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, 2010
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. (Check one):
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, 2010, there were 22,801,672 outstanding shares of
the registrant’s Common Stock, par value $2.00 per share.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX
|
|
Page No.
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited) for the Three Months and Six Months
Ended June 30, 2010 and 2009
|
3
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
2009
|
4
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) For the Six Months Ended June 30,
2010 and 2009
|
5
|
|
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders’ Equity (Unaudited) for the Three
Months and Six Months Ended June 30, 2010
|
6
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
7
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
36
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
37
|
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
38
|
|
|
|
|
|
Item
6.
|
Exhibits
|
40
|
|
|
|
|
|
Signatures
|
40
|
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,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
231,048 |
|
|
$ |
197,498 |
|
|
$ |
410,399 |
|
|
$ |
369,720 |
|
|
Cost
of sales
|
|
|
172,659 |
|
|
|
151,092 |
|
|
|
308,192 |
|
|
|
282,421 |
|
|
Gross
profit
|
|
|
58,389 |
|
|
|
46,406 |
|
|
|
102,207 |
|
|
|
87,299 |
|
|
Selling,
general and administrative expenses
|
|
|
41,803 |
|
|
|
36,813 |
|
|
|
78,468 |
|
|
|
72,832 |
|
|
Restructuring
and integration expenses
|
|
|
1,289 |
|
|
|
1,210 |
|
|
|
2,042 |
|
|
|
2,373 |
|
|
Operating
income
|
|
|
15,297 |
|
|
|
8,383 |
|
|
|
21,697 |
|
|
|
12,094 |
|
|
Other
income, net
|
|
|
298 |
|
|
|
3,422 |
|
|
|
696 |
|
|
|
3,527 |
|
|
Interest
expense
|
|
|
2,002 |
|
|
|
2,325 |
|
|
|
3,866 |
|
|
|
4,802 |
|
|
Earnings
from continuing operations before taxes
|
|
|
13,593 |
|
|
|
9,480 |
|
|
|
18,527 |
|
|
|
10,819 |
|
|
Provision
for income taxes
|
|
|
5,532 |
|
|
|
3,842 |
|
|
|
7,599 |
|
|
|
4,394 |
|
|
Earnings
from continuing operations
|
|
|
8,061 |
|
|
|
5,638 |
|
|
|
10,928 |
|
|
|
6,425 |
|
|
Loss
from discontinued operations, net of income taxes
|
|
|
(372 |
) |
|
|
(322 |
) |
|
|
(868 |
) |
|
|
(582 |
) |
|
Net
earnings
|
|
$ |
7,689 |
|
|
$ |
5,316 |
|
|
$ |
10,060 |
|
|
$ |
5,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share – Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
0.36 |
|
|
$ |
0.30 |
|
|
$ |
0.49 |
|
|
$ |
0.34 |
|
|
Discontinued
operations
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
Net
earnings per common share – Basic
|
|
$ |
0.34 |
|
|
$ |
0.28 |
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share – Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
0.35 |
|
|
$ |
0.30 |
|
|
$ |
0.48 |
|
|
$ |
0.34 |
|
|
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
Net
earnings per common share – Diluted
|
|
$ |
0.34 |
|
|
$ |
0.28 |
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares
|
|
|
22,570,886 |
|
|
|
18,814,723 |
|
|
|
22,493,031 |
|
|
|
18,705,997 |
|
|
Average
number of common shares and dilutive common shares
|
|
|
23,529,898 |
|
|
|
20,014,439 |
|
|
|
22,584,666 |
|
|
|
18,720,479 |
|
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,
2010
|
|
|
December 31,
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
14,717 |
|
|
$ |
10,618 |
|
|
Accounts
receivable, less allowance for discounts and doubtful accounts of $8,518
and $6,962 for 2010 and 2009, respectively
|
|
|
173,538 |
|
|
|
124,823 |
|
|
Inventories
|
|
|
218,138 |
|
|
|
199,752 |
|
|
Deferred
income taxes
|
|
|
16,862 |
|
|
|
18,129 |
|
|
Assets
held for sale
|
|
|
433 |
|
|
|
1,405 |
|
|
Prepaid
expenses and other current assets
|
|
|
9,966 |
|
|
|
9,487 |
|
|
Total
current assets
|
|
|
433,654 |
|
|
|
364,214 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
61,776 |
|
|
|
61,478 |
|
|
Goodwill
|
|
|
1,437 |
|
|
|
1,437 |
|
|
Other
intangibles, net
|
|
|
12,104 |
|
|
|
12,368 |
|
|
Deferred
income taxes
|
|
|
27,333 |
|
|
|
29,542 |
|
|
Other
assets
|
|
|
13,862 |
|
|
|
15,420 |
|
|
Total
assets
|
|
$ |
550,166 |
|
|
$ |
484,459 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
69,795 |
|
|
$ |
58,430 |
|
|
Current
portion of long-term debt
|
|
|
17,450 |
|
|
|
67 |
|
|
Accounts
payable
|
|
|
85,364 |
|
|
|
54,381 |
|
|
Sundry
payables and accrued expenses
|
|
|
26,284 |
|
|
|
24,114 |
|
|
Accrued
customer returns
|
|
|
34,612 |
|
|
|
20,442 |
|
|
Accrued
rebates
|
|
|
28,698 |
|
|
|
25,276 |
|
|
Payroll
and commissions
|
|
|
19,038 |
|
|
|
21,913 |
|
|
Total
current liabilities
|
|
|
281,241 |
|
|
|
204,623 |
|
|
Long-term
debt
|
|
|
284 |
|
|
|
17,908 |
|
|
Post-retirement
medical benefits
|
|
|
19,478 |
|
|
|
19,355 |
|
|
Other
accrued liabilities
|
|
|
23,756 |
|
|
|
23,821 |
|
|
Accrued
asbestos liabilities
|
|
|
24,135 |
|
|
|
24,874 |
|
|
Total
liabilities
|
|
|
348,894 |
|
|
|
290,581 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock – par value $2.00 per share:
|
|
|
|
|
|
|
|
|
|
Authorized
– 30,000,000 shares; issued 23,936,036 shares
|
|
|
47,872 |
|
|
|
47,872 |
|
|
Capital
in excess of par value
|
|
|
77,424 |
|
|
|
77,238 |
|
|
Retained
earnings
|
|
|
87,897 |
|
|
|
80,083 |
|
|
Accumulated
other comprehensive income
|
|
|
2,465 |
|
|
|
5,475 |
|
|
Treasury
stock – at cost 1,338,919 and 1,562,649 shares in 2010 and 2009,
respectively
|
|
|
(14,386 |
) |
|
|
(16,790 |
) |
|
Total
stockholders’ equity
|
|
|
201,272 |
|
|
|
193,878 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
550,166 |
|
|
$ |
484,459 |
|
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,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
10,060 |
|
|
$ |
5,843 |
|
|
Adjustments
to reconcile net earnings to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,673 |
|
|
|
7,263 |
|
|
Increase
in allowance for doubtful accounts
|
|
|
804 |
|
|
|
865 |
|
|
Increase
in inventory reserves
|
|
|
2,241 |
|
|
|
2,993 |
|
|
Amortization
of deferred gain on sale of building
|
|
|
(524 |
) |
|
|
(524 |
) |
|
Gain
on disposal of property, plant and equipment
|
|
|
(151 |
) |
|
—
|
|
|
Gain
on sale of investment
|
|
|
|
|
|
(2,336 |
) |
|
Equity
loss (income) from joint ventures
|
|
|
19 |
|
|
|
(14 |
) |
|
Employee
stock ownership plan allocation
|
|
|
817 |
|
|
|
171 |
|
|
Stock-based
compensation
|
|
|
921 |
|
|
|
590 |
|
|
Decrease
in deferred income taxes
|
|
|
3,475 |
|
|
|
|
|
Loss
from discontinued operations, net of income taxes
|
|
|
868 |
|
|
|
582 |
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
(49,519 |
) |
|
|
3,732 |
|
|
Decrease
(increase) in inventories
|
|
|
(19,769 |
) |
|
|
36,495 |
|
|
Decrease
(increase) in prepaid expenses and other current assets
|
|
|
(406 |
) |
|
|
1,351 |
|
|
Increase
(decrease) in accounts payable
|
|
|
26,244 |
|
|
|
(2,317 |
) |
|
Increase
in sundry payables and accrued expenses
|
|
|
16,983 |
|
|
|
21,016 |
|
|
Net
changes in other assets and liabilities
|
|
|
(1,744 |
) |
|
|
(3,112 |
) |
|
Net
cash provided by (used in) operating activities
|
|
|
(3,008 |
) |
|
|
72,598 |
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of property, plant and equipment
|
|
|
12 |
|
|
|
4 |
|
|
Net
cash received from the sale of land and buildings
|
|
|
873 |
|
|
|
|
|
Divestiture
of joint ventures
|
|
|
1,000 |
|
|
|
4,000 |
|
|
Proceeds
from sale of preferred stock investment
|
|
|
|
|
|
3,896 |
|
|
Capital
expenditures
|
|
|
(5,838 |
) |
|
|
(3,935 |
) |
|
Acquisitions
of businesses and assets
|
|
|
(2,024 |
) |
|
|
(5,996 |
) |
|
Net
cash used in investing activities
|
|
|
(5,977 |
) |
|
|
(2,031 |
) |
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments) under line-of-credit agreements
|
|
|
11,366 |
|
|
|
(58,000 |
) |
|
Net
repayment of long-term debt
|
|
|
(312 |
) |
|
|
(508 |
) |
|
Increase
(decrease) in overdraft balances
|
|
|
4,739 |
|
|
|
(2,476 |
) |
|
Adjustment
to costs related to issuance of common stock
|
|
|
36 |
|
|
|
|
|
Payments
of debt issuance cost
|
|
|
|
|
|
(3,790 |
) |
|
Dividends
paid
|
|
|
(2,246 |
) |
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
13,583 |
|
|
|
(64,774 |
) |
|
Effect
of exchange rate changes on cash
|
|
|
(499 |
) |
|
|
2,049 |
|
|
Net
