructuring and
integration expenses. Restructuring and integration expenses
decreased to $2.4 million for the six months ended June 30, 2009, compared to
$4.2 million in the same period of 2008. The 2009 expense related
primarily to severance and other exit costs incurred in connection with the
closure of our Edwardsville, Kansas manufacturing operations and Wilson, North
Carolina facility and building demolition costs incurred at our European
properties held for sale. The 2008 expenses related primarily to
charges incurred for severance and related costs in connection with the shutdown
of our Long Island City, New York manufacturing operations.
Operating
income. Operating income was $12.1 million in the first six
months of 2009, compared to $9.3 million in 2008. The increase of $2.8 million
was due primarily to the positive impact of margins at our Engine Management
Segment and lower operating expenses reflecting the impact of our postretirement
benefit amendment and cost reduction programs implemented in the second half of
2008.
Other income,
net. Other income, net decreased to $3.5 million for the six months ended
June 30, 2009, compared to $20.4 million in the same period of
2008. During the first six months of 2009, we redeemed our investment
in the preferred stock of a third party issuer resulting in a pretax gain of
$2.3 million. During 2008, we completed the sale of our Long Island
City, New York property for a purchase price of $40.6 million resulting in a
recognized gain in 2008 of $21.3 million, offset partially by a $1.4 million
charge related to the defeasance of our mortgage on the property.
Interest
expense. Interest expense decreased by $2.9 million to $4.8
million in the six months ended June 30, 2009, compared to $7.7 million in the
same period in 2008. The decline is due primarily to our debt
reduction efforts which resulted in lower borrowings on our revolving credit
facility and the repurchase of $45.1 million principal amount of our 6.75%
convertible subordinated debentures during the last six months of
2008. Lower borrowings more than offset the increase in the interest
rate on our revolving credit facility as a result of amendments made to the
credit agreement. Our accounts receivable factoring programs
initiated during the second quarter of 2008 with some of our larger customers in
order to accelerate collection of accounts receivable balances and improved
working capital management contributed to the lower year over year borrowings
for the six months ended June 30, 2009.
Income tax
provision. The income tax provision
in the six months ended June 30, 2009 was $4.4 million at an effective tax rate
of 40.6%, compared to $9.3 million and an effective tax rate of 42.6% for the
same period in 2008. The 2008 rate was higher primarily due to the
differences in the mix of domestic and foreign earnings as a result of the gain
on the sale of the Long Island City, New York property, the tax impact of the
non-deductibility of a portion of the $5 million distribution to a participant
in the unfunded supplemental executive retirement plan, and a tollgate tax on
our operations in Puerto Rico.
Loss from
discontinued operation. Loss from discontinued operation, net
of tax, reflects legal expenses associated with our asbestos related liability.
We recorded $0.6 million as a loss from discontinued operation for the six
months ended 2009 and 2008. As discussed more fully in Note 13 in the
notes to our consolidated financial statements, we are responsible for certain
future liabilities relating to alleged exposure to asbestos containing
products.
Liquidity
and Capital Resources
Operating
Activities. During the first six months of 2009, cash provided by
operations amounted to $68.8 million compared to cash used in operations of
$49.2 million in the same period of 2008. The year-over-year increase
in cash provided by operations is primarily the result of the impact of our
customer accounts receivable factoring program and improved inventory and
working capital management.
Investing
Activities. Cash used in
investing activities was $2 million in the first six months of 2009, compared to
cash provided by investing activities was $32 million in the first six months of
2008. Investing activities in 2009 included a $6 million payment to
complete our core sensor asset purchase transaction entered into in 2008 offset
by a $4 million cash receipt in connection with our December 2008 divestiture of
certain of our joint venture equity ownerships and $3.9 million in proceeds
received in connection with the redemption of preferred stock of a third-party
issuer. Cash provided by investing activities in 2008 includes $37.3
million in net cash proceeds from the sale of our Long Island City, New York
property. Capital expenditures in the first six months of 2009 were
$3.9 million compared to $5.3 million in the comparable period last
year.
Financing
Activities. Cash
used in financing activities was $61 million in the first six months of 2009,
compared to cash provided by financing activities of $17.3 million in the same
period of 2008. During the first six months of 2009, we reduced our
borrowings under our revolving credit facilities by $58 million reflecting the
impact of the accounts receivable factoring programs and improved working
capital management. Dividends of $3.3 million were paid in the first
six months of 2008. No dividends were paid in 2009.
