10-K 1 t300925.txt STANDARD MOTOR PRODUCTS, INC. 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-4743 STANDARD MOTOR PRODUCTS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW YORK 11-1362020 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101 -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (718) 392-0200 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED -------------------------------------- ----------------------------------------- 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 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 an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The aggregate market value of the voting common stock based on the closing price on the New York Stock Exchange on June 30, 2003 (the last business day of registrant's most recently completed second fiscal quarter) of $11.10 per share held by non-affiliates of the registrant was $151,463,862. For purposes of the foregoing calculation, all directors and officers have been deemed to be affiliates, but the registrant disclaims that any of such are affiliates. As of the close of business on February 27, 2004, there were 19,736,773 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, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held in 2004, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. STANDARD MOTOR PRODUCTS, INC. INDEX
PART I PAGE Item 1 Business ............................................................................ 3 Item 2 Properties .......................................................................... 14 Item 3 Legal Proceedings ................................................................... 16 Item 4 Submission of Matters to a Vote of Security Holders ................................. 16 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ............... 17 Item 6 Selected Financial Data ............................................................. 17 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A Quantitative and Qualitative Disclosures About Market Risk .......................... 31 Item 8 Financial Statements and Supplementary Data ......................................... 32 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 33 Item 9A Controls and Procedures ............................................................. 33 PART III Item 10 Directors and Executive Officers of the Registrant .................................. 33 Item 11 Executive Compensation .............................................................. 33 Item 12 Security Ownership of Certain Beneficial Owners and Management ...................... 34 Item 13 Certain Relationships and Related Transactions ...................................... 34 Item 14 Principal Accounting Fees and Services .............................................. 34 PART IV Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 35 Signatures .......................................................................... 39
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 ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS BASED ON EXPECTATIONS, ESTIMATES AND PROJECTIONS AS OF THE DATE OF THIS FILING. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. SEE ITEM 7-- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FORWARD-LOOKING STATEMENTS." ITEM 1. BUSINESS OVERVIEW We are a leading independent manufacturer and distributor 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 line of replacement parts. Our Engine Management Segment manufactures ignition and emission parts, on-board computers, 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 to warehouse distributors and large retail chains in the United States, Canada and Latin America. We also sell our products in Europe through our European Segment. 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, CSK Auto, O'Reilly Automotive and Pep Boys. We distribute parts under our own brand names, such as Standard, Blue Streak, Echlin, Niehoff and Four Seasons, and through private labels, such as Carquest and NAPA Auto Parts. BUSINESS STRATEGY Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality, low cost replacement parts in the engine management and temperature control automotive aftermarkets. The key elements of our strategy are as follows: 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; and o focusing further our engineering development efforts. 3 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 EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales by continuing to develop and expand 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 developed by OEMs in North America and Europe. o BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by marketing our products more broadly to the distribution businesses of OEMs who sell products to new car dealer service areas. 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 have a proven track record of managing costs and improving operating efficiency through consolidating redundant functions and realizing cost savings in our business. 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 efficient inventory management, including warranty and overstock return management; o maintaining and improving our cost effectiveness and competitive responsiveness to better serve the automotive aftermarket customer base; o adopting company-wide programs geared toward manufacturing and distribution efficiency; and o initiating company-wide overhead and operating expense cost reduction programs, such as closing excess facilities. o REDUCE OUR DEBT. We intend to apply any excess cash flow from operations and the management of working capital to reduce our outstanding indebtedness. ACQUISITION On June 30, 2003, we completed the acquisition of substantially all of the assets and assumed substantially all of the operating liabilities of Dana Corporation's Engine Management Group ("DEM"). DEM's customers consist of many of the leading warehouse distributors, such as NAPA Auto Parts, as well as many of the leading auto parts retail chains, such as CSK Auto, O'Reilly Automotive and Pep Boys. We are familiar with a great majority of them. Certain of these customers are already customers of ours to a limited extent or are customers in different product lines of ours. DEM's products enjoy strong brand recognition with its many leading automotive product names, including Echlin, Borg Warner and Niehoff, as well as with private labels through NAPA Auto Parts. In connection with the acquisition, we have reviewed our operations and implemented integration plans to restructure the operations of DEM. We will close seven of the DEM facilities. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation for further discussion. On February 3, 2004, we acquired the Canadian distribution of Dana Corporation's Engine Management Group for approximately $1 million. As part of the acquisition, we acquired inventory and will be relocating it into our distribution facility in Mississauga, Canada. 4 THE AUTOMOTIVE AFTERMARKET The automotive aftermarket industry is comprised of a large, diverse number of 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 the OEM's. 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. The automotive aftermarket industry is also dependent on new car sales, although to a lesser degree than original equipment manufacturers, or OEMs, and their suppliers, because these sales create the total number of cars available for repair. Despite the current economic climate, the current interest rate environment and aggressive financing programs by automakers has increased demand for new cars and trucks, which should benefit the automotive aftermarket manufacturers in the long term as vehicles age. 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 increase in total miles driven per year; o new and modified environmental regulations; o increase in pricing of new cars; and o new car quality and related warranties. Traditionally, the supply arms of OEMs and the independent manufacturers who supply the original equipment part applications have supplied a majority of the business to new car dealer networks. However, Ford and General Motors have recently moved to make their supply arms more independent, which may provide future opportunities for us to supply replacement parts to the dealer networks of the OEM's, 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, 2003. Our three reportable operating segments are Engine Management (i.e. effective June 30, 2003, Engine Management includes DEM), Temperature Control and Europe.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 2003 2002 2001 ------------------------ ---------------------------- ------------------------ Amount % of Total Amount % of Total Amount % of Total ---------- ---------- ----------- ------------ ---------- ---------- (DOLLARS IN THOUSANDS) ENGINE MANAGEMENT: Ignition and Emission Parts ................. $337,134 49.7% $232,511 38.9% $218,694 37.0% Wires and Cables ......... 69,528 10.2% 63,267 10.6% 58,720 9.9% Fuel System Parts ....... 7,713 1.1% 7,334 1.2% 8,084 1.4% -------- ----- -------- ----- -------- ----- TOTAL ENGINE MANAGEMENT ....... 414,375 61.0% 303,112 50.7% 285,498 48.3% -------- ----- -------- ----- -------- ----- TEMPERATURE CONTROL: Compressors ............... 89,676 13.2% 105,301 17.6% 117,965 19.9% Other Air Conditioning Parts ................... 117,720 17.3% 136,973 22.9% 138,542 23.4% Heating Parts ............ 12,180 1.8% 12,814 2.1% 13,349 2.3% -------- ----- -------- ----- -------- ----- TOTAL TEMPERATURE CONTROL ... 219,576 32.3% 255,088 42.6% 269,856 45.6% -------- ----- -------- ----- -------- ----- EUROPE: Engine Management Parts . 27,514 4.1% 26,575 4.4% 26,315 4.4% Temperature Control Parts 12,627 1.9% 9,453 1.6% 7,134 1.2% -------- ----- -------- ----- -------- ----- TOTAL EUROPE ................. 40,141 6.0% 36,028 6.0% 33,449 5.6% -------- ----- -------- ----- -------- ----- ALL OTHER .................... 4,691 0.7% 4,209 0.7% 2,849 0.5% -------- ----- -------- ----- -------- ----- TOTAL ................... $678,783 100.0% $598,437 100.0% $591,652 100.0% ======== ===== ======== ===== ======== =====
The table below shows our operating profit and identifiable assets by operating segment for the three years ended December 31, 2003.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------- 2003 2002 2001 -------------------------- --------------------------- -------------------------- OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Engine Management ........ $ 31,871 $ 448,687 $ 41,844 $ 247,318 $ 26,432 $ 233,564 Temperature Control ...... 4,702 150,248 10,095 157,343 3,624 182,083 Europe .................... (3,605) 31,188 (10,464) 30,728 (1,718) 40,407 All Other ................ (17,153) 64,402 (16,407) 55,369 (13,215) 53,375 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL ................... $ 15,815 $ 694,525 $ 25,068 $ 490,758 $ 15,123 $ 509,429 =========== =========== =========== =========== =========== ===========
"All Other" consists of items pertaining to our corporate headquarters function, as well as our Canadian business unit that do not meet the criteria of a reportable operating segment. 6 ENGINE MANAGEMENT SEGMENT BREADTH OF PRODUCTS. In our Engine Management Segment, which effective June 30, 2003 includes DEM, replacement parts for ignition and emission control systems accounted for approximately 50%, 39% and 37% of our consolidated net sales in 2003, 2002 and 2001, respectively. These parts include distributor caps and rotors, electronic ignition control modules, voltage regulators, coils, switches, sensors and EGR valves. We are a basic manufacturer of many of the ignition parts we market and continue to develop ways of increasing the number of parts we manufacture, rather than purchasing such parts from third parties. The Independence, Kansas DEM facility, which is one of the DEM facilities which will remain operating, will further enhance our ability to be a basic manufacturer with ignition and emission control systems. COMPUTER CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped with computer-controlled engine management systems to control ignition, emission control and fuel injection. The on-board computers monitor inputs from many types of sensors located throughout the vehicle, and control a myriad of valves, switches and motors to manage engine and vehicle performance. Electronic ignition systems enable the engine to improve fuel efficiency and reduce the level of hazardous fumes in exhaust gases. Electronic control modules and electronic voltage regulators comprised approximately 10%, 12% and 13% of our total ignition and emission consolidated net sales in 2003, 2002 and 2001, respectively. In 1992, we entered into a 50/50 joint venture in Canada with Blue Streak Electronics, Inc. to rebuild automotive engine management computers and mass air flow sensors. The volume of products produced by the joint venture are sold primarily to us and has positioned us as a key supplier in the growing remanufactured electronics markets. The Blue Streak joint venture has further expanded its product range to include computers used in temperature control, anti-lock brake systems and air bags. 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 emission laws have been implemented throughout the majority of the United States. The Clean Air Act, as amended in 1990, imposes strict emission 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. As the Clean Air Act was "phased in" beginning in 1994, automobiles must now comply with emission standards from the time they were manufactured, and in most states, until the last day they are in use. This law has, and in the future we expect this law and other new government emission laws to have, a positive impact on sales of our ignition and emission controls parts. Vehicles failing these new, more stringent tests have required 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 10%, 11% and 10% of our consolidated net sales in 2003, 2002 and 2001, respectively. 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 capitalize on the market's awareness of the importance of quality. In 1999, we relocated two of our wire and cable operations, one in Dallas, Texas and the other in Bradenton, Florida, to a new facility in Reynosa, Mexico. The Mexican operation focuses on assembly and packaging of the economy wire sets, while our premium line is manufactured at our facility in Edwardsville, Kansas. 7 With the acquisition of DEM's business, we acquired the ability to extrude our own wire in Mishawaka, Indiana to be used in our ignition wire sets. This vertical integration of a critical component offers us the ability to achieve lower costs and our own controlled source of supply and quality. TEMPERATURE CONTROL SEGMENT We manufacture, remanufacture and market a broad line of replacement parts for automotive temperature control and cooling systems (air conditioning, heating and engine cooling), primarily under the brand names of Four Seasons, Factory Air, Murray, Trumark, NAPA, Carquest, Hayden and Imperial. The major product groups sold by our Temperature Control Segment are new and remanufactured compressors, blower and radiator fan motors, dryers, evaporators, accumulators, hoses, heater cores, heater valves, fan assemblies, fan clutches, engine oil coolers, and transmission coolers. Our temperature control products accounted for approximately 32%, 43% and 46% of our consolidated net sales in 2003, 2002 and 2001, respectively. A major factor in the Temperature Control Segment's business is the federal regulation of ozone depleting chlorofluorocarbon refrigerants United States legislation phased out the production of domestic R-12 refrigerant. (e.g., DuPont's Freon) completely by the end of 1995. As the new law became effective, vehicle air conditioners needing repair or recharge were retrofitted to use the new R-134a refrigerant. New vehicle manufacturers began to use the new R-134a refrigerant in 1993 and today the vast majority of the U.S. vehicle fleet uses this refrigerant. Service dealers continue to seek training and certification in the new technology and our Temperature Control Segment has taken the lead in providing this training and certification. Additionally, we reengineered our compressor line to be able to operate efficiently utilizing either R-12 or R-134a refrigerants, and remain a leader in providing retrofit kits for conversion of R-12 systems. EUROPE SEGMENT In July 1996, we acquired an equity interest in Standard Motor Products (SMP) Holdings Limited (formerly Intermotor Holdings Limited) located in Nottingham, England. This was our first investment in Europe. (During 2002, we acquired the remaining equity interest bringing the Company's ownership percentage to 100%). SMP Holdings Limited manufactures and distributes a broad line of engine management products primarily to customers in Europe. Also in 1996, we expanded our presence in Europe by opening a European distribution center in Strasbourg, France for temperature control products. A joint venture (Blue Streak-Europe) between SMP Holdings Limited and Blue Streak Electronics was also initiated in 1996, which supplies rebuilt engine computers for the European market. Since 1996, we have made a series of smaller acquisitions supplementing both the Engine Management and Temperature Control portions of the business. With respect to the engine management business, in January 1999 we acquired Webcon UK Limited, an assembler and distributor of fuel system components. (We subsequently divested the Webcon product line in the third quarter of 2003 incurring an $0.8 million loss.) In 1999, we acquired Lemark Auto Accessories, a supplier of wire sets. In January 1999, Blue Streak Europe acquired Injection Correction UK LTD, and in September 2001, it also acquired TRW Inc.'s electronic control unit remanufacturing division, also located in the United Kingdom. In April of 2002, the wire business was further expanded by acquiring Carol Cable Limited, a manufacturer and distributor of wire. With respect to the temperature control portion of the business, following the opening of the distribution center in France, in 1997 a joint venture was entered into with Valeo, SA to remanufacture air conditioner compressors for the European market. In addition, in January 2000 we acquired Four Seasons UK Ltd. (formerly Vehicle Air Conditioning Parts Ltd.) a distributor of components for the repair of air conditioning systems. In July 2000, the Temperature Control business was further expanded by purchasing Automotive Heater Exchange SRL in Italy. Our European Segment accounted for approximately 6% of our consolidated net sales in 2003, 2002, and 2001, respectively. Aftermarket margins are under pressure from OE suppliers, while volumes are in a general decline in the ignition and carburetor product lines. The combination of factors has had a negative impact on Engine Management product sales with increasing amounts of underabsorbed overhead. We are currently focusing on ways of reducing manufacturing costs, including outsourcing products where their respective 8 volumes are declining and margins can be improved by outsourcing. In addition, we have made investments in capital projects to facilitate the sale of new OE niche customers and the aftermarket. We have also consolidated certain facilities and are reducing costs wherever we can. Unlike Engine Management sales, European Temperature Control product sales are increasing. Through acquisitions and more importantly a growing market, net sales have increased from $6.1 million in 2000 to $12.6 million in 2003. To date, the focus has been on product coverage and high customer service levels. We have consolidated certain facilities and are reducing costs wherever we can. 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, 2003: Year Ended December 31, --------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (Dollars in thousands) United States ............. $ 584,853 $ 512,055 $ 515,322 Europe ..................... 40,141 36,028 33,449 Canada ..................... 38,187 32,188 28,811 Other Foreign ............. 15,602 18,166 14,070 ---------- ---------- ---------- Total .................. $ 678,783 $ 598,437 $ 591,652 ========== ========== ========== The table below shows our long-lived assets by geographical area for the three years ended December 31, 2003: Year Ended December 31, --------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (Dollars in thousands) United States ............. $ 173,817 $ 109,778 $ 118,455 Europe ..................... 7,246 7,153 17,301 Canada ..................... 2,496 2,450 2,829 Other Foreign ............. 833 1,124 1,101 ---------- ---------- ---------- Total .................. $ 184,392 $ 120,505 $ 139,686 ========== ========== ========== SALES AND DISTRIBUTION Over the last ten years, there has been a trend toward consolidation in the distribution chain, both by warehouse distributors and retailers, and both vertically and horizontally. In the traditional distribution channel, where we sell our products to warehouse distributors, such distributors supply auto parts jobbers, who in turn sell to professional mechanics and to consumers who perform automotive repairs themselves. In recent years, distributors have been consolidating with other distributors, as well as jobbers. An increasing number of distributors own their jobbers. In addition, in certain cases jobbers have consolidated and formed their own buying group. In the retail distribution channel, retailers, who buy directly from us, sell directly to technicians and "do it yourselfers". Retailers are also consolidating among themselves and expanding into the jobber market. 