increase in cash and cash equivalents
|
|
|
4,099 |
|
|
|
7,842 |
|
|
CASH
AND CASH EQUIVALENTS at beginning of the period
|
|
|
10,618 |
|
|
|
6,608 |
|
|
CASH
AND CASH EQUIVALENTS at end of the period
|
|
$ |
14,717 |
|
|
$ |
14,450 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
2,882 |
|
|
$ |
4,450 |
|
|
Income
taxes
|
|
$ |
1,141 |
|
|
$ |
1,481 |
|
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, 2010
(Unaudited)
|
(In thousands)
|
|
Common
Stock
|
|
|
Capital in
Excess of
Par Value
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2010
|
|
$ |
47,872 |
|
|
$ |
77,230 |
|
|
$ |
81,336 |
|
|
$ |
4,719 |
|
|
$ |
(14,908 |
) |
|
$ |
196,249 |
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
|
|
7,689 |
|
|
|
|
|
|
|
|
|
|
|
7,689 |
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,119 |
) |
|
|
|
|
|
|
(1,119 |
) |
|
Pension
and retiree medical adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,135 |
) |
|
|
|
|
|
|
(1,135 |
) |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,435 |
|
|
Cash
dividends paid
|
|
|
|
|
|
|
|
|
|
|
(1,128 |
) |
|
|
|
|
|
|
|
|
|
|
(1,128 |
) |
|
Stock-based
compensation
|
|
|
|
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
522 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2010
|
|
$ |
47,872 |
|
|
$ |
77,424 |
|
|
$ |
87,897 |
|
|
$ |
2,465 |
|
|
$ |
(14,386 |
) |
|
$ |
201,272 |
|
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Six
Months Ended June 30, 2010
(Unaudited)
|
(In thousands)
|
|
Common
Stock
|
|
|
Capital in
Excess of
Par Value
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
47,872 |
|
|
$ |
77,238 |
|
|
$ |
80,083 |
|
|
$ |
5,475 |
|
|
$ |
(16,790 |
) |
|
$ |
193,878 |
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
|
|
10,060 |
|
|
|
|
|
|
|
|
|
|
|
10,060 |
|
|
Foreign
currency translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(723 |
) |
|
|
|
|
|
|
(723 |
) |
|
Pension
and retiree medical adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,287 |
) |
|
|
|
|
|
|
(2,287 |
) |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,050 |
|
|
Cash
dividends paid
|
|
|
|
|
|
|
|
|
|
|
(2,246 |
) |
|
|
|
|
|
|
|
|
|
|
(2,246 |
) |
|
Adjustment
to costs related to issuance of common stock
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
Stock-based
compensation
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
522 |
|
|
|
921 |
|
|
Employee
Stock Ownership Plan
|
|
|
|
|
|
|
(249 |
) |
|
|
|
|
|
|
|
|
|
|
1,882 |
|
|
|
1,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2010
|
|
$ |
47,872 |
|
|
$ |
77,424 |
|
|
$ |
87,897 |
|
|
$ |
2,465 |
|
|
$ |
(14,386 |
) |
|
$ |
201,272 |
|
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 with an increasing focus on the original
equipment and original equipment service markets.
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,
2009. 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, as we do not have controlling financial
interest. 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.
Reclassification
Certain
prior period amounts in the accompanying consolidated financial statements and
related notes have been reclassified to conform to the 2010
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, the valuation of deferred tax assets 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,
2009.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Recently Issued Accounting
Pronouncements
On March
31, 2010, we adopted Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair
Value Measurements that requires companies to enhance the usefulness of
fair value measurements by requiring both the disaggregation of information in
certain existing disclosures, as well as the inclusion of more robust
disclosures about valuation techniques and inputs to recurring and nonrecurring
fair value measurements. The adoption of this standard will impact
how we disclose in the future any material transfers into and out of Level 1
(measurements based on quoted prices in active markets) and Level 2 inputs
(measurements based on other observable inputs) of the fair value
hierarchy. There were no such transfers in the first six months of
2010.
Revenue
Arrangements with Multiple Deliverables
In
October 2009, the FASB issued ASU 2009-13, which will update Accounting Standard
Codification (“ASC”) 605, Revenue Recognition, and
changes the accounting for certain revenue arrangements. The new
standard sets forth requirements that must be met for an entity to recognize
revenue from the sale of a delivered item that is part of a multiple-element
arrangement when other items have not yet been delivered and requires the
allocation of arrangement consideration to each deliverable to be based on the
relative selling price. ASU 2009-13 is effective prospectively
for revenue arrangements entered into or materially modified in the fiscal years
beginning on or after June 15, 2010, which for us is January 1,
2011. We are currently evaluating the impact this new standard will
have on our financial statements.
Note
3. Restructuring and Integration Costs
The
aggregate liabilities relating to the restructuring and integration activities
as of December 31, 2009 and June 30, 2010 and activity for the six months ended
June 30, 2010 consisted of the following (in thousands):
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
8,774 |
|
|
$ |
1,971 |
|
|
$ |
10,745 |
|
|
Restructuring
and integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
1,234 |
|
|
|
808 |
|
|
|
2,042 |
|
|
Cash
payments
|
|
|
(2,675 |
) |
|
|
(364 |
) |
|
|
(3,039 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
7,333 |
|
|
$ |
2,415 |
|
|
$ |
9,748 |
|
Restructuring
Costs
Voluntary
Separation Program
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. The restructuring accrual relates to severance
and other retiree benefit enhancements to be paid through 2015. Of
the original restructuring charge of $8 million, we have $2.4 million remaining
as of June 30, 2010 that is expected to be paid in the amount of $0.8 million in
2010, $0.6 million in 2011, and $1 million for the period
2012-2015.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Activity,
by segment, for the six months ended June 30, 2010 related to this program
consisted of the following (in thousands):
|
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Other
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
1,395 |
|
|
$ |
385 |
|
|
$ |
1,422 |
|
|
$ |
3,202 |
|
|
Restructuring
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
96 |
|
|
|
— |
|
|
|
— |
|
|
|
96 |
|
|
Cash
payments
|
|
|
(373 |
) |
|
|
(44 |
) |
|
|
(447 |
) |
|
|
(864 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
1,118 |
|
|
$ |
341 |
|
|
$ |
975 |
|
|
$ |
2,434 |
|
Integration
Expenses
Overhead
Cost Reduction Program
Beginning
in 2007 in connection with our efforts to improve our operating efficiency and
reduce costs, we announced our intention to focus on company-wide overhead and
operating expense cost reduction activities, such as closing excess facilities
and reducing redundancies. Integration expenses under this program to
date relate primarily to the integration of operations to our facilities in
Mexico, and the closure of our production operations in Corona, California and
Hong Kong, China. We expect that all payments related to the current
liability will be made within twelve months.
Activity
for the six months ended June 30, 2010 related to this program, consisted of the
following (in thousands):
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
1,347 |
|
|
$ |
— |
|
|
$ |
1,347 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
1,218 |
|
|
|
727 |
|
|
|
1,945 |
|
|
Change
in estimated expenses
|
|
|
(36 |
) |
|
|
— |
|
|
|
(36 |
) |
|
Cash
payments
|
|
|
(1,136 |
) |
|
|
(221 |
) |
|
|
(1,357 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
1,393 |
|
|
$ |
506 |
|
|
$ |
1,899 |
|
Wire
and Cable Relocation
As a
result of our acquisition during 2009 of a wire and cable business and the
relocation of certain machinery and equipment to our Reynosa, Mexico
manufacturing facility, integration costs were incurred related to employee
severance and equipment relocation. As of June 30, 2010, all such
costs have been fully paid.