In March
2007, we entered into a Second Amended and Restated Credit Agreement with
General Electric Capital Corporation, as agent, and a syndicate of lenders for a
secured revolving credit facility. This restated credit agreement
replaces our prior credit facility with General Electric Capital
Corporation. The restated credit agreement (as amended in June 2009)
provides for a line of credit of up to $200 million (inclusive of the Canadian
term loan described below) and expires in March 2013. Direct borrowings under
the restated credit agreement bear interest at the LIBOR rate plus the
applicable margin (as defined), or floating at the index rate plus the
applicable margin, at our option. The interest rate may vary depending upon our
borrowing availability. The restated credit agreement is guaranteed by certain
of our subsidiaries and secured by certain of our assets.
In May
2009, we amended our restated credit agreement to permit the May 2009 exchange
of $12.3 million principal amount of our outstanding 6.75% convertible
subordinated debentures due 2009 for a like principal amount of our 15%
convertible subordinated debentures due 2011 and to provide that, beginning
October 15, 2010 and on a monthly basis thereafter, our borrowing availability
will be reduced by approximately $2 million for the repayment, repurchase or
redemption of the aggregate outstanding amount of our newly issued 15%
convertible subordinated debentures.
In June
2009, we further amended our restated credit agreement (1) to extend the
maturity date of our credit facility to March 20, 2013, (2) to reduce the
aggregate amount of the revolving credit facility (inclusive of the Canadian
term loan described below) from $275 million to $200 million, (3) to permit the
settlement at maturity of our 6.75% convertible subordinated debentures due July
15, 2009, our 15% convertible subordinated debentures due April 15, 2011, and
our 15% unsecured promissory notes due April 15, 2011; all with funds from our
revolving credit facility subject to borrowing availability, (4) to establish a
$10 million minimum borrowing availability requirement effective on the date of
repayment of our 6.75% convertible subordinated debentures, and (5) to provide
that, beginning October 15, 2010 and on a monthly basis thereafter our borrowing
availability will be reduced by approximately $0.9 million for the repayment or
repurchase of the aggregate outstanding amount of our newly issued 15% unsecured
promissory notes due 2011. In addition, as of the date of the
amendment the margin added to the index rate increased to between 2.25% - 2.75%
and the margin added to the LIBOR rate increased to 3.75% - 4.25%, in each case
depending upon the level of excess availability as defined in the restated
credit agreement.
Borrowings
under the restated credit agreement are collateralized by substantially all of
our assets, including accounts receivable, inventory and fixed assets, and those
of certain of our subsidiaries. After taking into account outstanding borrowings
under the restated credit agreement, there was an additional $98.2 million
available for us to borrow pursuant to the formula at June 30, 2009, of which
$32.1 million was reserved for repayment, repurchase or redemption, as the case
may be, of the aggregate outstanding amount of our 6.75% convertible
subordinated debentures, and $69.3 million available for us to borrow at July
15, 2009 after the settlement of the 6.75% convertible subordinated
debentures. At June 30, 2009 and December 31, 2008, the interest rate
on our restated credit agreement was 4.8% and 4.6%, respectively. Outstanding
borrowings under the restated credit agreement (inclusive of the Canadian term
loan described below), which are classified as current liabilities, were $85.8
million and $143.2 million at June 30, 2009 and December 31, 2008,
respectively.
At any
time that our average borrowing availability over the previous thirty days is
less than $30 million or if our borrowing availability is $20 million or less,
and until such time that we have maintained an average borrowing availability of
$30 million or greater for a continuous period of ninety days, the terms of our
restated credit agreement 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), and (2) to limit capital expenditure levels. As of June 30,
2009, we were not subject to these covenants. Availability under our
restated credit agreement is based on a formula of eligible accounts receivable,
eligible inventory and eligible fixed assets. Our restated credit
agreement also permits dividends and distributions by us provided specific
conditions are met.
In June
2009, we amended our credit agreement with GE Canada Finance Holding Company,
for itself and as agent for the lenders. The amended credit agreement provides
for a line of credit of up to $10 million, of which $7 million is currently
outstanding and which amount is part of the $200 million available for borrowing
under our restated credit agreement with General Electric Capital Corporation
(described above). The amended credit agreement is guaranteed and secured by us
and certain of our wholly-owned subsidiaries and expires in March
2013. Direct borrowings under the amended credit agreement bear
interest at the same rate as our restated credit agreement with General Electric
Capital Corporation (described above).