9 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 dealers sell "name brand" aftermarket parts and accessories and also service vehicles. The products available through the dealers are purchased through the original equipment service network, or OES network. Traditionally, the supply arms of OEM's have supplied a majority of OES network. However, the supply arms of certain OEM's have become more independent, which is providing 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. We believe the primary reason for this reputation is our high concentration of highly-qualified, well-trained salespeople dedicated to geographic territories, which allows us to provide a level of customer service that we believe is unmatched. From the outset, we thoroughly train our salespeople both in the function and application of our product lines , as well as in proven sales techniques. Customers, therefore, depend on these salespeople as a reliable source for technical information. We give newly hired salespeople extensive instruction at our training facility in Irving, Texas and have a policy of continuing education 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 the end-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 salespeople to be teachers and trainers, we focus our recruitment efforts on candidates who already have strong technical backgrounds as well as sales experience. We also create demand for our products through the Standard Plus Club. Our Standard Plus Club, a professional service dealer network offers technical and business development support and has a technical service telephone hotline which provides diagnostics and installation support. This club is available to technicians and provides training, special discount programs and on-line diagnostics assistance. In connection with our sales activities, we offer several types of discounts and allowances. We believe these discounts and allowances are a common practice throughout the automotive aftermarket industry. First, we offer cash discounts for paying invoices in accordance with the discounted terms of the invoice. Second, we offer pricing discounts based on volume and different product lines purchased from us. Supplementally, rebates and discounts are provided to customers as advertising and sales force allowances. In addition to the aforementioned discounts and rebates, allowances for warranty and overstock returns are also provided. CUSTOMERS Our customer base is comprised largely of warehouse distributors, large jobber outlets, other manufacturers and export customers. In addition to serving our traditional customer base, we have expanded into the retail market by selling to large retail chains such as Advance Auto Parts, AutoZone, CSK Auto, O'Reilly Automotive and Pep Boys. Our retail channel of distribution has grown significantly from approximately $41 million in consolidated net sales to retailers in 1993 to approximately $166 million in 2003. In 1997, we commenced distributing our products through the OES supplier channel, and sold approximately $3 million in consolidated net sales to OES suppliers which increased to approximately $38 million in 2003. Our five largest individual customers accounted for 43% of our 2003 consolidated net sales. One individual customer accounted for 12% of our 2003 consolidated net sales. COMPETITION We are a leading independent manufacturer of replacement parts for the product lines in Engine Management and Temperature Control. We compete primarily on the basis of price, product quality, customer service, product coverage, product availability, order turn-around time and order fill rate. We believe we differentiate ourselves from our competitors primarily through: 10 o a value-added, knowledgeable sales force; o extensive product coverage; o sophisticated parts cataloguing systems; and o inventory levels sufficient to meet the rapid delivery requirements of customers. In the engine management business, we are one of the leading independent manufacturers in the United States. Our significant competitors include Delco Electonics Corporation, Delphi Corporation, Federal-Mogul Corporation, Robert Bosch Corporation and Wells Manufacturing Corporation. Our temperature control business is one of the leading independent producers and distributors of a full line of temperature control products in North America and other geographic areas. Delphi Corporation, Visteon Corporation, AC Delco, Transpro, Inc. and Jordan Automotive Aftermarket, Inc. are some of our key competitors in this market. Although we are a leading independent manufacturer of automotive replacement parts with strong brand name recognition, we face substantial competition in all markets that we serve. The automotive aftermarket is highly competitive and 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 major manufacturers of replacement parts are divisions of companies having greater financial, marketing and other resources than we do. In addition, automobile manufacturers supply virtually every replacement part sold by us, although these manufacturers generally supply parts only for cars they produce. 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. 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. The seasonality of our business offers significant operational challenges in our manufacturing and distribution functions. To limit these challenges and to provide a rapid turnaround time of customer orders, we traditionally offer a pre-season selling program, known as our "Spring promotion", in which customers are offered a choice of a price discount or longer payment terms. WORKING CAPITAL MANAGEMENT Automotive aftermarket companies have been under increasing pressure to provide broad SKU (stock keeping unit) coverage in response to parts and brand proliferation. Since 1996, we have made significant changes to the inventory management system to reduce inventory requirements. We launched a new forecasting system in our Engine Management Segment that permitted a significant reduction in safety stocks. Our Engine Management Segment also introduced a new distribution system in the second half of 1999, which permits pack-to-order systems to be implemented. Such systems permit 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 instituted an aggressive inventory reduction campaign initiated in 2001. We targeted a minimum $30 million inventory reduction in 2001, but exceeded our goal by reducing inventory by $57 million that year. In 2002 and 2003, we further reduced inventory by $8 million and $4 million, respectively, before giving consideration to the DEM acquisition. Importantly, while reducing inventory levels, we maintained customer service fill rate levels of approximately 93%. By the end of 2004, we plan on reducing inventories further as DEM begins to become integrated. 11 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 in the event that they have overstocked their inventories. In particular, 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 and overstock return levels, beginning in 2000 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, our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not follow a twelve step warranty return process. Our profitability and working capital requirements have become more seasonal with the increased 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), ignition wire, stainless steel coils and rods, aluminum coils and rods, lead, rubber molding compound, thermo-set and thermo plastic molding powders. Additionally, we use components and cores (used parts) in our remanufacturing processes for computerized electronics and air conditioning compressors. We purchase many materials in the U.S. open market, but do have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores, we obtain them either from exchanges with customers who return cores when purchasing remanufactured parts, or through direct purchases from a network of core brokers. 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. Recently, prices of steel and other commodities have risen. 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. PRODUCTION AND ENGINEERING We engineer, tool and manufacture many of the components for our products, except for some commonly available small component parts from outside suppliers. We also perform our own plastic and rubber 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 computer modules and air conditioning compressors. We have found this level of vertical integration to provide advantages in terms of cost, quality and availability. We intend to selectively continue efforts toward further vertical integration to ensure a consistent quality and supply of low cost components. The DEM acquisition has expanded our ability to become a "basic" supplier. 12 We use the "just-in-time" cellular manufacturing concept as a major program to lower costs and improve efficiency. The main thrust of "just-in-time" cellular manufacturing is reducing work-in-process and finished goods inventory, and its implementation reduces the inefficient operations that burden many manufacturing processes. In 2000, we launched a program for the installation of a fully integrated enterprise resource planning (ERP) system. The implementation was completed in 2003 in our Temperature Control Segment. The existing Engine Management information system continues to meet the needs of our Engine Management Segment with DEM facilities being converted onto such systems during 2004. EMPLOYEES As of December 31, 2003, we employed approximately 3,500 people in the United States, and 1,000 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong. Of these, approximately 3,200 are production employees. With the closing of the DEM facilities, during 2004, we expect a net reduction of approximately 600 people from the approximate 1,900 employed in June 2003. We operate primarily in non-union facilities and have binding labor agreements with the workers at our two unionized facilities. We have approximately 130 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 April 7, 2005. As of December 31, 2003, approximately 130 of our production employees in Long Island City, New York are under a UAW contract that expires October 2, 2004. We also have a union relationship in Mexico with an agreement negotiated each year. The current union agreement in Mexico, which covers approximately 250 employees, expires on January 29, 2005. 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 two $10 million environmental policies to cover our existing facilities, except for one of our facilities which is currently undergoing minor environmental remediation and for the locations obtained from our acquisition of DEM. The environmental remediation costs at such facility are covered by an insurance policy of $3 million, which is subject to a $1.5 million deductible. Historically, we have not experienced casualty losses in any year in excess of our coverage. We have no reason to expect this experience to change, but can offer no assurances that liability losses in the future will not exceed our coverage. 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 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 . 13 ITEM 2. PROPERTIES We maintain our executive offices and a manufacturing plant in Long Island City, New York. The table below describes our principal physical properties.
OWNED OR APPROX. EXPIRATION STATE OR SQUARE DATE LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE ------------------- ---------- --------------------------------------------------- ----------- ----------- ENGINE MANAGEMENT Orlando FL Manufacturing (Ignition) 50,640 2007 Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned Wilson NC Manufacturing (Ignition) 31,500 2008 Reno NV Distribution (Ignition) 67,000 Owned Long Island City NY Administration and Manufacturing (Ignition) 294,000 Owned Greenville SC Manufacturing (Ignition) 181,525 Owned Disputanta VA Distribution (Ignition) 411,000 Owned Fajardo Puerto Rico Manufacturing (Ignition) 114,000 2007 Hong Kong HK Manufacturing (Ignition) 21,350 2005 Reynosa Mexico Manufacturing (Wire) 62,500 2009 Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned Nottingham England Manufacturing (Ignition) 46,777 Owned Nottingham England Manufacturing (Ignition) 10,000 2012 Wellingborough England Manufacturing (Wire) 18,500 2017 ACQUIRED LOCATIONS FROM DEM * Nashville TN Distribution 625,000 2021 * Branford CT Manufacturing 187,000 Owned * Guilford CT Office, partial sub-lease 27,689 2006 * Northvale NJ Vacant 20,000 2004 Mishawaka IN Manufacturing 153,066 Owned * Argos IN Manufacturing 65,520 Owned * Franklin Park IL Office/Storage 136,600 2006 Independence KS Manufacturing 273,388 Owned * Independence KS Vacant 51,770 Owned Pensacola FL Storage 990 2004 * Locations that will be closed as previously announced in our integration plans. TEMPERATURE CONTROL Corona CA Manufacturing and Distribution 78,200 2008 Lewisville TX Administration and Distribution 415,000 2009 Fort Worth TX Manufacturing and Distribution 204,000 Owned Fort Worth TX Manufacturing and Distribution 103,000 2004 Grapevine TX Manufacturing 180,000 Owned St. Thomas Canada Manufacturing 40,000 Owned Strasbourg France Administration and Distribution 16,146 2004 Massa Italy Administration and Distribution 13,100 2004 Grapevine TX Storage 83,125 2004 Grapevine TX Storage 5,000 2005
14 ITEM 2. PROPERTIES (CONTINUED)
OWNED OR APPROX. EXPIRATION STATE OR SQUARE DATE LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE ------------------- ---------- --------------------------------------------------- ----------- ----------- TEMPERATURE CONTROL/ENGINE MANAGEMENT Mississauga Canada Administration and Distribution (Ignition, Wire, 128,400 2006 Temperature Control) OTHER Cumming GA Vacated 77,000 2007 Irving TX Training Center 13,400 2004 Long Island City NY Storage 16,234 2013 Sunbury at Thames England Vacated but partially subleased 28,095 2007
The real property we own in Kansas, Nevada, South Carolina, Virginia and Texas is encumbered by a mortgage or deed of trust, as applicable, in favor of General Electric Capital Corporation, as agent for our secured revolving credit facility. 15 ITEM 3. LEGAL PROCEEDINGS On January 28, 2000, a former significant customer of ours which is currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court filed claims against a number of its former suppliers, including us. The claim against us alleged $0.5 million of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. The claim pertaining to the preferential payments was settled for an immaterial amount during the second quarter of 2002. In addition, this former customer seeks $9.4 million from us for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. We have purchased insurance with respect to the actions. On August 22, 2002, the court dismissed the antitrust claims. On July 8, 2003, the remaining claims were settled without any material financial effect on our business, financial condition or results of operations. 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, 2001, approximately 100 cases were outstanding for which we were responsible for any related liabilities. At December 31, 2002, the number of cases outstanding for which we were responsible for related liabilities increased to approximately 2,500, which include approximately 1,600 cases filed in December 2002 in Mississippi. We believe that these Mississippi cases filed against us in December 2002 were due in large part to potential plaintiffs accelerating the filing of their claims prior to the effective date of Mississippi's tort reform statute in January 2003, which statute eliminated the ability of plaintiffs to file consolidated cases. At December 31, 2003, approximately 3,300 cases were outstanding for which we were responsible for any related liabilities. Since inception in September 2001, the amounts paid for settled claims are $1.1 million. We do not have insurance coverage for the defense and indemnity costs associated with these claims. We recorded a liability associated with future settlements through 2052 and recorded an after tax charge of $16.9 million as a loss from a discontinued operation during the third quarter of 2002 to reflect such liability. See Note 17 of Notes to Consolidated Financial Statements for further discussion. 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. 16 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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, 2003 First Quarter......................... $ 15.70 $ 11.10 $ 0.09 Second Quarter........................ 13.62 10.50 0.09 Third Quarter......................... 11.72 9.25 0.09 Fourth Quarter........................ 12.36 9.10 0.09 FISCAL YEAR ENDED DECEMBER 31, 2002 First Quarter......................... $ 15.15 $ 12.90 $ 0.09 Second Quarter........................ 17.04 14.30 0.09 Third Quarter......................... 17.39 10.63 0.09 Fourth Quarter........................ 13.90 9.45 0.09 The last reported sale price of our common stock on the NYSE on February 27, 2004 was $13.88 per share. As of February 27, 2004, there were 490 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. Our current policy is to pay dividends on a quarterly basis. Our credit agreement permits dividends and distributions by us provided specific conditions are met. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data for the last five years ended December 31, 2003. 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, ----------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in thousands) STATEMENT OF OPERATIONS DATA: Net sales(1)..................... $ 678,783 $598,437 $591,652 $601,392 $653,451 Gross profit(1).................. 174,772 157,544 139,055 162,701 170,809 Operating income................. 15,815 25,068 15,123 30,711 30,223 Earnings (loss) from continuing operations (2)................. 224 6,091 (2,485) 9,729 7,625 Net earnings (loss)(3)(4)........ (1,518) (30,556) (2,485) 9,729 7,625
17
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in thousands) PER SHARE DATA: Earnings (loss) from continuing operations: Basic........................ $ 0.01 $ 0.51 $ (0.21) $ 0.82 $ 0.58 Diluted...................... 0.01 0.51 (0.21) 0.81 0.58 Net earnings (loss) per common share: Basic........................ (0.10) (2.57) (0.21) 0.82 0.58 Diluted...................... (0.10) (2.54) (0.21) 0.81 0.58 Cash dividends per common share............................ 0.36 0.36 0.36 0.36 0.34 OTHER DATA: Depreciation and amortization.... $17,092 $ 16,128 $18,909 $ 18,922 $ 17,230 Capital expenditures............. 8,926 7,598 13,740 16,652 14,423 Dividends........................ 5,615 4,290 4,236 4,324 4,456 BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents........ $19,647 $ 9,690 $ 7,496 $7,699 $40,380 Working capital ................. 191,333 140,683 121,566 188,091 205,806 Total assets..................... 694,525 490,758 509,429 549,396 556,021 Total debt....................... 217,810 176,917 205,925 202,591 195,425 Long-term debt (excluding current portion)............... 114,757 93,191 93,276 150,018 163,868 Stockholders' equity............. 226,041 153,881 185,687 194,305 203,518
