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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER: 1-4743
STANDARD MOTOR PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 392-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $2.00 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |_|
Accelerated Filer |X|
Non-Accelerated Filer |_| (Do not check if a smaller reporting company)
Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting common stock based on the closing price
on the New York Stock Exchange on June 30, 2008 (the last business day of
registrant's most recently completed second fiscal quarter) of $8.16 per share
held by non-affiliates of the registrant was $114,872,669. For purposes of the
foregoing calculation only, all directors and officers have been deemed to be
affiliates, but the registrant disclaims that any of such are affiliates.
As of February 28, 2009, there were 18,764,316 outstanding shares of the
registrant's common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated herein by
reference from the registrant's definitive proxy statement relating to its
annual meeting of stockholders to be held on May 21, 2009.
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STANDARD MOTOR PRODUCTS, INC.
INDEX
PART I. PAGE NO.
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Item 1.......Business ..................................................... 3
Item 1A......Risk Factors..................................................13
Item 1B......Unresolved Staff Comments.....................................19
Item 2. Properties....................................................20
Item 3. Legal Proceedings.............................................21
Item 4. Submission of Matters to a Vote of Security Holders...........21
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.............22
Item 6. Selected Financial Data.......................................24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....40
Item 8. Financial Statements and Supplementary Data...................41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................90
Item 9A. Controls and Procedures.......................................90
Item 9B. Other Information.............................................90
PART III.
Item 10. Directors, Executive Officers and Corporate Governance........91
Item 11. Executive Compensation........................................91
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters....................91
Item 13. Certain Relationships and Related Transactions, and
Director Independence ........................................91
Item 14. Principal Accounting Fees and Services........................91
PART IV.
Item 15. Exhibits, Financial Statement Schedules.......................92
Signatures....................................................93
2
PART I
IN THIS ANNUAL REPORT ON FORM 10-K, "STANDARD MOTOR PRODUCTS," "WE," "US," "OUR"
AND THE "COMPANY" REFER TO STANDARD MOTOR PRODUCTS, INC. AND ITS SUBSIDIARIES,
UNLESS THE CONTEXT REQUIRES OTHERWISE. THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE
INDICATED BY WORDS SUCH AS "ANTICIPATES," "EXPECTS," "BELIEVES," "INTENDS,"
"PLANS," "ESTIMATES," "PROJECTS" AND SIMILAR EXPRESSIONS. THESE STATEMENTS
REPRESENT OUR EXPECTATIONS BASED ON CURRENT INFORMATION AND ASSUMPTIONS AND ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN
RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, 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 RISK FACTORS,
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND THOSE DETAILED
HEREIN AND FROM TIME TO TIME IN THE FILINGS OF THE COMPANY WITH THE SEC.
FORWARD-LOOKING STATEMENTS ARE MADE ONLY AS OF THE DATE HEREOF, AND THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THE FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. IN ADDITION,
HISTORICAL INFORMATION SHOULD NOT BE CONSIDERED AS AN INDICATOR OF FUTURE
PERFORMANCE.
ITEM 1. BUSINESS
OVERVIEW
We are a leading independent manufacturer, distributor and marketer of
replacement parts for motor vehicles in the automotive aftermarket industry,
with an increasing focus on the original equipment and original equipment
service markets. We are organized into two major operating segments, each of
which focuses on a specific line of replacement parts. Our Engine Management
Segment manufactures ignition and emission parts, ignition wires, battery cables
and fuel system parts. Our Temperature Control Segment manufactures and
remanufactures air conditioning compressors, air conditioning and heating parts,
engine cooling system parts, power window accessories, and windshield washer
system parts. We also sell our products in Europe through our European Segment.
We 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,
ACi, BWD, Hayden and Four Seasons, and through private labels, such as CARQUEST
and NAPA Echlin.
BUSINESS STRATEGY
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. The key
elements of our strategy are as follows:
3
o MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT
AND TEMPERATURE CONTROL BUSINESSES. We are one of the leading
independent manufacturers serving North America and other geographic
areas in our core businesses of Engine Management and Temperature
Control. We believe that our success is attributable to our emphasis
on product quality, the breadth and depth of our product lines for
both domestic and imported automobiles, and our reputation for
outstanding customer service, as measured by rapid order turn-around
times and high-order fill rates.
To maintain our strong competitive position in our markets, we
remain committed to the following:
o providing our customers with broad lines of high quality
engine management and temperature control products, supported
by the highest level of customer service and reliability;
o continuing to maximize our production and distribution
efficiencies;
o continuing to improve our cost position through increased
global sourcing and increased manufacturing in low cost
countries; and o focusing further on our engineering
development efforts.
o PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND
TECHNICAL SUPPORT. Our goal is to increase sales to existing and new
customers by leveraging our skills in rapidly filling orders,
maintaining high levels of product availability and providing
technical support in a cost-effective manner. In addition, our
technically skilled sales force professionals provide product
selection and application support to our customers.
o EXPAND OUR PRODUCT LINES. We intend to increase our sales by
continuing to develop internally, or through potential acquisitions,
the range of Engine Management and Temperature Control products that
we offer to our customers. We are committed to investing the
resources necessary to maintain and expand our technical capability
to manufacture multiple product lines that incorporate the latest
technologies.
o BROADEN OUR CUSTOMER BASE. Our goal is to increase our customer base
by (a) continuing to leverage our manufacturing capabilities to
secure additional original equipment business with automotive,
industrial and heavy duty vehicle and equipment manufacturers and
their service part operations and (b) supporting the service part
operations of vehicle and equipment manufacturers with value added
services and product support for the life of the part.
o IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management
places significant emphasis on improving our financial performance
by achieving operating efficiencies and improving asset utilization,
while maintaining product quality and high customer order fill
rates. We intend to continue to improve our operating efficiency and
cost position by:
o increasing cost-effective vertical integration in key product
lines through internal development;
o focusing on integrated supply chain management;
o maintaining and improving our cost effectiveness and
competitive responsiveness to better serve our customer base,
including sourcing certain products from low cost countries
such as those in Asia.
o enhancing company-wide programs geared toward manufacturing
and distribution efficiency; and
o focusing on company-wide overhead and operating expense cost
reduction programs, such as closing excess facilities and
consolidating redundant functions.
4
o CASH UTILIZATION. We intend to apply any excess cash flow from
operations and the management of working capital primarily to reduce
our outstanding indebtedness.
THE AUTOMOTIVE AFTERMARKET
The automotive aftermarket industry is comprised of a large number of diverse
manufacturers varying in product specialization and size. In addition to
manufacturing, aftermarket companies allocate resources towards an efficient
distribution process and product engineering in order to maintain the
flexibility and responsiveness on which their customers depend. Aftermarket
manufacturers must be efficient producers of small lot sizes and do not have to
provide systems engineering support. Aftermarket manufacturers also must
distribute, with rapid turnaround times, products for a full range of vehicles
on the road. The primary customers of the automotive aftermarket manufacturers
are national and regional warehouse distributors, large retail chains,
automotive repair chains and the dealer service networks of Original Equipment
Manufacturers ("OEMs").
During periods of economic decline or weakness, more automobile owners may
choose to repair their current automobiles using replacement parts rather than
purchasing new automobiles, which benefits the automotive aftermarket industry,
including suppliers like us. Current global economic and financial market
conditions, including severe disruptions in credit markets and the potential for
a significant and prolonged global economic recession, have adversely affected,
and may continue to adversely affect, the volume of new cars and truck sales,
which could also benefit the automotive aftermarket.
The automotive aftermarket industry differs substantially from the OEM supply
business. Unlike the OEM supply business that primarily follows trends in new
car production, the automotive aftermarket industry's performance primarily
tends to follow different trends, such as:
o growth in number of vehicles on the road;
o increase in average vehicle age;
o change in total miles driven per year;
o new and modified environmental regulations;
o increase in pricing of new cars;
o new car quality and related warranties; and
o change in average fuel prices.
Traditionally, the parts manufacturers of OEMs and the independent manufacturers
who supply the original equipment (OE) part applications have supplied a
majority of the business to new car dealer networks. However, certain parts
manufacturers have become more independent and are no longer affiliated with
OEMs, which has provided, and may continue to provide, opportunities for us to
supply replacement parts to the dealer service networks of the OEMs, both for
warranty and out-of-warranty repairs.
5
FINANCIAL INFORMATION ABOUT OUR OPERATING SEGMENTS
The table below shows our consolidated net sales by operating segment and by
major product group within each segment for the three years ended December 31,
2008. Our three reportable operating segments are Engine Management, Temperature
Control and Europe.
YEAR ENDED
DECEMBER 31,
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2008 2007 2006
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% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
ENGINE MANAGEMENT:
Ignition and Emission Parts .... $437,693 56.4% $425,758 53.9% $436,238 53.7%
Wires and Cables ............... 90,464 11.7% 101,483 12.8% 106,983 13.2%
-------- -------- -------- -------- -------- --------
TOTAL ENGINE MANAGEMENT .......... 528,157 68.1% 527,241 66.7% 543,221 66.9%
-------- -------- -------- -------- -------- --------
TEMPERATURE CONTROL:
Compressors .................... 83,765 10.8% 94,416 12.0% 96,171 11.8%
Other Climate Control Parts .... 110,406 14.3% 113,188 14.3% 114,931 14.2%
-------- -------- -------- -------- -------- --------
TOTAL TEMPERATURE CONTROL ........ 194,171 25.1% 207,604 26.3% 211,102 26.0%
-------- -------- -------- -------- -------- --------
EUROPE:
Engine Management Parts ........ 41,956 5.4% 39,329 5.0% 30,297 3.7%
Temperature Control Parts ...... 2,249 0.3% 2,881 0.3% 16,747 2.1%
-------- -------- -------- -------- -------- --------
TOTAL EUROPE ..................... 44,205 5.7% 42,210 5.3% 47,044 5.8%
-------- -------- -------- -------- -------- --------
ALL OTHER ........................ 8,708 1.1% 13,130 1.7% 10,657 1.3%
-------- -------- -------- -------- -------- --------
TOTAL ...................... $775,241 100% $790,185 100% $812,024 100%
======== ======== ======== ======== ======== ========
The following table shows our operating profit and identifiable assets by
operating segment for the three years ended December 31, 2008.
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------
2008 2007 2006
------------------- ------------------- -------------------
OPERATING OPERATING OPERATING
PROFIT IDENTIFIABLE PROFIT IDENTIFIABLE PROFIT IDENTIFIABLE
(LOSS) ASSETS (LOSS) ASSETS (LOSS) ASSETS
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Engine Management ................ $(24,935) $340,713 $ 28,109 $443,465 $ 41,249 $430,158
Temperature Control .............. 2,331 112,259 10,215 113,440 11,954 109,734
Europe ........................... 510 26,637 968 36,538 46 26,708
All Other ........................ (16,194) 95,418 (15,878) 84,649 (16,284) 73,492
-------- -------- -------- -------- -------- --------
Total .......................... $(38,288) $575,027 $ 23,414 $678,092 $ 36,965 $640,092
======== ======== ======== ======== ======== ========
"All Other" consists of items pertaining to our corporate headquarters function
and our Canadian business unit, each of which does not meet the criteria of a
reportable operating segment.
ENGINE MANAGEMENT SEGMENT
BREADTH OF PRODUCTS. We manufacture a full line of engine management replacement
parts including distributor caps and rotors, electronic ignition control
modules, voltage regulators, coils, switches, emission sensors, EGR valves and
many other engine management components under our brand names Standard and BWD,
and through private labels such as CARQUEST and NAPA Echlin. We are a basic
manufacturer of many of the engine management parts we market. In addition, our
strategy includes sourcing certain products from low cost countries such as
those in Asia. In our Engine Management Segment, replacement parts for ignition
and emission control systems accounted for approximately 56%, of our
consolidated net sales in 2008 and 54% of our consolidated net sales in each of
2007 and 2006.
COMPUTER-CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped
with computer-controlled engine management systems to control ignition, emission
and fuel injection systems. The on-board computers monitor inputs from many
types of sensors located throughout the vehicle, and control a myriad of valves,
injectors, switches and motors to manage engine and vehicle performance.
Electronic ignition systems enable the engine to operate with improved fuel
efficiency and reduced level of hazardous fumes in exhaust gases.
6
We divide our electronic operations between product design and highly automated
manufacturing operations in Orlando, Florida and assembly operations, which are
performed in assembly plants in Orlando and Hong Kong.
Government emissions laws have been implemented throughout the majority of the
United States. The Clean Air Act imposes strict emissions control test standards
on existing and new vehicles, and remains the preeminent legislation in the area
of vehicle emissions. As many states have implemented required
inspection/maintenance tests, the Environmental Protection Agency, through its
rulemaking ability, has also encouraged both manufacturers and drivers to reduce
vehicle emissions. Automobiles must now comply with emissions standards from the
time they were manufactured and, in most states, until the last day they are in
use. This law and other government emissions laws have had, and we expect it to
continue to have, a positive impact on sales of our ignition and emission
controls parts since vehicles failing these laws may require repairs utilizing
parts sold by us.
Our sales of sensors, valves, solenoids and related parts have increased
steadily as automobile manufacturers equip their cars with more complex engine
management systems.
WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 12% of
our consolidated net sales in 2008, and 13% of our consolidated net sales in
each of 2007 and 2006. These products include ignition (spark plug) wires,
battery cables and a wide range of electrical wire, terminals, connectors and
tools for servicing an automobile's electrical system.
The largest component of this product line is the sale of ignition wire sets. We
have historically offered a premium brand of ignition wires and battery cables,
which capitalizes on the market's awareness of the importance of quality. We
extrude high voltage wire in our Mishawaka, Indiana facility which is used in
our ignition wire sets. This vertical integration of this critical component
offers us the ability to achieve lower costs and a controlled source of supply
and quality.
TEMPERATURE CONTROL SEGMENT
We manufacture, remanufacture and market a full line of replacement parts for
automotive temperature control (air conditioning and heating) systems, engine
cooling systems, power window accessories and windshield washer systems,
primarily under our brand names of Four Seasons, Factory Air, Hayden, Imperial
and ACi and through private labels such as CARQUEST, NAPA Echlin and Murray. The
major product groups sold by our Temperature Control Segment are new and
remanufactured compressors, clutch assemblies, blower and radiator fan motors,
filter dryers, evaporators, accumulators, hose assemblies, expansion valves,
heater valves, AC service tools and chemicals, fan assemblies, fan clutches,
engine oil coolers, transmission coolers, window lift motors and windshield
washer pumps. Our temperature control products accounted for approximately 25%
of our consolidated net sales in 2008, and 26% in each of 2007 and 2006.
Due to increasing offshore competitive price pressure, our Temperature Control
business made several changes within its manufacturing portfolio. We have
outsourced the manufacturing of several major AC product groups to low cost
areas such as those in Asia, and have implemented plans to consolidate
manufacturing facilities. In addition, we continue to increase production of
remanufactured compressors in our facility in Reynosa, Mexico.
Today's vehicles are being produced with smaller, more complex and efficient AC
system designs. These newer systems are less prone to leak resulting in fewer AC
system repairs. Our Temperature Control Segment continues to be a leader in
providing superior training to service dealers who seek the knowledge in which
to perform proper repairs for today's vehicles. We believe that our training
module (HVAC Tips & Techniques) remains one of the most sought-after training
clinics in the industry and among professional service dealers.
7
EUROPE SEGMENT
Our European Segment is conducted through our wholly-owned subsidiary, Standard
Motor Products (SMP) Holdings Limited located in Nottingham, England. SMP
Holdings Limited manufactures and distributes a broad line of engine management
products primarily to customers in Europe under our own brand names which
include Intermotor, Kerr Nelson, Lemark and Blue Streak and through private
labels such as Lucas. In December 2008, SMP Holdings Limited acquired the
remaining ownership interest of its joint venture partner in Blue Streak Europe
increasing its ownership interest to 100%. Blue Streak Europe supplies rebuilt
engine computers for the European market. In addition, our European Segment
continues to remanufacture and distribute, to a lesser degree, air conditioner
compressors for the European market.
Since inception, SMP Holdings Limited has made a series of smaller acquisitions
supplementing its Engine Management business. In January 1999, we acquired
Webcon UK Limited, an assembler and distributor of fuel system components, which
we subsequently divested in June 2003. In January 1999, Blue Streak Europe
acquired Injection Correction UK LTD, a subsidiary of Webcon, and in September
2001, acquired TRW Inc.'s electronic control unit remanufacturing division. In
April 1999, we acquired Lemark Auto Accessories, a supplier of wire sets. In
April 2002, the wire business was further expanded by acquiring Carol Cable
Limited, a manufacturer and distributor of wire. In April 2006, we acquired
substantially all of the assets of Biazet EI's ignition and coil business in
Poland. Subsequently, we relocated certain of our UK manufacturing operations to
our facility in Poland. In December 2007, we acquired Kerr Nelson Ltd., a
manufacturer and distributor of wire sets.
Our European Segment accounted for approximately 6%, 5% and 6% of our
consolidated net sales in 2008, 2007 and 2006, respectively. Aftermarket margins
are under pressure, while volumes are in a general decline in the ignition line.
We have responded to the adverse market conditions by reducing manufacturing
costs through consolidating certain facilities and outsourcing products to low
cost areas.
FINANCIAL INFORMATION ABOUT OUR FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We sell our line of products primarily in the United States, with additional
sales in Canada, Europe and Latin America. Our sales are substantially
denominated in U.S. dollars.
The table below shows our consolidated net sales by geographic area for the
three years ended December 31, 2008.
YEAR ENDED
DECEMBER 31,
------------------------------
2008 2007 2006
-------- -------- --------
(IN THOUSANDS)
United States ........... $650,498 $663,534 $688,030
Canada .................. 51,886 53,901 48,537
Europe .................. 44,205 42,210 47,044
Other International ..... 28,652 30,540 28,413
-------- -------- --------
Total ............... $775,241 $790,185 $812,024
======== ======== ========
8
The table below shows our long-lived assets by geographical area for the three
years ended December 31, 2008.
YEAR ENDED
DECEMBER 31,
------------------------------
2008 2007 2006
-------- -------- --------
(IN THOUSANDS)
United States ........... $ 89,528 $136,029 $144,208
Europe .................. 5,714 8,883 4,821
Canada .................. 3,540 3,954 4,014
Other International ..... 605 680 778
-------- -------- --------
Total ............... $ 99,387 $149,546 $153,821
======== ======== ========
SALES AND DISTRIBUTION
In the traditional distribution channel, we sell our products to warehouse
distributors, who supply auto parts jobbers, who in turn sell to professional
technicians and to consumers who perform automotive repairs themselves. In
recent years, warehouse distributors have consolidated with other distributors,
and an increasing number of distributors own their jobbers. In the retail
distribution channel, customers buy directly from us and sell directly to
technicians and "do-it-yourselfers." Retailers are also consolidating with other
retailers and have expanded into the jobber market, adding additional
competition in the "do-it-for-me" business segment targeting the professional
technician.
As automotive parts grow more complex, consumers are less likely to service
their own vehicles and may become more reliant on dealers and technicians. In
addition to new car sales, automotive dealerships sell OE brand parts and
service vehicles. The products available through the dealers are purchased
through the original equipment service (OES) network. Traditionally, the parts
manufacturers of OEMs have supplied a majority of the OES network. However,
certain parts manufacturers have become independent and are no longer affiliated
with OEMs. In addition, many Tier 1 OEM suppliers are disinterested in providing
service parts after serial production is complete. As a result of these factors,
there are additional opportunities for independent automotive aftermarket
manufacturers like us to supply the OES network.
We believe that our sales force is the premier direct sales force for our
product lines due to our concentration of highly-qualified, well-trained sales
people dedicated to geographic territories. Our sales force allows us to provide
customer service that we believe is unmatched by our competitors. We thoroughly
train our sales people both in the function and application of our product
lines, as well as in proven sales techniques. Customers, therefore, depend on
these sales people as a reliable source for technical information. We give newly
hired sales people extensive instruction at our training facility in Irving,
Texas and have a continuing education program that allows our sales force to
stay current on troubleshooting and repair techniques, as well as the latest
automotive parts and systems technology.
We generate demand for our products by directing a significant portion of our
sales effort to our customers' customers (i.e., jobbers and professional
technicians). We also conduct instructional clinics, which teach technicians how
to diagnose and repair complex systems related to our products. To help our
sales people to be teachers and trainers, we focus our recruitment efforts on
candidates who already have strong technical backgrounds as well as sales
experience.
In connection with our sales activities, we offer a variety of customer
discounts, allowances and incentives. For example, we offer cash discounts for
paying invoices in accordance with the specified discounted terms of the
invoice, and we offer pricing discounts based on volume and different product
lines purchased from us. We also offer rebates and discounts to customers as
advertising and sales force allowances, and allowances for warranty and
overstock returns are also provided. We believe these discounts, allowances and
incentives are a common practice throughout the automotive aftermarket industry,
and we intend to continue to offer them in response to competitive pressures.
9
CUSTOMERS
Our customer base is comprised largely of warehouse distributors, large
retailers, OE/OES customers, other manufacturers and export customers. Our
warehouse distributor customers include CARQUEST and NAPA Auto Parts, and
several large independent distributors affiliated with industry marketing group
associations. These associations include The Aftermarket Auto Parts Alliance,
The Automotive Distribution Network, Federated Auto Parts and National Pronto
Association. Our retail customers include Advance Auto Parts, AutoZone, O'Reilly
Automotive/CSK Auto, Canadian Tire and Pep Boys. In 2008, our consolidated net
sales to our major market channels consisted of $363 million to our traditional
customers, $254 million to our retail customers, $94 million to our OE/OES
customers, and $64 million to other customers.
Our five largest individual customers, including members of a marketing group,
accounted for 53% of our consolidated net sales in 2008, 50% of our consolidated
net sales in 2007 and 51% of our consolidated net sales in 2006. Three
individual customers accounted for 16%, 15% and 15%, respectively, of
consolidated net sales in 2008, and two individual customers accounted for 17%
and 15%, respectively, of consolidated net sales in 2007, and 18% and 14%,
respectively, of consolidated net sales in 2006.
COMPETITION
We are a leading independent manufacturer of replacement parts for product lines
in Engine Management and Temperature Control. We compete primarily on the basis
of product quality, product availability, customer service, product coverage,
order turn-around time, order fill rate and price. We believe we differentiate
ourselves from our competitors primarily through:
o a value-added, knowledgeable sales force;
o extensive product coverage;
o sophisticated parts cataloguing systems;
o inventory levels sufficient to meet the rapid delivery requirements
of customers; and
o breadth of manufacturing capabilities.
In the Engine Management business, we are one of the leading independent
manufacturers in the United States. Our competitors include AC Delco, Delphi
Corporation, Denso Corporation, Federal-Mogul Corporation, Robert Bosch
Corporation, Visteon Corporation, NGK/NTK, General Cable, Prestolite and United
Components, Inc.
Our Temperature Control business is one of the leading independent manufacturers
and distributors of a full line of temperature control products in North America
and other geographic areas. AC Delco, Delphi Corporation, Denso Corporation,
Sanden International Inc., Proliance International, Inc., Continental/Siemens
VDO Automotive and Visteon Corporation are some of our key competitors in this
market.
The automotive aftermarket is highly competitive, and we face substantial
competition in all markets that we serve. Our success in the marketplace
continues to depend on our ability to offer competitive prices, improved
products and expanded offerings in competition with many other suppliers to the
aftermarket. Some of our competitors may have greater financial, marketing and
other resources than we do. In addition, we face competition from automobile
manufacturers who supply many of the replacement parts sold by us, although
these manufacturers generally supply parts only for cars they produce through OE
dealerships.
SEASONALITY
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year, with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
and customer inventories. For example, a cool summer may lessen the demand for
our Temperature Control products, while a hot summer may increase such demand.
As a result of this seasonality and variability in demand of our Temperature
Control products, our working capital requirements peak near the end of the
second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by borrowings from our revolving credit facility.
10
WORKING CAPITAL MANAGEMENT
Automotive aftermarket companies have been under increasing pressure to provide
broad SKU (stock keeping unit) coverage due to parts and brand proliferation. In
response to this, we have made, and continue to make, changes to our inventory
management system designed to reduce inventory requirements. We upgraded our
forecasting system in our Engine Management and Temperature Control Segments
that will help us better manage our inventory levels and improve inventory
turns, although in recent years, inventory levels increased significantly as we
built bridge inventory levels to meet customer demand during our facility
relocation moves. We have a pack-to-order distribution system, which permits us
to retain slow moving items in a bulk storage state until an order for a
specific brand part is received. This system reduces the volume of a given part
in inventory and reduces the labor requirements to package and repackage
inventory. We also expanded our management system to improve inventory
deployment, enhance our collaboration with customers on forecasts, and further
integrate our supply chain both to customers and suppliers.
We face inventory management issues as a result of warranty and overstock
returns. Many of our products carry a warranty ranging from a 90-day limited
warranty to a lifetime limited warranty, which generally covers defects in
materials or workmanship and failure to meet industry published specifications.
In addition to warranty returns, we also permit our customers to return products
to us within customer-specific limits (which are generally limited to a
specified percentage of their annual purchases from us) in the event that they
have overstocked their inventories. In addition, the seasonality of our
Temperature Control Segment requires that we increase our inventory during the
winter season in preparation of the summer selling season and customers
purchasing such inventory have the right to make returns.
In order to better control warranty returns, we tightened the rules to reduce
returns arising from installer error or misdiagnosis. For example, with respect
to our air conditioning compressors, our most significant customer product
warranty returns, we established procedures whereby a warranty will be voided if
a customer does not provide acceptable proof that complete AC system repair was
performed.
Our profitability and working capital requirements are seasonal due to our sales
mix of Temperature Control products. Our working capital requirements peak near
the end of the second quarter, as the inventory build-up of air conditioning
products is converted to sales and payments on the receivables associated with
such sales have yet to be received. These increased working capital requirements
are funded by borrowings from our revolving credit facility.
SUPPLIERS
The principal raw materials purchased by us consist of brass, electronic
components, fabricated copper (primarily in the form of magnet and insulated
cable), steel magnets, laminations, tubes and shafts, stamped steel parts,
copper wire, ignition wire, stainless steel coils and rods, aluminum coils,
fittings, tubes and rods, cast aluminum parts, lead, steel roller bearings,
rubber molding compound, thermo-set and thermo plastic molding powders.
Additionally, we use components and cores (used parts) in our remanufacturing
processes for air conditioning compressors.
11
We purchase materials in the U.S. and foreign open markets and have a limited
number of supply agreements on key components. A number of prime suppliers make
these materials available. In the case of cores for air conditioning
compressors, we obtain them either from exchanges with customers who return
cores subsequent to purchasing remanufactured parts or through direct purchases
from a network of core brokers. In addition, we acquire certain materials by
purchasing products that are resold into the market, particularly by OEM sources
and other domestic and foreign suppliers.
We believe there is an adequate supply of primary raw materials and cores. In
order to ensure a consistent, high quality, low cost supply of key components
for each product line, we continue to develop our own sources through internal
manufacturing capacity. Throughout most of 2008, prices of steel, aluminum,
copper and other commodities have risen but in the fourth quarter of 2008,
commodity prices have decreased to more normalized levels. These increases did
not have a material impact on us, as we are not dependent on any single
commodity, however, there can be no assurance over the long term that increases
in commodity prices will not materially affect our business or results of
operations.