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
532 |
|
|
$ |
— |
|
|
$ |
532 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
— |
|
|
|
32 |
|
|
|
32 |
|
|
Cash
payments
|
|
|
(532 |
) |
|
|
(32 |
) |
|
|
(564 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Reynosa
Integration Program
During
2006 and 2007, we announced plans for the closure of our Long Island City, New
York and Puerto Rico manufacturing facilities and integration of operations in
Reynosa, Mexico. 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. As of June 30, 2010, the
reserve balance related to environmental clean-up at Long Island City of $1.9
million is included in other exit costs.
In
connection with the shutdown of the manufacturing operations at Long Island
City, 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 quarterly
for 20 years at $0.3 million per year, which commenced in December
2008. As of June 30, 2010, the reserve balance related to the pension
withdrawal liability of $3.2 million is included in the workforce reduction
reserve.
Activity
for the six months ended June 30, 2010 related to this program, consisted of the
following (in thousands):
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
3,693 |
|
|
$ |
1,971 |
|
|
$ |
5,664 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
(80 |
) |
|
|
49 |
|
|
|
(31 |
) |
|
Change
in estimated expenses
|
|
|
36 |
|
|
|
— |
|
|
|
36 |
|
|
Cash
payments
|
|
|
(143 |
) |
|
|
(111 |
) |
|
|
(254 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
3,506 |
|
|
$ |
1,909 |
|
|
$ |
5,415 |
|
Integration
activity, by segment, for the six months ended June 30, 2010 related to our
aggregate integration programs consisted of the following (in
thousands):
|
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Other
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
7,017 |
|
|
$ |
364 |
|
|
$ |
162 |
|
|
$ |
7,543 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
1,200 |
|
|
|
746 |
|
|
|
— |
|
|
|
1,946 |
|
|
Cash
payments
|
|
|
(1,842 |
) |
|
|
(259 |
) |
|
|
(74 |
) |
|
|
(2,175 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
6,375 |
|
|
$ |
851 |
|
|
$ |
88 |
|
|
$ |
7,314 |
|
Assets
Held for Sale
As of
June 30, 2010, we have reported $0.4 million as assets held for sale on our
consolidated balance sheet related to the net book value of vacant land located
in the U.K. and the closed facility in Reno, Nevada. 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 or loss in other income,
net as appropriate. In January 2010, we sold our Wilson, North
Carolina property and in February 2010 we sold vacant land at one of our
locations in the U.K.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note
4. Sale of Receivables
We 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
$112 million and $194.2 million of receivables during the three months and six
months ended June 30, 2010, 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. A charge in the amount of $1.7 million and $2.9 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, 2010, respectively, and $0.6 million and $1 million
for the comparable periods in 2009.
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,
2010
|
|
|
December 31,
2009
|
|
|
|
|
(In
thousands)
|
|
|
Finished
goods, net
|
|
$ |
142,170 |
|
|
$ |
130,054 |
|
|
Work
in process, net
|
|
|
5,633 |
|
|
|
4,472 |
|
|
Raw
materials, net
|
|
|
70,335 |
|
|
|
65,226 |
|
|
Total
inventories, net
|
|
$ |
218,138 |
|
|
$ |
199,752 |
|
Note
6. Credit Facilities and Long-Term Debt
Total
debt outstanding is summarized as follows:
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facilities
|
|
$ |
69,795 |
|
|
$ |
58,430 |
|
|
15%
convertible subordinated debentures
|
|
|
12,300 |
|
|
|
12,300 |
|
|
15%
unsecured promissory notes (1)
|
|
|
5,067 |
|
|
|
5,339 |
|
|
Other
|
|
|
367 |
|
|
|
336 |
|
|
Total
debt
|
|
$ |
87,529 |
|
|
$ |
76,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of debt
|
|
$ |
87,245 |
|
|
$ |
58,497 |
|
|
Long-term
debt
|
|
|
284 |
|
|
|
17,908 |
|
|
Total
debt
|
|
$ |
87,529 |
|
|
$ |
76,405 |
|
|
(1)
|
The
15% unsecured promissory notes were repaid in full in July 2010 with funds
from our revolving credit
facility.
|
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Deferred
Financing Costs
We had
deferred financing costs of $4.7 million and $5.6 million as of June 30, 2010
and December 31, 2009, respectively. These costs relate to our
revolving credit facility and the 15% convertible subordinated
debentures. Deferred financing costs as of June 30, 2010 are being
amortized, assuming no further prepayments of principal, in the amount of $1
million in 2010, $1.7 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) provides for
a line of credit of up to $200 million (inclusive of the Canadian revolving
credit facility 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.
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 $117.4 million
available for us to borrow pursuant to the formula at June 30,
2010. At June 30, 2010 and December 31, 2009, the interest rate on
our restated credit agreement was 4.5% and 4.1%, respectively. Outstanding
borrowings under the restated credit agreement (inclusive of the Canadian
revolving credit facility described below), which are classified as current
liabilities, were $69.8 million and $58.4 million at June 30, 2010 and December
31, 2009, 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,
2010, 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. Based upon
amounts outstanding as of June 30, 2010, beginning October 15, 2010 and on a
monthly basis thereafter, our borrowing availability will be reduced by
approximately $2.9 million for the repayment, repurchase or redemption of the
aggregate outstanding amount of our 15% convertible subordinated debentures and
our 15% unsecured promissory notes due April 15, 2011. In July 2010,
we prepaid the remaining outstanding principal amount of our 15% unsecured
promissory notes due April 15, 2011. As a result of the prepayment,
the reduction of our borrowing availability beginning October 15, 2010 has been
reduced on a monthly basis from $2.9 million to $2 million. 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
Revolving Credit Facility
In May
2010, we amended our credit agreement with GE Canada Finance Holding Company,
for itself and as agent for the lenders. The amended Canadian Credit
Agreement provides for the conversion of the then existing $10 million line of
credit into a revolving credit facility. The amendment also modifies
certain provisions of the amended Canadian Credit Agreement to parallel the
revolving credit provisions of our restated credit agreement with General
Electric Capital Corporation (described above). As of June 30, 2010,
$7 million of the $10 million available line of credit is outstanding and is
part of the $200 million available for borrowing under our restated credit
agreement with General Electric Capital Corporation. 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.
Subordinated
Debentures
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,
2010, 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.
Unsecured
Promissory Notes to Related Parties
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. In July 2010, we prepaid the remaining outstanding
principal amount with funds from our revolving credit facility. The
15% unsecured promissory notes would have matured on April 15, 2011, carried an
interest rate of 15%, payable semi-annually, were not convertible into common
stock and may have been prepaid prior to maturity. The 15% unsecured
promissory notes were subordinated in right of payment to all of our existing
and future senior indebtedness. Prepayments of the principal amount
had been made to fund annual or quarterly unfunded Supplemental Executive
Retirement Plan distributions to participants, as required.
Capital
Leases
During
2010 and 2009, we entered into capital lease obligations related to certain
equipment for use in our operations of $0.1 million and $0.4 million,
respectively. As of June 30, 2010, our remaining capital lease
obligations totaled $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.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note
7. Stock-Based Compensation Plans
We
account for our five stock-based compensation plans in accordance with the
provisions of Accounting Standards Codification 718, “Stock Compensation,” 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
The
following is a summary of the changes in outstanding stock options for the six
months ended June 30, 2010:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual
Term (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
378,095 |
|
|
$ |
13.26 |
|
|
|
3.7 |
|
|
Expired
|
|
|
(52,671 |
) |
|
$ |
14.33 |
|
|
|
— |
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Forfeited,
other
|
|
|
(8,900 |
) |
|
$ |
12.75 |
|
|
|
5.5 |
|
|
Outstanding
at June 30, 2010
|
|
|
316,524 |
|
|
$ |
13.10 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at June 30, 2010
|
|
|
316,524 |
|
|
$ |
13.10 |
|
|
|
3.2 |
|
There was
no aggregate intrinsic value of all outstanding stock options as of June 30,
2010. All outstanding stock options as of June 30, 2010 are fully
vested and exercisable. There were no stock options granted in the
six months ended June 30, 2010 and 2009, and for the period ended June 30, 2010,
we had no unrecognized compensation cost related to stock options and non-vested
stock options. There were no options exercised during the first six
months of 2010.