(1) On January 1, 2002, we adopted the guidelines of the Emerging Issues Task Force (EITF) entitled "Accounting for Certain Sales Incentives" and "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." These guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. Net sales and gross profit amounts for the periods prior to 2002 included in this Annual Report have been reclassified to conform to our 2002 presentation. As a result, certain costs of approximately $30.4 million, $25.4 million and $18 million have been reclassified for December 31, 2001 and 2000 and 1999, respectively. (2) Effective January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement No. 145 eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item of income and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board ("APB") No. 30, Reporting Results of Operations. As a result, the extraordinary loss on the early extinguishment of debt of approximately $2.8 million, $0.5 million and $1.1 million has been reclassified to interest expense for December 31, 2001, 2000 and 1999, respectively. (3) Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. As a result, we recorded an impairment loss on goodwill as a cumulative effect of accounting change of $18.3 million, net of tax, or $1.55 per diluted share, during the first quarter of 2002. The impairment loss relates to goodwill pertaining to certain of our reporting units with our European Segment and with our Temperature Control Segment and we recorded charges of $10.9 million related to our European Segment and $7.4 million related to our Temperature Control Segment. 18 Upon adoption of SFAS No. 142, our earnings before cumulative effect of accounting change for basic and diluted earnings per share adjusted to exclude goodwill amortization expense (net of tax) are as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- ---------- --------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Reported earnings (loss) before cumulative effect of accounting change ................................... $ (1,518) $ (12,206) $ (2,485) $ 9,729 $ 7,625 Add back: goodwill amortization expense, net of tax ...................... -- -- 2,727 2,574 2,481 --------- ---------- --------- ---------- ---------- Adjusted earnings (loss) before cumulative effect of accounting change ................................... $ (1,518) $ (12,206) $ 242 $ 12,303 $ 10,106 ========= ========== ========= ========== ========== BASIC EARNINGS (LOSS) PER SHARE: ----------------------------------- Reported basic earnings (loss) per share before cumulative effect of accounting change ..................... $ (0.10) $ (1.03) $ (0.21) $ 0.82 $ 0.58 Add back: goodwill amortization expense, net of tax ...................... -- -- 0.23 0.22 0.19 --------- ---------- --------- ---------- ---------- Adjusted basic earnings (loss) per share before cumulative effect of accounting change ..................... $ (0.10) $ (1.03) $ 0.02 $ 1.04 $ 0.77 ========= ========== ========= ========== ========== DILUTED EARNINGS (LOSS) PER SHARE: ----------------------------------- Reported diluted earnings (loss) per share before cumulative effect of accounting change .............. $ (0.10) $ (1.01) $ (0.21) $ 0.81 $ 0.58 Add back: goodwill amortization expense, net of tax ...................... -- -- 0.23 0.21 0.19 --------- ---------- --------- ---------- ---------- Adjusted diluted earnings (loss) per share before cumulative effect of accounting change .............. $ (0.10) $ (1.01) $ 0.02 $ 1.02 $ 0.77 ========= ========== ========= ========== ==========
Upon adoption of SFAS No. 142, our net earnings (loss) for basic and diluted earnings per share adjusted to exclude goodwill amortization expense (net of tax) are as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- ---------- --------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net earnings (loss) ........... $ (1,518) $ (30,556) $ (2,485) $ 9,729 $ 7,625 Add back: goodwill amortization expense, net of tax .......................... -- -- 2,727 2,574 2,481 --------- ---------- --------- ---------- ---------- Adjusted net earnings (loss) ........... $ (1,518) $ (30,556) $ 242 $ 12,303 $ 10,106 ========= ========== ========= ========== ========== BASIC NET EARNINGS (LOSS) PER SHARE: ---------------------------------------- Reported basic net earnings (loss) per share .......................... $ (0.10) $ (2.57) $ (0.21)$ 0.82 $ 0.58 Add back: goodwill amortization expense, net of tax .......................... -- -- 0.23 0.22 0.19 --------- ---------- --------- ---------- ---------- Adjusted basic net earnings (loss) per share ........................... $ (0.10) $ (2.57) $ 0.02 $ 1.04 $ 0.77 ========= ========== ========= ========== ========== DILUTED NET EARNINGS (LOSS) PER SHARE: ---------------------------------------- Reported diluted net earnings (loss) per share ........................... $ (0.10) $ (2.54) $ (0.21) $ 0.81 $ 0.58 Add back: goodwill amortization expense, net of tax .......................... -- -- 0.23 0.21 0.19 --------- ---------- --------- ---------- ---------- Adjusted diluted net earnings (loss) per share ........................... $ (0.10) $ (2.54) $ 0.02 $ 1.02 $ 0.77 ========= ========== ========= ========== ==========
(4) We recorded an after tax charge of $1.7 million and $18.3 million as a loss from discontinued operations to account for potential costs associated with our asbestos-related liability for the years ended December 31, 2003 and 2002, respectively. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report on Form 10-K contains forward-looking statements. 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. Forward-looking statements 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 a number of factors, including economic and market conditions; 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; 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; product liability (including, without limitation, those related to estimates to asbestos-related contingent liabilities) matters; as well as other risks and uncertainties, such as those described under Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the Securities and Exchange Commission. Those 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. 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, 2003. OVERVIEW We are a leading independent manufacturer and distributor 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, on-board computers, 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. As part of our efforts to grow our business, as well as to achieve increased production and distribution efficiencies, on June 30, 2003 we completed the acquisition of substantially all of the assets and assumed substantially all of the operating liabilities of Dana Corporation's Engine Management Group (subsequently referred to as "DEM"). Prior to the sale, DEM was a leading manufacturer of aftermarket parts in the automotive industry focused exclusively on engine management. Our plan is to restructure and to integrate the DEM business into our existing Engine Management Business. Under the terms of the acquisition, we paid Dana Corporation $91.3 million in cash, issued an unsecured promissory note of $15.1 million, and issued 1,378,760 shares of our common stock valued at $15.1 million. Including transaction costs, our total purchase price is expected to be approximately $130.5 million. We have reviewed our operations and implemented integration plans to restructure the operations of DEM. We announced in a press release on July 8, 2003, that we would close seven of the DEM facilities. As part of the integration and restructuring plans, we estimate total restructuring costs of $33.7 million. Such amounts were recognized as liabilities assumed in the acquisition and included in the allocation of the cost to acquire DEM. 20 Of the total restructuring costs, approximately $15.7 million relates to work force reductions and employee termination benefits. The amount primarily provides for severance costs relating to the involuntary termination of approximately 1,400 employees, individually employed throughout DEM facilities across a broad range of functions, including managerial, professional, clerical, manufacturing and factory positions. During 2003, approximately $2.1 million of termination benefits have been paid. The restructuring also includes approximately $17.9 million associated with exiting certain activities, primarily related to lease and contract termination costs. Specifically, our plans are to consolidate seven DEM operations into our existing plants. The restructuring accrual associated with other exiting activities specifically includes incremental costs and contractual termination obligations for items such as leasehold termination payments incurred as a direct result of these plans. At December 31, 2003, one of the seven facilities has been closed with the remainder expected to be vacated during 2004. The DEM acquisition in 2003 was strategic and continues to be our primary focus entering 2004. The critical goals we established for a successful integration were to maintain the DEM customer base; reduce excess capacity by closing seven of the acquired facilities in a 12 to 18 month timeframe; complete the transition for $30-35 million of cash outlays during this same period in restructuring and integration costs; and to achieve $50-55 million in estimated annual savings. We believe we are on target for meeting all of these goals. Based on our current expectations, we believe that the benefits from the above savings will materialize as we progress throughout 2004 and the full extent achieved in 2005. On February 3, 2004, we acquired the Canadian distribution of Dana Corporation's Engine Management Group for approximately $1 million. As part of the acquisition, we acquired inventory and will be relocating it into our distribution facility in Mississauga, Canada. For additional information about our business, strategy and competitive environment, refer to "Item 1 Business." COMPARISON OF FISCAL YEARS 2003 AND 2002 SALES. On a consolidated basis, net sales for 2003 were $678.8 million, an increase of $80.4 million, or 13.4%, compared to $598.4 million in 2002. Excluding DEM net sales of $115.5 million, Engine Management net sales were down $4.2 million during 2003 compared to 2002. The volume decline was in line with our forecasts, and would have been mitigated if we had implemented normal price level increases in 2003, which have been implemented in 2004. The Temperature Control net sales decrease of $35.5 million was primarily due to the loss of business with AutoZone and the very cool and wet weather conditions existing in the spring and early summer. GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, decreased to 25.7% in 2003, from 26.3% in 2002. A combination of lower margins from DEM and the loss in business in Temperature Control noted above, negatively effected gross margins during the period. As DEM is integrated, we do expect gross margins to improve as a result of operating efficiencies achieved in overhead absorption and material costs reductions. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses (SG&A) increased $26.4 million to $153.3 million in 2003, compared to $126.9 million in 2002. Excluding DEM SG&A expenses of $28.9 million, SG&A expenses decreased $2.5 million in 2003 versus 2002. During 2003 we incurred approximately $5.6 million of integration and restructuring expenses of which $2.8 million related to DEM and the remaining balance relating to our Temperature Control and European Segments compared to $2.2 million of restructuring expenses in 2002. Reducing DEM SG&A expenses is a major focus during the DEM integration and SG&A is expected to significantly decrease. GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is no longer amortized, but instead, is subject to an annual review for potential impairment. We completed our annual impairment test during the fourth quarter of 2003 and determined that our goodwill was not impaired. 21 During the first quarter of 2002, we performed our initial impairment test of goodwill reviewing the fair values of each of our reporting units using the discounted cash flows method, based on our weighted average cost of capital and market multiples. The decline in economic and market conditions, higher integration costs than anticipated and the general softness in the automotive aftermarket caused a decrease in the fair values of certain of our reporting units. As a result, we recorded an impairment loss on goodwill as a cumulative effect of accounting change of $18.3 million, net of tax, or $1.55 per diluted share during the first quarter of 2002. The impairment loss relates to goodwill of $10.9 million in our European Segment and $7.4 million in our Temperature Control Segment. In addition, during the fourth quarter of 2002 we wrote off approximately $3.3 million for the impairment of goodwill associated with the Engine Management reporting unit of our European Segment. OPERATING INCOME. Operating income decreased by $9.3 million to $15.8 million in 2003, compared to $25.1 million in 2002. This decrease was primarily due to the overall decrease in consolidated net sales as discussed above and the acquisition of DEM. OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased $3.7 million primarily due to unfavorable foreign exchange losses and lower interest and dividend income. INTEREST EXPENSE. Interest expense decreased by $0.3 million in 2003, compared to 2002, due to lower interest rates. INCOME TAX PROVISION. The effective tax rate for continuing operations was 84% in 2003 and 57% in 2002. The increase was primarily due to lower earnings in our domestic operations as compared to 2002 and operating losses in our European segment for which no income tax benefit has been recorded. Our foreign income tax relates primarily to our profitable Canadian and Hong Kong operations. LOSS FROM DISCONTINUED OPERATION. Loss from discontinued operation in 2003 reflects $1.7 million associated with asbestos-related legal expenses. In 2002, the $18.3 million charge included a reserve for future indemnification and 2002 legal expenses. As discussed more fully in Note 17 of the notes to the consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products. Based on the information contained in the September 2002 actuarial study, which estimated an undiscounted liability for settlement payments ranging from $27.3 million to $58 million, and all other available information considered by us, we recorded an after tax charge of $16.9 million as a loss from discontinued operation during the third quarter of 2002 to reflect such liability, excluding legal costs. 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 2052 in our consolidated financial statements, in accordance with generally accepted accounting principles. COMPARISON OF FISCAL YEARS 2002 AND 2001 SALES. On a consolidated basis, net sales for 2002 increased by $6.8 million over 2001 to $598.4 million. This net increase was driven by a $17.6 million increase in Engine Management, year over year. New business was the primary contributor with gains achieved in the retail business where certain customers expanded their own business; new wire and cable business acquired from an existing customer; and new original equipment customers acquired through our acquisition of Sagem Inc. in May of 2002. With respect to Temperature Control, net sales for 2002 decreased by $14.8 million to $255.1 million. Net sales were unfavorable due to a combination of factors including a partial loss in business with a significant retail customer in 2002; 2001 net sales including approximately $7 million of "pipeline" orders for a new customer which did not repeat in 2002; and distributors "working off "inventory left over from previous mild summer seasons. GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, increased to 26.3% in 2002 from 23.5% in 2001. The improvement in gross margins reflects the return in 2002 to more normal production levels, as the aggressive and successful inventory reduction campaign in 2001 benefited 2002, in both of our major segments. Engine Management gross margins improved approximately 4 percentage points, while Temperature Control improved approximately 3.7 percentage points. 2002 gross margins also benefited from a decrease in warranty returns in both Engine Management and Temperature Control. Overall, warranty returns improved by approximately 1 percentage point, as a percentage of net sales. 22 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $3 million to $126.9 million or 21.2% of net sales in 2002, from $123.9 million or 20.9% of net sales in 2001. The increase was primarily due to higher insurance and employee benefit costs. In addition, we incurred approximately $2.2 million of restructuring costs related to the consolidation of certain manufacturing and distribution facilities within the Temperature Control Segment. GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. Using the discounted cash flows method, based on our weighted average cost of capital and market multiples, we reviewed the fair values of each of our reporting units. The decline in economic and market conditions, higher integration costs than anticipated and the general softness in the automotive aftermarket caused a decrease in the fair values of certain of our reporting units. As a result, we recorded an impairment loss on goodwill as a cumulative effect of accounting change of $18.3 million, net of tax, or $1.55 per diluted share during the first quarter of 2002. The impairment loss relates to goodwill pertaining to certain of our reporting units within our European Segment and our Temperature Control Segment for which we recorded charges of $10.9 million and $7.4 million, respectively. During the fourth quarter of 2002, we completed our review of goodwill for potential impairment. After giving consideration to 2002 losses in Europe and budgeted 2003 losses, we wrote-off approximately $3.3 million of the remaining goodwill associated with the Engine Management reporting unit of the European Segment. With respect to the European Segment, approximately $1.4 million of goodwill remains on the December 31, 2002 balance sheet, all of which pertains to the Temperature Control reporting unit. OTHER INCOME. Other income, net increased approximately $0.4 million over 2001. Contributing to the increase was the elimination of fees related to an accounts receivable sales arrangement eliminated in April of 2001. INTEREST EXPENSE. Interest expense decreased by approximately $7 million, as compared to 2001. Contributing to overall decrease was lower borrowings (during 2002 total debt was reduced approximately $29 million) and lower interest rates. Effective January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement No. 145 eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item of income and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board ("APB") No. 30, Reporting Results of Operations ("APB No. 30"). As a result, we reclassified the $2.8 million extraordinary loss on the early extinguishment of debt recorded in 2001 to interest expense. INCOME TAXES. The overall effective tax rate increased from 25% in 2001 to 57% in 2002. The significant increase is primarily the result of the operating losses in our European Segment, for which no income tax benefit has been recorded because it is more likely than not that such benefit will not be realized in the near future. Supplementing the effect Europe had on the effective rate is the increase in the Company's domestic earnings as a percentage of overall earnings before taxes. 23 LOSS ON DISCONTINUED OPERATIONS. Loss on discontinued operations reflect the charges associated with asbestos, including legal expenses. As discussed more fully in Note 17 of the notes to the consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products. Based on the information contained in the September 2002 actuarial study, which estimated an undiscounted liability for settlement payments ranging from $27.3 million to $58 million, and all other available information considered by us, and as further set forth in such Note 17, we recorded an after tax charge of $16.9 million as a loss from discontinued operation during the third quarter of 2002 to reflect such liability. 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 2052 in our consolidated financial statements, in accordance with generally accepted accounting principles. Total legal expenses associated with asbestos related matters totaled $0.9 million in 2002. IMPACT OF INFLATION Although inflation is not a significant issue, management believes it will be able to continue to minimize any adverse effect of inflation on earnings through cost reduction programs, including the sale of manufactured products, and, where competitive situations permit, selling price increases. Recently, prices of steel and other commodities have risen. 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. FUTURE RESULTS OF OPERATIONS We continue to face competitive pressures. In order to sell at competitive prices while maintaining profit margins we are continuing to focus on overhead and cost reductions. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. During the year ended December 31, 2003, cash provided by operations amounted to $31.5 million, compared to $57 million in 2002 and $43.5 million in 2001. The reduction in 2003 was primarily attributable to lower earnings from continuing operations, a decrease in accounts payable and a lower decrease in inventory in 2003, as compared to 2002. The improvement in 2002, as compared to 2001, was primarily attributable to improved earnings from continuing operations, higher accounts payable and continued reductions in inventory. Inventory reductions continue to be a focus of management. For the year ended December 31, 2002, inventory decreased by an additional $8 million over the $57 million reduction in 2001, which resulted primarily from reduced production and purchases, and where needed, the temporary closing of manufacturing facilities. Inventory turnover was 2.2 x in 2003, 2.3 x in 2002 and 2.1x in 2001. Inventory turnover should improve as DEM is integrated, and inventory "build-ups" needed to ensure order fulfillment are reduced as DEM is effectively integrated. INVESTING ACTIVITIES. Cash used in investing activities was $101.9 million for the year ended December 31, 2003, compared to $26.9 million in 2002 and $14.2 million in 2001. The increase during 2003 was primarily due to the acquisition of DEM as discussed more fully in Note 2. The increase during 2002 was primarily due to acquisitions, partially offset by decreases in capital expenditures. Assets acquired consist primarily of property, plant and equipment, receivables and inventory. All acquisitions were financed with funds provided from our secondary equity offering, revolving credit facility and seller financing. In January 2002, we acquired the assets of a temperature control business from Hartle Industries for $4.8 million. The assets consist primarily of property, plant and equipment, and inventory. In April 2002, we acquired Carol Cable Limited, a manufacturer and distributor of wire sets based in the United Kingdom, for approximately $1.7 million. The assets from this acquisition consist primarily of property, plant and equipment, and inventory. In addition, during 2002, the Company paid approximately an additional $2.8 million for the remaining equity interest in SMP Holdings Limited. In May 2002, we purchased the aftermarket fuel injector business of Sagem Inc., a subsidiary of Johnson Controls, for $10.5 million. Sagem Inc. is a basic manufacturer of fuel injectors and was our primary supplier prior to the acquisition. Assets acquired from this acquisition consist primarily of property, plant and equipment, and inventory. The purchase was partially financed by the seller ($5.4 million to be paid over a two year period), with the remaining funds being provided under our revolving credit facility. 