PRODUCTION AND ENGINEERING
We engineer, tool and manufacture many of the components used in the assembly of
our products. We also perform our own plastic molding operations, stamping and
machining operations, automated electronics assembly and a wide variety of other
processes. In the case of remanufactured components, we conduct our own
teardown, diagnostics and rebuilding for air conditioning compressors. We have
found this level of vertical integration to provide advantages in terms of cost,
quality and availability. We intend to continue selective efforts toward further
vertical integration to ensure a consistent quality and supply of low cost
components. In addition, our strategy includes sourcing an increasing number of
finished goods and component parts from low cost countries such as those in
Asia.
EMPLOYEES
As of December 31, 2008, we employed approximately 2,300 people in the United
States, and 800 people in Mexico, Canada, Europe and Hong Kong. Of these,
approximately 1,500 are production employees. We operate primarily in non-union
facilities and have binding labor agreements with the workers at other unionized
facilities. We have approximately 125 production employees in Edwardsville,
Kansas who are covered by a contract with The International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") that
expires in April 2009. In September 2008, we entered into an agreement with UAW
regarding the shutdown of our manufacturing operations at Edwardsville, Kansas;
distribution operations will continue at Edwardsville. We also have union
relationships in Mexico with agreements negotiated at various intervals. The
current union agreements in Mexico cover approximately 500 employees and expire
in December 2009 and January 2010.
We believe that our facilities are in favorable labor markets with ready access
to adequate numbers of skilled and unskilled workers, and we believe our
relations with our union and non-union employees are good.
INSURANCE
We maintain basic liability coverage up to $2 million for automobile liability,
general and product liability and $50 million for umbrella liability coverage.
We also maintain environmental insurance of $10 million, covering our existing
U.S. and Canadian facilities. One of our facilities is currently undergoing
testing for potential environmental remediation. The environmental testing and
any remediation costs at such facility may be covered by several insurance
policies, although we can give no assurance that our insurance will cover any
environmental remediation claims. Historically, we have not experienced casualty
losses in any year in excess of our coverage. However, there can be no
assurances that liability losses in the future will not exceed our coverage.
12
AVAILABLE INFORMATION
We are a New York corporation founded in 1919. Our principal executive offices
are located at 37-18 Northern Boulevard, Long Island City, New York 11101, and
our main telephone number at that location is (718) 392-0200. Our Internet
address is WWW.SMPCORP.COM. We provide a link to reports that we have filed with
the SEC. However, for those persons that make a request in writing or by e-mail
(financial@smpcorp.com), we will provide free of charge our Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. These reports and other
information are also available, free of charge, at WWW.SEC.GOV.
ITEM 1A. RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW. THESE RISKS AND
UNCERTAINTIES ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES
NOT PRESENTLY KNOWN TO US OR OTHER FACTORS NOT PERCEIVED BY US TO PRESENT
SIGNIFICANT RISKS TO OUR BUSINESS AT THIS TIME ALSO MAY IMPAIR OUR BUSINESS AND
RESULTS OF OPERATIONS. IF ANY OF THE STATED RISKS ACTUALLY OCCUR THEY COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS.
OUR SUBSTANTIAL INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR CONVERTIBLE DEBENTURES.
We have a significant amount of indebtedness. As of December 31, 2008, our total
outstanding indebtedness was $194.2 million. We incurred $90 million of
indebtedness in July 1999 from the sale of our convertible debentures, of which
$44.9 million of principal is outstanding as of December 31, 2008. We have an
existing revolving bank credit facility of $275 million with General Electric
Capital Corporation, as agent, and a syndicate of lenders, which we refer to
throughout this Report as our revolving credit facility. As of December 31,
2008, we had $143.2 million of outstanding indebtedness and approximately $54.4
million of availability under this revolving credit facility. Our substantial
indebtedness could:
o make it more difficult to satisfy our obligations with respect to
our convertible debentures;
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our ability to obtain additional financing or borrow
additional funds;
o limit our ability to pay future dividends;
o limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
o require that a substantial portion of our cash flow from operations
be used for the payment of interest on our indebtedness and the
redemption of our convertible debentures instead of for funding
working capital, capital expenditures, acquisitions or for other
general corporate purposes; and
o increase the amount of interest expense that we have to pay because
some of our borrowings are at variable rates of interest, which, as
interest rates increase, would result in a higher interest expense.
In addition, we have granted the lenders under our revolving credit facility a
first priority security interest in substantially all of our currently owned and
future acquired personal property, real property and other assets. We have also
pledged shares of stock in our subsidiaries to those lenders. If we default on
any of our indebtedness, or if we are unable to obtain necessary liquidity, our
business could be adversely affected.
13
WE MAY NOT BE ABLE TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE
OUR INDEBTEDNESS AND FUND OUR FUTURE OPERATIONS.
Our ability either to make payments on or to refinance our indebtedness, to
redeem our convertible debentures, or to fund planned capital expenditures and
research and development efforts, will depend on our ability to generate cash in
the future. Our ability to generate cash is in part subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. For example, current conditions in the credit markets
generally, and those related to the automotive sector specifically, including
the ability of vendors to factor receivables from customers, could result in
reduced cash flow, or increased challenges in obtaining additional financing or
refinancing. Also, in operating our business we depend on the ability of our
customers to pay timely the amounts we have billed and any disruption in our
customers' ability to pay us because of financial difficulty, or otherwise,
would have a negative impact on our cash flow.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our revolving credit
facility will be adequate to meet our future liquidity needs for at least the
next 12 months. Significant assumptions underlie this belief, including, among
other things, that there will be no material adverse developments in our
business, liquidity or capital requirements. If we are unable to service our
indebtedness, we will be forced to adopt an alternative strategy that may
include actions such as:
o deferring or eliminating future cash dividends;
o reducing or delaying capital expenditures or restructuring
activities;
o reducing or delaying research and development efforts;
o selling assets;
o deferring or refraining from pursuing certain strategic iniatives
and acquisitions;
o refinancing our indebtedness; and
o seeking additional funding.
We cannot assure you that our business will generate sufficient cash flow from
operations, or that future borrowings will be available to us under our
revolving credit facility in amounts sufficient to enable us to pay the
principal and interest on our indebtedness, including our convertible
debentures, or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness on or before maturity. We cannot assure you
that we will be able to refinance any of our indebtedness on commercially
reasonable terms or at all.
SOURCES OF FINANCING MAY NOT BE AVAILABLE TO US IN THE AMOUNT OR UNDER THE TERMS
REQUIRED.
We may seek to access the credit and capital markets in order to repay at
maturity or redeem our convertible debentures. Access to, and the costs of
borrowing in, these markets depend in part on our credit ratings, which are
currently below investment grade. We can give no assurance that our credit
ratings will not decline further in the future, or that we can access these
markets at all. Further downgrades of these ratings would increase our costs of
borrowing and could adversely affect our liquidity. Additionally, the current
state of the credit and capital markets has resulted in severely constrained
liquidity conditions owing to a reevaluation of the risk attributable primarily,
but not limited, to the U.S. sub-prime mortgage crisis. Continuation of such
constraints may increase our costs of borrowing and could restrict our access to
this potential source of future liquidity in order to repay at maturity or
redeem our convertible debentures.
14
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED BY
GLOBAL ECONOMIC AND FINANCIAL MARKETS CONDITIONS.
Current global economic and financial markets conditions, including severe
disruptions in the credit markets and the potential for a significant and
prolonged global economic recession, may materially and adversely affect our
results of operations and financial condition. These conditions may also
materially impact our customers, suppliers and other parties with whom we do
business. For example, end users may put off discretionary repairs or drive less
miles thereby resulting in less need for our products. Economic and financial
market conditions that adversely affect our customers may cause them to
terminate existing purchase orders or to reduce the volume of products they
purchase from us in the future. In connection with the sale of products, we
normally do not require collateral as security for customer receivables and do
not purchase credit insurance. We may have significant balances owing from
customers that operate in cyclical industries and under leveraged conditions
that may impair the collectability of those receivables. Failure to collect a
significant portion of amounts due on those receivables could have a material
adverse effect on our results of operations and financial condition. Adverse
economic and financial market conditions may also cause our suppliers to be
unable to meet their commitments to us or may cause suppliers to make changes in
the credit terms they extend to us, such as shortening the required payment
period for outstanding accounts receivable or reducing the maximum amount of
trade credit available to us. Changes of this type could significantly affect
our liquidity and could have a material adverse effect on our results of
operations and financial condition. If we are unable to successfully anticipate
changing economic and financial markets conditions, we may be unable to
effectively plan for and respond to those changes, and our business could be
negatively affected.
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
COMPETE WITH SUPPLIERS OF AUTOMOTIVE AFTERMARKET PRODUCTS, SOME OF WHICH MAY
HAVE SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND OTHER RESOURCES THAN WE DO.
While we believe that our business is well positioned to compete in our two
primary market segments, Engine Management and Temperature Control, the
automotive aftermarket industry is highly competitive, and our success depends
on our ability to compete with suppliers of automotive aftermarket products. In
the Engine Management business, our competitors include AC Delco, Delphi
Corporation, Denso Corporation, Federal-Mogul Corporation, Robert Bosch
Corporation, Visteon Corporation, NGK/NTK, General Cable, Prestolite and United
Components, Inc. In the Temperature Control business, we compete with AC Delco,
Delphi Corporation, Denso Corporation, Sanden International, Inc., Proliance
International, Inc., Continental/Siemens VDO Automotive and Visteon Corporation.
In addition, automobile manufacturers supply many of the replacement parts we
sell.
Some of our competitors may have larger customer bases and significantly greater
financial, technical and marketing resources than we do. These factors may allow
our competitors to:
o respond more quickly than we can to new or emerging technologies and
changes in customer requirements by devoting greater resources than
we can to the development, promotion and sale of automotive
aftermarket products and services;
o engage in more extensive research and development;
o sell products at a lower price than we do;
o undertake more extensive marketing campaigns; and
o make more attractive offers to existing and potential customers and
strategic partners.
We cannot assure you that our competitors will not develop products or services
that are equal or superior to our products or that achieve greater market
acceptance than our products or that in the future other companies involved in
the automotive aftermarket industry will not expand their operations into
product lines produced and sold by us. We also cannot assure you that additional
entrants will not enter the automotive aftermarket industry or that companies in
the aftermarket industry will not consolidate. Any of such competitive pressures
could cause us to lose market share or could result in significant price
decreases and could have a material adverse effect upon our business, financial
condition and results of operations.
15
THERE IS SUBSTANTIAL PRICE COMPETITION IN OUR INDUSTRY, AND OUR SUCCESS AND
PROFITABILITY WILL DEPEND ON OUR ABILITY TO MAINTAIN A COMPETITIVE COST AND
PRICE STRUCTURE.
There is substantial price competition in our industry, and our success and
profitability will depend on our ability to maintain a competitive cost and
price structure. This is the result of a number of industry trends, including
the impact of offshore suppliers in the marketplace, the consolidated purchasing
power of large customers and actions taken by some of our competitors in an
effort to "win over" new business. We have in the past reduced prices to remain
competitive and may have to do so again in the future. Price reductions have
impacted our sales and profit margins and are expected to do so in the future.
In addition, we are implementing ongoing facility integration efforts to further
reduce costs. Our future profitability will depend in part upon the success of
our integration plans, and our ability to respond to changes in the product and
distribution channel mix, to continue to improve our manufacturing efficiencies,
to generate cost reductions, including reductions in the cost of components
purchased from outside suppliers, and to maintain a cost structure that will
enable us to offer competitive prices. Our inability to maintain a competitive
cost structure could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY NOT BE ABLE TO ACHIEVE THE COST SAVINGS THAT WE EXPECT FROM THE
RESTRUCTURING OF OUR OPERATIONS.
We are implementing a number of cost savings programs. Although we expect to
realize cost savings as a result of our restructuring plans, we may not be able
to achieve the level of benefits that we expect to realize or we may not be able
to realize these benefits within the time frames we currently expect. We are
currently rationalizing certain manufacturing operations in order to alleviate
redundant capacity and reduce our cost structure. This restructuring will
involve the movement of some U.S. production to Mexico. Our ability to achieve
these cost savings could be affected by a number of factors. Changes in the
amount, timing and character of charges related to restructuring, failure to
complete or a substantial delay in completing the restructuring and planned
divestitures, or receipt of lower proceeds from such divestitures than currently
is anticipated, could have a material adverse effect on us. Our cost savings is
also predicated upon maintaining our sales levels.
WE DEPEND ON A LIMITED NUMBER OF KEY CUSTOMERS, AND THE LOSS OF ANY SUCH
CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Our five largest individual customers, including members of a marketing group,
accounted for 53% of our consolidated net sales in 2008, 50% of consolidated net
sales in 2007, and 51% of consolidated net sales in 2006. Three individual
customers accounted for 16%, 15% and 15%, respectively, of consolidated net
sales in 2008, and two individual customers accounted for 17% and 15%,
respectively, of consolidated net sales in 2007, and 18% and 14%, respectively,
of consolidated net sales in 2006. The loss of one or more of these customers
or, a significant reduction in purchases of our products from any one of them,
could have a materially adverse impact on our business, financial condition and
results of operations.
Also, we do not typically enter into long-term agreements with any of our
customers. Instead, we enter into a number of purchase order commitments with
our customers, based on their current or projected needs. We have in the past,
and may in the future, lose customers or lose a particular product line of a
customer due to the highly competitive conditions in the automotive aftermarket
industry, including pricing pressures. A decision by any significant customer,
whether motivated by competitive conditions, financial difficulties or
otherwise, to materially decrease the amount of products purchased from us, to
change their manner of doing business with us, or to stop doing business with
us, could have a material adverse effect on our business, financial condition
and results of operations.
16
OUR BUSINESS IS SEASONAL AND IS SUBJECT TO SUBSTANTIAL QUARTERLY FLUCTUATIONS,
WHICH IMPACT OUR QUARTERLY PERFORMANCE AND WORKING CAPITAL REQUIREMENTS.
Historically, our operating results have fluctuated by quarter, with the
greatest sales occurring in the second and third quarters of the year and with
revenues generally being recognized at the time of shipment. It is in these
quarters that demand for our products is typically the highest, specifically in
the Temperature Control Segment of our business. In addition to this
seasonality, the demand for our Temperature Control products during the second
and third quarters of the year may vary significantly with the summer weather
and customer inventories. For example, a cool summer may lessen the demand for
our Temperature Control products, while a hot summer may increase such demand.
As a result of this seasonality and variability in demand of our Temperature
Control products, our working capital requirements peak near the end of the
second quarter, as the inventory build-up of air conditioning products is
converted to sales and payments on the receivables associated with such sales
have yet to be received. During this period, our working capital requirements
are typically funded by borrowing from our revolving credit facility.
WE MAY INCUR MATERIAL LOSSES AND SIGNIFICANT COSTS AS A RESULT OF
WARRANTY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
Our products are required to meet rigorous standards imposed by our customers
and our industry. Many of our products carry a warranty ranging from a 90-day
limited warranty to a lifetime limited warranty, which generally covers defects
in materials or workmanship and failure to meet industry published
specifications. In the event that there are material deficiencies or defects in
the design and manufacture of our products and/or installer error, the affected
products may be subject to warranty returns and/or product recalls. Although we
maintain a comprehensive quality control program, we cannot give any assurance
that our products will not suffer from defects or other deficiencies or that we
will not experience material warranty returns or product recalls in the future.
We accrue for warranty returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for warranty returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. We have in
the past incurred, and may in the future incur, material losses and significant
costs as a result of our customers returning products to us for warranty-related
issues in excess of anticipated amounts. Deficiencies or defects in our products
in the future may result in warranty returns and product recalls in excess of
anticipated amounts and may have a material adverse effect on our business,
financial condition and results of operations.
OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF OVERSTOCK
INVENTORY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS.
We permit overstock returns of inventory that may be either new or non-defective
or non-obsolete but that we believe we can re-sell. Customers are generally
limited to returning overstocked inventory according to a specified percentage
of their annual purchases from us. In addition, a customer's annual allowance
cannot be carried forward to the upcoming year.
We accrue for overstock returns as a percentage of sales, after giving
consideration to recent historical returns. While we believe that we make
reasonable estimates for overstock returns in accordance with our revenue
recognition policies, actual returns may differ from our estimates. To the
extent that overstocked returns are materially in excess of our projections, our
business, financial condition and results of operations may be materially
adversely affected.
17
OUR FUTURE PERFORMANCE MAY BE MATERIALLY ADVERSELY AFFECTED BY CHANGES IN
TECHNOLOGIES AND IMPROVEMENTS IN THE QUALITY OF NEW VEHICLE PARTS.
Changes in automotive technologies, such as vehicles powered by fuel cells or
electricity, could negatively affect sales to our aftermarket customers. These
factors could result in less demand for our products thereby causing a decline
in our results of operations or deterioration in our business and financial
condition and may have a material adverse effect on our long-term performance.
In addition, the size of the automobile replacement parts market depends, in
part, upon the growth in number of vehicles on the road, increase in average
vehicle age, change in total miles driven per year, new and modified
environmental regulations, increase in pricing of new cars and new car quality
and related warranties. The automobile replacement parts market has been
negatively impacted by the fact that the quality of more recent automotive
vehicles and their component parts (and related warranties) has improved,
thereby lengthening the repair cycle. Generally, if parts last longer, there
will be less demand for our products, and the average useful life of automobile
parts has been steadily increasing in recent years due to innovations in
products and technology. In addition, the introduction by original equipment
manufacturers of increased warranty and maintenance initiatives has the
potential to decrease the demand for our products. These factors could have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY BE MATERIALLY ADVERSELY AFFECTED BY ASBESTOS CLAIMS ARISING FROM PRODUCTS
SOLD BY OUR FORMER BRAKE BUSINESS, AS WELL AS BY OTHER PRODUCT LIABILITY CLAIMS.
In 1986, we acquired a brake business, which we subsequently sold in March 1998.
When we originally acquired this brake business, we assumed future liabilities
relating to any alleged exposure to asbestos-containing products manufactured by
the seller of the acquired brake business. In accordance with the related
purchase agreement, we agreed to assume the liabilities for all new claims filed
after September 1, 2001. Our ultimate exposure will depend upon the number of
claims filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense of such claims.
Actuarial consultants with experience in assessing asbestos-related liabilities
conducted a study to estimate our potential claim liability as of August 31,
2008. The updated study has estimated an undiscounted liability for settlement
payments, excluding legal costs and any potential recovery from insurance
carriers, ranging from $25.3 million to $69.2 million for the period through
2059. The change from the prior year study was a $1.5 million increase for the
low end of the range and a $14 million increase for the high end of the range.
Based on the information contained in the actuarial study and all other
available information considered by us, we concluded that no amount within the
range of settlement payments was more likely than any other and, therefore,
recorded the low end of the range as the liability associated with future
settlement payments through 2059 in our consolidated financial statements.
Accordingly, an incremental $2.1 million provision in our discontinued operation
was added to the asbestos accrual in September 2008 increasing the reserve to
approximately $25.3 million. According to the updated study, legal costs, which
are expensed as incurred and reported in earnings (loss) from discontinued
operation in the accompanying statement of operations, are estimated to range
from $19.1 million to $32.1 million during the same period.
At December 31, 2008, approximately 3,650 cases were outstanding for which we
were responsible for any related liabilities. Since inception in September 2001
through December 31, 2008, the amounts paid for settled claims are approximately
$7.1 million. A substantial increase in the number of new claims or increased
settlement payments or awards of damages could have a material adverse effect on
our business, financial condition and results of operations.
Given the uncertainties associated with projecting asbestos-related matters into
the future and other factors outside our control, we cannot give any assurance
that significant increases in the number of claims filed against us will not
occur, that asbestos-related damages or settlement awards will not exceed the
amount we have in reserve, or that additional provisions will not be required.
Management will continue to monitor the circumstances surrounding these
potential liabilities in determining whether additional reserves and provisions
may be necessary. We plan on performing a similar annual actuarial analysis
during the third quarter of each year for the foreseeable future.
18
In addition to asbestos-related claims, our product sales entail the risk of
involvement in other product liability actions. We maintain product liability
insurance coverage, but we cannot give any assurance that current or future
policy limits will be sufficient to cover all possible liabilities. Further, we
can give no assurance that adequate product liability insurance will continue to
be available to us in the future or that such insurance may be maintained at a
reasonable cost to us. In the event of a successful product liability claim
against us, a lack or insufficiency of insurance coverage could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY INCUR LIABILITIES UNDER GOVERNMENT REGULATIONS AND ENVIRONMENTAL LAWS,
WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Domestic and foreign political developments and government regulations and
policies directly affect automotive consumer products in the United States and
abroad. Regulations and policies relating to over-the-highway vehicles include
standards established by the United States Department of Transportation for
motor vehicle safety and emissions. The modification of existing laws,
regulations or policies, or the adoption of new laws, regulations or policies,
such as legislation offering incentives to remove older vehicles from the road,
could have a material adverse effect on our business, financial condition and
results of operations.
Our operations and properties are subject to a wide variety of increasingly
complex and stringent federal, state, local and international laws and
regulations, including those governing the use, storage, handling, generation,
treatment, emission, release, discharge and disposal of materials, substances
and wastes, the remediation of contaminated soil and groundwater and the health
and safety of employees. Such environmental laws, including but not limited to
those under the Comprehensive Environmental Response Compensation & Liability
Act, may impose joint and several liability and may apply to conditions at
properties presently or formerly owned or operated by an entity or its
predecessors, as well as to conditions at properties at which wastes or other
contamination attributable to an entity or its predecessors have been sent or
otherwise come to be located.
The nature of our operations exposes us to the risk of claims with respect to
such matters, and we can give no assurance that violations of such laws have not
occurred or will not occur or that material costs or liabilities will not be
incurred in connection with such claims. One of our facilities is currently
undergoing testing for potential environmental remediation. Based upon the
findings related to the testing, we increased our environmental reserve by $0.4
million in 2008. The testing and any environmental remediation costs at such
facility may be covered by several insurance policies, although we can give no
assurance that our insurance will cover any environmental remediation claims. We
also maintain insurance to cover our existing U.S. and Canadian facilities. We
can give no assurance that the future cost of compliance with existing
environmental laws and the liability for known environmental claims pursuant to
such environmental laws will not give rise to additional significant
expenditures or liabilities that would be material to us. In addition, future
events, such as new information, changes in existing environmental laws or their
interpretation, and more vigorous enforcement policies of federal, state or
local regulatory agencies, may have a material adverse effect on our business,
financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
19
ITEM 2. PROPERTIES
We maintain our executive offices in Long Island City, New York. The table below
describes our principal facilities as of December 31, 2008.
OWNED OR
APPROX. EXPIRATION
STATE OR SQUARE DATE
LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE
--------------------- -------- --------------------------------------------------- -------- --------
ENGINE MANAGEMENT
Orlando FL Manufacturing (Ignition) 50,640 2017
Mishawaka IN Manufacturing 153,070 Owned
Edwardsville KS Distribution (Wire) 355,000 Owned
Independence KS Manufacturing 273,390 Owned
Wilson NC Manufacturing (Ignition) 31,500 Owned
Long Island City NY Administration 103,500 2018
Greenville SC Manufacturing (Ignition) 181,525 Owned
Disputanta VA Distribution (Ignition) 411,000 Owned
Hong Kong China Manufacturing (Ignition) 21,350 2011
Reynosa Mexico Manufacturing (Wire) 100,000 2014
Reynosa Mexico Manufacturing (Ignition) 110,000 2009
TEMPERATURE CONTROL
Corona CA Manufacturing and Distribution 78,200 2011
Lewisville TX Administration and Distribution 415,000 2016
Grapevine TX Manufacturing 180,000 Owned
St. Thomas Canada Manufacturing 40,000 Owned
Reynosa Mexico Remanufacturing (Compressors) 80,140 2009
EUROPE
Nottingham England Administration and Distribution (Ignition and Wire) 35,520 2022
Wellingborough England Manufacturing (Wire) 19,380 2016
Bialystok Poland Manufacturing (Ignition) 42,050 2011
OTHER
Mississauga Canada Administration and Distribution (Ignition, Wire,
Temperature Control) 128,400 2016
Irving TX Training Center 13,400 2009
Reynosa Mexico Vacant 62,500 2009
AVAILABLE FOR SALE
Reno NV Vacant 67,000 Owned
Nottingham England Vacant 29,000 Owned
Nottingham England Vacant 46,780 Owned
The real property that we own in Indiana, Kansas, Nevada, North Carolina, South
Carolina, Virginia and Texas and in St. Thomas, Canada is encumbered by a
mortgage or deed of trust, as applicable, in favor of General Electric Capital
Corporation or its affiliated company, as agent for our revolving credit
facility. In addition, the real property we own in England is encumbered by a
lien in favor of the Royal Bank of Scotland.
20
ITEM 3. LEGAL PROCEEDINGS
In 1986, we acquired a brake business, which we subsequently sold in March 1998
and which is accounted for as a discontinued operation in the accompanying
consolidated financial statements. When we originally acquired this brake
business, we assumed future liabilities relating to any alleged exposure to
asbestos-containing products manufactured by the seller of the acquired brake
business. In accordance with the related purchase agreement, we agreed to assume
the liabilities for all new claims filed on or after September 1, 2001. Our
ultimate exposure will depend upon the number of claims filed against us on or
after September 1, 2001 and the amounts paid for indemnity and defense thereof.
At December 31, 2008, approximately 3,650 cases were outstanding for which we
were responsible for any related liabilities. We expect the outstanding cases to
increase gradually due to recent legislation in certain states mandating minimum
medical criteria before a case can be heard. Since inception in September 2001
through December 31, 2008, the amounts paid for settled claims are approximately
$7.1 million. In September 2007, we entered into an agreement with an insurance
carrier to provide us with limited insurance coverage for the defense and
indemnity costs associated with certain asbestos-related claims. We have
submitted various asbestos-related claims to the insurance carrier for coverage
under this agreement and received approximately $1.3 million for such claims in
November 2008. We intend to submit additional asbestos-related claims to the
insurance carrier for coverage. See Note 18 of the notes to consolidated
financial statements for further discussion.
In November 2004, the Company was served with a summons and complaint in the
U.S. District Court for the Southern District of New York by The Coalition for a
Level Playing Field, which is an organization comprised of a large number of
auto parts retailers. The complaint alleges antitrust violations by the Company
and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. In August 2005, we filed a
motion to dismiss the complaint, following which the plaintiff filed an amended
complaint dropping, among other things, all claims under the Sherman Act. The
remaining claims allege violations of the Robinson-Patman Act. Motions to
dismiss those claims were filed by us in February 2006. 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. Although we cannot predict the ultimate outcome of this case or
estimate the range of any potential loss that may be incurred in the litigation,
we believe that the lawsuit is without merit, deny all of the plaintiff's
allegations of wrongdoing and believe we have meritorious defenses to the
plaintiff's claims. We intend to defend vigorously this lawsuit.