Our
European subsidiary has revolving credit facilities which, at June 30, 2009,
provide for aggregate lines of credit up to $8.1 million. The amount of
short-term bank borrowings outstanding under these facilities was $5.2 million
on June 30, 2009 and $5.8 million on December 31, 2008. The weighted average
interest rate on these borrowings on June 30, 2009 and December 31, 2008 was
6.4% and 6.2%, respectively.
In July
1999, we completed a public offering of 6.75% convertible subordinated
debentures amounting to $90 million. The 6.75% convertible subordinated
debentures carry an interest rate of 6.75%, payable semi-annually, and matured
on July 15, 2009. The $90 million principal amount of the 6.75% convertible
subordinated debentures was convertible into 2,796,120 shares of our common
stock at the option of the holder.
From time
to time, we repurchased the debentures in open market transactions, on terms
that we believed to be favorable with any gains or losses as a result of the
difference between the net carrying amount and the reacquisition price recognized in the
period of repurchase. During the first six months of 2009, we
repurchased $0.5 million principal amount of the 6.75% convertible subordinated
debentures. In 2008, we repurchased $45.1 million principal amount of
the debentures resulting in a gain on the repurchase of $3.8
million. In May 2009, we exchanged $12.3 million aggregate principal
amount of our outstanding 6.75% convertible subordinated debentures due 2009 for
a like principal amount of newly issued 15% convertible subordinated debentures
due 2011. The 15% convertible subordinated debentures carry an
interest rate of 15%, payable semi-annually, and will mature on April 15,
2011.
As of
June 30, 2009, the remaining outstanding $32.1 million principal amount of the
6.75% convertible subordinated debentures was convertible into 996,661 shares of
our common stock and the $12.3 million principal amount of the 15% convertible
subordinated debentures is convertible into 820,000 shares of our common stock;
each at the option of the holder. The convertible subordinated
debentures are subordinated in right of payment to all of our existing and
future senior indebtedness. 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 subordinated debentures at a purchase price equal to
101% of their aggregate principal amount, plus accrued interest.
On July
15, 2009, we settled at maturity the remaining $32.1 million outstanding
principal amount of the 6.75% convertible subordinated debentures with funds
from our revolving credit facility.
During
2009, we entered into capital lease obligations related to certain equipment for
use in our operations totaling $0.4 million. Assets held under
capitalized leases are included in property, plant and equipment and depreciated
over the lives of the respective leases or over their economic useful lives,
whichever is less.
In July
2009, we issued $5.4 million aggregate principal amount of 15% unsecured
promissory notes to certain directors and executive officers and to the
trustees of our Supplemental Executive Retirement Plan on behalf of the plan
participants. The 15% unsecured promissory notes will mature on April 15, 2011
and carry an interest rate of 15%, payable semi-annually and are not convertible
into common stock. The 15% unsecured promissory notes are
subordinated in right of payment to all of our existing and future senior
indebtedness.
In order
to reduce our accounts receivable balances and improve our cash flow, we sold
undivided interests in certain of our receivables to financial
institutions. 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
$43 million and $72.8 million of receivables during the three months and six
months ended June 30, 2009, respectively. Under the terms of the
agreements, we retain no rights or interest, have no obligations with respect to
the sold receivables and do not service the receivables after the
sale. As such, these transactions are being accounted for as a sale
in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities.” A charge in the
amount of $0.6 million and $1 million related to the sale of receivables is
included in selling, general and administrative expense in our consolidated
statements of operations for the three months and six months ended June 30,
2009, respectively.
We
anticipate that our present sources of funds, including funds from operations
and additional borrowings, will continue to be adequate to meet our financing
needs over the next twelve months. We continue to evaluate
alternative sources to further improve the liquidity of our business and to fund
the refinance, repurchase or redemption, as the case may be, of the aggregate
outstanding amount of our convertible subordinated debentures, which may include
cash, securities or a combination thereof. The timing, terms, size
and pricing of any alternative sources of financing will depend on investor
interest and market conditions, and there can be no assurance that we will be
able to obtain any such financing. In addition, we have a significant
amount of indebtedness which could, among other things, increase our
vulnerability to general adverse economic and industry conditions, make it more
difficult to satisfy our obligations, limit our ability to pay future dividends,
limit our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate, and require that a substantial portion of
our cash flow from operations be used for the payment of interest on our
indebtedness instead of for funding working capital, capital expenditures,
acquisitions or for other corporate purposes. If we default on any of
our indebtedness, or breach any financial covenant in our revolving credit
facility, our business could be adversely affected. For further
information regarding the risks of our business, please refer to the Risk
Factors section of our Annual Report on Form 10-K for the year ending December
31, 2008.