24 Capital expenditures for the three most recent fiscal years ended December 31 totaled $8.9 million in 2003, $7.6 million in 2002 and $13.7 million in 2001. FINANCING ACTIVITIES. Cash provided by financing activities primarily for the acquisition of DEM for the year ended December 31, 2003 was $75 million compared to cash used in financing activities of $29.5 million for the year ended December 31, 2002 and $28.7 million in 2001. Dividends paid for the three most recent fiscal years ended December 31 were $5.6 million in 2003, $4.3 million in 2002 and $4.2 million in 2001. The decreased borrowings in 2002 and 2001 reflected our focus on reducing capital employed in the business. Effective April 27, 2001, we entered into an agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility. The term of the credit agreement was for a period of five years and provided for a line of credit up to $225 million. On June 30, 2003 we completed an amendment to our revolving credit facility to provide for an additional $80 million commitment, in connection with our acquisition of DEM. This additional commitment increases the total amount available for borrowing under our revolving credit facility to $305 million from $225 million, which now expires in 2008. Availability under our revolving credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets, and includes the purchased assets of DEM. We expect such availability under the revolving credit facility, following the initial draw down at the acquisition closing, to be sufficient to meet our ongoing operating and integration costs. Direct borrowings under our revolving credit facility bear interest at the prime rate plus the applicable margin (as defined) or the LIBOR rate plus the applicable margin (as defined), at our option. Borrowings are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of our domestic and Canadian subsidiaries. Our revolving credit facility prior to the DEM acquisition provided for certain financial covenants limiting our capital expenditures and requiring us to maintain a certain tangible net worth at the end of each fiscal quarter. Following our acquisition of DEM, the terms of our revolving credit facility provide for, among other provisions, new financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of EBITDA at the end of each fiscal quarter through December 31, 2004, (2) commencing September 30, 2004, to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months) through 2007, and (3) to limit capital expenditure levels for each fiscal year through 2007. In addition, in order to facilitate the aggregate financing of the acquisition, we completed a public equity offering of 5,750,000 shares of our common stock for net proceeds of approximately $55.7 million and issued to Dana Corporation 1,378,760 shares of our common stock valued at approximately $15.1 million. In connection with our acquisition of DEM, we issued to Dana Corporation an unsecured subordinated promissory note in the aggregate principal amount of approximately $15.1 million. The promissory note bears an interest rate of 9% per annum for the first year, with such interest rate increasing by one-half of a percentage point (0.5%) on each anniversary of the date of issuance. Accrued and unpaid interest is due quarterly under the promissory note. The maturity date of the promissory note is five and a half years from the date of issuance. The promissory note may be prepaid in whole or in part at any time without penalty. On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The loan is payable in monthly installments. The loan bears interest at a fixed rate of 5.50% maturing in July 2018. The mortgage loan is secured by a building and related property. Our profitability and working capital requirements are seasonal due to the sales mix of temperature control products. Our working capital requirements usually peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales begin to be received. Our working capital is further being impacted by restructuring and integration costs, as well as inventory build-ups necessary to ensure order fulfillment during the DEM integration. These increased working capital requirements are funded by borrowings from our lines of credit. We anticipate that our present sources of funds will continue to be adequate to meet our near term needs. 25 In October 2003, we entered into a new interest rate swap agreement with a notional amount of $25 million that is to mature in October 2006. Under this agreement, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 2.45% on the notional amount of $25 million. In July 2001, we entered into two interest rate swap agreements to manage our exposure to interest rate changes. The swaps effectively convert a portion of our variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional amounts. At December 31, 2002, we had two outstanding interest rate swap agreements (in an aggregate notional amount of $75 million), one of which matured in January 2003 and one of which is scheduled to mature in January 2004. Under these agreements, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million (matured in January 2003). If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the interest rate swap agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations for the applicable period. On July 26, 1999, we issued our convertible debentures, payable semi-annually, in the aggregate principal amount of $90 million. The debentures are convertible into 2,796,120 shares of our common stock, and mature on July 15, 2009. The proceeds from the sale of the debentures were used to prepay an 8.6% senior note, reduce short term bank borrowings and repurchase a portion of our common stock. During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which we could repurchase shares of our common stock. During such years, $26.7 million (in the aggregate) of common stock has been repurchased to meet present and future requirements of our stock option programs and to fund our Employee Stock Option Plan (ESOP). As of December 31, 2003, we have Board authorization to repurchase additional shares at a maximum cost of $1.7 million. During 2003, 2002 and 2001, we did not repurchase any shares of our common stock. The following is a summary of our contractual commitments, inclusive of our acquisition of DEM, as of December 31, 2003:
--------------------------------------------------------------------------- (IN THOUSANDS) 2004 2005 2006 2007 2008 THEREAFTER TOTAL -------- -------- -------- -------- -------- -------- -------- Principal payments of long term debt .......... $ 3,354 $ 555 $ 581 $ 610 $ 582 $112,429 $118,111 Operating leases ............ 12,824 12,156 9,322 5,752 4,512 39,481 84,047 Interest rate swap agreements 207 -- (59) -- -- -- 148 Severance payments related to restructuring ........ 1,283 -- -- -- -- -- 1,283 -------- -------- -------- -------- -------- -------- -------- Total commitments . $ 17,668 $ 12,711 $ 9,844 $ 6,362 $ 5,094 $151,910 $203,589 ======== ======== ======== ======== ======== ======== ========
The table above excludes approximately $14 million of severance expected to be paid in 2004 after the DEM facilities are closed. 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 annual financial statements on this Annual Report on Form 10-K. 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. 26 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 revenue from product sales upon shipment to customers. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost is generally 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. 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, 2003, the allowance for sales returns was $24.1 million. Similarly, our management must make estimates of the uncollectability of our accounts receivables Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. At December 31, 2003 the allowance for doubtful accounts and for discounts was $5.0 million. 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 exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2003, we had a valuation allowance of $23.2 million, due to uncertainties related to our ability to utilize some of our deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our business, financial condition and results of operations. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. With respect to goodwill, we test for potential impairment in the fourth quarter of each year as part of our annual budgeting process. We review the fair values of each of our reporting units using the discounted cash flows method and market multiples. 27 RETIREMENT AND POSTRETIREMENT MEDICAL BENEFITS. Each year we calculated the costs of providing retiree benefits under the provisions of SFAS 87 and SFAS 106. The key assumptions used in making these calculations are disclosed in Notes 11 and 12 to our consolidated financial statements. The most significant of these assumptions are the discount rate used to value the future obligation, expected return on plan assets and health care cost trend rates. We select discount rates commensurate with current market interest rates 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. ASBESTOS RESERVE. We are responsible for certain future liabilities relating to alleged exposure to asbestos-containing products. A September 2002 actuarial study estimated a liability for settlement payments ranging from $27.3 million to $58 million. 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 2052 in our consolidated financial statements, in accordance with generally accepted accounting principles. As is our accounting policy, the actuarial study was updated as of August 31, 2003 using methodologies consistent with the September 2002 study. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $27 to $71 million for the period through 2052. We continue to believe that no amount within the range was a better estimate after the updated study, therefore, no adjustment was recorded as our consolidated balance sheet at September 30, 2003 reflects a total liability of approximately $27 million. Legal costs, which are expensed as incurred, are estimated to range from $21 to $28 million during the same period. We plan on performing a similar 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 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 operations. Legal expenses associated with asbestos-related matters are expensed as incurred and recorded as a loss from discontinued operations in the statement of operations. OTHER LOSS RESERVES. We have numerous other loss exposures, such as environmental claims, 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 ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 143, Accounting for Asset Retirement Obligations ("Statement No. 143"), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, we will recognize a gain or loss on settlement. Effective January 1, 2003, we adopted Statement No. 143, which did not have a material effect on our consolidated financial statements. 28 RESCISSION OF FASB STATEMENTS In April 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement No. 145 eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item of income and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board ("APB") No. 30, Reporting Results of Operations ("APB No. 30"). Statement No. 145 also requires sales-leaseback accounting for lease modifications that have economic effects that are similar to sales-leaseback transactions, and makes various other technical corrections to existing pronouncements. Effective January 1, 2003, we adopted Statement No. 145, which did not have a material effect on our consolidated financial statements. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("Statement No. 146"). Statement No. 146, which is effective prospectively for exit or disposal activities initiated after December 31, 2002, applies to costs associated with an exit activity, including restructurings, or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Statement No. 146 requires that exit or disposal costs are recorded as an operating expense when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal by itself will not meet the requirement for recognizing a liability and the related expense under Statement No. 146. The adoption of Statement No. 146 did not have a material effect on our consolidated financial statements. ACCOUNTING FOR AND DISCLOSURES OF GUARANTEES In November 2002, the FASB issued interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("Interpretation No. 45"). Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. Interpretation No. 45 also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of Interpretation No. 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of Interpretation No. 45 did not have a material effect on our consolidated financial statements. See Note 17 of Notes to Consolidated Financial Statements for discussion of product warranty claims. ACCOUNTING FOR STOCK-BASED COMPENSATION In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123 ("Statement No. 148"). Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. CONSOLIDATION OF VARIABLE INTEREST ENTITIES In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. We will be required to apply FIN 46R to variable interests in VIEs created after 29 December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. We are evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and has not yet completed this analysis. At this time, it is anticipated that the effect on our consolidated balance sheet is not material. ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("Statement No. 150"). Statement No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, Statement No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Statement No. 150 did not have a material effect on our consolidated financial statements. 30 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 and the British pound. As of December 31, 2003, our financial instruments 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 both of the exchange rates affecting both of the foreign currencies in which the indebtedness and the financial instruments described above 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 enter into interest rate swap agreements. In October 2003, we entered into a new interest rate swap agreement with a notional amount of $25 million that is to mature in October 2006. Under this agreement, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 2.45% on the notional amount of $25 million. In July 2001, we entered into two interest rate swap agreements to manage our exposure to interest rate changes. The swaps effectively convert a portion of our variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional amounts. At December 31, 2002, we had two outstanding interest rate swap agreements (in an aggregate notional amount of $75 million), one of which matured in January 2003 and one of which is scheduled to mature in January 2004. Under these agreements, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million (matured in January 2003). If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the interest rate swap agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations for the applicable period. At December 31, 2003, we had approximately $217.8 million in loans and financing outstanding, of which approximately $118.1 million bear interest at fixed interest rates and approximately $99.7 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 46% at December 31, 2003 and 2002. Depending upon the level of borrowings under our revolving credit facility, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have approximately $1 million negative impact on our earnings or cash flows. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE NO. CONSOLIDATED ANNUAL FINANCIAL STATEMENTS (Audited) Independent Auditors' Report......................................... F-1 Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 F-2 Consolidated Balance Sheets as of December 31, 2003 and 2002......... F-3 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001................................................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001................................ F-5 Notes to Consolidated Annual Financial Statements.................... F-6 32 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Standard Motor Products, Inc.: We have audited the accompanying consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As described in Note 5, the Company adopted Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS as of January 1, 2002. /s/ KPMG LLP ------------------------ New York, New York March 26, 2004 F-1 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations --------------------------------------------------------------------------------
Year Ended December 31, --------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001 --------------------------------------------------------------------------------------------------------------------- Net sales (Note 6) $ 678,783 $ 598,437 $ 591,652 Cost of sales 504,011 440,893 452,597 --------------------------------------------------------------------------------------------------------------------- Gross profit 174,772 157,544 139,055 Selling, general and administrative expenses 153,303 126,901 123,932 Restructuring expenses 5,654 2,241 -- Goodwill impairment charge (Note 5) -- 3,334 -- --------------------------------------------------------------------------------------------------------------------- Operating income 15,815 25,068 15,123 Other income (expense), net (Note 13) (477) 3,187 2,763 Interest expense 13,907 14,244 21,202 --------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations before taxes 1,431 14,011 (3,316) Provision (benefit) for income taxes (Note 14) 1,207 7,920 (831) --------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations 224 6,091 (2,485) Loss from discontinued operation, net of tax of $581 and $6,099 (Note 17) (1,742) (18,297) -- --------------------------------------------------------------------------------------------------------------------- Loss before cumulative effect of accounting change (1,518) (12,206) (2,485) Cumulative effect of accounting change, net of tax of $2,473 (Note 5) -- (18,350) -- --------------------------------------------------------------------------------------------------------------------- Net loss $ (1,518) $ (30,556) $ (2,485) --------------------------------------------------------------------------------------------------------------------- Net earnings (loss) Per Common Share - Basic: Earnings (loss) from continuing operations $ 0.01 $ 0.51 $ (0.21) Discontinued operation (0.11) (1.54) -- Cumulative effect of accounting change -- (1.54) -- --------------------------------------------------------------------------------------------------------------------- Net loss Per Common Share - Basic $ (0.10) $ (2.57) $ (0.21) --------------------------------------------------------------------------------------------------------------------- Net earnings (loss) Per Common Share - Diluted: Earnings (loss) from continuing operations $ 0.01 $ 0.51 $ (0.21) Discontinued operation (0.11) (1.52) -- Cumulative effect of accounting change -- (1.53) -- --------------------------------------------------------------------------------------------------------------------- Net loss Per Common Share - Diluted $ (0.10) $ (2.54) $ (0.21) --------------------------------------------------------------------------------------------------------------------- Average number of common shares 15,744,930 11,914,968 11,774,591 Average number of common shares and dilutive common shares 15,793,008 12,008,496 11,774,591 ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-2 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets --------------------------------------------------------------------------------