Restricted and Performance
Stock Grants
As part
of the 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. 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. Forfeitures on restricted stock grants are estimated at
5% for employees and 0% for executives and directors, respectively, based on our
evaluation of historical and expected future turnover.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Our
restricted and performance-based share activity was as follows for the six
months ended June 30, 2010:
|
|
|
Shares
|
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
|
|
Balance
at December 31, 2009
|
|
|
288,425 |
|
|
$ |
9.40 |
|
|
Granted
|
|
|
6,000 |
|
|
$ |
7.94 |
|
|
Vested
|
|
|
(6,000 |
) |
|
$ |
4.70 |
|
|
Forfeited
|
|
|
(925 |
) |
|
$ |
11.04 |
|
|
Balance at June 30, 2010
|
|
|
287,500 |
|
|
$ |
9.30 |
|
We
recorded compensation expense related to restricted shares and performance-based
shares of $551,000 ($320,100 net of tax) and $207,200 ($123,050 net of tax) for
the six months ended June 30, 2010 and 2009, respectively. The unamortized
compensation expense related to our restricted and performance-based shares was
$1.5 million at June 30, 2010, and is expected to be recognized as they vest
over a weighted average period of 1.3 and 0.8 years for employees and directors,
respectively.
Note
8. Employee Benefits
The
components of net periodic benefit cost for our defined benefit plans and post
retirement benefit plans for the three months and six months ended June 30, 2010
and 2009 were as follows (in thousands):
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Pension Benefits (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
22 |
|
|
$ |
22 |
|
|
$ |
45 |
|
|
$ |
43 |
|
|
Interest
cost
|
|
|
36 |
|
|
|
72 |
|
|
|
73 |
|
|
|
144 |
|
|
Amortization
of prior service cost
|
|
|
40 |
|
|
|
28 |
|
|
|
80 |
|
|
|
55 |
|
|
Actuarial
net (gain) loss
|
|
|
— |
|
|
|
(33 |
) |
|
|
— |
|
|
|
(65 |
) |
|
Net
periodic benefit cost
|
|
$ |
98 |
|
|
$ |
89 |
|
|
$ |
198 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
41 |
|
|
$ |
74 |
|
|
$ |
96 |
|
|
$ |
149 |
|
|
Interest
cost
|
|
|
330 |
|
|
|
273 |
|
|
|
613 |
|
|
|
547 |
|
|
Amortization
of prior service cost
|
|
|
(2,257 |
) |
|
|
(2,317 |
) |
|
|
(4,515 |
) |
|
|
(4,634 |
) |
|
Amortization
of transition obligation
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
Actuarial net loss
|
|
|
368 |
|
|
|
383 |
|
|
|
687 |
|
|
|
767 |
|
|
Net periodic benefit cost
|
|
$ |
(1,517 |
) |
|
$ |
(1,586 |
) |
|
$ |
(3,117 |
) |
|
$ |
(3,169 |
) |
|
|
(1)
|
The
components of net periodic benefit costs for the three and six months
ended June 30, 2009 include the cost related to the U.K. pension plan
which was disposed of in November 2009 in connection with the sale of our
European distribution business.
|
For the
six months ended June 30, 2010, we made employee benefit contributions of
$0.6 million related to our postretirement plans. Based on current
actuarial estimates, we believe we will be required to make approximately
$1.1 million in contributions for 2010.
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 August 2009,
contributions of $73,500 were made related to calendar year 2008. In
March 2010, contributions of $67,000 were made related to calendar year
2009.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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 their fiduciary
duties. During 2010, we contributed to the trust an additional
170,000 shares from our treasury and released 175,075 shares from the trust
leaving 6,930 shares remaining in the trust as of June 30, 2010.
Note
9. Fair Value Measurements
We follow
a three-level fair value hierarchy that prioritizes the inputs to measure fair
value. This hierarchy requires entities to maximize the use of
“observable inputs” and minimize the use of “unobservable
inputs.” The three levels of inputs used to measure fair value are as
follows:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
as of the measurement date.
Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3:
Significant unobservable inputs that reflect assumptions that market
participants would use in pricing an asset or liability.
The
following is a summary of the carrying amounts and estimated fair values of our
financial instruments at June 30, 2010 and December 31, 2009 (in
thousands):
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
14,717 |
|
|
$ |
14,717 |
|
|
$ |
10,618 |
|
|
$ |
10,618 |
|
|
Deferred
compensation
|
|
|
5,409 |
|
|
|
5,409 |
|
|
|
5,319 |
|
|
|
5,319 |
|
|
Short
term borrowings
|
|
|
87,245 |
|
|
|
87,245 |
|
|
|
58,497 |
|
|
|
58,497 |
|
|
Long-term
debt
|
|
|
284 |
|
|
|
284 |
|
|
|
17,908 |
|
|
|
17,908 |
|
For fair
value purposes the carrying value of cash and cash equivalents approximates fair
value due to the short maturity of those investments. The fair value
of the underlying assets held by the deferred compensation plan are based on the
quoted market prices of the funds in registered investment companies and based
upon the quoted market price of our publicly traded 15% convertible subordinated
debentures which is used as a proxy for funds invested in the 15% unsecured
promissory notes, which are considered Level 1 inputs. The carrying
value of our revolving credit facilities, classified as short term borrowings,
equals fair market value because the interest rate reflects current market
rates. The fair value of our long-term debt is based upon the quoted
market price of our publicly traded 15% convertible subordinated debentures
which was also used as a proxy for our 15% unsecured promissory notes, and which
is considered a Level 1 input.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note
10. 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,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Basic
Net Earnings per Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
8,061 |
|
|
$ |
5,638 |
|
|
$ |
10,928 |
|
|
$ |
6,425 |
|
|
Loss
from discontinued operations
|
|
|
(372 |
) |
|
|
(322 |
) |
|
|
(868 |
) |
|
|
(582 |
) |
|
Net
earnings available to common stockholders
|
|
$ |
7,689 |
|
|
$ |
5,316 |
|
|
$ |
10,060 |
|
|
$ |
5,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
22,571 |
|
|
|
18,815 |
|
|
|
22,493 |
|
|
|
18,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations per common share
|
|
$ |
0.36 |
|
|
$ |
0.30 |
|
|
$ |
0.49 |
|
|
$ |
0.34 |
|
|
Loss
from discontinued operations per common share
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
Basic
net earnings per common share
|
|
$ |
0.34 |
|
|
$ |
0.28 |
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
8,061 |
|
|
$ |
5,638 |
|
|
$ |
10,928 |
|
|
$ |
6,425 |
|
|
Interest
income on debenture conversions (net of income tax
expense)
|
|
|
277 |
|
|
|
280 |
|
|
|
– |
|
|
|
– |
|
|
Earnings
from continuing operations plus assumed conversions
|
|
|
8,338 |
|
|
|
5,918 |
|
|
|
10,928 |
|
|
|
6,425 |
|
|
Loss
from discontinued operations
|
|
|
(372 |
) |
|
|
(322 |
) |
|
|
(868 |
) |
|
|
(582 |
) |
|
Net
earnings available to common stockholders plus assumed
conversions
|
|
$ |
7,966 |
|
|
$ |
5,596 |
|
|
$ |
10,060 |
|
|
$ |
5,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
22,571 |
|
|
|
18,815 |
|
|
|
22,493 |
|
|
|
18,706 |
|
|
Plus
incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of restricted stock
|
|
|
139 |
|
|
|
52 |
|
|
|
92 |
|
|
|
14 |
|
|
Dilutive
effect of convertible debentures
|
|
|
820 |
|
|
|
1,147 |
|
|
|
– |
|
|
|
– |
|
|
Weighted
average common shares outstanding – Diluted
|
|
|
23,530 |
|
|
|
20,014 |
|
|
|
22,585 |
|
|
|
18,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations per common share
|
|
$ |
0.35 |
|
|
$ |
0.30 |
|
|
$ |
0.48 |
|
|
$ |
0.34 |
|
|
Loss
from discontinued operations per common share
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
Diluted
net earnings per common share
|
|
$ |
0.34 |
|
|
$ |
0.28 |
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The
shares listed below were not included in the computation of diluted earnings 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,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Stock
options
|
|
|
317 |
|
|
|
430 |
|
|
|
317 |
|
|
|
430 |
|
|
Restricted
shares
|
|
|
61 |
|
|
|
110 |
|
|
|
108 |
|
|
|
162 |
|
|
6.75%
convertible subordinated debentures
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,270 |
|
|
15%
convertible subordinated debentures
|
|
|
– |
|
|
|
505 |
|
|
|
820 |
|
|
|
254 |
|
Note
11. Comprehensive Income
Comprehensive
income, net of income tax expense is as follows (in thousands):
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net
earnings as reported
|
|
$ |
7,689 |
|
|
$ |
5,316 |
|
|
$ |
10,060 |
|
|
$ |
5,843 |
|
|
Foreign
currency translation adjustment
|
|
|
(1,119 |
) |
|
|
3,229 |
|
|
|
(723 |
) |
|
|
2,049 |
|
|
Postretirement
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for recognition of prior period amounts
|
|
|
(1,356 |
) |
|
|
(1,624 |
) |
|
|
(2,699 |
) |
|
|
(2,937 |
) |
|
Unrecognized
amounts
|
|
|
221 |
|
|
|
210 |
|
|
|
412 |
|
|
|
420 |
|
|
Total
comprehensive income
|
|
$ |
5,435 |
|
|
$ |
7,131 |
|
|
$ |
7,050 |
|
|
$ |
5,375 |
|
Note
12. Industry Segments
In
November 2009, we sold our European distribution business to the managers of the
business for £1.8 million ($3 million) in cash and a promissory note and
approximately £1.4 million ($2.3 million) in assumed debt. In
connection with the sale, we retained our manufacturing operation in Poland,
certain land available for sale in the United Kingdom, and a small investment is
a joint venture. The third-party owned European operations will
continue to buy manufactured product from our facility in Poland and from our
domestic operations through two separate supply agreements. As such,
we are expected to receive significant continuing cash flows as a result of a
continuation of activities between us and the disposed business (the European
operations), and therefore the European operation’s results of operations have
not been presented as a discontinued operation.