The
following table summarizes our contractual commitments as of June 30, 2009 and
expiration dates of commitments through 2022:
(in
thousands)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014-
2022
|
|
|
Total
|
|
Principal
payments of long term debt (1) (2) |
|
$ |
32,179 |
|
|
$ |
99 |
|
|
$ |
12,399 |
|
|
$ |
58 |
|
|
$ |
─ |
|
|
$ |
─
|
|
|
$ |
44,735 |
|
Lease
obligations
|
|
|
4,736 |
|
|
|
8,015 |
|
|
|
6,305 |
|
|
|
5,540 |
|
|
|
5,648 |
|
|
|
16,651 |
|
|
|
46,895 |
|
Postretirement
benefits
|
|
|
550 |
|
|
|
1,132 |
|
|
|
1,158 |
|
|
|
1,212 |
|
|
|
1,258 |
|
|
|
13,227 |
|
|
|
18,537 |
|
Severance
payments related to
restructuring and integration
|
|
|
1,808 |
|
|
|
2,118 |
|
|
|
897 |
|
|
|
747 |
|
|
|
615 |
|
|
|
2,196 |
|
|
|
8,381 |
|
Total
commitments
|
|
$ |
39,273 |
|
|
$ |
11,364 |
|
|
$ |
20,759 |
|
|
$ |
7,557 |
|
|
$ |
7,521 |
|
|
$ |
32,074 |
|
|
$ |
118,548 |
|
(1)
|
On
July 15, 2009, we settled at maturity the remaining $32.1 million
outstanding principal amount of our 6.75% convertible subordinated
debentures with funds from our revolving credit facility. The
settlement is not included in the table
above.
|
(2)
|
In
July 2009, we issued $5.4 million aggregate principal amount of 15%
unsecured promissory notes to certain directors and executive
officers and to the trustees of our Supplemental Executive Retirement Plan
on behalf of the plan participants. These promissory notes will mature on
April 15, 2011. The issuance of the promissory notes is not included in
the table above.
|
Summary of Significant
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. There have been no material changes to our
critical accounting policies and estimates from the information provided in Note
1 of the notes to our consolidated financial statements in our Annual Report on
Form 10-K for the year ended December 31, 2008. You should be aware
that preparation of our consolidated quarterly financial statements in this
Report requires us to make estimates and assumptions that affect the reported
amount of assets and liabilities, the 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 assurances 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
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
utilize 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 generally either in outright
purchases 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 at the time it is eventually 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 June 30, 2009, the allowance for
sales returns was $26.6 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 June 30, 2009, the allowance for doubtful
accounts and for discounts was $11.1 million.
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 are recorded as a
reduction to revenue when incurred.
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 expense 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 it is
more likely than not that the deferred tax assets will not be recovered, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase or decrease this allowance in a period, we must include an
expense or recovery, respectively, within the tax provision in the statement of
operations.
Significant
management judgment is required in determining the adequacy of our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At June 30, 2009, we had
a valuation allowance of $26.5 million, due to uncertainties related to our
ability to utilize some of our deferred tax assets. The assessment of the
adequacy of our 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 for current trends or expected changes in our
estimating assumptions, we may need to modify the level of valuation allowance
which could materially impact our business, financial condition and results of
operations.
In
accordance with the provisions of SFAS Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No.109” (“FIN
48”), we recognize in our financial statements only those tax positions that
meet the more-likely-than-not-recognition threshold. We establish tax reserves
for uncertain tax positions that do not meet this threshold. Interest and
penalties associated with income tax matters are included in the provision for
income taxes in our consolidated statement of operations.
Valuation of
Long-Lived and Intangible Assets and Goodwill. At acquisition, we
estimate and record the fair value of purchased intangible assets, which
primarily consists of trademarks and trade names, patents and customer
relationships. The fair values of these intangible assets are
estimated based on management’s assessment and independent third-party
appraisals. Goodwill is the excess of the purchase price over the
fair value of identifiable net assets acquired in business
combinations. 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.