December 31, ---------------------- (IN THOUSANDS) 2003 2002 ---------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 19,647 $ 9,690 Marketable securities -- 7,200 Accounts receivable, less allowances for discounts and doubtful accounts of $5,009 and $4,882 in 2003 and 2002, respectively (Note 7) 174,223 117,644 Inventories (Notes 3 and 7) 253,754 174,785 Deferred income taxes (Note 14) 13,148 12,213 Prepaid expenses and other current assets 7,399 6,828 ---------------------------------------------------------------------------------------- Total current assets 468,171 328,360 Property, plant and equipment, net (Notes 4 and 7) 112,549 103,822 Goodwill, net (Note 5) 71,843 16,683 Other assets (Notes 6 and 11) 41,962 41,893 ---------------------------------------------------------------------------------------- Total assets $ 694,525 $ 490,758 ======================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable (Note 7) $ 99,699 $ 79,618 Current portion of long-term debt (Note 7) 3,354 4,108 Accounts payable 58,029 35,744 Sundry payables and accrued expenses 42,431 31,074 Accrued customer returns 24,115 16,341 Restructuring accrual (Note 2) 16,000 -- Accrued rebates 18,989 8,649 Payroll and commissions 14,221 12,143 ---------------------------------------------------------------------------------------- Total current liabilities 276,838 187,677 Long-term debt (Notes 7 and 8) 114,757 93,191 Postretirement medical benefits and other accrued liabilities (Notes 11 and 12) 36,848 30,414 Restructuring accrual (Note 2) 15,615 -- Accrued asbestos liabilities (Note 17) 24,426 25,595 ---------------------------------------------------------------------------------------- Total liabilities 468,484 336,877 ======================================================================================== Commitments and contingencies (Notes 7, 9, 10, 11, 12 and 17) Stockholders' equity (Notes 7, 8, 9, 10 and 11): Common Stock - par value $2.00 per share: Authorized 30,000,000 shares, issued 20,486,036 and 13,324,476 shares in 2003 and 2002, respectively 40,972 26,649 Capital in excess of par value 58,086 1,764 Retained earnings 141,553 148,686 Accumulated other comprehensive income (loss) 4,814 (2,581) Treasury stock - at cost (1,284,428 and 1,367,467 shares in 2003 and 2002, respectively) (19,384) (20,637) ---------------------------------------------------------------------------------------- Total stockholders' equity 226,041 153,881 ---------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 694,525 $ 490,758 ========================================================================================
1 See accompanying notes to consolidated financial statements. F-3 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows --------------------------------------------------------------------------------
Year Ended December 31, ------------------------------------- (IN THOUSANDS) 2003 2002 2001 ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,518) $ (30,556) $ (2,485) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 17,092 16,128 18,909 (Gain) loss on disposal of property, plant & equipment 1,001 (97) (265) Equity income from joint ventures (27) (352) (844) Employee stock ownership plan allocation 938 1,230 713 Tax benefit related to employee stock options -- 80 48 (Increase) decrease in deferred income taxes (1,632) 2,550 (3,628) Cumulative effect of accounting change -- 18,350 -- Loss from discontinued operation 1,742 18,297 -- Goodwill impairment charge -- 3,334 -- Change in assets and liabilities, net of effects from acquisitions: Decrease in accounts receivable, net 8,583 1,302 13,296 Decrease in inventories 3,511 7,996 56,966 (Increase) decrease in prepaid expenses and other current assets 446 7,485 (1,821) (Increase) decrease in other assets 1,802 (3,705) (1,687) Increase (decrease) in accounts payable (9,471) 5,322 (30,502) Increase(decrease) in sundry payables and accrued expenses 7,045 (3,215) (8,774) Decrease in restructuring accrual (2,085) -- -- Increase in other liabilities 4,036 12,806 3,524 ----------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 31,463 56,955 43,450 =========================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of property, plant and equipment 87 520 652 Capital expenditures (8,926) (7,598) (13,740) Maturity of investments 7,200 -- -- Payments for acquisitions, net of cash acquired (100,249) (19,855) (1,069) ----------------------------------------------------------------------------------------------------------- Net cash used in investing activities (101,888) (26,933) (14,157) =========================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under line-of-credit agreements 20,081 (31,246) 71,935 Principal payments and retirement of long-term debt (4,313) (3,181) (93,601) Borrowings under new long-term debt 10,000 5,419 -- Proceeds from issuance of common stock, net of issuance costs 55,744 -- -- Increase in overdraft balances 1,509 3,830 -- Debt issuance costs (2,460) (602) (3,261) Proceeds from exercise of employee stock options 91 589 473 Dividends paid (5,615) (4,290) (4,236) ----------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 75,037 (29,481) (28,690) ----------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 5,345 1,653 (806) ----------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 9,957 2,194 (203) Cash and cash equivalents at beginning of year 9,690 7,496 7,699 ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 19,647 $ 9,690 $ 7,496 ----------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 13,641 $ 14,362 $ 17,403 Income taxes $ 2,815 $ 1,549 $ 2,792 Non-cash investing and financing activities: Common stock issued to seller for acquisition $ 15,125 $ -- $ -- Issuance of long-term debt to seller for acquisition $ 15,125 $ -- $ -- ===========================================================================================================
See accompanying notes to consolidated financial statements. F-4 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity --------------------------------------------------------------------------------
Year Ended December 31, 2002 and 2001 2003, -------------------------------------------------------------------------------- ACCUMULATED CAPITAL IN OTHER COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY (IN THOUSANDS) STOCK PAR VALUE EARNINGS INCOME (LOSS) STOCK TOTAL --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 $ 26,649 $ 2,541 $190,253 $ (591) $(24,547) $194,305 Comprehensive Loss: Net loss (2,485) (2,485) Foreign currency translation adjustment (1,086) (1,086) Unrealized loss on interest rate swap agreements (2,045) (2,045) -------- Total comprehensive loss (5,616) Cash dividends paid (4,236) (4,236) Exercise of employee stock options (295) 768 473 Tax benefits applicable to the exercise of employee stock options 48 48 Employee Stock Ownership Plan (417) 1,130 713 --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 26,649 1,877 183,532 (3,722) (22,649) 185,687 Comprehensive Loss: Net loss (30,556) (30,556) Foreign currency translation adjustment 1,295 1,295 Unrealized gain on interest rate swap agreements, net of tax of $205 617 617 Minimum pension liability adjustment (771) (771) -------- Total comprehensive loss (29,415) Cash dividends paid (4,290) (4,290) Exercise of employee stock options (291) 880 589 Tax benefits applicable to the exercise of employee stock options 80 80 Employee Stock Ownership Plan 98 1,132 1,230 --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 26,649 1,764 148,686 (2,581) (20,637) 153,881 Comprehensive Loss: Net loss (1,518) (1,518) Foreign currency translation adjustment 6,162 6,162 Unrealized gain on interest rate swap agreements, net of tax of $439 1,317 1,317 Minimum pension liability adjustment (84) (84) Total comprehensive loss 5,877 -------- Cash dividends paid (5,615) (5,615) Issuance of common stock related to acquisition 14,323 56,546 70,869 Exercise of employee stock options (30) 121 91 Employee Stock Ownership Plan (194) 1,132 938 --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2003 $ 40,972 $ 58,086 $141,553 $ 4,814 $(19,384) $226,041 ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5 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" or "our") is engaged in the manufacture and distribution of replacement parts for motor vehicles in the automotive after-market 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 intercompany 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, inventory valuation reserves, depreciation and amortization of long-lived assets, product liability, asbestos and litigation matters, deferred tax asset valuation allowance and sales return allowances. Actual results could differ from those estimates. RECLASSIFICATIONS Where appropriate, certain amounts in 2002 and 2001 have been reclassified to conform with the 2003 presentation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES During 2003, the held-to-maturity securities matured. At December 31, 2002, held-to-maturity securities amounted to $7.2 million. Held-to-maturity securities consist primarily of U.S. Treasury Bills and corporate debt securities which are reported at amortized cost which approximates fair value. INVENTORIES Inventories are stated at the lower of cost (determined by means of the first-in, first-out method) or market. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Derivative Instruments are accounted for in accordance with SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet 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 are recognized. PROPERTY, PLANT AND EQUIPMENT These assets are recorded at cost and are depreciated using the straight-line method of depreciation over the estimated useful lives as follows: Estimated Life -------------------- Buildings and Improvements 10 to 33-1/2 years Machinery and equipment 7 to 12 years Tools, dies and auxiliary equipment 3 to 8 years Furniture and fixtures 3 to 12 years Computer software 3 to 10 years Leasehold improvements Shorter of life of asset or lease term GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. We adopted Statement of Financial Accounting Standards ("SFAS 142") in January 2002. Goodwill and certain other intangible assets having indefinite lives, which were previously amortized on a straight-line basis over the periods benefited, are no longer being 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. Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. 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 SFAS No. 141, "Business Combinations." 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. Prior to the adoption of SFAS No. 142, goodwill was assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered F-6 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- through undiscounted future operating cash flows of the acquired operation. The amount of goodwill and other intangible asset impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting our average cost of funds. 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 from product sales upon shipment to customers. 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. DEFERRED FINANCING COSTS We have incurred costs in obtaining financing. These costs of $9.7 million have been capitalized in other assets and are being amortized on a straight-line basis over the life of the related financing arrangements through 2009. At December 31, 2003 and 2002, total accumulated amortization was $3.6 million and $2.3 million, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The annual net postretirement benefit liability and related expense under our benefit plans are determined on an actuarial basis. 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 Statement of Financial Accounting Standards ("SFAS") 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. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. NET EARNINGS PER COMMON SHARE We present two calculations of earnings per common share. "Basic" earnings per common share equals net income divided by weighted average common shares outstanding during the period. "Diluted" earnings per common share equals net income 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 per common share. The following is a reconciliation of the shares used in calcu- lating basic and dilutive net earnings per common share. (IN THOUSANDS) 2003 2002 2001 ---------------------------------------------------------------- Weighted average common shares 15,745 11,915 11,775 ---------------------------------------------------------------- Effect of stock options 48 93 -- ---------------------------------------------------------------- Weighted average common equivalent shares outstanding assuming dilution 15,793 12,008 11,775 ---------------------------------------------------------------- The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. (IN THOUSANDS) 2003 2002 2001 ---------------------------------------------------------------- Stock options 844 574 625 Convertible debentures 2,796 2,796 2,796 ---------------------------------------------------------------- STOCK BASED COMPENSATION PLANS Under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123"), we account for stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related inter- pretations. Stock options granted during the years ended December 31, 2003, 2002 and 2001 were exercisable at prices equal to the fair market value of our common stock on the dates the options were granted; therefore, no compensation cost has been recognized for the stock options granted. If we accounted for stock-based compensation using the fair value method of Statement No. 123, as amended by Statement No. 148, the effect on net income (loss) and basic and diluted earnings (loss) per share would have been as follows: Year Ended December 31, ----------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001 --------------------------------------------------------------------------- Net loss, as reported $ (1,518) $(30,556) $ (2,485) Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (137) (235) (212) --------------------------------------------------------------------------- Pro forma net loss $ (1,655) $(30,791) $ (2,697) --------------------------------------------------------------------------- Loss per share: Basic - as reported $ (0.10) $ (2.57) $ (0.21) Basic - pro forma $ (0.11) $ (2.59) $ (0.23) Diluted - as reported $ (0.10) $ (2.54) $ (0.21) Diluted - pro forma $ (0.11) $ (2.56) $ (0.23) --------------------------------------------------------------------------- The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 2003 2002 2001 --------------------------------------------------------------------------- Expected option life 3.9 years 3.9 years 4.0 years Expected stock volatility 38.9% 38.7% 38.6% Expected dividend yield 2.6% 2.6% 2.8% Risk-free interest rate 2.4% 1.8% 4.2% Fair value of option $ 3.36 $ 4.07 $ 3.71 --------------------------------------------------------------------------- F-7 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- 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. 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 43%, 43% and 43% of consolidated net sales in 2003, 2002 and 2001, respectively. Within our five largest customers, the largest customer accounted for 12%, 14% and 10% of consolidated net sales in 2003, 2002 and 2001, respectively. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 1, 2002, we adopted the guidelines of the Emerging Issues Task Force Issue No. 01-09, Accounting Consideration Given by a Vendor to a Customer (Including Reseller of the Vendor's Products) ("EITF 01-09"). These guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. Historically, we have provided certain consideration, including rebates, product and discounts to customers and treated such costs as advertising, marketing and sales force expenses. Such costs are now treated as a reduction of revenues or as costs of sales. As a result, certain costs of approximately $30.4 million have been reclassified from selling, general and administrative expenses for the year ended December 31, 2001. These reclassifications had no effect on net earnings. SFAS 143 In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 143, Accounting for Asset Retirement Obligations ("Statement No. 143"), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, we will recognize a gain or loss on settlement. Effective January 1, 2003, we adopted Statement No. 143, which did not have a material effect on our consolidated financial statements. SFAS 145 In April 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("Statement No. 145"). Statement No. 145 eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item of income and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board ("APB")No. 30, Reporting Results of Operations. Statement No. 145 also requires sales-leaseback accounting for lease modifications that have economic effects that are similar to sales-leaseback transactions, and make various other technical corrections to existing pronouncements. Effective January 1, 2003, we adopted the provisions of Statement No. 145. As a result, the extraordinary loss on the early extinguishment of debt of approximately $2.8 million has been reclassified to interest expense for December 2001. SFAS 146 In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("Statement No. 146"). Statement No. 146, which is effective prospectively for exit or disposal activities initiated after December 31, 2002, applies to costs associated with an exit activity, including restructurings, or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Statement No. 146 requires that exit or disposal costs are recorded as an operating expense when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal by itself will not meet the requirement for recognizing a liability and the related expense under Statement No. 146. The adoption of Statement No. 146 did not have a material effect on our consolidated financial statements. FASB INTERPRETATION NO. 45 In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("Interpretation" No. 45"). Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. Interpretaton No. 45 also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of Interpretation No. 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of Interpretation No. 45 did not have a material effect on our consolidated financial statements. F-8 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- SFAS 148 In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123 ("Statement No. 148"). Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. FASB INTERPRETATION NO. 46 In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. We will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. We are evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and has not yet completed this analysis. At this time, it is anticipated that the effect on the company's consolidated balance sheet is not material. SFAS 150 In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("Statement No. 150"). Statement No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, Statement No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Statement No. 150 did not have a material effect on our consolidated financial statements. 