We are involved in various other litigation and product liability matters
arising in the ordinary course of business. Although the final outcome of any
asbestos-related matters or any other litigation or product liability matter
cannot be determined, based on our understanding and evaluation of the relevant
facts and circumstances, it is our opinion that the final outcome of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades publicly on the New York Stock Exchange under the
trading symbol "SMP." The following table shows the high and low sales prices
per share of our common stock as reported by the New York Stock Exchange and the
dividends declared per share for the periods indicated:
HIGH LOW DIVIDEND
---- --- --------
FISCAL YEAR ENDED DECEMBER 31, 2008
First Quarter..................................... $ 8.88 $ 5.76 $0.09
Second Quarter.................................... 9.60 5.95 0.09
Third Quarter..................................... 10.02 6.20 0.09
Fourth Quarter.................................... 6.45 2.17 0.09
FISCAL YEAR ENDED DECEMBER 31, 2007
First Quarter..................................... $18.43 $14.48 $0.09
Second Quarter.................................... 19.45 13.89 0.09
Third Quarter..................................... 16.70 7.37 0.09
Fourth Quarter.................................... 10.25 7.35 0.09
The last reported sale price of our common stock on the NYSE on February 28,
2009 was $2.09 per share. As of February 28, 2009, there were 586 holders of
record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our
board of directors and depend on our profitability, financial condition, capital
needs, future prospects, and other factors deemed relevant by our board. In
January 2009, our board voted to suspend our quarterly dividend. Our revolving
credit facility permits dividends and distributions by us provided specific
conditions are met. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for a
further discussion of our revolving credit facility.
There have been no unregistered offerings of our common stock during the fourth
quarter of 2008 nor any repurchases of our common stock during the fourth
quarter of 2008. For a discussion of our stock repurchases in 2007, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
22
The following graph compares the five year cumulative total return on the
Company's Common Stock to the total returns on the Standard & Poor's 500 Stock
Index and the S&P 1500 Auto Parts & Equipment Index, which is a combination of
automotive parts and equipment companies within the S&P 400, the S&P 500 and the
S&P 600. The graph shows the change in value of a $100 investment in the
Company's Common Stock and each of the above indices on December 31, 2003 and
the reinvestment of all dividends. The comparisons in this table are required by
the Securities and Exchange Commission and are not intended to forecast or be
indicative of possible future performance of the Company's Common Stock or the
referenced indices.
[GRAPHIC OMITTED]
S&P 1500 Auto Parts
& Equipment
SMP S&P 500 Index
---- ------- -------------------
2003............................ $100 $100 $100
2004............................ 133 110 101
2005............................ 81 116 81
2006............................ 135 135 85
2007............................ 76 142 103
2008............................ 35 90 48
* SOURCE: STANDARD & POOR'S
23
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the five
years ended December 31, 2008. This selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the notes
thereto included elsewhere in this Form 10-K.
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales ........................... $775,241 $790,185 $812,024 $830,413 $824,283
Gross profit ........................ 184,156 202,275 205,221 185,980 194,993
Goodwill and intangible asset
impairment charges (1) (2) ........ (39,387) -- -- -- (6,429)
Operating income (loss) ............. (38,288) 23,414 36,965 15,492 (327)
Earnings (loss) from continuing
operations ........................ (21,098) 5,431 9,163 (1,770) (8,907)
Earnings (loss) from discontinued
operation, net of tax ............. (1,796) (3,156) 248 (1,775) (3,909)
Cumulative effect of accounting
change, net of tax (3) ............ -- -- -- -- (1,564)
Net earnings (loss) (4) ............. (22,894) 2,275 9,411 (3,545) (14,380)
PER SHARE DATA:
Earnings (loss) from continuing
operations:
Basic ........................... $ (1.14) $ 0.29 $ 0.50 $ (0.09) $ (0.46)
Diluted ......................... (1.14) 0.29 0.50 (0.09) (0.46)
Earnings (loss) per common share:
Basic ........................... (1.24) 0.12 0.51 (0.18) (0.74)
Diluted ......................... (1.24) 0.12 0.51 (0.18) (0.74)
Cash dividends per common share ..... 0.36 0.36 0.36 0.36 0.36
OTHER DATA:
Depreciation and amortization ....... $ 14,700 $ 15,181 $ 15,486 $ 17,356 $ 19,013
Capital expenditures ................ 10,500 13,995 10,080 9,957 9,774
Dividends ........................... 6,653 6,683 6,579 7,024 6,955
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ........... $ 6,608 $ 13,261 $ 22,348 $ 14,046 $ 14,934
Working capital ..................... 104,599 183,074 183,313 169,768 194,760
Total assets ........................ 575,027 678,092 640,092 653,044 656,569
Total debt .......................... 194,157 255,311 238,320 248,327 224,186
Long-term debt (excluding current
portion) .......................... 273 90,534 97,979 98,549 114,236
Stockholders' equity ................ 163,545 188,364 190,699 185,707 207,312
(1) In accordance with the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), goodwill is tested for impairment at
the reporting unit level at least annually, and whenever events or changes
in circumstances indicate that goodwill might be impaired. Our annual
impairment test of goodwill as of December 31, 2008 and December 31, 2004,
indicated that the carrying amounts of certain of our reporting units
exceeded the corresponding fair values. As a result, we recorded a
non-cash goodwill impairment charge to operations of $38.5 million during
the fourth quarter of 2008 and $6.4 million during the fourth quarter of
2004. The 2008 impairment charge related to the Engine Management Segment
for goodwill acquired with our Dana acquisition. The 2004 impairment
charge related to our European Segment and Temperature Control Segment for
which we recorded a charge of $1.6 million and $4.8 million, respectively.
24
(2) During 2008, we implemented a plan to transition products sold under the
Neihoff name to our BWD name and discontinue the Neihoff brand name. As
such, we recognized an impairment charge for the total Neihoff trademark
value of $0.9 million.
(3) New customer acquisition costs refer to arrangements pursuant to which we
incur change-over-costs to induce a new or existing customer to switch
from a competitor's brand. In addition, change-over-costs include the
costs related to removing the new customer's inventory and replacing it
with Standard Motor Products inventory commonly referred to as a
stocklift. New customer acquisition costs were initially recorded as a
prepaid asset and the related expense was recognized ratably over a
12-month period beginning in the month following the stocklift as an
offset to sales. In the fourth quarter of 2004, we determined that it was
a preferable accounting method to reflect the customer acquisition costs
as a reduction to revenue when incurred. We recorded a cumulative effect
of a change in accounting for new customer acquisition costs totaling $1.6
million, net of tax effects, and recorded the accounting change as if it
had taken effect on October 1, 2004.
(4) We recorded an after tax gain (charge) of $(1.8) million, $(3.2) million,
$0.2 million, $(1.8) million and $(3.9) million as earnings (loss) from
discontinued operation to account for legal expenses and potential costs
associated with our asbestos-related liability for the years ended
December 31, 2008, 2007, 2006, 2005 and 2004, respectively. Such costs
were also separately disclosed in the Operating Activity section of the
Consolidated Statements of Cash Flows for those same years.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto. This discussion summarizes the
significant factors affecting our results of operations and the financial
condition of our business during each of the fiscal years in the three year
period ended December 31, 2008.
OVERVIEW
We are a leading independent manufacturer, distributor and marketer of
replacement parts for motor vehicles in the automotive aftermarket industry. We
are organized into two major operating segments, each of which focuses on a
specific segment of replacement parts. Our Engine Management Segment
manufactures ignition and emission parts, ignition wires, battery cables and
fuel system parts. Our Temperature Control Segment manufactures and
remanufactures air conditioning compressors, and other air conditioning and
heating parts. We sell our products primarily in the United States, Canada and
Latin America. We also sell our products in Europe through our European Segment.
We place significant emphasis on improving our financial performance by
achieving operating efficiencies and improving asset utilization, while
maintaining product quality and high customer order fill rates. We intend to
continue to improve our operating efficiency and cost position by focusing on
company-wide overhead and operating expense cost reduction programs, such as
closing excess facilities and consolidating redundant functions.
For additional information about our business, strategy and competitive
environment, see Item 1, "Business."
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.
26
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.
COMPARISON OF FISCAL YEARS 2008 AND 2007
SALES. Consolidated net sales for 2008 were $775.2 million, a decrease of $15
million or 1.9%, compared to $790.2 million in 2007, driven by a $13.4 million
decrease in our Temperature Control Segment due to price reductions initiated in
2008 to compete against low cost Chinese imports and a decrease in our
traditional market sales. This decline was offset by increased sales in our
Engine Management and European Segments of $0.9 million and $2 million,
respectively. The increase in consolidated net sales of Engine Management was
mainly due to continued growth in our OES customer sales combined with a 6%
year-over-year reduction in sales deductions such as customer returns and
allowances. These improvements were offset by a reduction in sales to our
traditional market as our customers reduced their inventory due to the economic
environment. The increase in net sales in our European Segment resulted from our
wire and cable business acquisition in December 2007.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
decreased by 1.8 percentage points to 23.8% in 2008 from 25.6% in 2007. The
lower gross margin resulted from decreases in Engine Management margins of 2.3
percentage points, Temperature Control margins of 2.5 percentage points offset,
in part, by a 0.6 percentage point increase in margin in our European Segment.
The decrease in the Engine Management margin was primarily due to unabsorbed
fixed costs in our planned closure of the Puerto Rico and Long Island City, New
York manufacturing plants, start up and training costs at our new Mexico plant,
and an increase in sales from our OES customers with lower margins. Temperature
Control's gross margin decrease resulted primarily from price reductions
initiated in 2008 and changes in product mix where sales of lower margin
products have increased. Europe's increase in gross margin was due to higher
margin sales from the wire and cable business acquisition partially offset by
unfavorable exchange rates on increased raw material procurements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses decreased by $1.7 million to $166.2 million or
21.4% of consolidated net sales in 2008, as compared to $167.9 million or 21.2%
of consolidated net sales in 2007. The decrease in SG&A expenses is due
primarily to a $3.7 million benefit recognized in 2008 from the post-retirement
benefit plan amendment, which benefit commenced in June 2008, and other cost
reduction efforts offset by discount fees of $1.2 million related to our
customer accounts receivable factoring program and an increase in our allowance
for doubtful accounts.
GOODWILL AND OTHER INDEFINITE LIFE ASSETS. We completed our annual impairment
test of goodwill and other indefinite life assets as of December 31, 2008.
Global economic and financial market conditions during the fourth quarter of
2008, including severe disruptions in credit markets and the continuing economic
recession, have caused us to reduce our business outlook and revenue forecasts,
thereby negatively impacting our estimates of fair value. As a result of these
factors, the carrying amount of our Engine Management Segment goodwill exceeded
its corresponding fair value, resulting in a non-cash goodwill impairment charge
to operations of $38.5 million during the fourth quarter of 2008. In addition,
during 2008 we implemented a plan to transition products sold under the Neihoff
name to our BWD name and discontinue the Neihoff brand name. As such, we
recognized a non-cash impairment charge for the Neihoff trademark value of $0.9
million. There were no such charges in 2007.
27
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring and integration expenses
increased to $16.9 million in 2008 compared to $10.9 million in 2007. During
2008, we incurred $12.6 million related to workforce reductions and $4.3 million
related to other exit costs for lease and contract termination costs as well as
upkeep costs associated with vacated facilities. The 2008 expenses are primarily
for charges incurred in connection with our company wide voluntary separation
package, the shutdown of our Long Island City, New York manufacturing
operations, the closure of our Puerto Rico manufacturing operations, the
integration of operations to our facilities in Mexico and for severance in
connection with the consolidation of our Reno distribution operations and
shutdown of our Edwardsville, Kansas manufacturing operations.
The 2007 expense related to charges made for the closure of our Puerto Rico and
Fort Worth, Texas production operations, the integration of operations to our
facilities in Mexico, and severance and related costs in connection with the
shutdown of our Long Island City manufacturing operations including a $1.8
million increase in our environmental reserve and an estimated $5.6 million
withdrawal liability as a result of our agreement with the union representing
the hourly employees at our Long Island City manufacturing facility. As part of
the agreement, we agreed to the payment of certain severance payments upon
termination of employment and to the withdrawal from the union's multi-employer
pension plan. The present value of the liability was estimated at $3.3 million
as of December 31, 2007 and was recorded as part of restructuring and
integration expenses.
OPERATING INCOME (LOSS). Operating loss was $38.3 million in 2008, compared to
operating income of $23.4 million in 2007. The decrease of $61.7 million was
primarily due to a decline in consolidated net sales, lower gross margins as a
percentage of sales driven by higher cost of goods sold due to unabsorbed fixed
costs during our planned transition to new manufacturing facilities, increased
restructuring and integration expenses, non-cash impairment charges of $38.5
million and $0.9 million for goodwill and as a result of our plan to discontinue
an acquired trademark, and receivable draft expenses incurred of $1.2 million in
connection with our factoring program that commenced in April 2008. These
combined factors offset the benefit received from the post-retirement plan
amendment of $3.7 million in 2008.
OTHER INCOME (EXPENSE), NET. Other income, net was $22.7 million in 2008, which
was $18.8 million higher than other income, net of $3.9 million in 2007. During
2008, we completed the sale of our Long Island City, New York property for a
sale price of $40.6 million resulting in a recognized gain in 2008 of $21.8
million, offset partially by a $1.4 million charge related to the defeasance of
our mortgage on the property. In addition, other income, net during 2008
included a $3.8 million gain on the repurchase of $45.1 million principal amount
of our convertible debentures. Other income, net in 2007 included a $0.8 million
gain on the sale of our Fort Worth, Texas manufacturing facility, a $1.4 million
gain in foreign exchange, and $0.7 million in dividend and interest income.
INTEREST EXPENSE. Interest expense of $13.6 million in 2008 was lower than
interest expense of $19.1 million in 2007 mainly due to lower borrowing costs as
a result of the interest rate benefit on our restated credit agreement and
accounts receivable factoring programs initiated with some of our larger
customers to accelerate collection of accounts receivable balances. Discount
fees associated with the program of $1.2 million were recorded in SG&A.
INCOME TAX PROVISION. The income tax benefit was $8.1 million for 2008 compared
to an income tax provision of $2.8 million for 2007. The decrease was due to
lower earnings and a lower effective tax rate, which is 27.8% in 2008 compared
to 34% in 2007. The 2008 rate was lower primarily due to the tax impact of the
non-deductibility of a portion of the $5 million distribution in the unfunded
supplemental executive retirement plan and a portion of the goodwill impairment
charge.. The 2007 rate benefited from the release of the valuation allowance
related to U.S. capital losses in consideration of the expected capital gain in
connection with our sale of our Long Island City, New York facility. We have
concluded that our current level of valuation allowance of $27.1 million
continues to be appropriate, as discussed in Note 15 of the notes to our
consolidated financial statements.
28
EARNINGS (LOSS) FROM DISCONTINUED OPERATION. Earnings (loss) from discontinued
operation, net of tax, reflects legal expenses associated with our asbestos
related liability and adjustments thereto based on the information contained in
the August 2008 actuarial study and all other available information considered
by us. We recorded $1.8 million as a loss and $3.2 million as a loss, both net
of tax, from discontinued operation for 2008 and 2007, respectively. The loss
for 2008 reflects a $2.1 million pre-tax adjustment to increase our indemnity
liability in line with the August 2008 actuarial study, as well as legal fees
incurred in litigation offset by a $1.3 million payment received from our
insurance carrier in November 2008. As discussed more fully in Note 18 of the
notes to our consolidated financial statements, we are responsible for certain
future liabilities relating to alleged exposure to asbestos containing products.
COMPARISON OF FISCAL YEARS 2007 AND 2006
SALES. Consolidated net sales for 2007 were $790.2 million, a decrease of $21.8
million or 2.7%, compared to $812 million in 2006, driven by decreases in our
Engine Management, Temperature Control and European Segments of $16 million,
$3.5 million and $4.8 million, respectively. The decrease in Engine Management
sales was mainly due to higher sales deductions consisting primarily of customer
warranty and overstock returns and other rebates and allowances. The net sales
decrease in our Temperature Control Segment was due primarily to lower pricing
and volume erosion caused by low cost foreign imports, partially offset by lower
customer warranty returns. Europe net sales in 2006 included $13.4 million
related to the European Temperature Control business that was divested in
December 2006. Excluding this divested business, Europe sales increased $8.6
million.
GROSS MARGINS. Gross margins, as a percentage of consolidated net sales,
increased by 0.3 percentage points to 25.6% in 2007 from 25.3% in 2006 mainly
due to margin improvements in our Engine Management and European Segments of 1
percentage point and 0.5 percentage points, respectively, partially offset by a
2 percentage point decrease in our Temperature Control margin. The margins in
Engine Management and Europe benefited mainly from continued improvements in
procurement and lower manufacturing costs. Partially offsetting these savings in
Engine Management were the impact of $15.9 million of higher sales deductions
for the year that negatively impacted gross margin as a percentage of sales. The
European Segment also benefited from the divestiture of its Temperature Control
business which carried lower margins. The decrease in Temperature Control margin
was primarily affected by selective price decreases to match offshore price
competition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased by $1.5 million to $167.9 million or
21.3% of consolidated net sales in 2007, as compared to $166.4 million or 20.5%
of consolidated net sales in 2006. The increase was due to a higher bad debt
provision on certain accounts receivable and slightly higher general and
administrative expenses, partially offset by a reduction in distribution
expenses.
RESTRUCTURING AND INTEGRATION EXPENSES. Restructuring expenses, which include
restructuring and integration expenses, increased to $10.9 million in 2007,
compared to $1.9 million in 2006. The 2007 expense related to charges made for
the closure of our Puerto Rico production operations, the integration of
operations in Mexico, the closure of our Fort Worth, Texas production facility
and severance and related costs in connection with the shutdown of our Long
Island City manufacturing operations. In December 2007, we reached an agreement
with the union representing the hourly employees at our Long Island City
manufacturing facility relating to the shutdown of our manufacturing operations.
As part of the agreement, we agreed to the payment of certain severance payments
upon termination of employment and to the withdrawal from the union's
multi-employer pension plan. The estimated withdrawal liability related to the
multi-employer plan is calculated at $5.6 million paid quarterly over 20 years.
The present value of the liability is estimated at $3.3 million and was recorded
as part of restructuring and integration expenses in 2007. In addition, a $1.8
million increase in our environmental reserve was recorded in 2007 for
remediation related to the planned sale of our Long Island City building.
29
Restructuring and integration expense in 2006 related mostly to severance costs
related to the move of our European and Puerto Rican production operations and
the divestiture of a production unit of our Temperature Control Segment.
OPERATING INCOME. Operating income was $23.4 million in 2007, compared to $37
million in 2006. The decrease of $13.6 million was primarily due to lower
consolidated net sales, as well as higher restructuring and integration
expenses.
OTHER INCOME (EXPENSE), NET. Other income, net was $3.9 million in 2007, which
was $4.3 million higher than other expense, net of $0.4 million in 2006. Other
income, net in 2007 includes a $0.8 million gain on the sale of our Fort Worth,
Texas manufacturing facility, a $1.4 million gain in foreign exchange, and $0.7
million in dividend and interest income. Other income (expense), net in 2006
included a $3.2 million loss incurred on the sale of a majority portion of our
European Temperature Control business. Offsetting the 2006 loss incurred on the
sale of a majority portion of our European Temperature Control business are a
$0.7 million gain in foreign exchange, $0.9 million in joint venture equity
income and $0.5 million in dividend and interest income.
INTEREST EXPENSE. Interest expense of $19.1 million in 2007 was $1.8 million
lower than interest expense of $20.9 million in 2006. The lower interest expense
in 2007 was due primarily to lower borrowing costs and lower average borrowings
during the year.
INCOME TAX PROVISION. The income tax provision was $2.8 million for 2007
compared to $6.5 million in 2006. The $3.7 million decrease was primarily due to
a lower effective rate in 2007, which was 34% compared to 41.5% in 2006. The
2007 rate was lower due to the release of the valuation allowance related to
U.S. capital losses in consideration of the expected capital gain in connection
with our sale of our Long Island City, New York facility. The 2006 rate was
higher due to the adverse impact of discrete items attributable to changes in
state tax rates, while the 2007 estimated tax rate benefited from pre-tax income
in Europe where previously unrecognized losses carried forward offset taxes
otherwise payable. Net deferred tax assets as of December 31, 2007 were $42.8
million and are net of a valuation allowance of $26.8 million and deferred tax
liabilities of $14.9 million.
EARNINGS (LOSS) FROM DISCONTINUED OPERATION. Earnings (loss) from discontinued
operation, net of tax, reflects legal expenses associated with our asbestos
related liability and adjustments thereto based on the information contained in
the August 2007 actuarial study and all other available information considered
by us. We recorded $3.2 million as a loss and $0.2 million as income, both net
of tax, from discontinued operation for 2007 and 2006, respectively. The loss
for 2007 reflects a $2.8 million pre-tax adjustment to increase our indemnity
liability in line with the August 2007 actuarial study, as well as legal fees
incurred in litigation, whereas the income for 2006 reflects a $3.4 million
pre-tax adjustment to reduce our indemnity liability in line with the August
2006 actuarial study, partially offset by legal fees incurred in litigation in
2006.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During 2008, cash provided by operations amounted to $44.9
million, compared to cash used by operations of $7.8 million million in 2007.
The $52.7 million increase in operating cash flow is primarily due the result of
improved working capital management when compared to last year. During the
second quarter of 2008, we began a program to sell undivided interests in
certain of our receivables which improved our year-over-year comparison. Further
working capital management improvements were realized as inventory was reduced
from levels built up in 2007 in preparation for our production facility moves
and accounts payable balances increased.
During 2007, cash used by operations amounts to $7.8 million, compared to cash
provided by operations of $33.7 million in 2006. The year over year decline of
$41.5 million is primarily due to an increase in inventories in order to bridge
our requirements while we proceeded with facility integration efforts, an
increase in accounts receivable and lower net earnings.
30
INVESTING ACTIVITIES. Cash provided by investing activities was $22.1 million in
2008, compared to cash used in investing activities of $13.4 million in 2007.
Cash provided by investing activities in 2008 includes $37.3 million in net cash
proceeds from the sale of the Long Island City, New York property and $4.9
million paid relating to the purchase of certain assets from a third party.
Capital expenditures in 2008 were $10.5 million compared to $14 million in the
comparable period last year.
For 2007, the cash used in investing of $13.4 million was a $7.4 million
increase to the $6 million used in 2006. The increase was primarily due to an
increase in capital expenditures of $3.9 million in 2007 and the acquisition in
December 2007 of a European wire and cable business for $3.8 million, offset in
part by proceeds of $4.2 million from the sale of our Fort Worth, Texas
manufacturing facility. During 2006, we received $3.1 million in proceeds from
the sale of a majority portion of our European Temperature Control business.
FINANCING ACTIVITIES. Cash used in financing activities was $66.2 million in
2008, compared to cash provided by financing activities of $9.3 million in 2007.
During 2008, we reduced our total borrowings using the net cash proceeds
received from the sale of the Long Island City, New York property and proceeds
received from our improved working capital management. During 2008, we defeased
the remaining $7.8 million mortgage loan on our Long Island City, New York
property and repurchased $45.1 million principal amount of our 6.75% debentures.
During 2007, proceeds from the exercise of employee stock options was $4.2
million and we purchased $5 million of our common stock.
Cash provided by financing activities was $9.3 million in 2007, compared to cash
used in financing activities of $20.2 million in 2006. The change was primarily
due to higher borrowings, an increase in cash overdrafts, and proceeds received
from the exercise of employee stock options, partially offset by a $5 million
purchase of treasury stock, essentially completing our share buyback program.
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, which prior
credit facility provided for a $305 million credit facility and which was to
expire in 2008. The restated credit agreement provides for a line of credit of
up to $275 million (inclusive of the Canadian term loan described below) and
expires in 2012. The restated credit agreement also provides a $50 million
accordion feature, which would allow us to expand the facility. Direct
borrowings under the restated credit agreement bear interest at the LIBOR rate
plus the applicable margin (as defined), or floating at the index rate plus the
applicable margin, at our option. The interest rate may vary depending upon our
borrowing availability. The restated credit agreement is guaranteed by certain
of our subsidiaries and secured by certain of our assets.
In December 2008, we amended our restated credit agreement (1) to establish a
limit of $50 million on the amount of subordinated convertible debentures that
we can repurchase in the open market prior to the closing of any additional debt
financing transaction, (2) to establish a minimum borrowing availability reserve
of $15 million, except in certain circumstances; provided that the minimum
borrowing availability reserve shall be reduced to zero on the effective date of
the redemption or repayment of our convertible subordinated debentures, (3) to
establish a $25 million minimum borrowing availability requirement effective on
the date of redemption or repayment of our convertible subordinated debentures,
which amount may be reduced by up to $10 million in certain circumstances, and
(4) to increase the margin added to the prime rate to 1.50% and the margin added
to the LIBOR rate to 2.75%; and on the earlier of (a) March 31, 2009 or (b) the
closing of any refinancing of our convertible subordinated debentures, to
further increase the margin added to the prime rate to between 1.75% - 2.25% and
the margin added to the LIBOR rate to between 3% - 3.5%, in each case depending
upon the level of excess availability as defined in the credit agreement.
31
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 $54.4 million available for us to borrow pursuant to the formula at
December 31, 2008, of which $14.9 million is reserved for repayment, repurchase
or redemption, as the case may be, of the aggregate outstanding amount of our
convertible debentures. At December 31, 2008 and December 31, 2007, the interest
rate on our restated credit agreement was 4.6% and 6.4%, respectively.
Outstanding borrowings under the restated credit agreement (inclusive of the
Canadian term loan described below), which are classified as current
liabilities, were $143.2 million and $148.7 million at December 31, 2008 and
December 31, 2007, 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 less than $20
million for more than two days in a consecutive 30-day period 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 December 31, 2008, 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. Pursuant to our December 2008 amendment to the restated credit
agreement, beginning January 15, 2009 and on a monthly basis thereafter, our
borrowing availability will be reduced by $5 million for the repayment,
repurchase or redemption of the aggregate outstanding amount of our convertible
debentures. Our restated credit agreement also permits dividends and
distributions by us provided specific conditions are met.
In March 2007, we amended our credit agreement with GE Canada Finance Holding
Company, for itself and as agent for the lenders. This amendment modifies our
existing $7 million credit agreement which was to expire in 2008. The amended
credit agreement provides for a line of credit of up to $12 million, of which $7
million is currently outstanding and which amount is part of the $275 million
available for borrowing under our restated credit agreement with General
Electric Capital Corporation (described above). The amended credit agreement is
guaranteed and secured by us and certain of our wholly-owned subsidiaries and
expires in 2012. Direct borrowings under the amended credit agreement bear
interest at the same rate as our restated credit agreement with General Electric
Capital Corporation (described above).
In December 2008, we amended our credit agreement with GE Canada Finance Holding
Company, for itself and as agent for the lenders. The amendment provides for,
among other things (1) the allowance of cash proceeds from the divestiture of
the Blue Streak Electronics joint venture to be applied in accordance with the
requirements of our U.S. restated credit agreement, and (2) an increase in the
interest rates applicable to our outstanding borrowings under the Canadian
credit agreement to be in line with the increases set forth in our U.S. restated
credit agreement (described above).