Effective
January 1, 2010, as a result of the sale of our European distribution business,
we realigned our business segments to more clearly reflect our evolving business
model. The realignment consisted of moving the results of our Poland
manufacturing facility within the Engine Management Segment to reflect the
change in responsibility for the operating activities, financial results,
forecasts, and strategic plans for the facility to the management of this
segment. Results for the three months and six months ended June 30,
2009 have been reclassified to reflect this realignment.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The
following tables show our net sales and operating income by our operating
segments (in thousands):
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine
Management
|
|
$ |
152,815 |
|
|
$ |
122,986 |
|
|
$ |
289,912 |
|
|
$ |
247,299 |
|
|
Temperature
Control
|
|
|
73,926 |
|
|
|
65,661 |
|
|
|
113,941 |
|
|
|
105,921 |
|
|
Europe
|
|
|
– |
|
|
|
7,325 |
|
|
|
– |
|
|
|
14,046 |
|
|
All
Other
|
|
|
4,307 |
|
|
|
1,526 |
|
|
|
6,546 |
|
|
|
2,454 |
|
|
Consolidated
|
|
$ |
231,048 |
|
|
$ |
197,498 |
|
|
$ |
410,399 |
|
|
$ |
369,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine
Management
|
|
$ |
4,576 |
|
|
$ |
3,946 |
|
|
$ |
9,008 |
|
|
$ |
11,206 |
|
|
Temperature
Control
|
|
|
1,004 |
|
|
|
1,122 |
|
|
|
1,923 |
|
|
|
1,820 |
|
|
Europe
|
|
|
– |
|
|
|
71 |
|
|
|
– |
|
|
|
92 |
|
|
All
Other
|
|
|
(5,580 |
) |
|
|
(5,139 |
) |
|
|
(10,931 |
) |
|
|
(13,118 |
) |
|
Consolidated
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine
Management
|
|
$ |
10,339 |
|
|
$ |
8,804 |
|
|
$ |
19,889 |
|
|
$ |
16,378 |
|
|
Temperature
Control
|
|
|
7,282 |
|
|
|
2,967 |
|
|
|
7,304 |
|
|
|
1,638 |
|
|
Europe
|
|
|
– |
|
|
|
(868 |
) |
|
|
– |
|
|
|
(647 |
) |
|
All
Other
|
|
|
(2,324 |
) |
|
|
(2,520 |
) |
|
|
(5,496 |
) |
|
|
(5,275 |
) |
|
Consolidated
|
|
$ |
15,297 |
|
|
$ |
8,383 |
|
|
$ |
21,697 |
|
|
$ |
12,094 |
|
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, 2010, approximately 1,534 cases were outstanding
for which we were responsible for any related liabilities. Since
inception in September 2001 through June 30, 2010, the amounts paid for settled
claims are approximately $9.7 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 for
coverage under this agreement, and received approximately $2.3 million in
reimbursement for settlement claims and defense costs. We have
submitted additional asbestos-related claims to such insurance carrier for
coverage. In addition, in May 2010 we entered into an agreement with
an excess insurance carrier to provide us with limited insurance coverage for
defense and indemnity costs associated with asbestos-related claims. We will
submit claims to this carrier after we have exhausted our coverage under the
agreement with the primary insurance carrier discussed above.
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.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The most
recent actuarial study was performed as of August 31, 2009. The
updated study has estimated an undiscounted liability for settlement payments,
excluding legal costs and any potential recovery from insurance carriers,
ranging from $26.6 million to $66.3 million for the period through 2059. The
change from the prior year study was a $1.3 million increase for the low end of
the range and a $2.9 million decrease 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 $2.2 million provision in our
discontinued operation was added to the asbestos accrual in September 2009
increasing the reserve to approximately $26.6 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 $21.4 million to $42 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.
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.
STANDARD
MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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, 2010 and 2009,
we have accrued $13.8 million and $12 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,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Balance,
beginning of period
|
|
$ |
10,565 |
|
|
$ |
10,523 |
|
|
$ |
10,476 |
|
|
$ |
10,162 |
|
|
Liabilities
accrued for current year sales
|
|
|
14,077 |
|
|
|
12,168 |
|
|
|
24,604 |
|
|
|
22,444 |
|
|
Settlements
of warranty claims
|
|
|
(10,819 |
) |
|
|
(10,686 |
) |
|
|
(21,257 |
) |
|
|
(20,601 |
) |
|
Balance,
end of period
|
|
$ |
13,823 |
|
|
$ |
12,005 |
|
|
$ |
13,823 |
|
|
$ |
12,005 |
|
|
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 and distributor 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.
In 2010,
as a result of the sale of our European distribution business, we realigned our
business segments to more clearly reflect our evolving business
model. The realignment consisted of moving the results of our Poland
manufacturing facility within the Engine Management Segment to reflect the
change in responsibility for the operating activities, financial results,
forecasts, and strategic plans for the facility to the management of this
segment.
We sell
our products primarily to warehouse distributors, large retail chains, original equipment
manufacturers and original equipment service part operations in the United
States, Canada and Latin America. Our customers consist of many of the leading
warehouse distributors, such as CARQUEST and NAPA Auto Parts, as well as many of
the leading auto parts retail chains, such as Advance Auto Parts, AutoZone,
O’Reilly Automotive/CSK Auto, Canadian Tire and Pep Boys. Our customers also
include national program distribution groups and specialty market distributors.
We distribute parts under our own brand names, such as Standard, BWD,
Intermotor, Four Seasons, Factory Air, ACi, Imperial and Hayden and through
private labels, such as CARQUEST, NAPA Echlin, NAPA Temp Products and NAPA
Belden.
Our goal
is to grow revenues and earnings and deliver returns in excess of our cost of
capital by providing high quality original equipment and replacement products to
the engine management and temperature control markets. Our management
places significant emphasis on improving our financial performance by achieving
operating efficiencies and improving asset utilization, while maintaining
product quality and high customer order fill rates. We intend to
continue to improve our operating efficiency, 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, 2010 to Three Months Ended June 30,
2009
Sales. Consolidated net
sales for the three months ended June 30, 2010 were $231 million, an increase of
$33.5 million, or 17%, compared to $197.5 million in the same period of 2009.
The increase in net sales is due to higher sales in our Engine Management and
Temperature Control segments, offset by a $7.3 million decrease related to the
sale of our European distribution business.