2. ACQUISITIONS AND RESTRUCTURING COSTS ACQUISITION OF DANA'S EMG BUSINESS On June 30, 2003, we completed the acquisition of substantially all of the assets and assumed substantially all of the operating liabilities of Dana Corporation's Engine Management Group ("DEM"). Prior to the sale, DEM was a leading manufacturer of aftermarket parts in the automotive industry focused exclusively on engine management. Under the terms of the acquisition, we paid Dana Corporation $91.3 million in cash, issued an unsecured promissory note of $15.1 million, and issued 1,378,760 shares of our common stock valued at $15.1 million using an average market price of $10.97 per share. Based on the estimated final purchase price, we expect to pay in cash an additional $1.9 million. The average market price was based on the average closing price for a range of trading days preceding the closing date of the acquisition. We also incurred an estimated $7.1 million in transaction costs. We also issued to Dana Corporation an unsecured subordinated promissory note in the aggregate principal amount of approximately $15.1 million. The promissory note bears an interest rate of 9% per annum for the first year, with such interest rate increasing by one-half of a percentage point (0.5%) on each anniversary of the date of issuance. Accrued and unpaid interest is due quarterly under the promissory note. The maturity date of the promissory note is five and a half years from the date of issuance. The promissory note may be prepaid in whole or in part at any time without penalty. In connection with the acquisition of DEM, we completed a public equity offering of 5,750,000 shares of our common stock for net proceeds of approximately $55.7 million. The net proceeds from this equity offering were used to repay a portion of our outstanding indebtedness under our revolving credit facility with General Electric Capital Corporation. On June 30, 2003, we also completed an amendment to our revolving credit facility, which increased the amount available under the credit facility by $80 million, to $305 million, as discussed more fully in Note 7 of Notes to Consolidated Financial Statements. We then financed the cash portion of the acquisition purchase price and the costs associated with the acquisition by borrowing from our amended credit facility. The preliminary purchase price of the acquisition is summarized as follows (In thousands): Value of common stock issued $ 15,125 Unsecured promissory note 15,125 Cash consideration 93,172 ------------------------------------------------------ Total consideration 123,422 Transaction costs 7,077 ------------------------------------------------------ Total purchase price $ 130,499 ------------------------------------------------------ The acquisition purchase price is subject to a final valuation of consideration which primarily relates to a post-closing adjustment, based upon the final book value of the acquired assets of DEM less the book value of the assumed liabilities of DEM as of the close of business on the closing date, subject to a maximum purchase price of $125 million. F-9 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- The following table summarizes the components of the net assets acquired (In thousands): Accounts receivable $ 65,162 Inventories 82,480 Property, plant and equipment 17,165 Goodwill 55,160 Other assets 128 ------------------------------------------------- Total assets acquired $220,095 ------------------------------------------------- Accounts payable $ 30,247 Sundry payables and accrued expenses 32,152 Accrued customer returns 7,013 Payroll and commissions 3,984 Other liabilities 16,200 ------------------------------------------------- Total liabilities assumed 89,596 ------------------------------------------------- Net assets acquired $130,499 ------------------------------------------------- The purchase price allocation is preliminary and is dependent on our final analysis of the net assets acquired, including intangibles which is expected to be completed by June 30, 2004. The acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141, and accordingly, the net tangible assets acquired were recorded at their fair value at the date of the acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. Goodwill of $55.2 million resulting from this acquisition has been assigned to our Engine Management reporting unit. Goodwill associated with this acquisition will be deductible for tax purposes. The following table represents our unaudited pro forma consolidated statement of operations for the years ended December 31, 2003 and 2002, as if the acquisition of DEM had been completed at January 1, 2003 and 2002, respectively. The pro forma information is presented for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition actually been made at such date, nor is it necessarily indicative of future operating results. Year Ended December 31, ----------------------- (IN THOUSANDS) 2003 2002 --------------------------------------------------------------- Net sales $ 822,515 $ 882,401 Loss from continuing operations $ (2,246) $ (36,231) Loss before cumulative effect of accounting change $ (3,988) $ (54,528) Net loss $ (3,988) $ (72,878) Net loss per common share: Net loss Basic $ (0.21) $ (3.82) Net loss - Diluted $ (0.21) $ (3.82) --------------------------------------------------------------- RESTRUCTURING COSTS In connection with the acquisition, we have reviewed our operations and implemented integration plans to restructure the operations of DEM. We announced in a press release on July 8, 2003 that we will close seven DEM facilities. As part of the integration and restructuring plans, we accrued an initial restructuring liability of approximately $34.7 million at June 30, 2003. Such amounts were recognized as liabilities assumed in the acquisition and included in the allocation of the cost to acquire DEM. Accordingly, such amounts resulted in additional goodwill being recorded in connection with the acquisition. Of the total restructuring accrual, approximately $16.8 million related to work force reductions and represented employee termination benefits. The accrual amount primarily provides for severance costs relating to the involuntary termination of approximately 1,400 employees, individually employed throughout DEM's facilities across a broad range of functions, including managerial, professional, clerical, manufacturing and factory positions. During the third and fourth quarters of 2003, $2.1million of termination benefits have been charged to the accrual. In addition, during 2003 there were non-cash adjustments of $1.1 million, as workforce reduction costs were less than amounts originally estimated. The restructuring accrual also includes approximately $17.9 million associated with exiting certain activities, primarily related to lease and contract termination costs. Specifically, our plans are to consolidate certain of DEM operations into our existing plants. The restructuring accrual associated with other exiting activities specifically includes incremental costs and contractual termination obligations for items such as leasehold termination payments incurred as a direct result of these plans, which will not have future benefits. Selected information relating to the restructuring costs included in the allocation of the cost to acquire DEM is as follows: Workforce Other (IN THOUSANDS) Reduction Exit Costs Total ----------------------------------------------------------------- Initial restructuring liability $ 16,800 $ 17,900 $ 34,700 Cash payments (2,085) -- (2,085) Adjustments (1,100) 100 (1,000) ----------------------------------------------------------------- Restructuring liability as of December 31, 2003 $ 13,615 $ 18,000 $ 31,615 ----------------------------------------------------------------- In January 2002, we acquired the assets of a Temperature Control business from Hartle Industries for $4.8 million. The assets acquired consist primarily of property, plant and equipment, and inventory. In April 2002, we acquired Carol Cable Limited, a manufacturer and distributor of wire sets, based in England, for $1.7 million. The assets acquired consist primarily of property, plant and equipment, and inventory. In addition, during 2002 we acquired the remaining equity interest in SMP Holdings Limited. In May 2002, we purchased the aftermarket fuel injector business of Sagem Inc., a subsidiary of Johnson Controls, for $10.5 million. Sagem Inc. is a basic manufacturer of fuel injectors, and was the primary supplier to us prior to our acquisition. The assets acquired consist primarily of property, plant and equipment, and inventory. The purchase was partially financed by the seller ($5.4 million to be paid over a two-year period), with the remaining funds being provided under our revolving credit facility. Our 2002 acquisitions did not have a material effect on our consolidated financial statements. F-10 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- On February 3, 2004, we acquired the Canadian distribution of Dana Corporation's Engine Management Group for approximately $1.0 million. As part of the acquisition we acquired inventory and will be relocating it into our distribution facility in Mississauga, Canada. 3. INVENTORIES December 31, -------------------- (IN THOUSANDS) 2003 2002 ---------------------------------------------------------- Finished goods $191,340 $141,487 Work in process 7,913 2,417 Raw materials 54,501 30,881 ---------------------------------------------------------- Total inventories $253,754 $174,785 ---------------------------------------------------------- 4. PROPERTY, PLANT AND EQUIPMENT December 31, -------------------- (IN THOUSANDS) 2003 2002 ---------------------------------------------------------- Land, buildings and improvements $ 71,900 $ 66,200 Machinery and equipment 136,551 120,655 Tools, dies and auxiliary equipment 22,046 19,962 Furniture and fixtures 26,984 25,831 Computer software 12,514 12,120 Leasehold improvements 7,285 7,164 Construction in progress 4,280 4,169 ---------------------------------------------------------- 281,560 256,101 Less accumulated depreciation and amortization 169,011 152,279 ---------------------------------------------------------- Total property, plant and equipment, net $112,549 $103,822 ---------------------------------------------------------- Depreciation expense was $17.1 million, $16.1 million and $18.9 million for 2003, 2002 and 2001, respectively. 5. GOODWILL Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is no longer amortized, but instead, is subject to an annual review for potential impairment. We completed our annual impairment test during the fourth quarter of 2003 and determined that our goodwill was not impaired. During the first quarter of 2002, we performed our initial impairment test of goodwill reviewing the fair values of each of our reporting units using the discounted cash flows method, based on our weighted average cost of capital, and market multiples. The decline in economic and market conditions, higher integration costs than anticipated and the general softness in the automotive aftermarket caused a decrease in the fair values of certain of our reporting units. As a result, we recorded an impairment loss on goodwill as a cumulative effect of accounting change of $18.3 million, net of tax, or $1.55 per diluted share during the first quarter of 2002. The impairment loss relates to our European Operation and Temperature Control Segment for which we recorded a charge of $10.9 million and $7.4 million, respectively. During the fourth quarter of 2002, we completed our annual-review of goodwill for potential impairment. After consideration to 2002 losses and budgeted 2003 losses, we wrote-off our remaining goodwill associated with the Engine Management reporting unit of our European Segment. With respect to our European Segment, approximately $1.4 million of goodwill remains on the December 31, 2003 and 2002 balance sheet, all of which pertains to the Temperature Control reporting unit. Engine Temperature (IN THOUSANDS) Management Control Europe Total -------------------------------------------------------------------- Balance as of December 31, 2002 $ 10,490 $ 4,822 $ 1,371 $ 16,683 Goodwill acquired 55,160 -- 55,160 --------------------------------------------------------------------- Balance as of December 31, 2003 $ 65,650 $ 4,822 $ 1,371 $ 71,843 --------------------------------------------------------------------- Upon adoption of SFAS No. 142, our earnings (loss) before cumulative effect of accounting change for basic and diluted earnings (loss) per share adjusted to exclude goodwill amortization expense (net of taxes) were as follows:
December 31, ----------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001 ------------------------------------------------------------------------------------- Reported loss before cumulative effect of accounting change $(1,518) $(12,206) $ (2,485) Add back: goodwill amortization expense, net of tax -- -- 2,727 ------------------------------------------------------------------------------------- Adjusted earnings (loss) before cumulative effect of accounting change $(1,518) $(12,206) $ 242 ------------------------------------------------------------------------------------- Basic earnings (loss) per share: Reported basic (loss) per share before cumulative effect of accounting change $ (0.10) $ (1.03) $ ( 0.21) Add back: goodwill amortization expense, net of tax -- -- 0.23 ------------------------------------------------------------------------------------- Adjusted basic earnings (loss) per share before cumulative effect of accounting change $ (0.10) $ (1.03) $ 0.02 ------------------------------------------------------------------------------------- Diluted earnings (loss) per share: Reported diluted loss per share before cumulative effect of accounting change $ (0.10) $ (1.01) $ (0.21) Add back: goodwill amortization expense, net of tax -- -- 0.23 ------------------------------------------------------------------------------------- Adjusted diluted earnings (loss) per share before cumulative effect of accounting change $ (0.10) $ (1.01) $ 0.02 -------------------------------------------------------------------------------------
Upon adoption of SFAS No. 142, our net earnings (loss) for basic and diluted earnings per share adjusted to exclude goodwill amortization expense (net of tax) were as follows:
December 31, ------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001 --------------------------------------------------------------------------------- Reported net loss $(1,518) $(30,556) $(2,485) Add back: goodwill amortization expense, net of tax -- -- 2,727 -------------------------------------------------------------------------------- Adjusted net earnings (loss) $(1,518) $(30,556) $ 242 -------------------------------------------------------------------------------- Basic net earnings (loss) per share: Reported basic net earnings (loss) per share $ (0.10) $ (2.57) $ (0.21) Add back: goodwill amortization expense, net of tax -- -- 0.23 -------------------------------------------------------------------------------- Adjusted basic net earnings (loss) per share $ (0.10) $ (2.57) $ 0.02 -------------------------------------------------------------------------------- Diluted net earnings (loss) per share: Reported diluted net earnings (loss) per share $ (0.10) $ (2.54) $ (0.21) -------------------------------------------------------------------------------- Add back: goodwill amortization expense, net of tax -- -- 0.23 Adjusted diluted net earnings (loss) per share $ (0.10) $ (2.54) $ 0.02 --------------------------------------------------------------------------------
F-11 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- 6. OTHER ASSETS December 31, (IN THOUSANDS) 2003 2002 ------------------------------------------------------------------- Unamortized customer supply agreements $ 946 $ 1,419 Equity in joint ventures 2,322 2,202 Deferred income taxes 19,389 18,692 Deferred financing costs 6,131 4,472 Other 13,174 15,108 ------------------------------------------------------------------- Total other assets $ 41,962 $ 41,893 ------------------------------------------------------------------- Included in the above caption "Other" is a preferred stock investment of $1.5 million in a customer. Net sales to this customer amounted to $53.0 million, $60.0 million and $57.9 million in 2003, 2002 and 2001, respectively. 7. CREDIT FACILITIES AND LONG-TERM DEBT Effective April 27, 2001, we entered into an agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility. The term of the credit agreement was for a period of five years and provided for a line of credit up to $225 million. On June 30, 2003, we completed an amendment to our revolving credit facility to provide for an additional $80 million commitment, in connection with our acquisition of DEM. This additional commitment increases the total amount available for borrowing under our revolving credit facility to $305 million from $225 million, which expires in 2008. Availability under our revolving credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. At December 31, 2003 and 2002, the interest rate on the Company's revolving credit facilities was 3.6% and 3.4%, respectively. Direct borrowings under our revolving credit facility bear interest at the prime rate plus the applicable margin (as defined) or the LIBOR rate plus the applicable margin (as defined), at our option. Outstanding borrowings under this revolving credit facility, classified as current liabilities was $95.9 million and $76.2 million at December 31, 2003 and 2002, respectively. Borrowings are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of our domestic and Canadian subsidiaries. The terms of our revolving credit facility provide for, among other provisions, financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of earnings before interest, taxes, depreciation and amortization (EBITDA), as defined, at the end of each fiscal quarter through December 31, 2004, (2) commencing September 30, 2004, to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months) through 2007, and (3) to limit capital expenditure levels for each fiscal year through 2007. The Company was in compliance with the covenants at December 31, 2003. In addition, a foreign subsidiary of ours has a revolving credit facility. The amount of short-term bank borrowings outstanding under this facility was $3.8 million and $3.4 million at December 31, 2003 and 2002, respectively. The weighted average interest rates on these borrowings at December 31, 2003 and 2002 were 6.3% and 6.5%, respectively. On July 26, 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. We may, at our option, redeem some or all of the 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, 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. In connection with our acquisition of DEM, we issued to Dana Corporation an unsecured subordinated promissory note in the aggregate principal amount of approximately $15.1 million. The promissory note bears an interest rate of 9% per annum for the first year, with such interest rate increasing by one-half of a percentage point (0.5%) on each anniversary of the date of issuance. Accrued and unpaid interest is due quarterly under the promissory note. The maturity date of the promissory note is five and a half years from the date of issuance. The promissory note may be prepaid in whole or in part at any time without penalty. On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The loan is payable in monthly installments. The loan bears interest at a fixed rate of 5.50% maturing in July 2018. The mortgage loan is secured by a building and related property. Long-term debt consists of: December 31, (IN THOUSANDS) 2003 2002 ------------------------------------------------------------------- 6.75% convertible subordinated debentures $ 90,000 $90,000 Unsecured promissory note 15,125 -- Mortgage loan 9,824 -- Other 3,162 7,299 ------------------------------------------------------------------- 118,111 97,299 Less current portion 3,354 4,108 ------------------------------------------------------------------- Total non-current portion of long-term debt $114,757 $93,191 ------------------------------------------------------------------- Maturities of long-term debt during the five years ending December 31, 2004 through 2008 are $3.4 million, $0.6 million, $0.6 million, $0.6 million and $0.6 million, respectively. 8. INTEREST RATE SWAP AGREEMENTS We do not enter into financial instruments for trading or speculative purposes. The principal financial instruments used for cash flow hedging purposes are interest rate swaps. In October 2003, we entered into a new interest rate swap agreement with a notional amount of $25 million that is to mature in October 2006. Under this agreement, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 2.45% on the notional amount of $25 million. In July 2001, we entered into two interest rate swap agreements to manage our exposure to interest rate changes. The swaps effectively convert a portion of our variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional amounts. At December 31, 2002, we had two outstanding interest rate swap agreements (in an aggregate notional amount of $75 million), one of F-12 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- which matured in January 2003 and the other is scheduled to mature in January 2004. Under these agreements we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million(matured in January 2003). If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations in the "interest expense" caption for the applicable period. It is not expected that any gain or loss will be reported in the statement of operations during the year ending December 31, 2004 nor was any recorded in 2003, 2002 or 2001. 9. STOCKHOLDERS' EQUITY We have authority to issue 500,000 shares of preferred stock, $20 par value, and our Board of Directors are vested with the authority to establish and designate series of preferred, to fix the number of shares therein and the variations in relative rights as between series. On December 18, 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, 2003. On January 17, 1996, our Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board declared a dividend of one Preferred Share Purchase Right (Right) for each of our outstanding common shares . The dividend was payable on March 1, 1996, to the shareholders of record as of February 15, 1996. The Rights are attached to and automatically trade with the outstanding shares of our common stock. The Rights will become exercisable only in the event that any person or group of affiliated persons becomes a holder of 20% or more of our outstanding common shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least 20% of our outstanding common shares. Once the rights become exercisable they entitle all other shareholders to purchase, by payment of an $80.00 exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a 20% position is acquired and prior to the acquisition of a 50% position, our Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of common stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration on February 28, 2006. During the years 1998 through 2000, our Board of Directors authorized multiple repurchase programs under which we could repurchase shares of our common stock. During such years, $26.7 million (in aggregate) of common stock has been repurchased to meet present and future requirements of our stock option programs and to fund our ESOP. As of December 31, 2003, we have Board authorization to repurchase additional shares at a maximum cost of $1.7 million. During 2003, 2002 and 2001, we did not repurchase any shares of our common stock. Accumulated other comprehensive income (loss) is comprised of the following: December 31, (IN THOUSANDS) 2003 2002 --------------------------------------------------------------------- Foreign currency translation adjustments $ 5,780 $ (382) Unrealized loss on interest rate swap agreement, net of tax (111) (1,428) Minimum pension liability, net of tax (855) (771) --------------------------------------------------------------------- Total accumulated other comprehensive income (loss) $ 4,814 $ (2,581) --------------------------------------------------------------------- 10. STOCK BASED COMPENSATION PLANS We have principally two fixed stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, as amended, we are authorized to issue 1,500,000 stock options. 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. Under the 1996 Independent Directors' Stock Option Plan, we are authorized to issue 50,000 stock options. 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, 2003, in aggregate 1,262,774 shares of authorized but unissued common stock were reserved for issuance under our stock option plans. A summary of the status of our stock option plans follow:
2003 2002 2001 ------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE (SHARES IN THOUSANDS) SHARES PRICE SHARES PRICE SHARES PRICE ------------------------------------------------------------------------------------- Outstanding at beginning of year 910 $17.14 1,011 $16.76 1,189 $16.60 Granted 346 14.69 10 14.43 10 13.05 Exercised (3) 9.79 (54) 9.74 (55) 9.29 Forfeited (90) 18.29 (57) 16.91 (133) 18.18 ------------------------------------------------------------------------------------- Outstanding at end of year 1,163 $16.33 910 $17.14 1,011 $16.76 ------------------------------------------------------------------------------------- Options exercisable at end of year 800 748 671 ------------------------------------------------------------------------------------- STOCK OPTIONS OUTSTANDING ------------------------------------------------------------------------------------- Shares Weighted-Average Range of Outstanding Remaining Weighted-Average Exercise Prices at 12/31/03 Contractual Life (Years) Exercise Price ------------------------------------------------------------------------------------- $ 6.56 - $11.29 320 4.6 $ 9.92 $13.05 - $16.94 418 5.4 $ 14.85 $20.50 - $24.84 425 1.9 $ 22.62 STOCK OPTIONS EXERCISABLE ------------------------------------------------------------------------------------- Range of Shares Exercisable Weighted-Average Exercise Prices at 12/31/03 Exercise Price ------------------------------------------------------------------------------------- $ 6.56 - $11.29 300 $10.14 $13.05 - $16.94 75 $15.58 $20.50 - $24.84 425 $22.62 -------------------------------------------------------------------------------------
F-13 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- 11. RETIREMENT BENEFIT PLANS We had a defined benefit pension plan covering certain former employees of our former Brake business. During 2002, a partial settlement of the plan occurred in conjunction with the purchase of non-participating annuity contracts for plan members. The final settlement under the plan will occur when the remaining assets under the plan are distributed. All pension benefit obligations have been satisified and the projected benefit obligation under the plan is $0. The following table represents a reconciliation of the beginning and ending benefit obligation, the fair value of plan assets and the funded status of the plan: December 31, --------------------- (IN THOUSANDS) 2003 2002 ---------------------------------------------------------------- Benefit obligation at beginning of year $ -- $ 8,813 Interest cost -- 368 Actuarial loss -- 1,096 Settlement -- (9,793) Benefits paid -- (484) ---------------------------------------------------------------- Benefit obligation at end of year $ -- $ -- ---------------------------------------------------------------- Fair value of plan assets at beginning of year $ 746 $ 11,062 Settlement -- (9,793) Actual return on plan assets (25) (39) Benefits paid -- (484) ---------------------------------------------------------------- Fair value of plan assets at end of year $ 721 $ 746 ---------------------------------------------------------------- Funded status $ 721 $ 746 Unrecognized net actuarial loss 81 56 ---------------------------------------------------------------- Prepaid benefit cost $ 802 $ 802 ---------------------------------------------------------------- Weighted average assumptions are as follows: December 31, ---------------------------- 2003 2002 2001 ----------------------------------------------------------------------- Discount rates N/A 6.50% 7.25% Expected long-term rate of return on assets N/A 8.00% 8.00% ----------------------------------------------------------------------- Components of net periodic (benefit) cost follow: December 31, ---------------------------- (IN THOUSANDS) 2003 2002 2001 ----------------------------------------------------------------------- Interest cost $ -- $ 368 $ 629 Return on assets (8) (530) (928) Settlement -- 228 -- Recognized actuarial (gain) loss 8 (5) (112) ----------------------------------------------------------------------- Net periodic (benefit) cost $ -- $ 61 $ (411) ----------------------------------------------------------------------- In addition, we participate in several multi employer plans which provide defined benefits to substantially all unionized workers. The Multi employer Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers associated with multi employer plans. We have not received information from the plans' administrators to determine our share, if any, of unfunded vested benefits. We and certain of our subsidiaries also maintain various defined contribution plans, which include profit sharing and provide retirement benefits for other eligible employees. The provisions for retirement expense in connection with the plans are as follows: Multi- Defined Contribution (IN THOUSANDS) employer Plans and Other Plans ----------------------------------------------------------------------- Year ended December 31, 2003 $ 225 $ 3,518 2002 306 2,553 2001 299 2,449 ----------------------------------------------------------------------- We have an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. 75,000 shares were granted to employees during 2003, 2002 and 2001, under the terms of the ESOP. These shares were funded directly from treasury stock. In fiscal 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. The provision for expense in connection with the ESOP was approximately $0.9 million in 2003, $1.2 million in 2002 and $0.7 million in 2001. 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 $99,000, $46,000 and $37,000 in 2003, 2002 and 2001, respectively. On October 1, 2001, we adopted a second unfunded SERP. The SERP is a defined benefit plan pursuant to which we will pay supplemental pension benefits to certain key employees upon retirement based upon the employees' years of service and compensation. December 31, --------------------------- (IN THOUSANDS) 2003 2002 ------------------------------------------------------------------- Benefit obligation at beginning of year $ 2,275 $ 1,342 Service cost 351 211 Interest cost 220 140 Actuarial loss 1,407 582 ------------------------------------------------------------------- Benefit obligation at end of year $ 4,253 $ 2,275 ------------------------------------------------------------------- Funded status $ (4,253) $ (2,275) Unrecognized prior service cost 1,022 1,132 Additional minimum pension liability (1,877) (1,298) Unrecognized net actuarial loss 1,800 538 ------------------------------------------------------------------- Accrued benefit cost $ (3,308) $ (1,903) ------------------------------------------------------------------- Components of net periodic benefit cost follow: December 31, --------------------------- (IN THOUSANDS) 2003 2002 ------------------------------------------------------------------- Service cost $ 351 $ 211 Interest cost 220 140 Amortization of prior service cost 110 110 Amortization of unrecognized loss 146 44 ------------------------------------------------------------------- Net periodic benefit cost $ 827 $ 505 ------------------------------------------------------------------- F-14 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- Actuarial assumptions used to determine costs and benefit obligations are as follows: December 31, --------------------------------- 2003 2002 ---------------------------------------------------------------- Discount rates 6.00% 6.50% Salary increase 4% 4% ---------------------------------------------------------------- 12. POSTRETIREMENT MEDICAL BENEFITS We provide certain medical and dental care benefits to eligible retired employees. Our current policy is to fund the cost of the health care plans on a pay-as-you-go basis. The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of the plan: December 31, -------------------------- (IN THOUSANDS) 2003 2002 ------------------------------------------------------------------- Benefit obligation at beginning of year $ 26,188 $ 20,484 Service cost 2,547 1,765 Interest cost 1,642 1,517 Actuarial loss 1,637 3,375 Benefits paid (1,087) (953) ------------------------------------------------------------------- Benefit obligation at end of year $ 30,927 $ 26,188 ------------------------------------------------------------------- Funded status $ (30,927) $(26,188) Unrecognized prior service cost 666 790 Unrecognized net actuarial loss 2,442 846 ------------------------------------------------------------------- Accrued benefit cost $ (27,819) $(24,552) ------------------------------------------------------------------- Components of net periodic benefit cost follow: December 31, ------------------------------------ (IN THOUSANDS) 2003 2002 2001 ----------------------------------------------------------------------------- Service cost $ 2,547 $ 1,765 $ 1,500 Interest cost 1,642 1,517 1,314 Amortization of prior service cost 124 124 124 Recognized actuarial (gain) loss 41 (53) (232) ----------------------------------------------------------------------------- Net periodic benefit cost $ 4,354 $ 3,353 $ 2,706 ----------------------------------------------------------------------------- Actuarial assumptions used to determine costs and benefit obligations are as follows: 2003 2002 2001 ----------------------------------------------------------------------------- Discount Rate 6.0% 6.5% 7.25% Current medical cost trend rate 12% 12% 9% Current dental cost trend rate 5% 5% 5% Ultimate medical cost trend rate 5% 5% 5% Year trend rate declines to ultimate 2005 2005 2005 ----------------------------------------------------------------------------- We expect to pay benefits of approximately $1.2 million to our unfunded postretirement benefit plan in 2004. Our measurement date for this plan is December 31. 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 2003: 1-Percentage- 1-Percentage- (IN THOUSANDS) Point Increase Point Decrease ------------------------------------------------------------------------ Effect on total of service and interest cost components $ 446 $ (359) Effect on post retirement benefit obligation $ 2,544 $ (2,110) ------------------------------------------------------------------------ In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. Since specific authoritative guidance on accounting for the federal subsidy is pending, FASB has permitted companies to defer the accounting for the effects of the Act. Accordingly, we have elected to defer the accounting for the changes in the Act, therefore, the impact of the Act has not been reflected in the accounting for our postretirement medical benefits or in disclosures above. We will account for the effects of the Act in the period in which authoritative guidance is issued, which could require a change in previously reported information. 13. OTHER INCOME (EXPENSE), NET Year Ended December 31, --------------------------------- (IN THOUSANDS) 2003 2002 2001 ----------------------------------------------------------------------- Interest and dividend income $ 446 $ 1,338 $ 1,336 Loss on sale of accounts receivable -- -- (484) Income from joint ventures 27 352 844 Gain (loss) on disposal of property, plant and equipment (301) 97 265 Gain (loss) on foreign exchange (1,357) 108 366 Other income (expense) - net 708 1,292 436 ----------------------------------------------------------------------- Total other income (expense), net $ (477) $ 3,187 $ 2,763 ----------------------------------------------------------------------- 14. INCOME TAXES The income tax provision (benefit) consists of the following: Year Ended December 31, -------------------------------- (IN THOUSANDS) 2003 2002 2001 ---------------------------------------------------------------------- Current: Domestic $ 804 $ 2,422 $ 1,124 Foreign 2,035 2,948 1,673 ---------------------------------------------------------------------- Total Current 2,839 5,370 2,797 ---------------------------------------------------------------------- Deferred: Domestic (1,617) 3,350 (3,408) Foreign (15) (800) (220) ---------------------------------------------------------------------- Total Deferred (1,632) 2,550 (3,628) ---------------------------------------------------------------------- Total income tax provision (benefit) $ 1,207 $ 7,920 $ (831) ---------------------------------------------------------------------- We have not provided for federal income taxes on the undistributed income of our foreign subsidiaries because of the availability of foreign tax credits and/or our intention to permanently reinvest such undistributed income. Cumulative undistributed earnings of foreign subsidiaries on which no United States income tax has been provided were $43.2 million at the end of 2003, 37.7 million at the end of 2002, $32.9 million at the end of 2001. Earnings (loss) before income taxes for foreign operations (excluding Puerto Rico) amounted to approximately $1.5 million, ($4.6) million, and $2.5 million, in 2003, 2002, and 2001, respectively. U.S. taxes on the earnings of the Puerto Rican subsidiary are largely eligible for tax credits against U.S. income taxes (phased out effective 2005) and are partially exempt from Puerto Rican income taxes under a tax exemption grant expiring in 2016. F-15 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- Reconciliations between the U.S. federal income tax rate and our effective income tax rate as a percentage of earnings from continuing operations before income taxes are as follows: Year Ended December 31, ---------------------------------------- 2003 2002 2001 ----------------------------------------------------------------------------- U.S. federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in tax rate resulting from: State and local income taxes, net of federal income tax benefit (7.2) 4.1 21.4 Non-deductible items, net 59.9 3.4 60.5 Income (benefit) taxes on foreign income (111.0) (2.4) (91.9) Change in valuation allowance 107.6 16.4 -- ----------------------------------------------------------------------------- Effective tax rate 84.3% 56.5% 25.0% ----------------------------------------------------------------------------- The following is a summary of the components of the net deferred tax assets and liabilities recognized in the accom- panying consolidated balance sheets: December 31, ------------------------- (IN THOUSANDS) 2003 2002 ------------------------------------------------------------------- Deferred tax assets: Inventories $ 7,060 $ 6,025 Allowance for customer returns 6,453 6,152 Postretirement benefits 10,989 10,390 Allowance for doubtful accounts 1,173 1,442 Accrued salaries and benefits 3,430 3,339 Net operating loss and tax credit carry forwards 17,988 14,084 Goodwill 2,581 3,578 Accrued asbestos liabilities 10,430 10,765 Other 5,583 5,580 ------------------------------------------------------------------- 65,687 61,355 Valuation allowance (23,239) (21,698) ------------------------------------------------------------------- Total $ 42,448 $ 39,657 ------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 8,747 $ 7,565 Promotional costs 395 1,106 Goodwill 688 -- Other 81 81 ------------------------------------------------------------------- Total 9,911 8,752 ------------------------------------------------------------------- Net deferred tax assets $ 32,537 $ 30,905 ------------------------------------------------------------------- During 2003, we increased the valuation allowance by $1.5 million. At December 31, 2003, we have approximately $28.0 million of domestic and foreign net operating loss carry forwards of which $13.6 million will expire between 2021 and 2023 and the remainder (foreign) have an indefinite carry forward period. We also have foreign tax credit carry forwards of approximately $1.4 million which expire between 2004 and 2007. We also have alternative minimum tax credit carry forwards of approximately $6.9 million for which there is no expiration date. We believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. However, if we are unable to generate sufficient taxable income in the future through our operations, increases in the valuation allowance may be required. 15. INDUSTRY SEGMENT AND GEOGRAPHIC DATA Under the provisions of SFAS No. 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:
Year ended December 31, 2003 --------------------------------------------------------------------------- Engine Temperature European Other (IN THOUSANDS) Management Control Group Adjustments Consolidated ---------------------------------------------------------------------------------------------------------- Net Sales $414,375 $219,576 $ 40,141 $ 4,691 $678,783 ---------------------------------------------------------------------------------------------------------- Depreciation and amortization 9,362 5,688 1,046 996 17,092 ---------------------------------------------------------------------------------------------------------- Operating income 31,871 4,702 (3,605) (17,153) 15,815 ---------------------------------------------------------------------------------------------------------- Investment in equity affiliates -- -- 42 2,280 2,322 ---------------------------------------------------------------------------------------------------------- Capital expenditures 5,473 2,438 1,015 -- 8,926 ---------------------------------------------------------------------------------------------------------- Total Assets $448,687 $150,248 $ 31,188 $ 64,402 $694,525 ----------------------------------------------------------------------------------------------------------
Our five largest individual customers, including members of one marketing group accounted for 43% of consolidated net sales in 2003. 29% and 14% of these net sales were generated from our Engine Management and Temperature Control seg- ments, respectively.
Year ended December 31, 2002 --------------------------------------------------------------------------- Engine Temperature European Other (IN THOUSANDS) Management Control Group Adjustments Consolidated ---------------------------------------------------------------------------------------------------------- Net Sales $303,112 $255,088 $ 36,028 $ 4,209 $598,437 ---------------------------------------------------------------------------------------------------------- Depreciation and amortization 8,660 5,484 902 1,082 16,128 ---------------------------------------------------------------------------------------------------------- Operating income 41,844 10,095 (10,464) (16,407) 25,068 ---------------------------------------------------------------------------------------------------------- Investment in equity affiliates -- -- 185 2,017 2,202 ---------------------------------------------------------------------------------------------------------- Capital expenditures 3,465 2,066 1,831 236 7,598 ---------------------------------------------------------------------------------------------------------- Total Assets $247,318 $157,343 $ 30,728 $ 55,369 $490,758 ----------------------------------------------------------------------------------------------------------
Our five largest individual customers, including members of one marketing group accounted for 43% of consolidated net sales in 2002. 22% and 21% of these net sales were generated from our Engine Management and Temperature Control seg- ments, respectively.