Our European subsidiary has revolving credit facilities which, at December 31,
2008, provide for aggregate lines of credit up to $8.4 million. The amount of
short-term bank borrowings outstanding under these facilities was $5.8 million
on December 31, 2008 and $8 million on December 31, 2007. The weighted average
interest rate on these borrowings on December 31, 2008 and December 31, 2007 was
6.2% and 6.7%, respectively.
In July 1999, we issued convertible debentures, payable semi-annually, in the
aggregate principal amount of $90 million. The debentures carry an interest rate
of 6.75%, payable semi-annually. The debentures are convertible into 2,796,120
shares of our common stock, and mature on July 15, 2009. We may, from time to
time, repurchase the debentures in the open market, or through privately
negotiated transactions, on terms that we believe to be favorable with any gains
or losses as a result of the difference between the net carrying amount and the
reacquisition price recognized in the period of repurchase. We intend to fund
any such purchases from available cash. In 2008, we repurchased $45.1 million
principal amount of the debentures resulting in a gain on the repurchase of $3.8
million. As of December 31, 2008, the remaining convertible debentures are
convertible into 1,393,866 shares of our common stock at the option of the
holder. Pursuant to our amendment to our revolving credit facility in December
2008, we are limited to $50 million in the aggregate in subordinated debentures
that can be repurchased in the open market.
32
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 $114.1 million of
receivables for the year ended December 31, 2008. Under the terms of the
agreements, we retain no rights or interest, have no obligations with respect to
the sold receivables and do not service the receivables after the sale. As such,
these transactions are being accounted for as a sale in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." A charge in the amount of $1.2 million related
to the sale of receivables is included in selling, general and administrative
expense in our consolidated statement of operations for the year ended December
31, 2008.
In August 2007, our Board of Directors authorized a $3.3 million increase in our
stock repurchase program. The program was in addition to our then existing
program authorizing $1.7 million of stock repurchases. During 2007, we
repurchased 541,750 shares of our common stock, essentially completing the
entire $5 million repurchase program. No shares of our common stock were
repurchased in the comparable 2008 and 2006 periods.
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. In addition, we are currently reducing
spending to improve our cash flow in anticipation of the maturity of our
convertible debentures. Reduction efforts include suspension of our quarterly
dividend, foregoing salary increases and reduced capital expenditures. We
continue to evaluate alternative sources to further improve the liquidity of our
business and to fund the refinance, repurchase or redemption, as the case may
be, of the aggregate outstanding amount of our convertible debentures, which may
include cash, securities or a combination thereof. The timing, terms, size and
pricing of any alternative sources of financing will depend on investor interest
and market conditions, and there can be no assurance that we will be able to
obtain any such financing. In addition, we have a significant amount of
indebtedness which could, among other things, increase our vulnerability to
general adverse economic and industry conditions, make it more difficult to
satisfy our obligations with respect to our convertible debentures, 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 and the redemption of our
convertible debentures 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.
The following table summarizes our contractual commitments as of December 31,
2008 and expiration dates of commitments through 2022:
(IN THOUSANDS) 2009 2010 2011 2012 2013 2014-2022 TOTAL
----------------------------------------------------------------------------------------------------------------------------
Principal payments of
long term debt(1)(2) ................. $ 44,953 $ 89 $ 88 $ 88 $ 8 $ -- $ 45,226
Operating leases(1) .................... 9,376 7,919 6,210 5,445 5,552 16,624 51,126
Post retirement benefits ............... 1,099 1,132 1,158 1,212 1,258 13,227 19,086
Severance payments related
to restructuring and integration ..... 6,548 2,118 897 747 615 2,196 13,121
-------- -------- -------- -------- -------- -------- --------
Total commitments.. .......... $ 61,976 $ 11,258 $ 8,353 $ 7,492 $ 7,433 $ 32,047 $128,559
======== ======== ======== ======== ======== ======== ========
33
(1) In March 2008, in connection with the closing of the sale of our Long
Island City, New York property the remaining balance of the $7.8 million
mortgage loan was defeased and we entered into a lease agreement with the
purchaser whereby we would lease space at the property. The initial term
of the lease is ten years and contains four 5-year renewal options. Refer
to Note 4 in the notes to our consolidated financial statements for
further details.
(2) In July 1999, we issued convertible debentures, payable semi-annually, in
the aggregate principal amount of $90 million that are scheduled to mature
on July 15, 2009. In 2008, we repurchased $45.1 million principal amount
of the debentures resulting in a gain on the repurchase of $3.8 million.
Refer to Note 9 in the notes to our consolidated financial statements for
further details.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 of the notes to our consolidated financial
statements. You should be aware that preparation of our consolidated annual and
quarterly financial statements requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our consolidated financial
statements, and the reported amounts of revenue and expenses during the
reporting periods. We can give no assurance that actual results will not differ
from those estimates.
REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement
parts for motor vehicles from both our Engine Management and Temperature Control
Segments. We recognize revenues when products are shipped and title has been
transferred to a customer, the sales price is fixed and determinable, and
collection is reasonably assured. For some of our sales of remanufactured
products, we also charge our customers a deposit for the return of a used core
component which we can use in our future remanufacturing activities. Such
deposit is not recognized as revenue but rather carried as a core liability. The
liability is extinguished when a core is actually returned to us. We estimate
and record provisions for cash discounts, quantity rebates, sales returns and
warranties in the period the sale is recorded, based upon our prior experience
and current trends. As described below, significant management judgments and
estimates must be made and used in estimating sales returns and allowances
relating to revenue recognized in any accounting period.
INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost
is 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.
34
SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
Management must make estimates of potential future product returns related to
current period product revenue. Management analyzes historical returns, current
economic trends, and changes in customer demand when evaluating the adequacy of
the sales returns and other allowances. Significant management judgments and
estimates must be made and used in connection with establishing the sales
returns and other allowances in any accounting period. At December 31, 2008, the
allowance for sales returns was $19.7 million. Similarly, management must make
estimates of the uncollectability of our accounts receivables. Management
specifically analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. At December 31, 2008, the allowance for
doubtful accounts and for discounts was $10 million.
NEW CUSTOMER ACQUISITION COSTS. New customer acquisition costs refer to
arrangements pursuant to which we incur change-over costs to induce a new
customer to switch from a competitor's brand. In addition, change-over costs
include the costs related to removing the new customer's inventory and replacing
it with Standard Motor Products inventory commonly referred to as a stocklift.
New customer acquisition costs are recorded as a reduction to revenue when
incurred.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax expense together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income, and to the extent we believe that it is more likely than not that the
deferred tax assets will not be recovered, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase or
decrease this allowance in a period, we must include an expense or recovery,
respectively, within the tax provision in the statement of operations.
Significant management judgment is required in determining the adequacy of our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. At December
31, 2008, we had a valuation allowance of $27.1 million, due to uncertainties
related to our ability to utilize some of our deferred tax assets. The
assessment of the adequacy of our valuation allowance is based on our estimates
of taxable income by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable.
In the event that actual results differ from these estimates, or we adjust these
estimates in future periods for current trends or expected changes in our
estimating assumptions, we may need to modify the level of valuation allowance
which could materially impact our business, financial condition and results of
operations.
In accordance with the provisions of SFAS Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No.109" ("FIN
48"), we recognize in our financial statements only those tax positions that
meet the more-likely-than-not-recognition threshold. We establish tax reserves
for uncertain tax positions that do not meet this threshold. Interest and
penalties associated with income tax matters are included in the provision for
income taxes in our consolidated statement of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. At acquisition, we
estimate and record the fair value of purchased intangible assets, which
primarily consists of trademarks and trade names, patents and customer
relationships. The fair values of these intangible assets are estimated based on
management's assessment and independent third-party appraisals. Goodwill is the
excess of the purchase price over the fair value of identifiable net assets
acquired in business combinations. Goodwill and certain other intangible assets
having indefinite lives are not amortized to earnings, but instead are subject
to periodic testing for impairment. Intangible assets determined to have
definite lives are amortized over their remaining useful lives.
35
We assess the impairment of long-lived and identifiable intangibles assets and
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. With respect to goodwill, we test for impairment
of goodwill of a reporting unit on an annual basis or in interim periods if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying amount. Factors we consider important, which
could trigger an impairment review, include the following: (a) significant
underperformance relative to expected historical or projected future operating
results; (b) significant changes in the manner of our use of the acquired assets
or the strategy for our overall business; and (c) significant negative industry
or economic trends. We review the fair values of each of our reporting units
using the discounted cash flows method and market multiples.
To the extent the carrying amount of a reporting unit exceeds the fair value of
the reporting unit; we are required to perform a second step, as this is an
indication that the reporting unit goodwill may be impaired. In this step, we
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB Statement
No. 141, "Business Combinations" ("SFAS 141"). The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, we compare the carrying value of such
assets with finite lives to the estimated undiscounted future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair
value and their carrying value.
There are inherent assumptions and estimates used in developing future cash
flows requiring management's judgment in applying these assumptions and
estimates to the analysis of identifiable intangibles and long-lived asset
impairment including projecting revenues, interest rates, tax rates and the cost
of capital. Many of the factors used in assessing fair value are outside the
control of management and it is reasonably likely that assumptions and estimates
will change in future periods. These changes can result in future impairments.
In the event our planning assumptions were modified resulting in impairment to
our assets, we would be required to include an expense in our statement of
operations, which could materially impact our business, financial condition and
results of operations.
RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS. Each year, we calculate the
costs of providing retiree benefits under the provisions of SFAS 87, "Employers'
Accounting for Pensions" and SFAS 106, "Employers' Accounting for
Post-Retirement Benefits Other than Pensions". The 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. The medical cost trend rate is based on our actual medical claims and
future projections of medical cost trends. During 2008, we announced that, in
lieu of the current U.S. post-retirement medical and dental plans previously
funded on a pay-as-you-go basis, a Health Reimbursement Account ("HRA") will be
established beginning January 1, 2009 for each qualified retiree thereby
eliminating the need for the medical cost trend rate assumption in our actuarial
computation for this plan.
36
SHARE BASED COMPENSATION. FAS 123(R) requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values on the grant date using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense on a straight-line basis over the
requisite service periods in our condensed consolidated statement of operations.
Forfeitures are estimated at the time of grant based on historical trends in
order to estimate the amount of share-based awards that will ultimately vest.
Furthermore, FAS 123(R) requires the monitoring of actual forfeitures and the
subsequent adjustment to forfeiture rates to reflect actual forfeitures.
ENVIRONMENTAL RESERVES. We are subject to various U.S. federal and state and
local environmental laws and regulations and are involved in certain
environmental remediation efforts. We estimate and accrue our liabilities
resulting from such matters based upon a variety of factors including the
assessments of environmental engineers and consultants who provide estimates of
potential liabilities and remediation costs. Such estimates may or may not
include potential recoveries from insurers or other third parties and are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
ASBESTOS RESERVE. We are responsible for certain future liabilities relating to
alleged exposure to asbestos-containing products. In accordance with our
accounting policy, our most recent actuarial study as of August 31, 2008
estimated an undiscounted liability for settlement payments, excluding legal
costs, ranging from $25.3 million to $69.2 million for the period through 2059.
As a result, in 2008 an incremental $2.1 million provision in our discontinued
operation was added to the asbestos accrual increasing the reserve to
approximately $25.3 million as of that date. Based on the information contained
in the actuarial study and all other available information considered by us, we
concluded that no amount within the range of settlement payments was more likely
than any other and, therefore, recorded the low end of the range as the
liability associated with future settlement payments through 2059 in our
consolidated financial statements. In addition, according to the updated study,
legal costs, which are expensed as incurred and reported in earnings (loss) from
discontinued operation, are estimated to range from $19.1 million to $32.1
million during the same period. We 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.
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
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurement. This statement applies under other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. SFAS 157 is effective for the fiscal
year beginning after November 15, 2007, which for us is the year ending December
31, 2008. As of January 1, 2008, we adopted SFAS 157. The adoption of SFAS 157
did not impact our consolidated financial statements in any material respect.
37
In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's effective
date for all non-financial assets and liabilities, except those items recognized
or disclosed at fair value on an annual or more frequently recurring basis,
until years beginning after November 15, 2008. Derivatives measured at fair
value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing the
impact, if any, which the adoption of FSP FAS 157-b will have on our
consolidated financial position, results of operations and cash flows.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). We adopted the applicable
provisions of SFAS 158 on December 31, 2006. The provisions in SFAS 158 that
require companies to measure plan assets and benefit obligations as of the date
of the employer's fiscal year-end are effective for fiscal years ending after
December 15, 2008, which for us is the year ending December 31, 2009. As all of
our plan measurement dates are as of December 31, our fiscal year-end reporting
date, there will be no impact on us as related to the measurement date
provisions of SFAS 158.
FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"), including an amendment
of FASB Statement No. 115. SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value. The Statement's
objective is to improve financial reporting by allowing entities to mitigate
volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge
accounting provisions. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
new Statement establishes presentation and disclosure requirements to help
financial statement users understand the effect of the entity's election on its
earnings, but does not eliminate disclosure requirements of other accounting
standards. SFAS 159 is effective as of the beginning of the first fiscal year
that begins after November 15, 2007, and is effective for us as of January 1,
2008. The adoption of SFAS 159 did not impact our consolidated financial
statements in any material respect.
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141R"). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for the fiscal year beginning after December 15, 2008, which for us is
the fiscal year beginning January 1, 2009. SFAS 141R will have an impact on the
manner in which we account for future acquisitions beginning in the fiscal year
2009.
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, which for us is the fiscal year beginning January 1, 2009. The adoption of
SFAS 160 is not expected to have a material impact on our consolidated financial
position, results of operations and cash flows.
38
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). This Statement requires
enhanced disclosures about an entity's derivative and hedging activities and
thereby improves the transparency of financial reporting. This Statement is
effective for financial statements issued for fiscal years and interim periods
ending after November 15, 2008, which for us is the fiscal year ending December
31, 2008. The adoption of SFAS 161 will have an impact on the manner in which we
would disclose any derivative or hedging activities, if present.
CONVERTIBLE DEBT INSTRUMENTS
In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion" ("FSP
APB 14-1") which requires issuers of convertible debt that may be settled wholly
or partly in cash to account for the debt and equity components separately. This
FSP is effective for fiscal years beginning after December 15, 2008, which for
us is the fiscal year beginning January 1, 2009 and must be applied
retrospectively to all periods presented. We have reviewed the provisions of of
FSP APB 14-1 and have determined that the adoption of FSP APB 14-1 will not
require a change in the manner in which we report our 6.75% convertible
subordinated debentures.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange
and interest rates. These exposures are actively monitored by management. Our
exposure to foreign exchange rate risk is due to certain costs, revenues and
borrowings being denominated in currencies other than one of our subsidiary's
functional currency. Similarly, we are exposed to market risk as the result of
changes in interest rates which may affect the cost of our financing. It is our
policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
EXCHANGE RATE RISK
We have exchange rate exposure primarily with respect to the Canadian dollar,
the British pound, the Euro, the Polish zloty and the Hong Kong dollar. As of
December 31, 2008, our monetary assets and liabilities which are subject to this
exposure are immaterial, therefore, the potential immediate loss to us that
would result from a hypothetical 10% change in foreign currency exchange rates
would not be expected to have a material impact on our earnings or cash flows.
This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange
rates affecting the foreign currencies in which monetary assets and liabilities
are denominated and does not take into account the offsetting effect of such a
change on our foreign-currency denominated revenues.
INTEREST RATE RISK
We manage our exposure to interest rate risk through the proportion of fixed
rate debt and variable rate debt in our debt portfolio. To manage a portion of
our exposure to interest rate changes, we have in the past entered into interest
rate swap agreements.
At December 31, 2008, we had approximately $194.2 million in loans and financing
outstanding, of which approximately $44.9 million bear interest at fixed
interest rates and approximately $149.3 million bear interest at variable rates
of interest. We invest our excess cash in highly liquid short-term investments.
Our percentage of variable rate debt to total debt was 76.9% and 61.7% at
December 31, 2008 and 2007, respectively. Depending upon the level of borrowings
under our revolving credit facility and our excess cash, the effect of a
hypothetical, instantaneous and unfavorable change of 100 basis points in the
interest rate may have an approximate $1.6 million negative impact on our
earnings or cash flows.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
--------
Management's Report on Internal Control over Financial Reporting ....... 42
Report of Independent Registered Public Accounting Firm--Internal
Control Over Financial Reporting .................................... 43
Report of Independent Registered Public Accounting
Firm--Consolidated Financial Statements ............................. 44
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007, and 2006 ................................... 45
Consolidated Balance Sheets as of December 31, 2008 and 2007 ........... 46
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007, and 2006 ................................... 47
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2008, 2007, and 2006 ................... 48
Notes to Consolidated Financial Statements ............................. 49
41
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Stockholders
Standard Motor Products, Inc.:
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of
the Exchange Act). Our internal control system was designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Because of these inherent limitations, internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and presentation, and may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
We assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2008. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on our
assessment using those criteria, we concluded that, as of December 31, 2008, our
internal control over financial reporting is effective.
Our independent registered public accounting firm, Grant Thornton LLP, has
audited our consolidated financial statements for 2008 and has issued an
attestation report concurring with management's assessment of our internal
control over financial reporting. Grant Thornton's report appears on the
following pages of this "Item 8. Financial Statements and Supplementary Data."
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
INTERNAL CONTROL OVER REPORTING
Board of Directors and Stockholders
Standard Motor Products, Inc.
We have audited Standard Motor Products, Inc. and Subsidiaries' (a New York
corporation) internal control over financial reporting as of December 31, 2008,
based on criteria established in INTERNAL CONTROL - INTEGRATED FRAMEWORK issued
by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Standard Motor Products, Inc. and Subsidiaries' management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on
Standard Motor Products, Inc. and Subsidiaries' internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Standard Motor Products, Inc. and Subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in INTERNAL CONTROL -
INTEGRATED FRAMEWORK issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Standard Motor Products, Inc. and Subsidiaries as of December 31, 2008 and 2007,
and the related consolidated statements of operations, changes in comprehensive
income and stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2008, and our report dated March 11, 2009,
expressed an unqualified opinion on those consolidated financial statements and
includes explanatory paragraphs relating to the application of FASB
Interpretation No. 48 effective January 1, 2007, and the application of
Statement of Financial Accounting Standards No. 123 (R) as of January 1, 2006,
and No. 158 as of December 31, 2006.
/s/ GRANT THORNTON LLP
New York, New York
March 11, 2009
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Stockholders
Standard Motor Products, Inc.
We have audited the accompanying consolidated balance sheets of Standard Motor
Products, Inc. and Subsidiaries (the "Company") (a New York corporation) as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, comprehensive income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Standard Motor
Products, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 11 to the consolidated financial statements, the Company
changed its method of accounting for share-based compensation effective January
1, 2006, in connection with the adoption of Statement of Financial Statement
Standards No. 123 (revised 2004), "Share-Based Payment."
As discussed in Notes 12 and 13 to the consolidated financial statements, the
Company changed its method of accounting for defined benefit pension and other
postretirement plans, effective as of December 31, 2006, in connection with the
adoption of Statement of Financial Statement Standards No. 158, "Employers'
Accounting for Defined Pension and Other Post Retirement Plans."
As discussed in Note 15 to the consolidated financial statements, the Company
adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement 109,"
effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Standard Motor
Products, Inc. and Subsidiaries' internal control over financial reporting as of
December 31, 2008, based on criteria established in INTERNAL CONTROL -
INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"), and our report dated March 11, 2009, expressed an
unqualified opinion thereon.
/s/ GRANT THORNTON LLP
New York, New York
March 11, 2009
44
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2008 2007 2006
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
Net sales ........................................................ $ 775,241 $ 790,185 $ 812,024
Cost of sales .................................................... 591,085 587,910 606,803
------------ ------------ ------------
Gross profit .................................................. 184,156 202,275 205,221
Selling, general and administrative expenses ..................... 166,199 167,928 166,400
Goodwill and intangible impairment charge ........................ 39,387 -- --
Restructuring and integration expenses ........................... 16,858 10,933 1,856
------------ ------------ ------------
Operating (loss) income ....................................... (38,288) 23,414 36,965
Other income (expense), net ...................................... 22,670 3,881 (383)
Interest expense ................................................. 13,585 19,066 20,925
------------ ------------ ------------
Earnings (loss) from continuing operations before taxes ....... (29,203) 8,229 15,657
Provision for (benefit from) income taxes ........................ (8,105) 2,798 6,494
------------ ------------ ------------
Earnings (loss) from continuing operations ....................... (21,098) 5,431 9,163
Earnings (loss) from discontinued operation, net of income tax
of $1,198, $2,101 and $809 .................................... (1,796) (3,156) 248
------------ ------------ ------------
Net earnings (loss) ........................................... $ (22,894) $ 2,275 $ 9,411
============ ============ ============
Net earnings (loss) per common share - Basic:
Earnings (loss) from continuing operations .................. $ 1.14) $ 0.29 $ 0.50
Discontinued operation ...................................... (0.10) (0.17) 0.01
------------ ------------ ------------
Net earnings (loss) per common share - Basic ..................... $ (1.24) $ 0.12 $ 0.51
============ ============ ============
Net earnings (loss) per common share - Diluted:
Earnings (loss) from continuing operations .................. $ (1.14) $ 0.29 $ 0.50
Discontinued operation ...................................... (0.10) (0.17) 0.01
------------ ------------ ------------
Net earnings (loss) per common share - Diluted ................... $ (1.24) $ 0.12 $ 0.51
============ ============ ============
Average number of common shares .................................. 18,500,229 18,530,548 18,283,707
============ ============ ============
Average number of common shares and dilutive common shares ....... 18,531,148 18,586,532 18,325,175
============ ============ ============
See accompanying notes to consolidated financial statements.
45
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
2008 2007
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 6,608 $ 13,261
Accounts receivable, less allowances for discounts and doubtful accounts
of $10,021 and $8,964 in 2008 and 2007, respectively ...................... 174,401 204,445
Inventories, net ............................................................ 232,435 252,277
Deferred income taxes ....................................................... 20,038 17,003
Assets held for sale ........................................................ 1,654 5,373
Prepaid expenses and other current assets ................................... 12,459 10,748
-------- --------
Total current assets ............................................... 447,595 503,107
Property, plant and equipment, net ............................................... 66,901 71,775
Goodwill, net .................................................................... 1,100 41,566
Other intangibles, net ........................................................... 15,185 16,325
Other assets ..................................................................... 44,246 45,319
-------- --------
Total assets ....................................................... $575,027 $678,092
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ............................................................... $148,931 $156,756
Current portion of long-term debt ........................................... 44,953 8,021
Accounts payable ............................................................ 68,312 64,384
Sundry payables and accrued expenses ........................................ 25,745 29,242
Accrued customer returns .................................................... 19,664 23,149
Accrued rebates ............................................................. 18,623 21,494
Payroll and commissions ..................................................... 16,768 16,987
-------- --------
Total current liabilities ...................................... 342,996 320,033
Long-term debt ................................................................... 273 90,534
Post-retirement medical benefits and other accrued liabilities ................... 44,455 56,510
Accrued asbestos liabilities ..................................................... 23,758 22,651
-------- --------
Total liabilities .............................................. 411,482 489,728
-------- --------
Commitments and contingencies
Stockholders' equity:
Common Stock - par value $2.00 per share:
Authorized 30,000,000 shares, issued 20,486,036 shares .................. 40,972 40,972
Capital in excess of par value .............................................. 58,841 59,220
Retained earnings ........................................................... 76,600 106,147
Accumulated other comprehensive income ...................................... 7,799 5,546
Treasury stock - at cost (1,923,491 and 2,189,079 shares in 2008
and 2007, respectively) ................................................. (20,667) (23,521)
-------- --------
Total stockholders' equity ..................................... 163,545 188,364
-------- --------
Total liabilities and stockholders' equity ..................... $575,027 $678,092
======== ========
See accompanying notes to consolidated financial statements.
46
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $(22,894) $ 2,275 $ 9,411
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation and amortization 14,700 15,181 15,486
Increase to allowance for doubtful accounts 1,874 709 405
Increase to inventory reserves 3,747 6,623 6,128
Gain on sale of building (21,845) -- --
Loss on defeasance of mortgage loan 1,444 -- --
Gain on repurchase of convertible debentures (3,981) -- --
Loss (gain) on disposal of property, plant and equipment 930 (794) 71
Loss on impairment of assets 39,696 317 --
Loss on divestiture of European Temperature Control division -- -- 3,209
Equity loss (income) from joint ventures 319 (116) (915)
Employee stock ownership plan allocation 1,595 1,867 1,190
Stock-based compensation 880 485 848
Decrease (increase) in deferred income taxes (3,894) (3,200) 328
Increase (decrease) in tax valuation allowance 232 (1,167) 1,875
Loss (earnings) on discontinued operations, net of tax 1,796 3,156 (248)
Change in assets and liabilities:
Decrease (increase) in accounts receivable 28,170 (19,866) (11,758)
Decrease (increase) in inventories 18,240 (24,150) (701)
Increase in prepaid expenses and other current assets (2,223) (2,887) (43)
Increase in accounts payable 5,341 9,861 7,693
Increase (decrease) in sundry payables and accrued expenses (11,121) 5,908 2,173
Net changes in other assets and liabilities (8,073) (1,998) (1,463)
-------- -------- --------
Net cash (used in) provided by operating activities 44,933 (7,796) 33,689
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment 73 148 995
Net cash received from the sale of buildings 37,341 4,173 --
Capital expenditures (10,500) (13,995) (10,080)
Proceeds from the divestiture of European Temperature Control division -- -- 3,119
Acquisitions of businesses and assets (4,850) (3,759) --
-------- -------- --------
Net cash provided by (used in) investing activities 22,064 (13,433) (5,966)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit agreements (8,907) 16,544 (9,082)
Defeasance of mortgage loan (7,755) -- --
Repurchase of convertible debentures (40,867) -- --
Principal payments of long-term debt (574) (629) (570)
Increase (decrease) in overdraft balances (1,413) 449 (4,716)
Proceeds from exercise of employee stock options -- 4,185 738
Excess tax benefits related to the exercise of employee stock options -- 454 --
Purchase of treasury stock -- (4,997) --
Dividends paid (6,653) (6,683) (6,579)
-------- -------- --------
Net cash provided by (used in) financing activities (66,169) 9,323 (20,209)
-------- -------- --------
Effect of exchange rate changes on cash (7,481) 2,819 788
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (6,653) (9,087) 8,302
CASH AND CASH EQUIVALENTS at beginning of year 13,261 22,348 14,046
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year $ 6,608 $ 13,261 $ 22,348
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 14,349 $ 18,228 $ 19,224
======== ======== ========
Income taxes $ 3,880 $ 4,236 $ 2,976
======== ======== ========
Non-cash investing and financing activities:
Reduction of restructuring accrual applied against goodwill $ -- $ -- $ 10,606
======== ======== ========
See accompanying notes to consolidated financial statements.