The
following table summarizes net sales and gross margins by segment for the
quarters ended June 30, 2010 and 2009, respectively:
|
Three Months Ended
June 30,
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
152,815 |
|
|
$ |
73,926 |
|
|
$ |
— |
|
|
$ |
4,307 |
|
|
$ |
231,048 |
|
|
Gross
margins
|
|
|
37,488 |
|
|
|
17,707 |
|
|
|
— |
|
|
|
3,194 |
|
|
|
58,389 |
|
|
Gross
margin percentage
|
|
|
24.5 |
% |
|
|
24 |
% |
|
|
— |
|
|
|
— |
|
|
|
25.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
122,986 |
|
|
$ |
65,661 |
|
|
$ |
7,325 |
|
|
$ |
1,526 |
|
|
$ |
197,498 |
|
|
Gross
margins
|
|
|
31,077 |
|
|
|
11,462 |
|
|
|
1,871 |
|
|
|
1,996 |
|
|
|
46,406 |
|
|
Gross
margin percentage
|
|
|
25.3 |
% |
|
|
17.5 |
% |
|
|
25.5 |
% |
|
|
— |
|
|
|
23.5 |
% |
Engine
Management’s net sales increased $29.8 million, or 24.3%, to $152.8 million for
the second quarter of 2010. The sales growth was driven by continued
stronger sales across all markets including a rebound in the OE/OES markets,
which were down significantly in 2009, and inventory increases on the part of
several customers as they return to more normalized stocking
levels. In addition, incremental sales from our acquisition of
Federal Mogul’s wire and cable business, which began shipping in September 2009,
contributed to the increase in our traditional sales volumes.
Temperature
Control’s net sales increased $8.3 million, or 12.6%, to $73.9 million for the
second quarter of 2010. The increase in sales primarily reflects
incremental new business in our retail market and an increase in demand in both
the retail and traditional markets as customer built up inventories in response
to warmer temperatures.
Gross
margins. Gross margins, as a percentage of consolidated net
sales, increased to 25.3% in the second quarter of 2010, compared to 23.5% in
the second quarter of 2009. The increase resulted from improvements
in Temperature Control margins of 6.5 percentage points, partially offset by a
0.8 percentage point decrease to Engine Management margins. The gross
margin percentage increase in Temperature Control compared to the prior year was
primarily the result of increased production improving fixed overhead absorption
while the Engine Management gross margin percentage was negatively impacted by
higher mix of OE/OES sales volumes and mix of lower margin products, offset, in
part, by improving fixed overhead absorption resulting from increased
production.
Selling, general
and administrative expenses. Selling, general and
administrative expenses (SG&A) increased by $5 million to $41.8 million or
18.1% of consolidated net sales, in the second quarter of 2010, as compared to
$36.8 million, or 18.6% of consolidated net sales in the second quarter of
2009. The increase in SG&A expenses is due primarily to an
incremental increase in selling, marketing and distribution expenses as a result
of higher sales volumes, partially offset by a reduction in administration
expenses. Expenses related to the sale of receivables, which are
included in SG&A, were $1.7 million in the second quarter of 2010 compared
to $0.6 million in the same period of last year.
Restructuring and
integration expenses. Restructuring and integration expenses
increased slightly to $1.3 million in the second quarter of 2010, compared to
$1.2 million in the second quarter of 2009. The 2010 expense related
primarily to severance costs incurred in connection with the announced closures
of our Corona, California and Hong Kong, China manufacturing facilities and a
charge related to the closure of our Long Island City building. 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.
Components
of our restructuring and integration accruals, by segment, were as follows (in
thousands):
|
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Other
|
|
|
Total
|
|
|
Exit
activity liability at March 31, 2010
|
|
$ |
7,407 |
|
|
$ |
859 |
|
|
$ |
1,299 |
|
|
$ |
9,565 |
|
|
Restructuring
and integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
866 |
|
|
|
423 |
|
|
|
— |
|
|
|
1,289 |
|
|
Cash
payments
|
|
|
(780 |
) |
|
|
(90 |
) |
|
|
(236 |
) |
|
|
(1,106 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
7,493 |
|
|
$ |
1,192 |
|
|
$ |
1,063 |
|
|
$ |
9,748 |
|
Operating
income. Operating income was $15.3 million in the second
quarter of 2010, compared to $8.4 million in the second quarter of
2009. The increase of $6.9 million was primarily due to the higher
net sales and an increase in Temperature Control gross margins, partially offset
by increased SG&A expenses.
Other income,
net. Other income, net decreased to $0.3 million in the second quarter of
2010 compared to $3.4 million in the same period in 2009. In the
second quarter of 2009, 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 $0.3 million in the
second quarter of 2010 compared to the same period in 2009 due to lower average
borrowings partially offset by higher average interest rates.
Income tax
provision. The income tax provision
in the second quarter of 2010 was $5.5 million at an effective tax rate of 40.7%
compared to $3.8 million and an effective tax rate of 40.5% for the same period
in 2009. The effective tax rate was essentially flat year over
year.
Loss from
discontinued operation. Loss from discontinued operation, net
of tax, reflects legal expenses associated with our asbestos related liability.
We recorded $0.4 million and $0.3 million as a loss from discontinued operation
for the second quarter of 2010 and 2009, respectively. 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, 2010 to Six Months Ended June 30, 2009
Sales. Consolidated net
sales for the six months ended June 30, 2010 were $410.4 million, an increase of
$40.7 million, or 11%, compared to $369.7 million in the same period of 2009.
The increase in net sales is due to higher sales in our Engine Management and
Temperature Control Segments offset by a $14 million decrease related to the
sale of our European distribution business.
The
following table summarizes net sales and gross margins by segment for the six
months ended June 30, 2010 and 2009, respectively:
|
Six Months Ended
June 30,
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
289,912 |
|
|
$ |
113,941 |
|
|
$ |
— |
|
|
$ |
6,546 |
|
|
$ |
410,399 |
|
|
Gross
margins
|
|
|
70,622 |
|
|
|
25,960 |
|
|
|
— |
|
|
|
5,625 |
|
|
|
102,207 |
|
|
Gross
margin percentage
|
|
|
24.4 |
% |
|
|
22.8 |
% |
|
|
— |
|
|
|
— |
|
|
|
24.9 |
% |
|
Six Months Ended
June 30,
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
247,299 |
|
|
$ |
105,921 |
|
|
$ |
14,046 |
|
|
$ |
2,454 |
|
|
$ |
369,720 |
|
|
Gross
margins
|
|
|
61,603 |
|
|
|
17,708 |
|
|
|
3,698 |
|
|
|
4,290 |
|
|
|
87,299 |
|
|
Gross
margin percentage
|
|
|
24.9 |
% |
|
|
16.7 |
% |
|
|
26.3 |
% |
|
|
— |
|
|
|
23.6 |
% |
Engine
Management’s net sales increased $42.6 million, or 17.2%, to $289.9 million for
the first six months of 2010. Engine Management’s revenue growth was
driven by overall strong demand for our products across all market channels
including inventory increases on the part of several customers as they return to
more normalized stocking levels. In addition, incremental sales from
our acquisition of Federal Mogul’s wire and cable business, which began shipping
in September 2009, contributed to the increase in our traditional sales
volumes.
Temperature
Control’s net sales increased $8 million, or 7.6%, to $113.9 million for the
first six months of 2010. The increase in sales primarily reflects
incremental new business in our retail market and continued strong demand in our
traditional business.
Gross
margins. Gross margins, as a percentage of consolidated net sales, for
the six months ended June 30, 2010 increased to 24.9% compared to 23.6% the same
period of 2009. The increase resulted from a 6.1 percentage point increase in
Temperature Control margins offset, in part, by a decrease in Engine Management
margins of 0.5 percentage points. Temperature Control’s gross margin increase
resulted primarily from favorable manufacturing and price variances as sales
volumes increased due to stronger demand and incremental new sales. The decrease
in the Engine Management margins was the result of a higher
mix of OE/OES sales volumes and mix of lower margin products, offset, in part,
by improving fixed overhead absorption resulting from increased
production.
Selling, general
and administrative expenses. Selling, general and
administrative expenses (SG&A) increased by $5.7 million to $78.5 million or
19.1% of consolidated net sales, in the six months ended June 30, 2010, as
compared to $72.8 million, or 19.7% of consolidated net sales in like period of
2009. The increase in SG&A expenses is due primarily to higher
selling, marketing and distribution expenses as a result of the increase in
sales. Expenses related to the sale of receivables, which are
included in SG&A, were $2.9 million in the six months ended June 30, 2010
compared to $1 million in the same period last year.
Restructuring and
integration expenses. Restructuring and integration expenses
decreased to $2 million for the six months ended June 30, 2010, compared to $2.4
million in the same period of 2009. The 2010 expense related
primarily to severance costs incurred in connection with the announced closures
of our Corona, California and Hong Kong, China manufacturing facilities and a
charge related to the closure of our Long Island City building. 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.
Operating
income. Operating income was $21.7 million in the first six
months of 2010, compared to $12.1 million in 2009. The increase of $9.6 million
was due primarily to stronger sales across all markets of our Engine Management
Segment including a rebound in the OE/OES markets and higher sales volumes and
favorable manufacturing variances in our Temperature Control Segment, offset, in
part, by an increase in SG&A expenses.