We assess
the impairment of long-lived and identifiable intangibles assets and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. With respect to goodwill, we test for impairment
of goodwill of a reporting unit on an annual basis or in interim periods if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying amount. 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. We review the fair values of each of our
reporting units using the discounted cash flows method and market
multiples.
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 FASB
Statement No. 141(R), “Business Combinations” (“SFAS 141R”). 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.
There are
inherent assumptions and estimates used in developing future cash flows
requiring management’s judgment in applying these assumptions and estimates to
the analysis of identifiable intangibles and long-lived asset impairment
including projecting revenues, interest rates, tax rates and the cost of
capital. Many of the factors used in assessing fair value are outside
the control of management and it is reasonably likely that assumptions and
estimates will change in future periods. These changes can result in
future impairments. In the event our planning assumptions were
modified resulting in impairment to our assets, we would be required to include
an expense in our statement of operations, which could materially impact our
business, financial condition and results of operations.
Retirement and
Postretirement Medical Benefits. Each year, we calculate the
costs of providing retiree benefits under the provisions of SFAS 87, “Employers’
Accounting for Pensions” and SFAS 106, “Employers’ Accounting for
Post-Retirement Benefits Other than Pensions”. The determination of
defined benefit pension and postretirement plan obligations and their associated
costs requires the use of actuarial computations to estimate participant plan
benefits the employees will be entitled to. The key assumptions used
in making these calculations are the eligibility criteria of participants, the
discount rate used to value the future obligation, and expected return on plan
assets. The discount rate reflects the yields available 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.
Share Based
Compensation. FAS 123(R) requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors based on estimated fair values on the grant date using
an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense on a straight-line basis
over the requisite service periods in our condensed consolidated statement of
operations. Forfeitures are estimated at the time of grant based on
historical trends in order to estimate the amount of share-based awards that
will ultimately vest. Furthermore, FAS 123(R) requires the monitoring of
actual forfeitures and the subsequent adjustment to forfeiture rates to reflect
actual forfeitures.
Environmental
Reserves. We are subject to various U.S. federal and state and
local environmental laws and regulations and are involved in certain
environmental remediation efforts. We estimate and accrue our liabilities
resulting from such matters based upon a variety of factors including the
assessments of environmental engineers and consultants who provide estimates of
potential liabilities and remediation costs. Such estimates may or may not
include potential recoveries from insurers or other third parties and are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several
years.
Asbestos
Reserve. We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. In accordance with our
accounting policy, our most recent actuarial study as of August 31, 2008
estimated an undiscounted liability for settlement payments, excluding legal
costs and any potential recovery from insurance carriers, ranging from $25.3
million to $69.2 million for the period through 2059. As a result, in September
2008 an incremental $2.1 million provision in our discontinued operation was
added to the asbestos accrual increasing the reserve to approximately $25.3
million as of that date. Based on the information contained in the actuarial
study and all other available information considered by us, 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 2059 in our consolidated financial
statements. In addition, according to the updated study, legal costs, which are
expensed as incurred and reported in earnings (loss) from discontinued
operation, are estimated to range from $19.1 million to $32.1 million during the
same period. We plan to perform an annual actuarial analysis during
the third quarter of each year for the foreseeable future. Based on this
analysis and all other available information, we will continue to 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. The aforementioned estimated settlement payments and legal
costs do not reflect any limited coverage that we may obtain pursuant to an
agreement with an insurance carrier for certain asbestos-related
claims. See Note 13 of notes to our consolidated financial
statements.
Other Loss
Reserves. We have other loss exposures, for such matters as 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
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurement. This statement applies
under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value
measurements. SFAS 157 was effective for the fiscal year beginning
after November 15, 2007, which for us is the year ending December 31,
2008. As of January 1, 2008, we adopted SFAS 157. The
adoption of SFAS 157 did not impact our consolidated financial statements in any
material respect.
In
December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157’s effective date
for all non-financial assets and liabilities, except those items recognized or
disclosed at fair value on an annual or more frequently recurring basis, until
years beginning after November 15, 2008. Derivatives measured at fair
value under FAS 133 were not deferred under FSP FAS 157-b. As of
January 1, 2009, we adopted SFAS 157 for non-financial assets and
liabilities. The adoption of SFAS 157 as it related to certain
non-financial assets and liabilities did not impact our consolidated financial
statements in any material respect.