47
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CAPITAL ACCUMULATED
IN EXCESS OTHER
COMMON OF PAR RETAINED COMPREHENSIVE TREASURY
STOCK VALUE EARNINGS INCOME (LOSS) STOCK TOTAL
----- ----- -------- ------------- ----- -----
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2005 .................... $40,972 $56,966 $109,649 $4,158 $(26,038) $185,707
Comprehensive Loss:
Net income ................................... 9,411 9,411
Foreign currency translation adjustment ...... 1,300 1,300
Unrealized gain on interest rate swap
agreements, net of tax of $(198) ........... (298) (298)
Adoption of FASB Statement No.158, net of
income taxes of $1,906 ..................... (1,414) (1,414)
Additional minimum pension liability
adjustment ................................. (205) (205)
Total comprehensive loss ..................... 8,794
Cash dividends paid ............................. (6,579) (6,579)
Exercise of employee stock options .............. (49) 787 738
Stock-based compensation ........................ 653 195 848
Employee Stock Ownership Plan ................... (141) 1,332 1,191
------- ------- ------- ------ -------- --------
BALANCE AT DECEMBER 31, 2006 .................... 40,972 57,429 112,481 3,541 (23,724) 190,699
Comprehensive Income:
Net income ................................... 2,275 2,275
Foreign currency translation adjustment ...... 3,196 3,196
Minimum pension liability adjustment ......... (1,191) (1,191)
Total comprehensive income ................... 4,280
Impact of adopting provisions of FIN 48 ......... (1,926) (1,926)
Cash dividends paid ............................. (6,683) (6,683)
Purchase of treasury stock ...................... (4,997) (4,997)
Exercise of employee stock options .............. 494 3,691 4,185
Stock-based compensation ........................ 314 171 485
Excess tax benefits related to exercise of
employee stock options ....................... 454 454
Employee Stock Ownership Plan ................... 529 1,338 1,867
------- ------- ------- ------ -------- --------
BALANCE AT DECEMBER 31, 2007 .................... 40,972 59,220 106,147 5,546 (23,521) 188,364
Comprehensive Loss:
Net loss ..................................... (22,894) (22,894)
Foreign currency translation adjustment ...... (8,973) (8,973)
Pension and retiree medical adjustment ....... 11,226 11,226
Total comprehensive loss ..................... (20,641)
Cash dividends paid ............................. (6,653) (6,653)
Stock-based compensation ........................ 169 711 880
Employee Stock Ownership Plan ................... (548) 2,143 1,595
------- ------- ------- ------ -------- --------
BALANCE AT DECEMBER 31, 2008 .................... $40,972 $58,841 $76,600 $7,799 $(20,667) $163,545
======= ======= ======= ====== ======== ========
See accompanying notes to consolidated financial statements
48
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as "we," "us," "our" or the "Company") is
engaged in the manufacture and distribution of replacement parts for motor
vehicles in the automotive aftermarket industry. The consolidated financial
statements include our accounts and all subsidiaries in which we have more than
a 50% equity ownership. Our investments in unconsolidated affiliates are
accounted for on the equity method. All significant inter-company items have
been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have made a
number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Some of the more
significant estimates include allowances for doubtful accounts, realizability of
inventory, goodwill and other intangible assets, depreciation and amortization
of long-lived assets, product liability, pensions and other post-retirement
benefits, asbestos and litigation matters, deferred tax asset valuation
allowance and sales return allowances. Actual results could differ from these
estimates.
RECLASSIFICATION
Certain prior period amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 2008
presentation.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
We do not generally require collateral for our trade accounts receivable.
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. These allowances are established based on a
combination of write-off history, aging analysis, and specific account
evaluations. When a receivable balance is known to be uncollectible, it is
written off against the allowance for doubtful accounts. Cash discounts are
provided based on an overall average experience rate applied to qualifying
accounts receivable balances.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market. Inventories are reduced by an allowance
for excess and obsolete inventories, based on our review of on-hand inventories.
We provided for an inventory reserve of $33.7 million and $36.7 million as of
December 31, 2008 and 2007, respectively.
49
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We use cores (used parts) in our remanufacturing processes for air conditioning
compressors. The production of air conditioning compressors involves the
rebuilding of used cores, which we acquire either in outright purchases from
used parts brokers, or from returns pursuant to an exchange program with
customers. Under such exchange programs, we reduce our inventory, through a
charge to cost of sales, when we sell a finished good compressor, and put back
to inventory the used core exchanged at standard cost through a credit to cost
of sales when it is actually received from the customer.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We recognize derivatives as either an asset or liability measured at its fair
value. For derivatives that have been formally designated as a cash flow hedge
(interest rate swap agreements), the effective portion of changes in the fair
value of the derivatives are recorded in "accumulated other comprehensive income
(loss)." Amounts in "accumulated other comprehensive income (loss)" are
reclassified into earnings in the "interest expense" caption when interest
expense on the underlying borrowings is recognized.
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at historical cost and are depreciated using the
straight-line method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE
------------------
Buildings and improvements......................... 25 to 33-1/2 years
Building refurbishments............................ 10 years
Machinery and equipment............................ 7 to 12 years
Tools, dies and auxiliary equipment................ 3 to 8 years
Furniture and fixtures............................. 3 to 12 years
Leasehold improvements are depreciated over the shorter of the estimated useful
life or the term of the lease. Costs related to maintenance and repairs which do
not prolong the assets useful lives are expensed as incurred. We assess our
property, plant and equipment to be held and used for impairment when indicators
are present that the carrying value may not be recoverable.
GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS
At acquisition, we estimate and record the fair value of purchased intangible
assets, which primarily consists of trademarks and trade names, patents and
customer relationships. The fair values of these intangible assets are estimated
based on management's assessment and independent third-party appraisals.
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations. Goodwill and certain other
intangible assets having indefinite lives are not amortized to earnings, but
instead are subject to periodic testing for impairment. Intangible assets
determined to have definite lives are amortized over their remaining useful
lives.
We assess the impairment of long-lived and identifiable intangibles assets and
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. With respect to goodwill, we test for impairment
of goodwill of a reporting unit on an annual basis or in interim periods if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying amount. Factors we consider important, which
could trigger an impairment review, include the following: (a) significant
underperformance relative to expected historical or projected future operating
results; (b) significant changes in the manner of our use of the acquired assets
or the strategy for our overall business; and (c) significant negative industry
or economic trends. We review the fair values of each of our reporting units
using the discounted cash flows method and market multiples.
50
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
To the extent the carrying amount of a reporting unit exceeds the fair value of
the reporting unit; we are required to perform a second step, as this is an
indication that the reporting unit goodwill may be impaired. In this step, we
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB Statement
No. 141, "Business Combinations" ("SFAS 141"). The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill.
Intangible and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, we compare the carrying value of such
assets with finite lives to the estimated undiscounted future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair
value and their carrying value.
There are inherent assumptions and estimates used in developing future cash
flows requiring management's judgment in applying these assumptions and
estimates to the analysis of identifiable intangibles and long-lived asset
impairment including projecting revenues, interest rates, tax rates and the cost
of capital. Many of the factors used in assessing fair value are outside the
control of management and it is reasonably likely that assumptions and estimates
will change in future periods. These changes can result in future impairments.
In the event our planning assumptions were modified resulting in impairment to
our assets, we would be required to include an expense in our statement of
operations, which could materially impact our business, financial condition and
results of operations.
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 our inventory commonly referred to as
a stocklift. New customer acquisition costs are recorded as a reduction to
revenue when incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year-end exchange
rates, and revenues and expenses are translated at average exchange rates during
the year. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income (loss) and remains there
until the underlying foreign operation is liquidated or substantially disposed
of. Where the U.S. dollar is the functional currency, transaction gains or
losses arising from the remeasurement of financial statements are recorded in
the statement of operations under the caption "other income (expense)."
REVENUE RECOGNITION
We recognize revenues when products are shipped and title has been transferred
to a customer, the sales price is fixed and determinable, and collection is
reasonably assured. For some of our sales of remanufactured products, we also
charge our customers a deposit for the return of a used core component which we
can use in our future remanufacturing activities. Such deposit is not recognized
as revenue but rather carried as a core liability. The liability is extinguished
when a core is actually returned to us. We estimate and record provisions for
cash discounts, quantity rebates, sales returns and warranties in the period the
sale is recorded, based upon our prior experience and current trends.
51
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Selling, general and administration expenses includes shipping costs and
advertising, which are expensed as incurred. Shipping and handling charges, as
well as freight to customers, are included in distribution expenses as part of
selling, general and administration expenses.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred in conjunction with our debt
financing activities and are capitalized in other assets and amortized over the
life of the related financing arrangements through 2012. If the debt is retired
early, the related unamortized deferred financing costs are written off in the
period the debt is retired to other (income) expense. As of December 31, 2008
and 2007, these costs totaled $12.4 million and $10.7 million, respectively, and
total accumulated amortization of these costs was $8.8 million and $8 million,
respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The determination of defined benefit pension and post retirement plan
obligations and their associated expenses requires the use of actuarial
valuations to estimate the benefits the employees earn while working as well as
the present value of those benefits. Inherent in these valuations are financial
assumptions including expected return on plan assets, discount rates at which
liabilities can be settled, rates of increase of health care costs as well as
employee demographic assumptions such as retirement patterns, mortality and
turnover. Management reviews these assumptions annually with its actuarial
advisors. The actuarial assumptions used may differ materially from actual
results due to changing market and economic conditions, higher or lower turnover
rates or longer or shorter life spans of participants. Benefits are determined
primarily based upon employees' length of service.
INCOME TAXES
Income taxes are calculated using the asset and liability method in accordance
with the provisions of FASB Statement No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are determined based on the estimated future
tax effects of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, as measured by the current
enacted tax rates.
We maintain valuation allowances when it is more likely than not that all or a
portion of a deferred asset will not be realized. The valuation allowance is
intended in part to provide for the uncertainty regarding the ultimate
utilization of our U.S. foreign tax credit carryovers, and foreign net operating
loss carry forwards. Changes in valuation allowances caused by changes in
circumstances that result in a change in judgment about the realizability of
deferred tax assets are reflected in our tax provision in income from continuing
operations in the period of change. 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 that
could potentially enhance the likelihood of the realization of a deferred tax
asset. Deferred tax expense (benefit) is the result of changes in the deferred
tax asset and liability.
52
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with the provisions of SFAS Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No.109" ("FIN
48"), we recognize in our financial statements only those tax positions that
meet the more-likely-than-not-recognition threshold. We establish tax reserves
for uncertain tax positions that do not meet this threshold. Interest and
penalties associated with income tax matters are included in the provision for
income taxes in our consolidated statement of operations. Our accrual for
interest and penalties was $0.4 million upon adoption of FIN 48 and at December
31, 2008.
We are subject to taxation in the US and various state, local and foreign
jurisdictions. We remain subject to examination by US Federal, state, and local
tax authorities for tax year 2001 as well as 2003 through 2007. With a few
exceptions, we are no longer subject to US Federal, state, and local
examinations by tax authorities for the tax year 2002 and for tax years prior to
2001. Foreign jurisdictions have statutes of limitations generally ranging from
2 to 5 years. Years still open to examination by foreign tax authorities in
major jurisdictions include the United Kingdom (2007 onward), Canada (2003
onward) and Hong Kong (2003 onward). We do not presently anticipate that our
unrecognized tax benefits will significantly increase or decrease prior to
September 15, 2009, the due date for the U.S. Federal tax return; however,
actual developments in this area could differ from those currently expected.
REPORTING OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes (a) net income, (b) the cumulative effect
of translating balance sheets of foreign subsidiaries to U.S. dollars, (c) the
effect of adjusting interest rate swaps to market, and (d) the recognition of
the unfunded status of pension and post-retirement benefit plans as well as
minimum pension liabilities. The last three are not included in the income
statement and are reflected as adjustments to stockholders' equity.
NET EARNINGS (LOSS) PER COMMON SHARE
We present two calculations of earnings (loss) per common share. "Basic"
earnings (loss) per common share equals net income (loss) divided by weighted
average common shares outstanding during the period. "Diluted" earnings (loss)
per common share equals net income (loss) divided by the sum of weighted average
common shares outstanding during the period plus potentially dilutive common
shares. Potentially dilutive common shares that are anti-dilutive are excluded
from net earnings (loss) per common share. The following is a reconciliation of
the shares used in calculating basic and dilutive net earnings (loss) per common
share.
2008 2007 2006
---- ---- ----
(IN THOUSANDS)
Weighted average common shares outstanding - Basic....... 18,500 18,531 18,284
PLUS INCREMENTAL SHARES FROM ASSUMED CONVERSIONS:
Dilutive effect of restricted stock................. 31 28 41
Dilutive effect of stock options.................... -- 28 --
------ ------ ------
Weighted average common shares outstanding - Diluted..... 18,531 18,587 18,325
====== ====== ======
53
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The average shares listed below were not included in the computation of diluted
earnings (loss) per share because to do so would have been anti-dilutive for the
periods presented or because they were excluded under the treasury method.
2008 2007 2006
---- ---- ----
(IN THOUSANDS)
Stock options and restricted shares................ 640 687 991
Convertible debentures............................. 2,423 2,796 2,796
ENVIRONMENTAL RESERVES
We are subject to various U.S. federal and state and local environmental laws
and regulations and are involved in certain environmental remediation efforts.
We estimate and accrue our liabilities resulting from such matters based upon a
variety of factors including the assessments of environmental engineers and
consultants who provide estimates of potential liabilities and remediation
costs. Such estimates may or may not include potential recoveries from insurers
or other third parties and are not discounted to reflect the time value of money
due to the uncertainty in estimating the timing of the expenditures, which may
extend over several years.
ASBESTOS LITIGATION
In evaluating our potential asbestos-related liability, we use an actuarial
study that is prepared by a leading actuarial firm with expertise in assessing
asbestos-related liabilities. We evaluate the estimate of the range of
undiscounted liability to determine which amount to accrue. If there is no
amount within the range of settlement payments that is more likely than any
other, we record the low end of the range as the liability associated with
future settlement payments. Legal costs are expensed as incurred.
TRADE RECEIVABLES
In compliance with Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, ("SFAS 140") sales of accounts receivable are reflected as a
reduction of accounts receivable in the consolidated balance sheet at the time
of sale and any related expense is included in selling, general and
administrative expenses in our consolidated statements of income.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash investments and accounts receivable.
We place our cash investments with high quality financial institutions and limit
the amount of credit exposure to any one institution. Although we are directly
affected by developments in the vehicle parts industry, management does not
believe significant credit risk exists. With respect to accounts receivable,
such receivables are primarily from warehouse distributors and major retailers
in the automotive aftermarket industry located in the United States. We perform
ongoing credit evaluations of our customers' financial conditions. Our five
largest individual customers, including members of a marketing group, accounted
for 53% of our consolidated net sales in 2008, 50% of consolidated net sales in
2007, and 51% of consolidated net sales in 2006. Three individual customers
accounted for 16%, 15% and 15%, respectively, of consolidated net sales in 2008,
and two individual customers accounted for 17% and 15%, respectively, of
consolidated net sales in 2007, and 18% and 14%, respectively, of consolidated
net sales in 2006. Substantially all of the cash and cash equivalents, including
foreign cash balances, at December 31, 2008 and 2007 were uninsured. Foreign
cash balances at December 31, 2008 and 2007 were $5.5 million and $5.3 million,
respectively.
54
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurement. This statement applies under other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. SFAS 157 is effective for the fiscal
year beginning after November 15, 2007, which for us is the year ending December
31, 2008. As of January 1, 2008, we adopted SFAS 157. The adoption of SFAS 157
did not impact our consolidated financial statements in any material respect.
In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157's effective
date for all non-financial assets and liabilities, except those items recognized
or disclosed at fair value on an annual or more frequently recurring basis,
until years beginning after November 15, 2008. Derivatives measured at fair
value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing the
impact, if any, which the adoption of FSP FAS 157-b will have on our
consolidated financial position, results of operations and cash flows.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). We adopted the applicable
provisions of SFAS 158 on December 31, 2006. The provisions in SFAS 158 that
require companies to measure plan assets and benefit obligations as of the date
of the employer's fiscal year-end are effective for fiscal years ending after
December 15, 2008, which for us is the year ending December 31, 2009. As all of
our plan measurement dates are as of December 31, our fiscal year-end reporting
date, there will be no impact on us as related to the measurement date
provisions of SFAS 158.
FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"), including an amendment
of FASB Statement No. 115. SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value. The Statement's
objective is to improve financial reporting by allowing entities to mitigate
volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge
accounting provisions. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
new Statement establishes presentation and disclosure requirements to help
financial statement users understand the effect of the entity's election on its
earnings, but does not eliminate disclosure requirements of other accounting
standards. SFAS 159 is effective as of the beginning of the first fiscal year
that begins after November 15, 2007, and is effective for us as of January 1,
2008. The adoption of SFAS 159 did not impact our consolidated financial
statements in any material respect.
55
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141R"). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for the fiscal year beginning after December 15, 2008, which for us is
the fiscal year beginning January 1, 2009. SFAS 141R will have an impact on the
manner in which we account for future acquisitions beginning in the fiscal year
2009.
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, which for us is the fiscal year beginning January 1, 2009. The adoption of
SFAS 160 is not expected to have a material impact on our consolidated financial
position, results of operations and cash flows.
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). This Statement requires
enhanced disclosures about an entity's derivative and hedging activities and
thereby improves the transparency of financial reporting. This Statement is
effective for financial statements issued for fiscal years and interim periods
ending after November 15, 2008, which for us is the fiscal year ending December
31, 2008. The adoption of SFAS 161 will have an impact on the manner in which we
would disclose any derivative or hedging activities, if present.
CONVERTIBLE DEBT INSTRUMENTS
In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion" ("FSP
APB 14-1") which requires issuers of convertible debt that may be settled wholly
or partly in cash to account for the debt and equity components separately. This
FSP is effective for fiscal years beginning after December 15, 2008, which for
us is the fiscal year beginning January 1, 2009 and must be applied
retrospectively to all periods presented. We have reviewed the provisions of of
FSP APB 14-1 and have determined that the adoption of FSP APB 14-1 will not
require a change in the manner in which we report our 6.75% convertible
subordinated debentures.
56
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTRUCTURING AND INTEGRATION COSTS
The aggregate restructuring and integration activities for the two years ended
December 31, 2008 consisted of the following (in thousands):
WORKFORCE OTHER EXIT
REDUCTION COSTS TOTAL
--------- ---------- -----
Exit activity liability at December 31, 2006 ... $ 1,219 $ 868 $ 2,087
-------- -------- --------
Amounts provided for during 2007 ............... 5,822 5,111 10,933
Cash payments during 2007 ...................... (1,206) (2,858) (4,064)
-------- -------- --------
Exit activity liability at December 31, 2007 ... 5,835 3,121 8,956
-------- -------- --------
Amounts provided for during 2008 ............... 12,568 4,290 16,858
Adjustments .................................... (59) (63) (122)
Cash payments during 2008 ...................... (5,593) (4,392) (9,985)
-------- -------- --------
Exit activity liability at December 31, 2008 ... $ 12,751 $ 2,956 $ 15,707
======== ======== ========
RESTRUCTURING COSTS
During 2008, as part of an initiative to improve the effectiveness and
efficiency of operations, we implemented certain organizational changes and
offered eligible employees a voluntary separation package. Related to these
organizational changes, we have recorded a restructuring charge of $8 million
(net of tax, $4.8 million) for work force reductions. Termination benefits
incurred consisted of severance of $5.8 million and other retiree benefit
enhancements of $2.2 million. Scheduled payments during future years are $4.8
million in 2009, $1.6 million in 2010, $0.6 million in 2011, and $1 million for
the period 2012-2015.
In connection with our acquisition of substantially all of the assets and the
assumption of substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM") in June 2003, we established
restructuring accruals relating to the consolidation of DEM into our existing
operations. Of the original provision, we have a restructuring accrual relating
to work force reductions, employee termination benefits and contract termination
costs of $0.8 million remaining as of December 31, 2008. As of December 31, 2008
and 2007, the reserve balance consisted of workforce reductions of $0.2 million
and $0.3 million, respectively, and an exit reserve balance for other exit
costs, primarily related to lease and contract termination costs of $0.6
million.
INTEGRATION EXPENSES
During 2008 and 2007, we incurred integration expenses of $8.9 million and $10.9
million, respectively. Integration expenses for 2008 related primarily to the
cost of moving and closing our Puerto Rico production operations, the
integration of operations to our facilities in Mexico, the closure of our Long
Island City, New York production facilities, the closure and consolidation of
our distribution operations in Reno, Nevada, the closure of our production
operations in Edwardsville, Kansas and the cost of consolidating our European
production operations.
The 2007 amount relates primarily to the cost of moving and closing our Puerto
Rico production operations, the integration of operations to our facilities in
Mexico, the closure of our Fort Worth, Texas production facility, the closure of
our Long Island City, New York production facility and the cost of moving our
European production operations.
57
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 2008, we announced plans to consolidate our ignition distribution
operations in Reno, Nevada with our current facility in Disputanta, Virginia.
The closure and transition to Disputanta, Virginia was completed in December
2008 and we intend to sell the vacated building in Reno, Nevada.
In September 2008, we entered into an agreement with the International Union,
United Automobile, Aerospace and Agricultural Implement Workers or America and
its Local 710 ("UAW") regarding the shutdown of our manufacturing operations at
Edwardsville, Kansas, which will be transferred to our Reynosa, Mexico facility.
The relocation of such manufacturing operations is expected to be completed by
the end of the third quarter 2009.
In connection with the closure of our distribution operations in Reno, Nevada
and manufacturing operations in Edwardsville, Kansas, and corresponding
consolidation plans, we expect to incur one-time termination benefits to be paid
to certain employees at the end of a specified requisite service period. We
estimate these termination benefits to be $1.1 million related to our Reno,
Nevada and Edwardsville, Kansas personnel which will be recognized as expense
ratably over the requisite service period. We are still evaluating the estimates
related to additional incremental costs such as equipment removal and
impairment, headcount overlap during a transitional training period and other
equipment relocation costs.
In December 2007, we entered into an agreement with the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America and
its Local 365 ("UAW") regarding the shut down of our manufacturing operations at
Long Island City, New York. During 2007, we recorded a charge of $2.3 million
for costs associated with the shutdown activities, which included severance
costs of $0.5 million and environmental clean-up costs of $1.8 million. In 2008,
we recorded an additional charge of $2.4 million for severance expenses
recognized ratably over the requisite service period and a charge of $0.4
million to adjust our environment clean-up reserve to our current assessment. In
connection with the shutdown of the manufacturing operations at Long Island City
that was completed in March 2008, we incurred a total of $2.9 million in
severance costs and $2.2 million in costs associated with equipment removal,
capital expenditures, environmental clean-up costs and other cash costs. In
addition, we incurred a withdrawal liability from a multi-employer pension plan.
The pension plan withdrawal liability is related to trust asset
under-performance in a multi-employer plan that covers our UAW employees at the
Long Island City facility and is payable in a lump sum or over a period which is
not to exceed 20 years. In December 2007, we recorded a charge of $3.3 million
related to the present value of the undiscounted $5.6 million withdrawal
liability discounted over 80 quarterly payments using a credit-adjusted,
risk-free rate. Under the terms of the agreement, quarterly payments totaling
$0.3 million commenced in December 2008. As of December 31, 2008, the reserve
balance related to the shutdown of our manufacturing operations at Long Island
City consisted of workforce reductions of $3.5 million, including the pension
withdrawal liability of $3.3 million and other exit costs of $2.2 million for
environmental clean-up costs.
In October 2006, we announced plans to close our Puerto Rico manufacturing
facility related to the Engine Management Segment and relocate operations to
other manufacturing sites. In connection with this closing, we incurred one-time
termination benefits of $2.1 million to be paid to certain employees at the end
of a specified requisite service period. We also recorded approximately $1
million of various expenses to move the production assets, close the Puerto Rico
facility, and relocate some employees. During 2008 we recognized an additional
$1.1 million as we completed the closure of the production facility and as of
December 31, 2008, the reserve balance for workforce reductions was $0.1
million.
In July 2007, we sold our Fort Worth, Texas manufacturing facility. As a result
of the sale, we incurred one-time termination benefits paid to certain
employees. These termination benefits amounted to approximately $0.4 million and
were recognized over the requisite service period. In addition, we incurred
approximately $0.8 million in various expenses to move the production assets and
close the facility. These expenses were recognized as incurred and have been
fully paid.
58
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ASSETS HELD FOR SALE
As of December 31, 2008, in accordance with the requirements of FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we
have reported $1.7 million as assets held for sale on our consolidated balance
sheet related to the net book value of two buildings in our European Segment and
our Reno, Nevada facility within our Engine Management Segment. Following plant
closures resulting from integration activities, these buildings have been vacant
and therefore a decision to solicit bids has been made. We anticipate that a
negotiated sale to a third-party will occur within the next twelve months and
will record any resulting gain in other income as appropriate.
3. SALE OF RECEIVABLES
In April 2008, we began to sell undivided interests in certain of our
receivables to financial institutions. We entered these agreements at our
discretion when we determined that the cost of factoring was less than the cost
of servicing our receivables with existing debt. Pursuant to these agreements,
we sold $114.1 million of receivables as of December 31, 2008. Under the terms
of the agreements, we retain no rights or interest, have no obligations with
respect to the sold receivables, and do not service the receivables after the
sale. As such, these transactions are being accounted for as a sale in
accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." A charge in the amount of
$1.2 million related to the sale of receivables is included in selling, general
and administrative expense in our consolidated statements of operations for the
year ended December 31, 2008.
4. SALE OF LONG ISLAND CITY, NEW YORK PROPERTY
In March 2008, we completed the sale of our property located at 37-18 Northern
Blvd., Long Island City, New York and entered into a Lease Agreement with the
purchaser whereby we would lease space at the property. The purchase price for
the property was $40.6 million with the proceeds used to reduce debt. The
initial term of the lease is ten years and contains four 5-year renewal options.
The sale has been recorded as a sale and leaseback transaction. As our retention
rights to the property will be more than minor but less than substantially all,
a portion of the gain has been deferred. The total gain from the sale of the
property was $31.6 million, of which $21.1 million was recognized upon closing
with the balance of the gain of $10.5 million deferred to be recognized on a
straight line basis over the initial term of the lease of ten years. In
connection with the closing, we have defeased the existing mortgage loan on the
property of $7.8 million which resulted in a loss on the extinguishment of debt
of $1.4 million, consisting of fees and expenses of $1 million and the write-off
of deferred finance costs of $0.4 million. The gain on the sale of the property
and the loss on extinguishment of debt are included in other income, net in the
consolidated statement of operations.
As of December 31, 2007, in accordance with the requirements of FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), we reported the net book value of the property of $5.4 million as assets
held for sale on our consolidated balance sheet.