Other income,
net. Other income, net decreased to $0.7 million for the six months ended
June 30, 2010 compared to $3.5 million in the same period in 2009. In
2010, other income, net included a $0.2 million gain on the sale of vacant land
at one of our locations in the U.K. In the second quarter of 2009, 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 $0.9 million to $3.9
million in the six months ended June 30, 2010, compared to $4.8 million in the
same period in 2009. The decline is due primarily to lower average
borrowings partially offset by higher average interest rates.
Income tax
provision. The income tax provision
in the six months ended June 30, 2010 was $7.6 million at an effective tax rate
of 41%, compared to $4.4 million and an effective tax rate of 40.6% for the same
period in 2009. The effective tax rate was essentially flat year over
year.
Loss from
discontinued operation. Loss from discontinued operation, net
of tax, reflects legal expenses associated with our asbestos related liability.
We recorded $0.9 million and $0.6 million as a loss from discontinued operation
for the six months ended June 30, 2010 and 2009, respectively. 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.
Restructuring
and Integration Costs
The
aggregated liabilities relating to the restructuring and integration activities
as of December 31, 2009 and June 30, 2010 and activity for the six months ended
June 30, 2010, consisted of the following (in thousands):
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
8,774 |
|
|
$ |
1,971 |
|
|
$ |
10,745 |
|
|
Restructuring
and integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
1,234 |
|
|
|
808 |
|
|
|
2,042 |
|
|
Cash
payments
|
|
|
(2,675 |
) |
|
|
(364 |
) |
|
|
(3,039 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
7,333 |
|
|
$ |
2,415 |
|
|
$ |
9,748 |
|
Restructuring
Costs
Voluntary
Separation Program
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. The restructuring accrual relates to severance
and other retiree benefit enhancements to be paid through 2015. Of
the original restructuring charge of $8 million, we have $2.4 million remaining
as of June 30, 2010 that is expected to be paid in the amount of $0.8 million in
2010, $0.6 million in 2011, and $1 million for the period
2012-2015.
Activity
for the six months ended June 30, 2010 related to this program, by segment,
consisted of the following (in thousands):
|
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Other
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
1,395 |
|
|
$ |
385 |
|
|
$ |
1,422 |
|
|
$ |
3,202 |
|
|
Restructuring
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
96 |
|
|
|
— |
|
|
|
— |
|
|
|
96 |
|
|
Cash
payments
|
|
|
(373 |
) |
|
|
(44 |
) |
|
|
(447 |
) |
|
|
(864 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
1,118 |
|
|
$ |
341 |
|
|
$ |
975 |
|
|
$ |
2,434 |
|
Integration
Expenses
Overhead
Cost Reduction Program
Beginning
in 2007 in connection with our efforts to improve our operating efficiency and
reduce costs, we announced our intention to focus on company-wide overhead and
operating expense cost reduction activities, such as closing excess facilities
and reducing redundancies. Integration expenses under this program to
date relate primarily to the integration of operations to our facilities in
Mexico, and the closure of our production operations in Corona, California and
Hong Kong, China. We expect that all payments related to the current
liability will be made within twelve months.
Activity
for the six months ended June 30, 2010 related to this program, consisted of the
following (in thousands):
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
1,347 |
|
|
$ |
— |
|
|
$ |
1,347 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
1,218 |
|
|
|
727 |
|
|
|
1,945 |
|
|
Change
in estimated expenses
|
|
|
(36 |
) |
|
|
— |
|
|
|
(36 |
) |
|
Cash
payments
|
|
|
(1,136 |
) |
|
|
(221 |
) |
|
|
(1,357 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
1,393 |
|
|
$ |
506 |
|
|
$ |
1,899 |
|
Wire
and Cable Relocation
As a
result of our acquisition during 2009 of a wire and cable business and the
relocation of certain machinery and equipment to our Reynosa, Mexico
manufacturing facility, integration costs were incurred related to employee
severance and equipment relocation. As of June 30, 2010, all such
costs have been fully paid.
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
532 |
|
|
$ |
— |
|
|
$ |
532 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
— |
|
|
|
32 |
|
|
|
32 |
|
|
Cash
payments
|
|
|
(532 |
) |
|
|
(32 |
) |
|
|
(564 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Reynosa
Integration Program
During
2006 and 2007, we announced plans for the closure of our Long Island City, New
York and Puerto Rico manufacturing facilities and integration of operations in
Reynosa, Mexico. In connection with the shutdown of the manufacturing
operations at Long Island City that was completed in March of 2008, we incurred
severance costs and costs associated with equipment removal, capital
expenditures, and environmental clean-up. As of June 30, 2010, the
reserve balance related to environmental clean-up at Long Island City of $1.9
million is included in other exit costs.
In
connection with the shutdown of the manufacturing operations at Long Island
City, 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 quarterly
for 20 years at $0.3 million per year, which commenced in December
2008. As of June 30, 2010, the reserve balance related to the pension
withdrawal liability of $3.2 million is included in the workforce reduction
reserve.
Activity
for the six months ended June 30, 2010 related to this program, consisted of the
following (in thousands):
|
|
|
Workforce
Reduction
|
|
|
Other Exit
Costs
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
3,693 |
|
|
$ |
1,971 |
|
|
$ |
5,664 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
(80 |
) |
|
|
49 |
|
|
|
(31 |
) |
|
Change
in estimated expenses
|
|
|
36 |
|
|
|
— |
|
|
|
36 |
|
|
Cash
payments
|
|
|
(143 |
) |
|
|
(111 |
) |
|
|
(254 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
3,506 |
|
|
$ |
1,909 |
|
|
$ |
5,415 |
|
Integration
activity for the six months ended June 30, 2010 related to our aggregate
integration programs, by segment, consisted of the following (in
thousands):
|
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Other
|
|
|
Total
|
|
|
Exit
activity liability at December 31, 2009
|
|
$ |
7,017 |
|
|
$ |
364 |
|
|
$ |
162 |
|
|
$ |
7,543 |
|
|
Integration
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
provided for during 2010
|
|
|
1,200 |
|
|
|
746 |
|
|
|
— |
|
|
|
1,946 |
|
|
Cash
payments
|
|
|
(1,842 |
) |
|
|
(259 |
) |
|
|
(74 |
) |
|
|
(2,175 |
) |
|
Exit
activity liability at June 30, 2010
|
|
$ |
6,375 |
|
|
$ |
851 |
|
|
$ |
88 |
|
|
$ |
7,314 |
|
Liquidity
and Capital Resources
Operating
Activities. During the first six months of 2010, cash used in operations
amounted to $3 million compared to cash provided by operations of $72.6 million
in the same period of 2009. The year-over-year decrease is primarily
the result of higher accounts receivables due to an increase in sales volumes
and the build-up of inventory levels in response to increased demand, partially
offset by higher payables and accrued expenses.
Investing
Activities. Cash used in
investing activities was $6 million in the first six months of 2010, compared to
$2 million in the first six months of 2009. During 2010, we received
a $1 million payment related to the note issued in connection with the
divestiture of certain of our joint venture equity ownerships and received
proceeds of $0.9 million from the sale of our Wilson, North Carolina building
and the sale of the vacant land at one of our locations in the
U.K. In addition, investing activities in 2010 included a $2 million
payment related to the acquisition of certain products lines by our Temperature
Control Segment.
Investing
activities in 2009 included a $6 million payment to complete our core sensor
asset purchase transaction entered in 2008 offset, in part, by a $4 million cash
receipt in connection with our joint venture divestiture and $3.9 million in
proceeds received in connection with the redemption of preferred stock of a
third-party issuer. Capital expenditures in the first six months of
2010 were $5.8 million compared to $3.9 million in the comparable period last
year.
Financing
Activities. Cash
provided by financing activities was $13.6 million in the first six months of
2010, compared to cash used in financing activities of $64.8 million in the same
period of 2009. The increase is primarily due to higher borrowings
and an increase in cash overdrafts compared to the same period of
2009. During 2010 increased borrowings were used to finance the
increase in working capital resulting from the increase in sales volumes and
inventory build-up and to finance cash used in investing activities while during
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 $2.2 million were
paid in the first six months of 2010. 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) provides for
a line of credit of up to $200 million (inclusive of the Canadian revolving
credit facility 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.