In April
2009, the FASB issued FSP FAS 157-4 that affirmed the exit price objective of
fair value measurements even if there has been a significant decrease in the
volume and level of activity for the asset or liability. When quoted
market prices may not be determinative of fair value, a reporting entity shall
consider the reasonableness of a range of fair value estimates. The
FSP is effective for interim and annual reporting periods ending after June 15,
2009, which for us was June 30, 2009. As of June 30, 2009, we adopted
SFAS 157 as it related to inactive markets. The adoption of SFAS 157
as it related to inactive markets did not impact our consolidated financial
statements in any material respect.
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141R”). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for the fiscal year beginning
after December 15, 2008, which for us is the fiscal year beginning January 1,
2009. As of January 1, 2009, we adopted SFAS 141R. Our
adoption of SFAS 141R will have an impact on the manner in which we account for
future acquisitions.
In April
2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies.” The FSP eliminates the distinction between
contractual and non-contractual contingencies, including the initial recognition
and measurement criteria, in SFAS 141R. Additionally, the FSP
requires an acquirer to develop a systematic and rational basis for subsequently
measuring and accounting for acquired contingencies depending on their
nature. The FSP is effective for contingent assets and liabilities
acquired in business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after
December 15, 2008, which for us is an acquisition occurring after January 1,
2009.
Non-Controlling
Interests in Consolidated Financial Statements
In
December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, which for us is the fiscal year
beginning January 1, 2009. The adoption of SFAS 160 has not had a
material impact on our consolidated financial statements.
Disclosures
about Derivative Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). This Statement requires
enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. The
effective date was clarified as prospectively for annual and interim periods
beginning on or after November 15, 2008 in FSP FAS 133-1 and FIN 45-4,
“Disclosures about Credit Derivatives No. 133 and FASB Interpretation No. 45;
and Clarification of the Effective Date of FASB Statement No.
161.” The adoption of SFAS 161 will have an impact on the manner in
which we would disclose any derivative or hedging activities, if
present.
Convertible
Debt Instruments
In May
2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion” (“FSP APB 14-1”)
which requires issuers of convertible debt that may be settled wholly or partly
in cash to account for the debt and equity components
separately. This FSP is effective for fiscal years beginning after
December 15, 2008, which for us is the fiscal year beginning January 1, 2009 and
must be applied retrospectively to all periods presented. We have
reviewed the provisions of FSP APB 14-1 and have determined that the adoption of
FSP APB 14-1 will not require a change in the manner in which we report our
convertible subordinated debentures.
Subsequent
Events
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. SFAS
165 is effective for interim or annual periods ending after June 15, 2009, which
for us was June 30, 2009. We have reviewed the provisions of SFAS 165
and adopted SFAS 165 as of June 30, 2009. In connection with the
adoption of SFAS 165 we have included a disclosure to address the date through
which we evaluated subsequent events.
Fair
Value Interim Disclosures
In April
2009, the FASB issued FSP SFAS 107-1, “Interim Disclosure about Fair Value of
Financial Instruments (“FSP 107-1”). FSP 107-1 requires interim
disclosures regarding the fair values of financial instruments that are within
the scope of FAS No. 107, “Disclosures about the Fair Value of Financial
Instruments.” These disclosures include the methods and significant
assumptions used to estimate the fair value of financial instruments on an
interim basis as well as changes of the methods and significant assumptions from
prior periods. The FSP is effective for interim and annual reporting
periods ending after June 15, 2009, which for us was June 30,
2009. As of June 30, 2009, we adopted FSP 107-1 as it related to
interim fair value disclosures. We determined that the adoption of
FAS 107-1 required additional interim disclosures but does not change the
accounting treatment for these financial instruments.
Codification
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of
SFAS No. 162” (the Codification). The Codification will be the single
source of authoritative nongovernmental U.S. GAAP, superseding existing FASB,
AICPA, EITF and related literature. The Codification eliminates the GAAP
hierarchy contained in SFAS No. 162 and establishes one level of authoritative
GAAP. All other literature is considered non-authoritative. This Statement is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009, which for us would be September 30,
2009. There will be no change to the company’s consolidated financial
statements upon adoption.