59
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES
DECEMBER 31,
--------------------
2008 2007
---- ----
(In thousands)
Finished goods, net...................................... $152,804 $182,914
Work in process, net..................................... 5,031 5,850
Raw materials, net....................................... 74,600 63,513
-------- --------
Total inventories, net............................... $232,435 $252,277
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
--------------------
2008 2007
---- ----
(In thousands)
Land, buildings and improvements......................... $ 40,795 $ 43,313
Machinery and equipment.................................. 119,734 136,107
Tools, dies and auxiliary equipment...................... 25,198 25,944
Furniture and fixtures................................... 26,734 29,857
Leasehold improvements................................... 5,102 8,554
Construction in progress................................. 7,182 9,397
-------- --------
224,745 253,172
Less accumulated depreciation............................ 157,844 181,397
-------- --------
Total property, plant and equipment, net............. $ 66,901 $ 71,775
======== ========
Depreciation expense was $12.1 million, $12.9 million and $13.4 million for
2008, 2007 and 2006, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is tested for impairment on an annual basis, and more frequently if
indicators of potential impairment exist, using a fair-value approach. Under
FASB Statement No. 142, "Goodwill and Other Intangible Assets," we completed our
annual impairment test of goodwill as of December 31, 2008 and 2007,
respectively.
The first step of the SFAS No. 142 impairment analysis consists of a comparison
of the fair value of the reporting unit with its carrying amount, including
goodwill. Global economic and financial market conditions during the fourth
quarter of 2008, including severe disruptions in credit markets and the
continuing economic recession, have caused us to reduce our business outlook and
revenue forecasts, thereby negatively impacting our estimates of fair value. The
fair value of the Engine Management reporting unit was determined based on a
combination of Income Approach, which estimates the fair value based on future
discounted cash flows, and Market Approach, which estimates the fair value based
on market prices of comparable companies. Fair values were established based on
management's assessment and independent third-party appraisals. We also
considered our total market capitalization as of December 31, 2008, using an
average closing price for three months, 6 months and year-to-date.
Based on the first step analysis for Engine Management related to the goodwill
acquired as a result of our Dana acquisition, it was determined that the
carrying amount of the goodwill was in excess of its respective fair value. The
second step analysis consisted of comparing the implied fair value of the
goodwill with the carrying amount of the goodwill, with an impairment charge
resulting from any excess of the carrying value of the goodwill over the implied
fair value of the goodwill based on a hypothetical allocation of the estimated
fair value of Engine Management. Based on the second step analysis, we concluded
that all of the goodwill recorded at the reporting unit related to the Dana
acquisition was impaired. As a result, we recorded a non cash goodwill
impairment charge to operations of $38.5 million.
60
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additionally, continued sustained declines in our market capitalization could
require additional impairment charges to be recorded in future periods for the
remaining goodwill related to our our February 2008 asset purchase agreement in
our Engine Management Segment.
Changes in the carrying value of goodwill by operating segment during the years
ended December 31, 2008 and 2007 are as follows (in thousands):
ENGINE
MANAGEMENT EUROPE TOTAL
---------- ------ -----
Balance as of December 31, 2006 ............. $ 38,488 $ -- $ 38,488
Acquisition of UK wire and cable business ... -- 3,078 3,078
--------------------------------------------------------------------------------
Balance as of December 31, 2007 ............. 38,488 3,078 41,566
Purchase accounting adjustments ............. -- (3,078) (3,078)
Impairment of goodwill ...................... (38,488) -- (38,488)
Acquisition of core sensor business ......... 1,100 -- 1,100
--------------------------------------------------------------------------------
Balance as of December 31, 2008 ............. $ 1,100 $ -- $ 1,100
================================================================================
During 2007, our European affiliate acquired the wire and cable business of a
third party in the United Kingdom for a purchase price of $3.7 million. Net
assets acquired were $0.6 million, and the excess purchase price over net assets
of $3.1 million had been reported as goodwill in our consolidated balance sheet.
In 2008, we retained a third party valuation firm to value the net assets
acquired and as a result the entire goodwill balance of $3.1 million has been
allocated to indentifiable intangible assets (see below).
In February 2008, we acquired the core sensor business of a third party. The
total purchase price for all production lines is equal to the net book value of
the assets purchased plus $1.25 million in cash. During 2008, we have completed
the relocation and purchase of certain production lines for an aggregate
purchase price of $4.9 million, of which $1.1 million has been recorded as an
addition to goodwill in our consolidated balance sheet.
OTHER INTANGIBLE ASSETS
Other intangibles assets include computer software. Computer software, net of
amortization, was $2.9 million and $4.1 million as of December 31, 2008 and
2007, respectively. Computer software is amortized over its estimated useful
life of 3 to 10 years. Amortization expense for computer software was $1.3
million, $1.2 million and $1 million for the years ended December 31, 2008, 2007
and 2006, respectively.
61
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets associated with the acquisition of DEM
as well as the acquisition of a wire and cable business in our European Segment,
as of December 31, 2008 and 2007 consist of:
DECEMBER 31,
--------------------
2008 2007
---- ----
(In thousands)
Customer relationships .......................... $ 12,484 $ 10,000
Trademarks and trade names (1) .................. 5,429 6,100
Patents and supply contracts .................... 420 --
-------- --------
18,333 16,100
Less accumulated amortization (2) ............... (5,221) (3,889)
Less currency translation adjustment ............ (797) --
-------- --------
Net ......................................... $ 12,315 $ 12,211
======== ========
(1) During 2008, we recognized an impairment charge of $0.9 million related to
the discontinuance of a trademark acquired in connection with the DEM
acquisition.
(2) Applies to all intangible assets, except for the DEM acquisition related
trademarks and trade names.
In connection with the DEM acquisition in June 2003, $16.1 million was allocated
to intangible assets consisting of customer relationships and trademarks and
trade names; $10 million was assigned to customer relationships and will be
amortized on a straight-line basis over the estimated useful life of 10 years;
and the remaining $6.1 million of acquired intangible assets was assigned to
trademarks and trade names which is not subject to amortization as they were
determined to have indefinite useful lives. During 2008, we made the decision,
along with our customers, to discontinue one of the trademarks acquired in
connection with the acquisition. Products sold under the trademark will be
changed over to another trademark. Revenues under the trademark will gradually
decline through 2010 with no revenue in 2011. In connection with this decision,
we recorded an impairment charge of $0.9 million in 2008.
Of the total purchase price for the wire and cable business in our European
Segment, $3.1 million has been allocated to indentifiable intangible assets
consisting of customer relationships, trademarks and supply contracts; of which
$2.5 million was assigned to customer relationships and will be amortized on a
straight-line basis over the estimated useful life of 12 years; $0.4 million was
assigned to supply contracts with an estimated useful life of 5 years and the
remaining $0.2 million assigned to trademarks with an estimated useful life of
15 years.
Total amortization expense for acquired intangible assets was $1.3 million for
the year ended December 31, 2008 and $1.1 million per year for the years ended
December 31, 2007 and 2006. Based on the current estimated useful lives assigned
to our intangible assets, amortization expense for 2009 through 2012 is
estimated to be $1.3 million per year and $0.7 million in 2013.
62
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OTHER ASSETS
DECEMBER 31,
--------------------
2008 2007
---- ----
(In thousands)
Equity in joint ventures......................... $ 254 $ 2,310
Deferred income taxes, net (Note 15)............. 28,045 25,809
Deferred financing costs, net.................... 3,644 2,373
Long term receivables............................ 4,793 4,004
Other............................................ 7,510 10,823
-------- --------
Total other assets, net...................... $ 44,246 $ 45,319
======== ========
Included in the above caption "Other" is a preferred stock investment of $1.5
million in a customer, which is carried at cost. Net sales to this customer
amounted to $29.7 million, $35.4 million and $37.4 million in 2008, 2007 and
2006, respectively. Also included in "Other" are $5.5 million of assets held in
a nonqualified defined contribution pension plan.
JOINT VENTURE OPERATIONS
On December 31, 2008, we sold our equity ownership interests in our Blue Streak
Electronics, Ltd. ("BSE"), Ototest, Ltd. ("Ototest") and Testar, Ltd. ("Testar")
joint ventures to our partner and purchased the remaining ownership interest in
Blue Streak Europe Ltd. ("BS Europe") increasing our ownership interest in BS
Europe to 100%. Along with the sale of our interest in BSE, we sold certain
inventory and have signed a long term transition service agreement to provide
sales force support, cataloging, distribution and technology conversion
services. We sold our equity interests and inventory for $7.1 million, which
approximated our net book value. The sales transactions are subject to customary
post-closing adjustments. BS Europe was acquired for 1 British pound.
Blue Streak Electronics, Ltd. was established in 1992, and until the sale in
2008 we maintained a 50% ownership interest in this joint venture. The joint
venture remanufactures on-board computers for the automobile aftermarket. The
headquarters of BSE are located in Canada and its manufacturing operations are
in Tijuana, Mexico. BSE has a fiscal year end of December 31.
Testar, Ltd. and Ototest, Ltd were established in 1995 and 2007, respectively,
and until the sale in 2008 we maintained a 50% ownership interest in each of
these joint ventures. The headquarters and manufacturing facilities of Testar
and Ototest are located in Israel. The joint ventures produce software products
for use in on-board computers for the automobile aftermarket. Testar and Ototest
have a fiscal year end of December 31.
63
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is summarized selected financial information from our sold joint
ventures:
AS OF DECEMBER 31,
-------------------
AGGREGATED FINANCIAL INFORMATION 2008 2007
--------------------------------------------------------------------------------
(In thousands)
Current assets .......................................... $ 4,511 $ 6,829
Non-current assets ...................................... 2,468 2,977
Current liabilities ..................................... 4,763 5,096
Non-current liabilities ................................. -- --
YEAR ENDED DECEMBER 31,
------------------------------
2008 2007 2006
-------------------------------------------------------------------------------
(In thousands)
Net sales .................................... $ 8,641 $ 8,026 $ 11,584
Costs and expenses ........................... 10,206 7,938 10,288
-------- -------- --------
Net earnings (loss) .......................... $ (1,565) $ 88 $ 1,296
======== ======== ========
As of December 31, 2008, we have an equity ownership investment in a joint
venture located in Europe. Our ownership interest in this joint venture is
accounted for on the equity method. The following is summarized selected
financial information from our joint ventures for the years ended December 31,
2008, 2007 and 2006:
AS OF DECEMBER 31,
-------------------
AGGREGATED FINANCIAL INFORMATION 2008 2007
-------------------------------------------------------------------------------
(In thousands)
Current assets .......................................... $ 2,020 $ 4,570
Non-current assets ...................................... 436 293
Current liabilities ..................................... 1,950 3,262
Non-current liabilities ................................. 10 44
YEAR ENDED DECEMBER 31,
------------------------------
2008 2007 2006
-------------------------------------------------------------------------------
(In thousands)
Net sales .................................... $ 3,299 $ 3,548 $ 2,672
Costs and expenses ........................... 3,255 3,325 1,968
-------- -------- --------
Net earnings (loss) .......................... $ 44 $ 223 $ 704
======== ======== ========
64
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CREDIT FACILITIES AND LONG-TERM DEBT
Total debt outstanding is summarized as follows:
DECEMBER 31,
-------------------
2008 2007
---- ----
(In thousands)
Revolving credit facilities (1) .................. $148,931 $156,756
6.75% convertible subordinated debentures (2) .... 44,865 90,000
Mortgage loan (3) ................................ -- 7,891
Other ............................................ 361 664
-------- --------
Total debt ................................... $194,157 $255,311
======== ========
Current maturities of long-term liabilities ...... $193,884 $164,777
Long-term debt ................................... 273 90,534
-------- --------
Total debt ................................... $194,157 $255,311
======== ========
(1) Consists of the revolving credit facility, the Canadian term loan and the
European revolving credit facilities.
(2) In 2008, we repurchased $45.1 million principal amount of the debentures.
The convertible debentures will mature on July 15, 2009.
(3) The mortgage loan was secured by the Long Island City, New York property.
In March 2008 in connection with the sale of the property, we defeased the
mortgage loan.
Maturities of long-term debt during the five years ending December 31, 2009
through 2013 are $45 million, $0.1 million, $0.1 million, $0.1 million and $0
million, respectively.
DEFERRED FINANCING COSTS
We had deferred financing cost of $3.6 million and $2.7 million as of December
31, 2008 and 2007, respectively. In connection with the amendment to our
revolving credit facility in December 2008, we incurred $2.2 million of issuance
costs related to bank fees, legal and other professional fees which are being
amortized over the remaining term of the revolving credit facility. In March
2008 in connection with the sale of the Long Island City, New York property we
defeased the mortage loan and deferred financing costs of $0.4 million were
written off. Deferred financing costs as of December 31, 2008 are related to our
revolving credit facility and convertible subordinated debentures.
65
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Scheduled amortization for future years, assuming no further prepayments of
principal is as follows:
(AMOUNTS IN THOUSANDS)
-------------------------------------------------------------------
2009........................................................ 1,190
2010........................................................ 1,090
2011........................................................ 1,090
2012........................................................ 273
2013 and beyond............................................. --
-------------------------------------------------------------------
Total amortization.......................................... 3,643
===================================================================
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, which prior
credit facility provided for a $305 million credit facility and which was to
expire in 2008. The restated credit agreement provides for a line of credit of
up to $275 million (inclusive of the Canadian term loan described below) and
expires in 2012. The restated credit agreement also provides a $50 million
accordion feature, which would allow us to expand the facility. Direct
borrowings under the restated credit agreement bear interest at the LIBOR rate
plus the applicable margin (as defined), or floating at the index rate plus the
applicable margin, at our option. The interest rate may vary depending upon our
borrowing availability. The restated credit agreement is guaranteed by certain
of our subsidiaries and secured by certain of our assets.
In December 2008, we amended our restated credit agreement (1) to establish a
limit of $50 million on the amount of subordinated convertible debentures that
we can repurchase in the open market prior to the closing of any additional debt
financing transaction, (2) to establish a minimum borrowing availability reserve
of $15 million, except in certain circumstances; provided that the minimum
borrowing availability reserve shall be reduced to zero on the effective date of
the redemption or repayment of our convertible subordinated debentures, (3) to
establish a $25 million minimum borrowing availability requirement effective on
the date of redemption or repayment of our convertible subordinated debentures,
which amount may be reduced by up to $10 million in certain circumstances, and
(4) to increase the margin added to the prime rate to 1.50% and the margin added
to the LIBOR rate to 2.75%; and on the earlier of (a) March 31, 2009 or (b) the
closing of any refinancing of our convertible subordinated debentures, to
further increase the margin added to the prime rate to between 1.75% - 2.25% and
the margin added to the LIBOR rate to between 3% - 3.5%, in each case depending
upon the level of excess availability as defined in the credit agreement.
Borrowings under the restated credit agreement are collateralized by
substantially all of our assets, including accounts receivable, inventory and
fixed assets, and those of certain of our subsidiaries. After taking into
account outstanding borrowings under the restated credit agreement, there was an
additional $54.4 million available for us to borrow pursuant to the formula at
December 31, 2008, of which $14.9 million is reserved for repayment, repurchase
or redemption, as the case may be, of the aggregate outstanding amount of our
convertible debentures. At December 31, 2008 and December 31, 2007, the interest
rate on our restated credit agreement was 4.6% and 6.4%, respectively.
Outstanding borrowings under the restated credit agreement (inclusive of the
Canadian term loan described below), which are classified as current
liabilities, were $143.2 million and $148.7 million at December 31, 2008 and
December 31, 2007, respectively.
66
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At any time that our average borrowing availability over the previous thirty
days is less than $30 million or if our borrowing availability is less than $20
million for more than two days in a consecutive 30-day period 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 December 31, 2008, 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. Pursuant to our December 2008 amendment to the restated credit
agreement, beginning January 15, 2009 and on a monthly basis thereafter, our
borrowing availability will be reduced by $5 million for the repayment,
repurchase or redemption of the aggregate outstanding amount of our convertible
debentures. Our restated credit agreement also permits dividends and
distributions by us provided specific conditions are met.
CANADIAN TERM LOAN
In March 2007, we amended our credit agreement with GE Canada Finance Holding
Company, for itself and as agent for the lenders. This amendment modifies our
existing $7 million credit agreement which was to expire in 2008. The amended
credit agreement provides for a line of credit of up to $12 million, of which $7
million is currently outstanding and which amount is part of the $275 million
available for borrowing under our restated credit agreement with General
Electric Capital Corporation (described above). The amended credit agreement is
guaranteed and secured by us and certain of our wholly-owned subsidiaries and
expires in 2012. Direct borrowings under the amended credit agreement bear
interest at the same rate as our restated credit agreement with General Electric
Capital Corporation (described above).
In December 2008, we amended our credit agreement with GE Canada Finance Holding
Company, for itself and as agent for the lenders. The amendment provides for,
among other things (1) the allowance of cash proceeds from the divestiture of
the Blue Streak Electronics joint venture to be applied in accordance with the
requirements of our U.S. restated credit agreement, and (2) an increase in the
interest rates applicable to our outstanding borrowings under the Canadian
credit agreement to be in line with the increases set forth in our U.S. restated
credit agreement (described above).
REVOLVING CREDIT FACILITIES--EUROPE
Our European subsidiary has revolving credit facilities which, at December 31,
2008, provide for aggregate lines of credit up to $8.4 million. The amount of
short-term bank borrowings outstanding under these facilities was $5.8 million
on December 31, 2008 and $8 million on December 31, 2007. The weighted average
interest rate on these borrowings on December 31, 2008 and December 31, 2007 was
6.2% and 6.7%, respectively.
SUBORDINATED DEBENTURES
In July 1999, we completed a public offering of convertible subordinated
debentures amounting to $90 million. The convertible debentures carry an
interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009.
The convertible debentures are convertible into 2,796,120 shares of our common
stock at the option of the holder. We may, at our option, redeem some or all of
the convertible debentures at any time on or after July 15, 2004, for a
redemption price equal to the issuance price plus accrued interest. In addition,
if a change in control, as defined in the agreement, occurs at the Company, we
will be required to make an offer to purchase the convertible debentures at a
purchase price equal to 101% of their aggregate principal amount, plus accrued
interest. The convertible debentures are subordinated in right of payment to all
of our existing and future senior indebtedness.
67
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We may, from time to time, repurchase the debentures in the open market, or
through privately negotiated transactions, on terms that we believe to be
favorable with any gains or losses as a result of the difference between the net
carrying amount and the reacquisition price recognized in the period of
repurchase. In 2008, we repurchased $45.1 million principal amount of the
debentures resulting in a gain on the repurchase of $3.8 million. As of December
31, 2008, the convertible debentures are convertible into 1,393,866 shares of
our common stock at the option of the holder. Pursuant to our amendment to our
revolving credit facility in December 2008, we are limited to $50 million in the
aggregate in subordinated debentures that can be repurchased in the open market.
MORTGAGE LOAN AGREEMENT
In June 2003, we borrowed $10 million under a mortgage loan agreement. The
mortgage loan was secured by the Long Island City, New York property and in
connection with the sale of the property in March 2008, we defeased the loan. We
incurred fees and expenses in the defeasance of approximately $1 million, and
deferred finance costs capitalized of $0.4 million were written off upon the
defeasance. See Note 4.
10. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par value, and
our Board of Directors is vested with the authority to establish and designate
any series of preferred, to fix the number of shares therein and the variations
in relative rights as between each series. In December 1995, our Board of
Directors established a new series of preferred shares designated as Series A
Participating Preferred Stock. The number of shares constituting the Series A
Preferred Stock is 30,000. The Series A Preferred Stock is designed to
participate in dividends, ranks senior to our common stock as to dividends and
liquidation rights and has voting rights. Each share of the Series A Preferred
Stock shall entitle the holder to one thousand votes on all matters submitted to
a vote of the stockholders of the Company. No such shares were outstanding at
December 31, 2008 and 2007.
As of December 31, 2006, we had Board authorization to repurchase additional
shares of our common stock up to a maximum cost of $1.7 million. In August 2007,
our Board of Directors authorized a $3.3 million increase in our stock
repurchase program. In 2007, we repurchased approximately $5 million of our
common stock pursuant to these authorizations.
Accumulated other comprehensive income is comprised of the following:
DECEMBER 31,
-------------------
2008 2007
---- ----
(In thousands)
Foreign currency translation adjustments................... $ 2,606 $ 11,579
Unrecognized postretirement benefit costs (credit)......... 5,193 (6,033)
-------- --------
Total accumulated other comprehensive income........... $ 7,799 $ 5,546
======== ========
68
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK-BASED COMPENSATION PLANS
Our stock-based compensation program is a broad-based program designed to
attract and retain employees while also aligning employees' interests with the
interests of our shareholders. In addition, members of our Board of Directors
participate in our stock-based compensation program in connection with their
service on our board. We currently have five active stock-based compensation
plans.
Effective January 1, 2006, we adopted FASB Statement No. 123R, "Share-Based
Payment" ("SFAS 123R"), which prescribes the accounting for equity instruments
exchanged for employee and director services. Under SFAS 123R, stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the grant, and is recognized as an expense over the service period
applicable to the grantee. The service period is the period of time that the
grantee must provide services to us before the stock-based compensation is fully
vested.
The stock options granted prior to 2006 gradually vested at annual intervals
through December 31, 2007. We recognized compensation expense for prior years'
grants which vest after January 1, 2006 based on the grant-date fair value,
estimated in accordance with SFAS 123 which was used in our prior pro forma
disclosure. Our policy was to calculate the compensation expense related to the
stock-based compensation granted to employees and directors on a straight-line
basis over the full vesting period of the grants. The expense for the years
ended December 31, 2007 and 2006 reflects our estimate of expected forfeitures
which we determine to be immaterial, based on history and remaining time until
vesting of the remaining options.
We adopted SFAS 123R using the modified prospective transition method. Under
this transition method, the compensation expense recognized on or after January
1, 2006 includes the compensation cost based on the grant-date fair value
estimated in accordance with: (a) SFAS 123 for all stock-based compensation that
was granted prior to, but vested on or after, January 1, 2006; and (b) SFAS 123R
for all stock-based compensation that was granted on or after January 1, 2006.
Stock-based compensation expense was $446,300 ($322,450, net of tax) or $0.02
per basic and diluted share, $342,500 ($224,800, net of tax) or $0.01 per per
basic and diluted share and $712,000 ($433,000, net of tax) or $0.02 per basic
and diluted share for the years ended December 31, 2008, 2007 and 2006,
respectively.
STOCK OPTION GRANTS
Under the 1994 Omnibus Stock Option Plan, as amended, which terminated in May
2004, we were authorized to issue options to purchase 1,500,000 shares of common
stock. The options become exercisable over a three to five year period and
expire at the end of five years following the date they become exercisable. At
December 31, 2008, there were options to purchase an aggregate of 178,949 shares
of common stock.
Under the 1996 Independent Directors' Stock Option Plan, which terminated in May
2006, we were authorized to issue options to purchase 50,000 shares of common
stock. The options became exercisable one year after the date of grant and
expired at the end of ten years following the date of grant. At December 31,
2008, there were options to purchase an aggregate of 22,200 shares of common
stock.
Under the 2004 Omnibus Stock Option Plan, which terminates in May 2014, we were
authorized to issue options to purchase 500,000 shares of common stock. The
options become exercisable over a three to five year period and expire at the
end of ten years following the date of grant. At December 31, 2008, there were
options to purchase an aggregate of 298,674 shares of common stock.
69
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the 2004 Independent Directors' Stock Option Plan, we were authorized to
issue options to purchase 50,000 shares of common stock. The options become
exercisable one year after the date of grant and expire at the end of ten years
following the date of grant. At December 31, 2008, there were options to
purchase an aggregate of 16,000 shares of common stock.
Under the 2006 Omnibus Incentive Plan, which terminates in May 2016, we are
authorized to issue, among other things, shares of restricted and performance
based stock to eligible employees and directors of up to 700,000 shares of
common stock. Stock options forfeited under the previous stock option plans and
equity awards under the incentive plan are eligible to be granted again under
the 2006 Omnibus Incentive Plan with respect to stock options and equity awards
so forfeited.
At December 31, 2008, under all of our option plans there were options to
purchase an aggregate of 515,823 shares of common stock, with no shares of
common stock available for future grants. There were no stock options granted in
the years ended December 31, 2008, 2007 and 2006, and for the year-ended
December 31, 2008, we had no unrecognized compensation cost related to stock
options and non-vested stock options.
Stock option-based compensation expense in 2007 was $85,200 ($55,800, net of
tax), all for unvested options. Stock option-based compensation expense in 2006
was $547,400 ($333,100, net of tax), including $264,700 for unvested options. As
of December 31, 2006, we had $88,200 of unrecognized compensation cost related
to non-vested stock options granted, which was recognized over a
weighted-average period of four months in 2007. There was no stock option-based
compensation expense in 2008.
The following is a summary of the changes in outstanding stock options for the
years ended December 31, 2008 and 2007:
Weighted
Weighted Average
Average Remaining
Exercise Contractual
Shares Price Term (Years)
--------------------------------------------------------------------------------
Outstanding at December 31, 2006 ............ 990,898 $ 13.61 5.1
--------------------------------------------------------------------------------
Expired ..................................... (39,999) $ 24.84 --
--------------------------------------------------------------------------------
Exercised ................................... (328,211) $ 12.75 --
Forfeited, Other ............................ (15,068) $ 13.53 5.5
--------------------------------------------------------------------------------
Outstanding at December 31, 2007 ............ 607,620 $ 13.34 4.8
--------------------------------------------------------------------------------
Expired ..................................... (39,498) $ 11.92 --
Exercised ................................... -- -- --
Forfeited, Other ............................ (52,299) $ 13.83 2.0
--------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 2008 ............ 515,823 $ 13.40 4.1
--------------------------------------------------------------------------------
Options exercisable at December 31, 2008 .... 515,823 $ 13.40 4.1
================================================================================
There was no aggregate intrinsic value of all outstanding stock options as of
December 31, 2008. All outstanding stock options as of December 31, 2008 are
exercisable. There were no options exercised in 2008. The total intrinsic value
of options exercised was $1.3 million and $0.3 million during the years ended
December 31, 2007 and 2006, respectively.
70
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the changes in non-vested stock options for the
year ended December 31, 2007:
Weighted
Average Grant
Date Fair
Shares Value
-----------------------
Non-vested shares at January 1, 2007................... 129,750 $2.72
Forfeitures............................................ (1,125) $2.72
Vested................................................. (128,625) $2.72
--------------------------------------------------------------------------------
Non-vested shares at December 31, 2007................. --
================================================================================
All stock options in 2008 are fully vested.
RESTRICTED STOCK AND PERFORMANCE SHARE GRANTS
As part of the 2006 Omnibus Incentive Plan, we are authorized to issue shares of
restricted and/or performance-based stock to eligible employees and directors.
Selected executives and other key personnel are granted performance awards whose
vesting is contingent upon meeting various performance measures with a retention
feature. This component of compensation is designed to encourage the long-term
retention of key executives and to tie executive compensation directly to
Company performance and the long-term enhancement of shareholder value.
Performance-based shares are subject to a three year measuring period and the
achievement of performance targets and, depending upon the achievement of such
performance targets, they may become vested on the third anniversary of the date
of grant. Each period we evaluate the probability of achieving the applicable
targets and we adjust our accrual accordingly. Restricted shares become fully
vested upon the third and first anniversary of the date of grant for employees
and directors, respectively.
Prior to the time a restricted share becomes fully vested or a performance share
is issued, the awardees cannot transfer, pledge, hypothecate or encumber such
shares. Prior to the time a restricted share is fully vested, the awardees have
all other rights of a stockholder, including the right to vote (but not receive
dividends during the vesting period). Prior to the time a performance share is
issued, the awardees shall have no rights as a stockholder. All shares and
rights are subject to forfeiture if certain employment conditions are not met.