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 $117.4 million
available for us to borrow pursuant to the formula at June 30,
2010. At June 30, 2010 and December 31, 2009, the interest rate on
our restated credit agreement was 4.5% and 4.1%, respectively. Outstanding
borrowings under the restated credit agreement (inclusive of the Canadian
revolving credit facility described below), which are classified as current
liabilities, were $69.8 million and $58.4 million at June 30, 2010 and December
31, 2009, 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,
2010, 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. Based upon amounts
outstanding as of June 30, 2010, beginning October 15, 2010 and on a monthly
basis thereafter, our borrowing availability will be reduced by approximately
$2.9 million for the repayment, repurchase or redemption of the aggregate
outstanding amount of our 15% convertible subordinated debentures and our 15%
unsecured promissory notes due April 15, 2011. In July 2010, we
prepaid the remaining outstanding principal amount of our 15% unsecured
promissory notes due April 15, 2011. As a result of the prepayment,
the reduction of our borrowing availability beginning October 15, 2010 has been
reduced on a monthly basis from $2.9 million to $2 million. Our
restated credit agreement also permits dividends and distributions by us
provided specific conditions are met.
In May
2010, we amended our credit agreement with GE Canada Finance Holding Company,
for itself and as agent for the lenders. The amended Canadian Credit
Agreement provides for the conversion of the then existing $10 million line of
credit into a revolving credit facility. The amendment also modifies
certain provisions of the amended Canadian Credit Agreement to parallel the
revolving credit provisions of our restated credit agreement with General
Electric Capital Corporation (described above). As of June 30, 2010,
$7 million of the $10 million available line of credit is outstanding and is
part of the $200 million available for borrowing under our restated credit
agreement with General Electric Capital Corporation. 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.
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,
2010, 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.
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. In July 2010, we prepaid the remaining outstanding
principal amount with funds from our revolving credit facility. The
15% unsecured promissory notes would have matured on April 15, 2011, carried an
interest rate of 15%, payable semi-annually, were not convertible into common
stock and may have been prepaid prior to maturity. The 15% unsecured
promissory notes were subordinated in right of payment to all of our existing
and future senior indebtedness. Prepayments of the principal amount
had been made to fund annual or quarterly unfunded Supplemental Executive
Retirement Plan distributions to participants, as required.
During
2010 and 2009, we entered into capital lease obligations related to certain
equipment for use in our operations of $0.1 million and $0.4 million,
respectively. As of June 30, 2010, our remaining capital lease
obligations totaled $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 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
$112 million and $194.2 million of receivables during the three months and six
months ended June 30, 2010, 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. A charge in the amount of $1.7 million and $2.9 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, 2010, respectively, and $0.6 million and $1 million
for the comparable periods in 2009.
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. 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, 2009.
The
following table summarizes our contractual commitments as of December 31, 2009
and expiration dates of commitments through 2028:
|
(in
thousands)
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015-
2028
|
|
|
Total
|
|
|
Principal
payments of long term debt (1)
|
|
$ |
– |
|
|
$ |
17,639 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
17,639 |
|
|
Lease
obligations
|
|
|
8,928 |
|
|
|
7,685 |
|
|
|
5,979 |
|
|
|
5,905 |
|
|
|
5,187 |
|
|
|
9,879 |
|
|
|
43,563 |
|
|
Postretirement
benefits
|
|
|
1,080 |
|
|
|
1,104 |
|
|
|
1,135 |
|
|
|
1,182 |
|
|
|
1,238 |
|
|
|
11,645 |
|
|
|
17,384 |
|
|
Severance
payments related to restructuring and integration
|
|
|
4,097 |
|
|
|
920 |
|
|
|
751 |
|
|
|
652 |
|
|
|
530 |
|
|
|
3,876 |
|
|
|
10,826 |
|
|
Total
commitments
|
|
$ |
14,105 |
|
|
$ |
27,348 |
|
|
$ |
7,865 |
|
|
$ |
7,739 |
|
|
$ |
6,955 |
|
|
$ |
25,400 |
|
|
$ |
89,412 |
|
| |
(1)
|
The
$5.1 million principal amount of the 15% unsecured promissory notes due
April 2011 was repaid in full in July 2010 with funds from our revolving
credit facility.
|
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, 2009. 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. We must make
estimates of potential future product returns related to current period product
revenue. We analyze historical returns, current economic trends, and changes in
customer demand when evaluating the adequacy of the sales returns and other
allowances. Significant 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,
2010, the allowance for sales returns was $34.6 million. Similarly,
we must make estimates of the uncollectability of our accounts receivables. We
specifically analyze accounts receivable and analyze 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, 2010, the allowance for
doubtful accounts and for discounts was $8.5 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.
We
maintain valuation allowances when it is more likely than not that all or a
portion of a deferred asset will not be realized. In determining
whether a valuation allowance is warranted, we evaluate factors such as prior
earnings history, expected future earnings, carryback and carryforward periods
and tax strategies. Management considers all positive and negative evidence to
estimate if sufficient future taxable income will be generated to realize the
deferred tax asset. We consider cumulative losses in recent years as well as the
impact of one time events in assessing our core pretax
earnings. Assumptions regarding future taxable income require
significant judgment. Our assumptions are consistent with estimates and plans
used to manage our business which includes restructuring and integration
initiatives which are expected to generate significant savings in future
periods.
At June
30, 2010, we had a valuation allowance of $29.8 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 generally accepted accounting practices, 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 our assessment. 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. 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
addition, identifiable intangible assets having indefinite lives are reviewed
for impairment on an annual basis. In reviewing for impairment, we
compare the carrying value of such assets 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 our 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
our control 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
Post-Retirement Medical Benefits. Each year, we calculate the
costs of providing retiree benefits under the provisions of Accounting Standards
Codification 712, “Nonretirement Postemployment Benefits” and Accounting
Standards Codification 715, “Retirement Benefits.” 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. Accounting Standards Codification 718 “Stock
Compensation,” 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. We
monitor actual forfeitures for any subsequent adjustment to forfeiture
rates.
Environmental
Reserves. We are subject to various U.S. federal, 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 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. Potential recoveries from insurers or other third parties of
environmental remediation liabilities are recognized independently from the
recorded liability, and any asset related to the recovery will be recognized
only when the realization of the claim for recovery is deemed
probable.
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, 2009
estimated an undiscounted liability for settlement payments, excluding legal
costs and any potential recovery from insurance carriers, ranging from $26.6
million to $66.3 million for the period through 2059. As a result, in September
2009 an incremental $2.2 million provision in our discontinued operation was
added to the asbestos accrual increasing the reserve to approximately $26.6
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 $21.4 million to $42 million during the
same period. We will continue 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.
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
On March
31, 2010, we adopted Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair
Value Measurements that requires companies to enhance the usefulness of
fair value measurements by requiring both the disaggregation of information in
certain existing disclosures, as well as the inclusion of more robust
disclosures about valuation techniques and inputs to recurring and nonrecurring
fair value measurements. The adoption of this standard will impact
how we disclose in the future any material transfers into and out of Level 1
(measurements based on quoted prices in active markets) and Level 2
(measurements based on other observable inputs) inputs of the fair value
hierarchy. There were no such transfers in the first six months of
2010.
Revenue Arrangements with Multiple
Deliverables
In
October 2009, the FASB issued ASU 2009-13 which will update ASC 605,
Revenue
Recognition, and changes
the accounting for certain revenue arrangements. The new standard sets forth requirements that
must be met for an entity to recognize revenue from the sale of a delivered item
that is part of a multiple-element arrangement when other items have not yet
been delivered and requires the allocation of arrangement consideration
to each deliverable to be based on the relative selling
price. ASU
2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in the fiscal years beginning on or after June 15, 2010,
which for us is January 1, 2011. We are currently evaluating the
impact this new standard will have on our financial
statements.
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 and the Hong Kong dollar. As of June
30, 2010 and December 31, 2009, 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
79.7% at June 30, 2010 and 76.5% at December 31, 2009.
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, 2009.
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, 2010, 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 may 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. 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, 2010, approximately 1,534 cases were outstanding for which we were
responsible for any related liabilities. Since inception in September
2001 through June 30, 2010, the amounts paid for settled claims are
approximately $9.7 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 for coverage under this
agreement, and received approximately $2.3 million in reimbursement for
settlement claims and defense costs. We have submitted additional
asbestos-related claims to such insurance carrier for coverage. In
addition, in May 2010 we entered into an agreement with an excess insurance
carrier to provide us with limited insurance coverage for defense and indemnity
costs associated with asbestos-related claims. We will submit claims to this
carrier after we have exhausted our coverage under the agreement with the
primary insurance carrier discussed above.
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, 2009. The
updated study has estimated an undiscounted liability for settlement payments,
excluding legal costs and any potential recovery from insurance carriers,
ranging from $26.6 million to $66.3 million for the period through 2059. The
change from the prior year study was a $1.3 million increase for the low end of
the range and a $2.9 million decrease 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 $2.2 million provision in our
discontinued operation was added to the asbestos accrual in September 2009
increasing the reserve to approximately $26.6 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 $21.4 million to $42 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.
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.
| |
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 2, 2010
|
/s/ James J. Burke
|
|
|
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.
|