ITEM
3.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We are
exposed to market risk, primarily related to foreign currency exchange and
interest rates. These exposures are actively monitored by management. Our
exposure to foreign exchange rate risk is due to certain costs, revenues and
borrowings being denominated in currencies other than one of our subsidiary’s
functional currency. Similarly, we are exposed to market risk as the result of
changes in interest rates, which may affect the cost of our financing. It is our
policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
We have
exchange rate exposure, primarily, with respect to the Canadian dollar, the
British Pound, the Euro, the Polish zloty, the Mexican peso and the Hong Kong
dollar. As of June 30, 2009 and December 31, 2008, our monetary assets and
liabilities 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 the exchange rates affecting the foreign
currencies in which monetary assets and liabilities are denominated and does not
take into account the offsetting effect of such a change on our foreign-currency
denominated revenues.
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 have in the past entered into interest rate swap
agreements. We invest our excess cash in highly liquid short-term
investments. Our percentage of variable rate debt to total debt was
67.1% at June 30, 2009 and 76.9% at December 31, 2008.
Other
than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K
for the year ended December 31, 2008.
ITEM
4.
|
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. 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.
(b) Changes in Internal Control
Over Financial Reporting.
During
the quarter ended June 30, 2009, we have not made any changes in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
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.
PART II – OTHER
INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
In 1986,
we acquired a brake business, which we subsequently sold in March 1998 and which
is accounted for as a discontinued operation 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 June 30, 2009, approximately 3,670 cases were outstanding
for which we were responsible for any related liabilities. We expect the
outstanding cases to increase gradually due to legislation in certain states
mandating minimum medical criteria before a case can be heard. Since inception
in September 2001 through June 30, 2009, the amounts paid for settled claims are
approximately $8.1 million. In September 2007, we entered into an agreement with
an insurance carrier to provide us with limited insurance coverage for the
defense and indemnity costs associated with certain asbestos-related claims. We
have submitted various asbestos-related claims to the insurance carrier for
coverage under this agreement, and the insurance carrier reimbursed us $2.4
million for settlement claims and defense costs. We have submitted additional
asbestos-related claims to the insurance carrier for coverage.
In
November 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 us 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. Plaintiff filed opposition to our motions,
and we subsequently filed replies in June 2006. Oral arguments were
originally scheduled for September 2006, however the court adjourned these
proceedings until a later date to be determined. Subsequently, the judge
initially assigned to the case recused himself, and a new judge has been
assigned before whom further preliminary proceedings have been held. 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
this lawsuit vigorously.
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
|
(a)
|
Our
2009 Annual Meeting of Stockholders was held on May 21,
2009.
|
(b)
|
The
following person were elected as our
directors:
|
Robert M.
Gerrity
Pamela
Forbes Lieberman
Arthur S.
Sills
Lawrence
I. Sills
Peter J.
Sills
Frederick
D. Sturdivant
William
H. Turner
Richard
S. Ward
Roger M.
Widmann
(c)
|
The
following names were voted upon at the Annual
Meeting:
|
|
(1)
|
Election
of Directors:
|
|
|
Votes For
|
|
|
Votes Withheld
|
|
|
|
|
|
|
|
|
Robert
M. Gerrity
|
|
|
13,772,271 |
|
|
|
1,988,794 |
|
Pamela
Forbes Lieberman
|
|
|
13,830,154 |
|
|
|
1,930,911 |
|
Arthur
S. Sills
|
|
|
13,773,151 |
|
|
|
1,987,914 |
|
Lawrence
I. Sills
|
|
|
13,787,422 |
|
|
|
1,973,643 |
|
Peter
J. Sills
|
|
|
13,776,477 |
|
|
|
1,984,588 |
|
Frederick
D. Sturdivant
|
|
|
13,814,204 |
|
|
|
1,946,861 |
|
William
H. Turner
|
|
|
13,750,363 |
|
|
|
2,010,702 |
|
Richard
S. Ward
|
|
|
13,815,611 |
|
|
|
1,945,454 |
|
Roger
M. Widmann
|
|
|
13,829,237 |
|
|
|
1,931,828 |
|
|
(2)
|
Ratification
of Appointment of Grant Thornton LLP as the Company’s Registered Public
Accounting Firm:
|
Votes
For |
|
Votes
Against
|
|
|
Votes
Abstained
|
|
|
|
|
|
|
|
|
15,681,210 |
|
|
65,855
|
|
|
|
14,000
|
|
|
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.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STANDARD
MOTOR PRODUCTS, INC.
(Registrant)
Date:
August 6, 2009
James J.
Burke
Vice
President Finance, Chief
Financial Officer
(Principal
Financial and Accounting Officer)
STANDARD
MOTOR PRODUCTS, INC.
EXHIBIT
INDEX
Exhibit
Number
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|