Under the plan, 700,000 shares are authorized to be issued. At December 31,
2008, under our 2006 Omnibus Incentive Plan, there were an aggregate of (a)
300,175 shares of restricted and performance-based stock grants issued, net of
forfeitures, and (b) 399,825 shares of common stock available for future grants.
For the year ended December 31, 2008, 110,250 restricted and performance-based
shares were granted (78,500 restricted shares and 31,750 performance-based
shares), and for the year ended December 31, 2007, 111,850 restricted and
performance-based shares were granted (81,600 restricted shares and 30,250
performance-based shares).
In determining the grant date fair value, the stock price on the date of grant,
as quoted on the New York Stock Exchange, was reduced by the present value of
dividends expected to be paid on the shares issued and outstanding during the
requisite service period, discounted at a risk-free interest rate. The risk-free
interest rate is based on the U.S. Treasury rates at the date of grant with
maturity dates approximately equal to the restriction or vesting period at the
grant date. The fair value of the shares at the date of grant is amortized to
expense ratably over the restriction period. Forfeitures on restricted stock
grants are estimated at 2% for employees and 0% for executives and directors,
respectively, based on evaluation of historical and expected future turnover.
71
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As related to restricted and performance stock shares, we recorded compensation
expense of $446,300 ($322,450, net of tax), $257,300 ($169,000, net of tax),
$164,200 ($99,900, net of tax) for the year ended December 31, 2008, 2007 and
2006, respectively. The unamortized compensation expense related to our
restricted and performance-based shares was $875,500 and $821,900 at December
31, 2008 and 2007, respectively and is expected to be recognized over a weighted
average period of 1.7 and 0.3 years for employees and directors, respectively,
as of December 31, 2008 and over a weighted average period of 1.8 and 0.8 years
for employees and directors, respectively, as of December 31, 2007.
Our restricted and performance-based share activity was as follows for the years
ended December 31, 2008 and 2007:
Weighted Average
Grant Date Fair
Shares Value Per Share
--------- ----------------
Balance at December 31, 2006 93,775 $7.21
Granted ............................... 111,850 $7.28
Vested ................................ (5,500) $7.49
Forfeited.............................. (6,925) $7.01
----------------------------
Balance at December 31, 2007 ............. 193,200 $7.25
Granted ............................... 110,250 $6.46
Vested ................................ (13,700) $8.33
Forfeited.............................. (8,975) $6.67
----------------------------
BALANCE AT DECEMBER 31, 2008 ............. 280,775 $6.88
=======================================================================
The weighted-average grant date fair value of restricted and performance-based
shares outstanding as of December 31, 2008, 2007 and 2006 was $1.9 million (or
$6.88 per share), $1.4 million (or $7.25 per share), and $0.7 million (or $7.21
per share), respectively.
12. RETIREMENT BENEFIT PLANS
DEFINED CONTRIBUTION PLANS - We and certain of our subsidiaries maintain various
defined contribution plans, which include profit sharing and provide retirement
benefits for substantially all of our employees. Matching obligations, the
majority of which were funded in cash in connection with the plans are as
follows (in thousands):
U.S. DEFINED EUROPEAN DEFINED
CONTRIBUTION CONTRIBUTION
------------ ------------
Year ended December 31,
2008....................................... $4,181 $324
2007....................................... 4,001 377
2006....................................... 3,736 289
In August 1994, we established an unfunded Supplemental Executive Retirement
Plan (SERP) for key employees. Under the plan, these employees may elect to
defer a portion of their compensation and, in addition, we may at our discretion
make contributions to the plan on behalf of the employees. Such contributions
were $113,500 in 2007 and $83,000 in 2006 and we have recorded an obligation of
$117,000 for 2008.
72
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We also have an Employee Stock Ownership Plan and Trust (ESOP) for employees who
are not covered by a collective bargaining agreement. In 2000, we created an
employee benefits trust to which we contributed 750,000 shares of treasury
stock. We are authorized to instruct the trustees to distribute such shares
toward the satisfaction of our future obligations under employee benefit plans.
The shares held in trust are not considered outstanding for purposes of
calculating earnings per share until they are committed to be released. The
trustees will vote the shares in accordance with its fiduciary duties. During
2008, we contributed to the trust an additional 137,023 shares from our treasury
and released 199,471 shares from the trust leaving 529 shares remaining in the
trust as of December 31, 2008. The provision for expense in connection with the
ESOP was approximately $1.6 million in 2008, $1.9 million in 2007, and $1.2
million in 2006.
MULTI-EMPLOYER BENEFIT PLANS - We participate in multi-employer plans which
provide defined benefits to unionized workers at certain of our manufacturing
facilities. Contributions to the plans are determined in accordance with the
provisions of a negotiated labor contract.
In December 2007, we entered into an agreement with the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America and
its Local 365 regarding the shut down of our manufacturing operations at Long
Island City, New York, which operations will be transferred to other facilities.
As part of the agreement, effective January 5, 2008, we agreed to withdraw from
the multi-employer pension plan covering our UAW employees at the Long Island
City facility. As a result, we incurred a withdrawal liability. The pension plan
withdrawal liability is related to trust asset under-performance and is payable
in a lump sum or over a period which is not to exceed 20 years. In December
2007, we recorded a charge of $3.3 million related to the present value of the
undiscounted $5.6 million withdrawal liability discounted over 80 quarterly
payments using a credit-adjusted, risk-free rate. Under the terms of the
agreement, quarterly payments totaling $0.3 million commenced in December 2008.
DEFINED BENEFIT PENSION PLANS - We maintain qualified and nonqualified defined
benefit retirement plans covering certain current and former U.S. and European
employees. The defined benefit retirement plans are generally based on years of
service and employee compensation.
In October 2001, we adopted a defined benefit unfunded SERP. The SERP, as
amended, is a defined benefit plan pursuant to which we will pay supplemental
pension benefits to certain key employees upon the attainment of a contractual
participant's payment date based upon the employees' years of service and
compensation. In June 2008, a participant in the unfunded SERP reached his
applicable payment date. In connection therewith, we recorded a settlement loss
of $0.6 million in June 2008. The corresponding distribution of $5 million was
made in July 2008. We use a January 1 measurement date for this plan. Benefit
obligations as of the end of each year reflect assumptions in effect as of this
date.
Additionally, we maintain a UK defined benefit plan. The defined benefit plan is
closed to new entrants and existing active members ceased accruing any further
benefits.
73
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The benefit obligation, fair value of plan assets, funded status, and amounts
recognized in the consolidated financial statements for our defined benefit
retirement plans, as of and for the years ended December 31, 2008 and 2007, were
(in thousands):
DEFINED BENEFIT RETIREMENT PLANS
--------------------------------------------
U.S. PLANS EUROPEAN PLANS
--------------------------------------------
2008 2007 2008 2007
---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ................. $ 6,912 $ 5,642 $ 3,200 $ 3,310
Service cost ............................................ 91 426 -- --
Interest cost ........................................... 236 353 137 173
Benefits paid ........................................... (4,983) -- (80) (105)
Actuarial loss (gain) ................................... (459) 491 (155) (227)
Translation adjustment .................................. -- -- (827) 49
-----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year .................. $ 1,797 $ 6,912 $ 2,275 $ 3,200
-----------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year .......... -- -- $ 3,462 $ 3,288
Employer contributions .................................. -- -- 72 95
Actual return on plan assets ............................ -- -- (538) 135
Benefits paid ........................................... -- -- (80) (105)
Translation adjustment .................................. -- -- (895) 49
-----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year ........... $ -- $ -- $ 2,021 $ 3,462
-----------------------------------------------------------------------------------------------------------
FUNDED (UNFUNDED) STATUS OF THE PLANS ...................... $ (1,797) $ (6,912) $ (254) $ 262
-----------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE BALANCE SHEET
Accrued postretirement benefit liabilities (assets) ..... $ 1,797 $ 6,912 $ 254 $ (262)
Accumulated other comprehensive loss (pre-tax)
related to:
Unrecognized net actuarial losses ................ 192 1,245 1,817 1,797
Unrecognized prior service cost (credit) ......... 469 580 -- --
The unrecognized amounts recorded in accumulated other comprehensive income will
be subsequently recognized as expense consistent with our historical accounting
policy for amortizing those amounts. Actuarial gains and losses incurred in
future periods and not recognized as expense in those periods will be recognized
as increases or decreases in other comprehensive income (loss), net of tax. As
they are subsequently recognized as a component of expense, the amounts recorded
in other comprehensive loss in prior periods are adjusted.
74
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following defined benefit plan amounts were included in other comprehensive
income, net of tax, during the year ended December 31, 2008, in accordance with
FAS 158 (in thousands).
RECLASSIFICATION
ADJUSTMENT FOR PRIOR
INCURRED BUT PERIOD AMOUNTS
NOT RECOGNIZED RECOGNIZED
-------------------------------------
ACTUARIAL GAINS (LOSSES)
SERP defined benefit plan............. $(295) $ (18)
Foreign benefit and other plans....... (155) (84)
PRIOR SERVICE (COST) CREDIT
SERP defined benefit plan............. -- (66)
Foreign benefit and other plans....... -- --
--------------------------------------------------------------------------------
$(450) $(168)
--------------------------------------------------------------------------------
The prior service cost (credit) included in accumulated other comprehensive loss
at the end of 2008 and expected to be recognized in net periodic benefit cost
during 2009 is $0.1 million ($60,000 net of tax). No plan assets are expected to
be returned to us during the year ended December 31, 2009.
The net periodic benefit cost as determined by FAS 87, Employers' Accounting for
Pensions, related to our plans include the following components (in thousands):
DECEMBER 31,
--------------------------
U.S. DEFINED BENEFIT RETIREMENT PLANS: 2008 2007 2006
---- ---- ----
Service cost .................................... $ 91 $ 426 $ 393
Interest cost ................................... 236 353 284
Amortization of prior service cost .............. 110 110 111
Amortization of unrecognized loss ............... 30 158 117
-----------------------------------------------------------------------------
Net periodic benefit cost ....................... $ 467 $1,047 $ 905
-----------------------------------------------------------------------------
EUROPEAN DEFINED BENEFIT RETIREMENT PLANS:
Service cost .................................... $ -- $ -- $ --
Interest cost ................................... 137 173 168
Amortization of net actuarial loss .............. 84 113 --
Expected return on plan assets .................. (186) (225) (196)
-----------------------------------------------------------------------------
Net periodic benefit cost ....................... $ 35 $ 61 $ (28)
-----------------------------------------------------------------------------
TOTAL NET PERIODIC BENEFIT COSTS ........... $ 502 $1,108 $ 877
=============================================================================
75
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actuarial assumptions used to determine costs and benefit obligations related to
our U.S. defined benefit plan are as follows:
DECEMBER 31,
--------------------------
2008 2007 2006
---- ---- ----
Discount rates ................................. 5.75% 5.75% 5.75%
Salary increase ................................ 4.00% 4.00% 4.00%
Actuarial assumptions used to determine costs and benefit obligations related to
our European defined benefit plan are as follows:
DECEMBER 31,
--------------------------
2008 2007 2006
---- ---- ----
Discount rates ................................. 6.70% 5.90% 5.23%
Expected long-term rates of return on assets ... 7.50% 7.00% 7.00%
Inflation ...................................... 3.00% 3.30% 3.00%
The Company's discount rates are determined by considering current yield curves
representing high quality, long-term fixed income instruments. We set our
discount rate for all U.S. plans based on a review of the Moody AA Long-Term
Corporate Bond Index and a pension liability index; and our discount rate for
our European plans is based on corporate cash bond yields. We believe that the
timing and amount of cash flows related to these instruments is expected to
match the estimated defined benefit payment streams of our plans.
The expected return on plan assets reflects the average rate of earnings
expected on the funds invested to provide for the benefits included in the
benefit obligations. The assumption reflects long-term expectations for future
rate of return for the investment portfolio over the life of the benefit
obligation, with consideration given to the distribution of investments by asset
class and historical rates of return for each individual asset class. The return
on plan assets for 2008 was approximately (20.9) %. The return on plan assets
for 2007 was approximately 4.3%.
For defined benefit pension plans in which the accumulated benefit obligation
(ABO) was in excess of the fair value of the plans' assets, the projected
benefit obligation (PBO), ABO and fair value of the plans' assets as of December
31, 2008 and 2007 were as follows (in thousands):
-----------------------------------
U.S. PLANS EUROPEAN PLANS
----------------- ---------------
2008 2007 2008 2007
---- ---- ---- ----
Projected benefit obligation............ $ 1,797 $ 6,912 $ 2,275 $3,200
Accumulated benefit obligation.......... 1,797 5,957 2,275 3,200
Fair value of plan assets............... -- -- 2,021 3,462
===============================================================================
76
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The European pension plan's fair value measurements and weighted-average asset
allocation by asset category at December 31 is as follows (in thousands):
2008 2007
------------------------------------
ASSET CATEGORY: FAIR VALUE FAIR VALUE
------------------------------------
Equity securities............... $1,348 66.7% $2,479 71.6%
Bonds........................... 352 17.4 463 13.4
Property........................ 16 15.1 520 15
Cash............................ 305 0.8 -- --
-------------------------------------------------------------------------
$2,021 100% $3,462 100%
=========================================================================
A third party management company has the fiduciary responsibility for making
investment decisions related to the assets of our UK defined benefit pension
plan. Their investment objectives for the assets of the defined benefit pension
plan are to minimize the net present value of expected funding contributions and
to meet or exceed the rate of return assumed for plan funding purposes over the
long term. Investment policies and strategies governing the assets of the plans
are designed to achieve investment objectives within prudent risk parameters.
Our risk management practices include the use of external investment managers
and the maintenance of a portfolio diversified by asset class, investment
approach and security holdings. Under FAS 157, plan assets' fair values are
determined based on observable inputs, which are quoted market prices for
identical assets in active markets.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as follows (in thousands):
U.S. PLAN EUROPEAN PLAN
BENEFITS BENEFITS
---------------------------------------------------------------------------
2009........................................ $ -- $ 96
2010........................................ -- 110
2011........................................ -- 125
2012........................................ -- 140
2013........................................ -- 155
Years 2014 - 2018........................... $5,764 $847
===========================================================================
13. POST-RETIREMENT MEDICAL BENEFITS
We provide certain medical and dental care benefits to eligible retired U.S. and
Canadian employees. Eligibility for U.S. employees is limited to employees hired
before 1996. In May 2008, we announced that, in lieu of the current retiree
medical and dental plans previously funded on a pay-as-you-go basis, a Health
Reimbursement Account ("HRA") will be established beginning January 1, 2009 for
each qualified U.S. retiree. The plan amendment will effectively reduce benefits
attributed to employee services already rendered and credit a fixed amount into
an HRA to cover both medical and dental costs for all current and future
eligible retirees. The remeasurement of the postretirement welfare benefit plan
as a result of these benefit modifications generated a $24.5 million reduction
in the accumulated postretirement benefit obligation on June 1, 2008 which will
be amortized on a straight-line basis and recognized as a reduction in benefit
costs over the remaining service to full eligibility (3.8 years). The annual
reduction to expense over the amortization period will be $6.4 million
commencing on June 1, 2008.
77
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The benefit obligation, funded status, and amounts recognized in the
consolidated financial statements for our post retirement medical benefit plans
as of and for the years ended December 31, 2008 and 2007, were as follows: (in
thousands):
DEFINED BENEFIT RETIREMENT PLANS
--------------------------------------------
U.S. PLANS CANADIAN PLANS
--------------------------------------------
2008 2007 2008 2007
---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ................. $ 40,221 $ 37,201 $ 888 $ 991
Service cost ............................................ 525 791 10 27
Interest cost ........................................... 1,640 2,169 41 62
Benefits paid ........................................... (953) (871) (33) (24)
Actuarial loss (gain) ................................... 1,823 931 (101) (349)
Plan amendment .......................................... (24,514) -- -- 181
-----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year .................. $ 18,742 $ 40,221 $ 805 $ 888
-----------------------------------------------------------------------------------------------------------
FUNDED (UNFUNDED) STATUS OF THE PLANS ...................... $(18,742) $(40,221) $ (805) $ (888)
-----------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE BALANCE SHEET
Accrued postretirement benefit liabilities .............. $ 18,742 $ 40,221 $ 805 $ 888
Accumulated other comprehensive loss (pre-tax)
related to:
Unrecognized net actuarial losses (gains) ........ 14,588 14,197 (365) (345)
Unrecognized prior service cost (credit) ......... (26,329) (8,401) (175) (235)
Unrecognized net transition obligation (asset) ... -- -- 21 31
The estimated net loss and prior service cost (credit) that is expected to be
amortized from accumulated other comprehensive income into post-retirement
medical benefits cost during 2009 are $0.1 million and ($9.3) million,
respectively.
Net periodic benefit cost related to our plans includes the following components
(in thousands):
DECEMBER 31,
-----------------------------
U.S. POST RETIREMENT PLANS: 2008 2007 2006
---- ---- ----
Service cost ............................... $ 525 $ 791 $ 785
Interest cost .............................. 1,640 2,169 2,000
Amortization of prior service cost ......... (6,586) (2,853) (2,853)
Amortization of unrecognized loss .......... 1,432 1,310 1,481
----------------------------------------------------------------------------
Net periodic benefit cost .................. $(2,989) $ 1,417 $ 1,413
----------------------------------------------------------------------------
CANADIAN POST RETIREMENT PLANS:
Service cost ............................... $ 10 $ 27 $ 22
Interest cost .............................. 41 62 50
Amortization of transition obligation ...... 4 5 4
Amortization of prior service cost ......... (15) (18) --
Amortization of net actuarial loss ......... (15) -- (15)
----------------------------------------------------------------------------
Net periodic benefit cost .................. $ 25 $ 76 $ 61
----------------------------------------------------------------------------
TOTAL NET PERIODIC BENEFIT COSTS ...... $(2,964) $ 1,493 $ 1,474
============================================================================
78
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actuarial assumptions used to determine costs and benefit obligations related to
our U.S. post-retirement plan are as follows:
DECEMBER 31,
--------------------
2008 2007 2006
---- ---- ----
Discount rate ............................... 5.75% 5.75% 5.75%
Current medical cost trend rate ............. -- 9% 9%
Current dental cost trend ................... -- 5% 5%
Ultimate medical cost trend rate ............ -- 5% 5%
Year trend rate declines to ultimate ........ -- 2012 2011
Actuarial assumptions used to determine costs and benefit obligations related to
our Canadian post-retirement plan are as follows:
DECEMBER 31,
--------------------
2008 2007 2006
---- ---- ----
Discount rates .............................. 7% 5.75% 5.25%
Current medical cost trend rate ............. 9% 10% 6.8%
Ultimate medical cost trend rate ............ 5% 5% 5%
Year trend rate declines to ultimate ........ 2012 2012 2009
The Company's discount rates are determined by considering current yield curves
representing high quality, long-term fixed income instruments. We set our
discount rate for all U.S. plans based on a review of the Moody AA Long-Term
Corporate Bond Index and a pension liability index. We adjust the discount rate
for all U.S. plans to determine our discount rate for the Canadian plans based
on variances in the cost of borrowing money from the central bank and credit
spreads. We believe that the timing and amount of cash flows related to these
instruments is expected to match the estimated defined benefit payment streams
of our plans.
The following benefit payments which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
-------------------------------------------------------------------
2009................................................... $ 1,003
2010................................................... 1,022
2011................................................... 1,033
2012................................................... 1,072
2013................................................... 1,103
Years 2014 - 2018...................................... $ 6,616
===================================================================
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for 2008 (in
thousands):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------------------------
Effect on total of service and interest cost components.... $ 7 $ 6
Effect on post retirement benefit obligation............... $ 59 $ (49)
79
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. OTHER INCOME (EXPENSE), NET
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
---- ---- ----
(IN THOUSANDS)
Interest and dividend income ............................... $ 20 $ 687 $ 498
Gain on repurchase of convertible debentures ............... 3,847 -- --
Income from joint ventures ................................. (319) 116 915
Gain on sale of buildings .................................. 21,845 812 --
Loss on mortgage defeasance ................................ (1,444) -- --
Loss on divestiture of European Temperature Control
operations ............................................... -- -- (3,209)
Gain (loss) on disposal of property, plant and equipment ... (394) (18) (71)
Gain (loss) on foreign exchange ............................ (1,280) 1,421 646
Other income - net ......................................... 395 863 838
-----------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET ...................... $ 22,670 $ 3,881 $ (383)
===============================================================================================
15. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
Current:
Domestic ................................................. $ 442 $ 1,473 $ 968
Foreign ................................................. 1,997 3,720 2,135
-----------------------------------------------------------------------------------------------
Total Current .............................................. 2,439 5,193 3,103
-----------------------------------------------------------------------------------------------
Deferred:
Domestic ................................................ (10,492) (2,500) 3,416
Foreign ................................................. (52) 105 (25)
-----------------------------------------------------------------------------------------------
Total Deferred ............................................. (10,544) (2,395) 3,391
-----------------------------------------------------------------------------------------------
TOTAL INCOME TAX PROVISION ............................ $ (8,105) $ 2,798 $ 6,494
===============================================================================================
We have not provided for U.S. income taxes on the undistributed earnings of our
foreign subsidiaries that are deferred from U.S. income taxation and that we
intend to be permanently reinvested. The Company has provided for U.S. income
tax regarding those undistributed earnings of our foreign subsidiaries subject
to current taxation under Subpart F of the Internal Revenue Code. Cumulative
undistributed earnings of foreign subsidiaries on which no U.S. income tax has
been provided were $50.2 million at the end of 2008, $44.1 million at the end of
2007, and $35.9 million at the end of 2006.
Earnings before income taxes for foreign operations (excluding Puerto Rico)
amounted to approximately $4.9 million, $9.3 million, and $6.6 million in 2008,
2007 and 2006, respectively. Prior to 2006, U.S. income taxes on the earnings of
the Puerto Rican subsidiary were largely eligible for tax credits against such
U.S. income taxes. During 2006, such earnings became fully subject to U.S.
income taxes. Such earnings are partially exempt from Puerto Rican income taxes
under a tax exemption grant expiring in 2016.
80
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliations between taxes at the United States federal income tax rate and
taxes at our effective income tax rate on earnings from continuing operations
before income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
---- ---- ----
U.S. federal income tax rate of 35% .............................. $(10,221) $ 2,880 $ 5,480
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal income tax benefit (1,421) (93) 33
State tax credits ............................................. -- 3 8
Non-deductible compensation ................................... 1,830 -- --
Non-deductible portion of goodwill impairment charge .......... 551 -- --
Other non-deductible items, net ............................... 986 809 246
Impact on deferred tax assets, Puerto Rico .................... -- -- (1,146)
Income (benefit) taxes attributable to foreign income ......... (62) 366 (2)
Change in valuation allowance ................................. 232 (1,167) 1,875
-------- -------- --------
Provision (benefit) for income
taxes ....................................................... $ (8,105) $ 2,798 $ 6,494
======== ======== ========
The following is a summary of the components of the net deferred tax assets and
liabilities recognized in the accompanying consolidated balance sheets (in
thousands):
DECEMBER 31,
--------------------
2008 2007
---- ----
Deferred tax assets:
Inventories ....................................................... $ 13,173 $ 11,071
Allowance for customer returns .................................... 7,414 8,675
Post-retirement benefits .......................................... 7,758 18,550
Allowance for doubtful accounts ................................... 4,086 3,808
Accrued salaries and benefits ..................................... 12,722 9,858
Net operating loss, capital loss and tax credit carry forwards .... 17,124 14,351
Goodwill .......................................................... 3,385 543
Deferred gain on building sale .................................... 3,860 --
Accrued asbestos liabilities ...................................... 9,986 9,501
Other ............................................................. 4,909 8,174
-------- --------
84,417 84,531
-------- --------
Valuation allowance (1) ........................................... (27,073) (26,840)
-------- --------
TOTAL DEFERRED TAX ASSETS ......................................... $ 57,344 $ 57,691
======== ========
Deferred tax liabilities:
Depreciation ...................................................... $ 8,855 $ 3,594
Promotional costs ................................................. 292 560
Goodwill .......................................................... -- 672
Restructuring costs ............................................... -- 8,851
Other ............................................................. 113 1,202
-------- --------
TOTAL DEFERRED TAX LIABILITIES .................................... $ 9,260 $ 14,879
-------- --------
NET DEFERRED TAX ASSETS .............................................. $ 48,084 $ 42,812
======== ========
81
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Current net deferred tax assets are $20 million and $17 million for 2008
and 2007, respectively. Non-current net deferred tax assets are $28.1
million and $25.8 million for 2008 and 2007, respectively. The tax
valuation allowance was allocated to the current deferred tax assets in
the amounts of $11.3 million and $10.7 million in 2008 and 2007,
respectively. The long term tax deferred assets had a valuation allowance
of $15.8 million and $16.2 million in 2008 and 2007, respectively.
In assessing the realizability of the deferred tax assets, management considers
whether it is more likely than not that some portion or the entire deferred tax
asset will be realized. Ultimately, the realization of the deferred tax asset is
dependent upon the generation of sufficient taxable income in those periods in
which temporary differences become deductible and/or net operating loss
carryforwards can be utilized. We consider the level of historical taxable
income, scheduled reversal of temporary differences, tax planning strategies and
projected future taxable income in determining whether a valuation allowance is
warranted. Based on these considerations, we believe it is more likely than not
that we will realize the benefit of the net deferred tax asset of $48.1 million
as of December 31, 2008, which is net of a valuation allowance of $27.1 million.
The deferred tax asset valuation allowance of $27.1 million is intended to
provide for uncertainty regarding the ultimate utilization of our state tax
credit carryovers, U.S. foreign tax credit carryovers, foreign net operating
loss carry forwards, and certain long lived deferred tax assets stemming mainly
from accrued asbestos liabilities and post-retirement benefit obligations.
During 2008, the valuation allowance increased by $0.2 million primarily
attributable to foreign net operating losses. In addition, if we are unable to
generate sufficient taxable income in the future through our operations,
increases in the valuation allowance may be required.
At December 31, 2008, we have approximately $27.4 million of domestic and
foreign net operating loss carryforwards, of which $2.4 million will expire in
2011 through 2013, $15.6 million will expire in 2025 through 2028, with the
remainder of $9.4 million having an indefinite carryforward period. We also have
foreign tax credit carryforwards of approximately $1.1 million that will expire
in 2010 through 2012 and an alternative minimum tax credit carryforward of
approximately $6.4 million, which has no expiration date.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
Balance at January 1, 2008.................................... $ 2,300
Increase based on tax positions taken in the current year..... --
Decrease based on tax positions taken in the current year..... --
-------
Balance at December 31, 2008.................................. $ 2,300
=======
The amount of unrecognized tax benefits at December 31, 2008, includes $2
million of unrecognized tax benefits which, if ultimately recognized, will
reduce our annual effective tax rate.
We are subject to taxation in the US and various state, local and foreign
jurisdictions. We remain subject to examination by US Federal, state, and local
tax authorities for tax year 2001 as well as 2003 through 2007. With a few
exceptions, we are no longer subject to US Federal, state, and local
examinations by tax authorities for the tax year 2002 and for tax years prior to
2001. Foreign jurisdictions have statutes of limitations generally ranging from
2 to 5 years. Years still open to examination by foreign tax authorities in
major jurisdictions include the United Kingdom (2007 onward), Canada (2003
onward) and Hong Kong (2003 onward). We do not presently anticipate that our
unrecognized tax benefits will significantly increase or decrease prior to
September 15, 2009, the due date for the U.S. Federal tax return; however,
actual developments in this area could differ from those currently expected.
82
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We recognize interest and penalties associated with income tax matters as
components of the "provision for income taxes." Our accrual for interest and
penalties was $0.4 million upon adoption of FIN 48 and at December 31, 2008.
16. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of FASB Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"), we have three reportable
operating segments, which are the major product areas of the automotive
aftermarket in which we compete. Engine Management consists primarily of
ignition and emission parts, wire and cable, and fuel system parts. Temperature
Control consists primarily of compressors, other air conditioning parts and
heater parts. The third reportable operating segment is Europe, which consists
of both Engine Management and Temperature Control reporting units.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). The following tables
contain financial information for each reportable segment (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
---- ---- ----
NET SALES:
Engine Management ...................... $528,157 $527,241 $543,221
Temperature Control .................... 194,171 207,604 211,102
Europe ................................. 44,205 42,210 47,044
Other .................................. 8,708 13,130 10,657
-----------------------------------------------------------------------------
Total ................................ $775,241 $790,185 $812,024
=============================================================================
DEPRECIATION AND AMORTIZATION:
Engine Management ...................... $ 9,362 $ 9,474 $ 9,893
Temperature Control .................... 2,824 2,936 3,457
Europe ................................. 1,065 1,019 816
Other .................................. 1,449 1,752 1,320
-----------------------------------------------------------------------------
Total ................................ $ 14,700 $ 15,181 $ 15,486
=============================================================================
OPERATING PROFIT (LOSS):
Engine Management ...................... $(24,935) $ 28,109 $ 41,249
Temperature Control .................... 2,331 10,215 11,954
Europe ................................. 510 968 46
Other .................................. (16,194) (15,878) (16,284)
-----------------------------------------------------------------------------
Total ................................ $(38,288) $ 23,414 $ 36,965
=============================================================================
INVESTMENT IN EQUITY AFFILIATES:
Engine Management ...................... $ -- $ -- $ --
Temperature Control .................... -- -- --
Europe ................................. 254 145 201
Other .................................. -- 2,165 2,282
-----------------------------------------------------------------------------
Total ................................ $ 254 $ 2,310 $ 2,483
=============================================================================
83
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITAL EXPENDITURES:
Engine Management ...................... $ 7,453 $ 10,622 $ 7,481
Temperature Control .................... 1,837 1,542 1,339
Europe ................................. 1,187 1,792 1,215
Other .................................. 23 39 45
-----------------------------------------------------------------------------
Total ................................ $ 10,500 $ 13,995 $ 10,080
=============================================================================
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
---- ---- ----
TOTAL ASSETS:
Engine Management ...................... $340,713 $443,465 $430,158
Temperature Control .................... 112,259 113,440 109,734
Europe ................................. 26,637 36,538 26,708
Other .................................. 95,418 84,649 73,492
-----------------------------------------------------------------------------
Total ................................ $575,027 $678,092 $640,092
=============================================================================
Reconciliation of segment operating profit (loss) to net earnings (loss):
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
---- ---- ----
Operating profit (loss) .................. $(38,288) $ 23,414 $ 36,965
Other income (expense) ................... 22,670 3,881 (383)
Interest expense ......................... 13,585 19,066 20,925
--------------------------------
Earnings (loss) from continuing operations
before taxes ........................... (29,203) 8,229 15,657
Income tax expense (benefit) ............. (8,105) 2,798 6,494
--------------------------------
Earnings (loss) from continuing operations (21,098) 5,431 9,163
Discontinued operation, net of tax ....... (1,796) (3,156) 248
--------------------------------
Net earnings (loss) ...................... $(22,894) $ 2,275 $ 9,411
=============================================================================
Other Adjustments consist of items pertaining to our corporate headquarters
function, as well as our Canadian business unit that does not meet the criteria
of a reportable operating segment under SFAS 131.
REVENUES
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
---- ---- ----
(IN THOUSANDS)
United States ............................ $650,498 $663,534 $688,030
Canada ................................... 51,886 53,901 48,537
Europe ................................... 44,205 42,210 47,044
Other Foreign ............................ 28,652 30,540 28,413
--------------------------------
Total ................................. $775,241 $790,185 $812,024
=============================================================================
84
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG LIVED ASSETS
DECEMBER 31,
--------------------------------
2008 2007 2006
---- ---- ----
(IN THOUSANDS)
United States ............................ $ 89,528 $136,029 $144,208
Europe ................................... 3,540 8,883 4,821
Canada ................................... 5,714 3,954 4,014
Other Foreign ............................ 605 680 778
--------------------------------
Total .................................. $ 99,387 $149,546 $153,821
=============================================================================
Revenues are attributed to countries based upon the location of the customer.
Long lived assets are attributed to countries based upon the location of the
assets.
Our five largest individual customers, including members of a marketing group,
accounted for 53% of our consolidated net sales in 2008, 50% of consolidated net
sales in 2007, and 51% of consolidated net sales in 2006, respectively. These
net sales were generated from our Engine Management and Temperature Control
Segments.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments.
TRADE ACCOUNTS RECEIVABLE
The carrying amount of trade receivables reflects net recovery value and
approximates fair value because of their short outstanding terms.
TRADE ACCOUNTS PAYABLE
The carrying amount of trade payables approximates fair value because of their
short outstanding terms.
SHORT TERM BORROWINGS
The carrying value of our revolving line of credit borrowings equals fair market
value because the interest rate reflects current market rates. The fair value of
our convertible debentures is estimated based on quoted market prices or current
rates offered to us for debt of the same remaining maturities.
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted market prices
or current rates offered to us for debt of the same remaining maturities.
85
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of our financial instruments are as follows (in
thousands):
CARRYING AMOUNT FAIR VALUE
--------------- ----------
DECEMBER 31, 2008
Cash and cash equivalents.......................... $ 6,608 $ 6,608
Trade accounts receivable.......................... 174,401 174,401
Trade accounts payable............................. 68,312 68,312
Short term borrowings.............................. 193,884 188,668
Long-term debt..................................... 273 273
DECEMBER 31, 2007
Cash and cash equivalents.......................... $ 13,261 $ 13,261
Trade accounts receivable.......................... 204,445 204,445
Trade accounts payable............................. 64,384 64,384
Short term borrowings.............................. 164,647 164,647
Long-term debt..................................... 90,664 86,839
18. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three years ended December 31, 2008 was as follows
(in thousands):
TOTAL REAL ESTATE OTHER
----- ----------- -----
2008......................................... $ 9,835 $ 7,344 $ 2,491
2007......................................... 8,948 5,996 2,952
2006......................................... 8,438 5,983 2,455
At December 31, 2008, we are obligated to make minimum rental payments through
2022, under operating leases, which are as follows (in thousands):
2009.................................................................. $ 9,376
2010.................................................................. 7,919
2011.................................................................. 6,210
2012.................................................................. 5,445
2013.................................................................. 5,552
Thereafter............................................................ 16,624
--------------------------------------------------------------------------------
Total............................................................. $ 51,126
================================================================================
We generally warrant our products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time of
the product depending on the nature of the product. As of December 31, 2008 and
2007, we have accrued $10.2 million and $11.3 million, respectively, for
estimated product warranty claims included in accrued customer returns. The
accrued product warranty costs are based primarily on historical experience of
actual warranty claims. Warranty expense for each of the years 2008, 2007 and
2006 were $45.8 million, $47.2 million, and $49.3 million, respectively.
86
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides the changes in our product warranties:
DECEMBER 31,
--------------------
2008 2007
(In thousands)
Balance, beginning of period ........................... $ 11,317 $ 11,704
Liabilities accrued for current year sales ............. 45,762 47,191
Settlements of warranty claims ......................... (46,917) (47,578)
-------- --------
Balance, end of period ................................. $ 10,162 $ 11,317
-------- --------
LETTERS OF CREDIT. At December 31, 2008, we had outstanding letters of credit
with certain vendors aggregating approximately $0.4 million. The contract amount
of the letters of credit is a reasonable estimate of their value as the value
for each is fixed over the life of the commitment.
CHANGE OF CONTROL ARRANGEMENTS. We entered into change in control arrangements
with two key officers. In the event of a change of control (as defined in the
agreement), each executive will receive severance payments and certain other
benefits as provided in their respective agreement.
ASBESTOS. In 1986, we acquired a brake business, which we subsequently sold in
March 1998 and which is accounted for as a discontinued operation. When we
originally acquired this brake business, we assumed future liabilities relating
to any alleged exposure to asbestos-containing products manufactured by the
seller of the acquired brake business. In accordance with the related purchase
agreement, we agreed to assume the liabilities for all new claims filed on or
after September 1, 2001. Our ultimate exposure will depend upon the number of
claims filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense thereof. At December 31, 2008, approximately 3,650 cases
were outstanding for which we were responsible for any related liabilities. We
expect the outstanding cases to increase gradually due to legislation in certain
states mandating minimum medical criteria before a case can be heard. Since
inception in September 2001 through December 31, 2008, the amounts paid for
settled claims are approximately $7.1 million. In September 2007, we entered
into an agreement with an insurance carrier to provide us with limited insurance
coverage for the defense and indemnity costs associated with certain
asbestos-related claims. We have submitted various asbestos-related claims to
the insurance carrier for coverage under this agreement, and the insurance
carrier has accepted coverage for approximately $1.3 million of claims. We
intend to submit additional asbestos-related claims to the insurance carrier for
coverage.
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.
87
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The most recent actuarial study was performed as of August 31, 2008. The updated
study has estimated an undiscounted liability for settlement payments, excluding
legal costs and any potential recovery from insurance carriers, ranging from
$25.3 million to $69.2 million for the period through 2059. The change from the
prior year study was a $1.5 million increase for the low end of the range and a
$14 million increase for the high end of the range. Based on the information
contained in the actuarial study and all other available information considered
by us, we concluded that no amount within the range of settlement payments was
more likely than any other and, therefore, recorded the low end of the range as
the liability associated with future settlement payments through 2059 in our
consolidated financial statements. Accordingly, an incremental $2.1 million
provision in our discontinued operation was added to the asbestos accrual in
September 2008 increasing the reserve to approximately $25.3 million. According
to the updated study, legal costs, which are expensed as incurred and reported
in earnings (loss) from discontinued operation in the accompanying statement of
operations, are estimated to range from $19.1 million to $32.1 million during
the same period.
We plan to perform an annual actuarial evaluation during the third quarter of
each year for the foreseeable future. Given the uncertainties associated with
projecting such matters into the future and other factors outside our control,
we can give no assurance that additional provisions will not be required. We
will continue to monitor the circumstances surrounding these potential
liabilities in determining whether additional provisions may be necessary. At
the present time, however, we do not believe that any additional provisions
would be reasonably likely to have a material adverse effect on our liquidity or
consolidated financial position.
ANTITRUST LITIGATION. In November 2004, we were served with a summons and
complaint in the U.S. District Court for the Southern District of New York by
The Coalition for a Level Playing Field, which is an organization comprised of a
large number of auto parts retailers. The complaint alleges antitrust violations
by us and a number of other auto parts manufacturers and retailers and seeks
injunctive relief and unspecified monetary damages. In August 2005, we filed a
motion to dismiss the complaint, following which the plaintiff filed an amended
complaint dropping, among other things, all claims under the Sherman Act. The
remaining claims allege violations of the Robinson-Patman Act. Motions to
dismiss those claims were filed by us in February 2006. Plaintiff filed
opposition to our motions, and we subsequently filed replies in June 2006. Oral
arguments were originally scheduled for September 2006, however the court
adjourned these proceedings until a later date to be determined. Subsequently,
the judge initially assigned to the case recused himself, and a new judge has
been assigned before whom further preliminary proceedings have been held.
Although we cannot predict the ultimate outcome of this case or estimate the
range of any potential loss that may be incurred in the litigation, we believe
that the lawsuit is without merit, deny all of the plaintiff's allegations of
wrongdoing and believe we have meritorious defenses to the plaintiff's claims.
We intend to defend vigorously this lawsuit.
OTHER LITIGATION. We are involved in various other litigation and product
liability matters arising in the ordinary course of business. Although the final
outcome of any asbestos-related matters or any other litigation or product
liability matter cannot be determined, based on our understanding and evaluation
of the relevant facts and circumstances, it is our opinion that the final
outcome of these matters will not have a material adverse effect on our
business, financial condition or results of operations.
88
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. QUARTERLY FINANCIAL DATA UNIT (UNAUDITED)
2008 QUARTER ENDED
--------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------
Net sales ............................................. $148,876 $202,938 $215,343 $208,084
Gross profit .......................................... 35,531 48,772 48,629 51,224
Earnings (loss) from continuing operations ............ (34,070) 397 (772) 13,347
Earnings (loss) from discontinued operation, net of
taxes ............................................ 432 (1,579) (323) (326)
Net earnings (loss) ................................... $(33,638) $ (1,182) $ (1,095) $ 13,021
Net earnings (loss) from continuing operations
per common share:
Basic ............................................ $ (1.84) $ 0.02 $ (0.04) $ 0.73
Diluted .......................................... $ (1.84) $ 0.02 $ (0.04) $ 0.68
-------- -------- -------- --------
Net earnings (loss) per common share:
Basic ............................................ $ (1.81) $ (0.06) $ (0.06) $ 0.71
Diluted .......................................... $ (1.81) $ (0.06) $ (0.06) $ 0.66
======================================================================================================
2007 QUARTER ENDED
--------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------
Net sales ............................................. $167,251 $206,169 $216,950 $199,815
Gross profit .......................................... 39,069 54,642 56,689 51,875
Earnings (loss) from continuing operations ............ (7,943) 4,782 5,656 2,936
Loss from discontinued operation, net of
taxes ............................................ (380) (2,148) (279) (349)
Net earnings (loss) ................................... $ (8,323) $ 2,634 $ 5,377 $ 2,587
Net earnings (loss) from continuing operations
per common share:
Basic ............................................ $ (0.43) $ 0.26 $ 0.30 $ 0.16
Diluted .......................................... $ (0.43) $ 0.26 $ 0.30 $ 0.16
-------- -------- -------- --------
Net earnings (loss) per common share:
Basic ............................................ $ (0.45) $ 0.14 $ 0.29 $ 0.14
Diluted .......................................... $ (0.45) $ 0.14 $ 0.28 $ 0.14
======================================================================================================
89
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as
of the end of the period covered by this Report. This evaluation also included
consideration of our internal controls and procedures for the preparation of our
financial statements as required under Section 404 of the Sarbanes-Oxley Act.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this Report.
(b) Management's Report on Internal Control Over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act, as part of this Report we
have furnished a report regarding our internal control over financial report as
of December 31, 2008. The report is under the caption "Management's Report on
Internal Control Over Financial Reporting" in "Item 8. Financial Statements and
Supplementary Data," which report is incorporated herein by reference.
(c) Attestation Report of Independent Registered Public Accounting Firm.
Grant Thornton, our independent registered public accounting firm, has issued an
opinion as to the effectiveness of the Company's internal control over financial
reporting as of December 31, 2008. The opinion is under the caption "Report of
Independent Registered Public Accounting Firm-Internal Control Over Financial
Reporting" in "Item 8. Financial Statements and Supplementary Data" for this
attestation report, which is incorporated herein by reference.
(d) Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2008 and subsequent to that date, we have
not made changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
We continue to review, document and test our internal control over financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business. These
efforts will lead to various changes in our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
90
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the
information in our Definitive Proxy Statement to be filed with the SEC in
connection with our 2009 Annual Meeting of Stockholders (the "2009 Proxy
Statement") set forth under the captions "Election of Directors," "Management
Information," "Corporate Governance" and "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information in our 2009 Proxy Statement set forth under captions "Corporate
Governance," "Executive Compensation and Related Information" and "Compensation
and Management Development Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the
information in our 2009 Proxy Statement set forth under the captions "Executive
Compensation and Related Information" and "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information in our 2009 Proxy Statement set forth under the captions "Corporate
Governance" and "Executive Compensation and Related Information."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the
information in our 2009 Proxy Statement set forth under the captions "Audit and
Non-Audit Fees."
91
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The Index to Consolidated Financial Statements of the Registrant
under Item 8 of this Report is incorporated herein by reference as
the list of Financial Statements required as part of this Report.
(2) The following financial schedule and related report for the years
2008, 2007 and 2006 is submitted herewith:
Report of Independent Registered Public Accounting Firm on Schedule
II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not
applicable or the information is included in the financial
statements or notes thereto.
(3) Exhibits.
The exhibit list in the Exhibit Index is incorporated by reference
as the list of exhibits required as part of this Report.
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(REGISTRANT)
/s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
/s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and Chief Financial Officer
New York, New York
March 11, 2009
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lawrence I. Sills and James J. Burke, jointly and
severally, as his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 11, 2009 /s/ Lawrence I. Sills
---------------------
Lawrence I. Sills
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
March 11, 2009 /s/ James J. Burke
------------------
James J. Burke
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
93
March 11, 2009 /s/ Robert M. Gerrity
---------------------
Robert M. Gerrity, Director
March 11, 2009 /s/ Pamela Forbes Lieberman
---------------------------
Pamela Forbes Lieberman, Director
March 11, 2009 /s/ Arthur S. Sills
--------------------
Arthur S. Sills, Director
March 11, 2009 /s/ Peter J. Sills
------------------
Peter J. Sills, Director
March 11, 2009 /s/ Frederick D. Sturdivant
---------------------------
Frederick D. Sturdivant, Director
March 11, 2009 /s/ William H. Turner
---------------------
William H. Turner, Director
March 11, 2009 /s/ Richard S. Ward
-------------------
Richard S. Ward, Director
March 11, 2009 /s/ Roger M. Widmann
--------------------
Roger M. Widmann, Director
94
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
------
3.1 Restated By-Laws, dated May 23, 1996, filed as an Exhibit of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as an
Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
3.3 Certificate of Amendment of the Certificate of Incorporation, dated
February 15, 1996, filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996.
4.1 Form of Subordinated Debenture Indenture (including form of convertible
debenture) (incorporated by reference to Exhibit 4.1 to the Company's
Amendment No. 2 to its Registration Statement on Form S-3 (Registration
No. 333-79177), filed on July 20, 1999).
10.1 Employee Stock Ownership Plan and Trust, dated January 1, 1989
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989).
10.2 1996 Independent Outside Directors Stock Option Plan of Standard Motors
Products, Inc. (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.3 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended and restated, (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 333-59524), filed on
April 25, 2001).
10.4 Supplemental Compensation Plan effective October 1, 2001 (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.5 Severance Compensation Agreement, dated December 12, 2001, between
Standard Motor Products, Inc. and John Gethin (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 2001).
95
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
------
10.6 Severance Compensation Agreement, dated December 12, 2001, between
Standard Motor Products, Inc. and James Burke (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 2001).
10.7 Credit Agreement, dated as of December 29, 2005, among SMP Motor Products,
Ltd., as Borrower, (incorporated by reference to the Company's Current
Report on Form 8-K filed on January 3, 2006).
10.8 Repurchase and Prepayment Agreement, dated as of December 29, 2005,
between Standard Motor Products, Inc., and Dana Corporation (incorporated
by reference to the Company's Current Report on Form 8-K filed on January
3, 2006).
10.9 Amendment to the Standard Motor Products, Inc. Supplemental Compensation
Plan, effective December 1, 2006 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2006).
10.10 Retention Bonus and Insurance Agreement, dated December 26, 2006, between
Standard Motor Products, Inc. and John Gethin (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 2006).
10.11 Retention Bonus and Insurance Agreement dated December 26, 2006, between
Standard Motor Products, Inc. and James Burke (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 2006).
10.12 Purchase and Sale Agreement, dated December 21, 2007, between Standard
Motors Products, Inc. and EXII Northern Boulevard Acquisition LLC
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2007).
10.13 Lease Agreement, dated March 12, 2008, between Standard Motors Products,
Inc. and 37-18 Northern Boulevard LLC (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2007).
10.14 Standard Motor Products, Inc. Special Incentive Plan (incorporated by
reference to our Current Report on Form 8-K filed January 28, 2008).
10.15 First Amendment Agreement dated as of March 20, 2007, among SMP Motor
Products, Ltd., as borrower and the other credit parties thereto, and GE
Canada Finance Holding Company, as lender and agent, and the other lenders
thereto (incorporated by reference to the Company's Form 8-K filed March
21, 2007).
10.16 Second Amended and Restated Credit Agreement dated as of March 20, 2007,
among Standard Motor Products, Inc., as borrower and the other credit
parties thereto, and General Electric Capital Corp., as agent and lender,
Bank of America, N.A. and Wachovia Bank, N.A., as lenders and
co-syndication agents, JPMorgan Chase Bank, N.A., as lender and as
documentation agent, and the other lenders thereto (incorporated by
reference to the Company's Form 8-K filed March 21, 2007).
96
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
------
10.17 Second Amendment Agreement dated as of May 1, 2007, among SMP Motor
Products, Ltd., as borrower and the other credit parties thereto, and GE
Canada Finance Holding Company, as lender and agent, and the other lenders
thereto.
10.18 Consent and Amendment No. 1 to Second Amended and Restated Credit
Agreement dated as of October 12, 2007, among Standard Motor Products,
Inc., as borrower and the other credit parties thereto, and General
Electric Capital Corp., as agent and lender, Bank of America, N.A. and
Wachovia Bank, N.A., as lenders and co-syndication agents, JPMorgan Chase
Bank, N.A., as lender and as documentation agent, and the other lenders
thereto.
10.19 Amendment No. 2 to Second Amended and Restated Credit Agreement dated as
of March 6, 2008, among Standard Motor Products, Inc., as borrower and the
other credit parties thereto, and General Electric Capital Corp., as agent
and lender, Bank of America, N.A. and Wachovia Bank, N.A., as lenders and
co-syndication agents, JPMorgan Chase Bank, N.A., as lender and as
documentation agent, and the other lenders thereto.
10.20 Consent and Amendment No. 3 to Second Amended and Restated Credit
Agreement dated as of May 12, 2008, among Standard Motor Products, Inc.,
as borrower and the other credit parties thereto, and General Electric
Capital Corp., as agent and lender, Bank of America, N.A. and Wachovia
Bank, N.A., as lenders and co-syndication agents, JPMorgan Chase Bank,
N.A., as lender and as documentation agent, and the other lenders thereto.
10.21 Amendment No. 4 to Second Amended and Restated Credit Agreement dated as
of December 18, 2008, among Standard Motor Products, Inc., as borrower and
the other credit parties thereto, and General Electric Capital Corp., as
agent and lender, Bank of America, N.A. and Wachovia Bank, N.A., as
lenders and co-syndication agents, JPMorgan Chase Bank, N.A., as lender
and as documentation agent, and the other lenders thereto (incorporated by
reference to the Company's Form 8-K filed December 22, 2008).
10.22 Amendment No. 3 to Credit Agreement dated as of December 18, 2008, among
SMP Motor Products, Ltd., as borrower and the other credit parties
thereto, and GE Canada Finance Holding Company, as lender and agent, and
the other lenders thereto (incorporated by reference to the Company's Form
8-K filed December 22, 2008).
10.23 Amendment to Severance Compensation Agreement, dated as of December 15,
2008, between Standard Motor Products, Inc. and John Gethin.
10.24 Amendment to Severance Compensation Agreement, dated as of December 15,
2008, between Standard Motor Products, Inc. and James Burke.
10.25 Amended and Restated Supplemental Executive Retirement Plan, dated as of
December 15, 2008.
97
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
------
21 List of Subsidiaries of Standard Motor Products, Inc.
23 Consent of Independent Registered Public Accounting Firm.
24 Power of Attorney (see signature page to Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Stockholders and Board of Directors
Standard Motor Products, Inc.
We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial statements
of Standard Motor Products, Inc and Subsidiaries (the "Company") referred to in
our report dated March 11, 2009, which is included in the annual report to
security holders and incorporated by reference in Part II of this form. Our
report on the consolidated financial statements includes explanatory paragraphs
relating to the application of FASB Interpretation No. 48 effective January 1,
2007, and the application of Statement of Financial Accounting Standards No. 123
(R) as of January 1, 2006, and No. 158 as of December 31, 2006. Our audits of
the basic financial statements included the financial statement schedule listed
in the index appearing under Item 15(a)(2), which is the responsibility of the
Company's management. In our opinion, this financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
New York, New York
March 11, 2009
99
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2008, 2007 and 2006
Additions
---------
Balance at Charged to
beginning costs and Balance at
Description of year expenses Other Deductions end of year
----------- ------- -------- ----- ---------- -----------
Year ended December 31, 2008:
Allowance for doubtful accounts $ 6,620,000 $ 1,874,000 $ (78,000)(1) $ 368,000 $ 8,048,000
Allowance for discounts 2,344,000 10,979,000 -- 11,350,000 1,973,000
------------ ------------ ------------- ------------ ------------
$ 8,964,000 $ 12,853,000 $ -- $ 11,778,000 $ 10,021,000
============ ============ ============= ============ ============
Allowance for sales returns $ 23,149,000 $ 81,488,000 $ -- $ 84,973,000 $ 19,664,000
============ ============ ============= ============ ============
Allowance for inventory valuation $ 36,747,000 $ 3,747,000 $ -- $ 6,765,000 $ 33,729,000
============ ============ ============= ============ ============
Year ended December 31, 2007:
Allowance for doubtful accounts $ 7,311,000 $ 709,000 $ (1,030,000)(1) $ 370,000 $ 6,620,000
Allowance for discounts 2,154,000 11,463,000 -- 11,273,000 2,344,000
------------ ------------ ------------- ------------ ------------
$ 9,465,000 $ 12,172,000 $ (1,030,000)(1) $ 11,643,000 $ 8,964,000
============ ============ ============= ============ ============
Allowance for sales returns $ 21,705,000 $ 88,889,000 $ -- $ 87,445,000 $ 23,149,000
============ ============ ============= ============ ============
Allowance for inventory valuation $ 35,438,000 $ 6,623,000 $ -- $ 5,314,000 $ 36,747,000
============ ============ ============= ============ ============
Year ended December 31, 2006:
Allowance for doubtful accounts $ 7,527,000 $ 405,000 $ (382,000)(2) $ 239,000 $ 7,311,000
Allowance for discounts 2,047,000 11,491,000 -- 11,384,000 2,154,000
------------ ------------ ------------- ------------ ------------
$ 9,574,000 $ 11,896,000 $ (382,000)(2) $ 11,623,000 $ 9,465,000
============ ============ ============= ============ ============
Allowance for sales returns $ 22,346,000 $ 82,259,000 $ (95,000)(2) $ 82,805,000 $ 21,705,000
============ ============ ============= ============ ============
Allowance for inventory valuation $ 39,061,000 $ 6,128,000 $ (846,000)(2) $ 8,905,000 $ 35,438,000
============ ============ ============= ============ ============
(1) Reclass to non-current for receivables with extended terms.
(2) Allowances for divested companies.
100