Year ended December 31, 2001 --------------------------------------------------------------------------- Engine Temperature European Other (IN THOUSANDS) Management Control Group Adjustments Consolidated ---------------------------------------------------------------------------------------------------------- Net Sales $285,498 $269,856 $ 33,449 $ 2,849 $591,652 ---------------------------------------------------------------------------------------------------------- Depreciation and amortization 9,649 6,462 1,961 837 18,909 ---------------------------------------------------------------------------------------------------------- Operating income 26,432 3,624 (1,718) (13,215) 15,123 ---------------------------------------------------------------------------------------------------------- Investment in equity affiliates 105 -- 166 1,878 2,149 ---------------------------------------------------------------------------------------------------------- Capital expenditures 4,724 6,781 775 1,460 13,740 ---------------------------------------------------------------------------------------------------------- Total Assets $233,564 $182,083 $ 40,407 $ 53,375 $509,429 ----------------------------------------------------------------------------------------------------------
F-16 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- Our five largest individual customers, including members of one marketing group accounted for 43% of consolidated net sales in 2001. 18% and 25% of these net sales were generated from our Engine Management and Temperature Control segments, respectively. 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 No.131. REVENUE ---------------------------------------------- Year ended December 31, ---------------------------------------------- (IN THOUSANDS) 2003 2002 2001 ---------------------------------------------------------------------- United States $ 584,853 $ 512,055 $ 515,322 Europe 40,141 36,028 33,449 Canada 38,187 32,188 28,811 Other Foreign 15,602 18,166 14,070 ---------------------------------------------------------------------- Total $ 678,783 $ 598,437 $ 591,652 ---------------------------------------------------------------------- LONG LIVED ASSETS ---------------------------------------------- Year ended December 31, ---------------------------------------------- (IN THOUSANDS) 2003 2002 2001 ---------------------------------------------------------------------- United States $ 173,817 $ 109,778 $ 118,455 Europe 7,246 7,153 17,301 Canada 2,496 2,450 2,829 Other Foreign 833 1,124 1,101 ---------------------------------------------------------------------- Total $ 184,392 $ 120,505 $ 139,686 ---------------------------------------------------------------------- Revenues are attributed to countries based upon the location of the customer. 16. 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. MARKETABLE SECURITIES The fair values of investments are estimated based on quoted market prices for these or similar instruments. 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. INTEREST RATE SWAPS The fair value of our financial instruments are based on market quotes and represents the net amount required to terminate the position, taking into consideration market rates and counterparty credit risk. The estimated fair values of our financial instruments are as follows: DECEMBER 31, 2003 CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE ------------------------------------------------------------------- Cash and cash equivalents $ 19,647 $ 19,647 Long-term debt (118,111) (116,570) Interest rate swaps (148) (148) ------------------------------------------------------------------- DECEMBER 31, 2002 CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE ------------------------------------------------------------------- Cash and cash equivalents $ 9,690 $ 9,690 Marketable securities 7,200 7,200 Long-term debt (97,299) (80,188) Interest rate swaps (1,905) (1,905) ------------------------------------------------------------------- 17. COMMITMENTS AND CONTINGENCIES Total rent expense for the three-years ended December 31, 2003 was as follows: (IN THOUSANDS) TOTAL ESTATE OTHER ------------------------------------------------------------------- 2003 $12,286 $9,143 $3,143 2002 8,434 6,282 2,152 2001 8,673 6,508 2,165 ------------------------------------------------------------------- At December 31, 2003, we are obligated to make minimum rental payments through 2021, under operating leases which are as follows : (IN THOUSANDS) ------------------------------------------------------------------------ 2004 ............... $12,824 2007 .............. 5,752 2005 ............... 12,156 2008 .............. 4,512 2006 ............... 9,322 Thereafter ........ 39,481 ------------------------------------------------------------------------ Total ............. $84,047 ------------------------------------------------------------------------ We also have lease and sub-lease agreements in place for various properties under our control. We expect to receive operating lease payments from lessees during the five years ending December 31, 2004 through 2008 of $0.6 million, $0.6 million, $0.6 million, $0.6 million, and $0.5 million, respectively. We generally warrant our products against certain manufac turing and other defects. These product warranties are vided for specific periods of time of the product depend ing on the nature of the product. As of December 31, 2003 and 2002, we have accrued $14.0 million and $10.4 million, respectively, for estimated product warranty claims. The accrued product warranty costs are based primarily on torical experience of actual warranty claims. Warranty expense for each of the years 2003, 2002 and 2001 were: $46.6 million, $46.7 million and $52.2 million, respectively. The following table provides the changes in our product warranties: Year Ended December 31, ----------------------------- (IN THOUSANDS) 2003 2002 ----------------------------------------------------------------------------- Balance, beginning of period $10,360 $ 12,743 Assumed liabilities from acquisition of DEM 3,600 -- Liabilities accrued for current year sales 46,592 46,671 Settlements of warranty claims (46,565) (49,054) ----------------------------------------------------------------------------- Balance, end of period $13,987 $ 10,360 ----------------------------------------------------------------------------- F-17 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- At December 31, 2003, we had outstanding letters of credit aggregating approximately $4.0 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. We entered into Change in Control arrangements with two key officers. In the event of a Change of Control (as defined), each executive will receive severance payments, (as defined), and certain other benefits. On January 28, 2000, a former significant customer of ours, which is currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including us. The claim against us alleged $0.5 million of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. The claim pertaining to the preferential payments was settled for an immaterial amount during the second quarter of 2002. In addition, this former customer seeks $9.4 million from us for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. We have purchased insurance with respect to the actions. On August 22, 2002, the court dismissed the antitrust claims. On July 8, 2003, the remaining claims were settled without any material financial effect on our business, financial condition or results of operations. 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, 2001, approximately 100 cases were outstanding for which we were responsible for any related liabilities. At December 31, 2002, the number of cases outstanding for which we were responsible for related liabilities increased to approximately 2,500, which include approximately 1,600 cases filed in December 2002 in Mississippi. We believe that these Mississippi cases filed against us in December 2002 were due in large part to potential plaintiffs accelerating the filing of their claims prior to the effective date of Mississippi's tort reform statue in January 2003, which statute eliminated the ability of plaintiffs to file consolidated cases. At December 31, 2003, approximately 3,300 cases were outstanding for which we were responsible for any related liabilities. Since inception in September 2001, the amounts paid for settled claims are $1.1 million. We do not have insurance coverage for the defense and indemnity costs associated with these claims. 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. Actuarial consultants with experience in assessing asbestos-related liabilities completed a study in September 2002 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 for the remainder of 2002 through 2052; (3) an analysis of our currently pending claims; and (4) an analysis of our settlements to date in order to develop average settlement values. Based upon all the information considered by the actuarial firm, the actuarial study estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $27.3 million to $58 million for the period through 2052. Accordingly, based on the information contained in the actuarial study and all other available information considered by us, we recorded an after tax charge of $16.9 million as a loss from discontinued operation during the third quarter of 2002 to reflect such liability, excluding legal costs. 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 2052 in our consolidated financial statements, in accordance with generally accepted accounting principles. As is our accounting policy, the actuarial study was updated as of August 31, 2003 using methodologies consistent with the September 2002 study. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $27 to $71 million for the period through 2052. We continue to believe that no amount within the range was a better estimate after the updated study, therefore, no adjustment was recorded as our consolidated balance sheet at September 30, 2003 reflects a total liability of approximately $27 million. Legal costs, which are expensed as incurred, are estimated to range from $21 to $28 million during the same period. We plan on performing a similar annual actuarial analysis during the third quarter of each year for the foreseeable future. Given the uncertainties associated with projecting such matters into the future, the short period of time that we have been responsible for defending these claims, and other factors outside our control, we can give no assurance that additional provisions will not be required. Management 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. 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 F-18 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -------------------------------------------------------------------------------- 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. 18. QUARTERLY FINANCIAL DATA unit (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended 2003 2003 2003 2003 ----------------------------------------------------------------------------------- Net Sales $ 162,454 $ 214,479 $ 166,125 $ 135,725 ----------------------------------------------------------------------------------- Gross Profit 38,125 58,288 43,819 34,540 ----------------------------------------------------------------------------------- Earnings (loss) from continuing operations (5,511) 2,042 4,300 (607) ----------------------------------------------------------------------------------- Loss from discontinued operation, net of taxes (370) (591) (433) (348) ----------------------------------------------------------------------------------- Net Earnings (loss) $ (5,881) $ 1,451 $ 3,867 $ (955) ----------------------------------------------------------------------------------- Net Earnings (loss) from continuing operations per common share: Basic $ (0.29) $ 0.11 $ 0.34 $ (0.05) Diluted $ (0.29) $ 0.11 $ 0.34 $ (0.05) ----------------------------------------------------------------------------------- Net Earnings (loss) per common share: Basic $ (0.31) $ 0.08 $ 0.31 $ (0.08) Diluted $ (0.31) $ 0.08 $ 0.31 $ (0.08) -----------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended 2002 2002 2002 2002 ----------------------------------------------------------------------------------- Net Sales $ 107,856 $ 183,631 $ 180,629 $ 126,321 ----------------------------------------------------------------------------------- Gross Profit 29,127 50,608 46,833 30,976 ----------------------------------------------------------------------------------- Earnings (loss) from continuing operations (8,087) 9,832 6,267 (1,921) ----------------------------------------------------------------------------------- Loss from discontinued operation, net of taxes (254) (16,918) (806) (319) ----------------------------------------------------------------------------------- Cumulative effect of accounting change, net of taxes -- -- -- (18,350) ----------------------------------------------------------------------------------- Net Earnings (loss) $ (8,341) $ (7,086) $ 5,461 $ (20,590) ----------------------------------------------------------------------------------- Net Earnings (loss) from continuing operations per common share: Basic $ (0.68) $ 0.82 $ 0.53 $ (0.16) Diluted $ (0.68) $ 0.72 $ 0.48 $ (0.16) ----------------------------------------------------------------------------------- Net Earnings (loss) per common share: Basic $ (0.70) $ (0.59) $ 0.46 $ (1.74) Diluted $ (0.70) $ (0.42) $ 0.43 $ (1.74) -----------------------------------------------------------------------------------
The fourth quarter of 2003 reflects unfavorable adjustments including approximately $2.9 million of integration and restructuring costs related to DEM and our Temperature Control Segment; and a $2 million additional inventory obsolescence provision for Temperature Control inventory due to reduced sales volume. The fourth quarter of 2002 reflects unfavorable adjustments including approximately $1.6 million of restructuring costs related to the consolidation of certain manufacturing and distributing facilities within the Temperature Control Segment; and a writeoff of approximately $3.3 million for the impairment of goodwill associated with the Engine Management reporting unit of the Europe Segment. F-19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that the Company's disclosure and procedures are effective. (b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the information in our 2004 Proxy Statement set forth under the captions "Election of Directors" "Information About Nominees" and "Executive Compensation." CODE OF ETHICS We have adopted a code of business conduct and ethics for Directors, Officers and Employees. The Code of Ethics is available on our website at WWW.SMPCORP.COM. Shareholders may request a free copy of the Code of Ethics from: Standard Motor Products, Inc. Attention: Investor Relations 37-18 Northern Blvd. Long Island City, NY 11101 (718) 392-0200 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information in our 2004 Proxy Statement set forth under captions "Information Regarding Executive Officer Compensation" and "Information Regarding the Board and its Committees - Directors Compensation." 33 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 2004 Proxy Statement set forth under the captions "Equity Compensation Plan Information" and "Information Regarding Beneficial Ownership of Principal Shareholders, Directors 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 2004 Proxy Statement set forth under the captions "Certain Relationships and Related Transactions." ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is incorporated herein by reference to the information in our 2004 Proxy Statement set forth under the captions "Audit and Non-Audit Fees." 34 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 15(A). DOCUMENT LIST (1) Among the responses to this Item 15(a) are the following financial statements. Independent Auditors' Report Financial Statements: Consolidated Balance Sheets - December 31, 2003 and 2002 Consolidated Statements of Operations - Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002 and 2001 Notes to Consolidated Financial Statements (2) The following financial schedule and related report for the years 2003, 2002 and 2001 is submitted herewith: Independent Auditors' Report of 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 required by Item 601 of Securities and Exchange Commission Regulations S-K: See "Exhibit Index". 15(B). REPORTS ON FORM 8-K On October 31, 2003, we filed a current report on Form 8-K reporting under Item 9 - Regulation FD Disclosure (Information furnished pursuant to Item 12 - Results of Operations and Financial Condition) that Standard Motor Products, Inc. issued a press release announcing its financial results for the quarter ended September 30, 2003 and a quarterly dividend. A copy of the press release was filed as an exhibit to such Form 8-K. 35 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT NUMBER 2.1 Asset Purchase Agreement, dated as of February 7, 2003, by and among Dana Corporation, Automotive Controls Corp., BWD Automotive Corporation, Pacer Industries, Inc., Ristance Corporation, Engine Controls Distribution Services, Inc., as Sellers, and Standard Motor Products, Inc., as Buyer (incorporated by reference to Standard Motor Products, Inc.'s Current Report on Form 8-K (File No. 001-04743), Filed on February 10, 2003). 3.1 By-laws filed as an Exhibit of Company's annual report on Form 10-K for the year ended December 31, 1986. 3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as an Exhibit of Company's Annual Report on Form 10-K for the year ended December 31, 1990. 3.3 Restated Articles of Incorporation, dated February 15, 1996, filed as an Exhibit of Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. 3.4 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. 4.1 Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.2 of Standard Motor Products, Inc.'s Registration Statement on Form S-8 (Registration No. 333-51565), dated May 1, 1998). 4.2 Certificate of Amendment to the Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.3 of Standard Motor Products, Inc.'s Registration Statement on Form S-8 (Registration No. 333-51565), filed on May 1, 1998). 4.3 Restated By-Laws, dated May 23, 1996 (incorporated by reference to Exhibit 3.4 of Standard Motor Products, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 36 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT NUMBER 4.4 Form of Subordinated Debenture Indenture (including form of convertible debenture) (incorporated by reference to Exhibit 4.1 to Standard Motor Products, Inc.'s Amendment No. 2 to its Registration Statement on Form S-3 (Registration No. 333-79177), filed on July 20, 1999). 4.5 Rights Agreement, dated as of February 15, 1996, between Standard Motor Products, Inc. and Registrar & Transfer Co., as rights agent (incorporated by reference to Standard Motor Products, Inc.'s Registration Statement on Form 8-A (File No. 001-04743), filed on April 11, 1996). 4.6 Form of Share Ownership Agreement by and between Standard Motor Products, Inc. and Dana Corporation (incorporated by reference to Standard Motor Products, Inc.'s Current Report on Form 8-K (File No. 001-04743), filed on February 10, 2003). 10.1 Employee Stock Ownership Plan and Trust dated January 1, 1989 filed as an Exhibit of Company's Annual Report on Form 10-K for the year ended December 31, 1989. 10.2 Supplemental Executive Retirement Plan dated August 15, 1994 filed as an Exhibit of Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.3 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc. is filed as Exhibit 4.1 of the Company's Registration Statement on Form S-8 (33-58655). 10.4 1996 Independent Outside Directors Stock Option Plan of Standard Motors Products, Inc. filed as an Exhibit of Company's annual report on Form 10-K for the year ended December 31, 1996. 10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as amended, is filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (333-51565), dated May 1, 1998. 10.6 Credit Agreement dated April 27, 2001 among Standard Motor Products, Inc. and subsidiaries, as Borrowers and GE Capital Corp. as Agent and Lender, GMAC Commercial Credit LLC, on Lender and Syndication Agent and Bank of America, N.A., as Lender and Documentation Agent. 10.7 The 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc. as Amended and restated, is filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (33359524), dated April 25, 2001. 37 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT NUMBER 10.8 Supplemental Compensation Plan effective October 1, 2001. 10.9 Change of Control Agreement dated December 12, 2001 between Standard Motor Products, Inc. and John Gethin. 10.10 Change of Control Agreement dated December 12, 2001 between Standard Motor Products, Inc. and James Burke. 10.11 First Amendment to Amended and Restated Credit Agreement, dated June 27, 2003, among Standard Motor Products, Inc., as Borrower and General Electric Capital Corp. and Bank of America, as Lenders. 21 List of Subsidiaries of Standard Motor Products, Inc. 23 Consent of Independent Auditors - KPMG LLP 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. 38 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; Chief Financial Officer New York, New York March 30, 2004 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 30, 2004 /S/ LAWRENCE I. SILLS ----------------------------------------------------- Lawrence I. Sills Chairman, Chief Executive Officer and Director March 30, 2004 /S/ ARTHUR D. DAVIS ----------------------------------------------------- Arthur D. Davis, Vice Chairman and Director March 30, 2004 /S/ MARILYN F. CRAGIN ----------------------------------------------------- Marilyn F. Cragin, Director March 30, 2004 /S/ SUSAN F. DAVIS ----------------------------------------------------- Susan F. Davis, Director March 30, 2004 /S/ ARTHUR S. SILLS ----------------------------------------------------- Arthur S. Sills, Director March 30, 2004 /S/ PETER J. SILLS ----------------------------------------------------- Peter J. Sills, Director 39 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Standard Motor Products, Inc.: Under date of March 26, 2004, we reported on the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003, as contained in the annual report on Form 10-K for the year 2003. Our report contains an explanatory paragraph that the Company adopted Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS as of January 1, 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP ----------------------- New York, New York March 26, 2004 40 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts Years ended December 31, 2003, 2002 and 2001
ADDITIONS --------- BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT DESCRIPTION OF YEAR EXPENSES OTHER (1) DEDUCTIONS END OF YEAR --------------- --------------- -------------- -------------- --------------- YEAR ENDED DECEMBER 31, 2003: Allowance for doubtful accounts $ 3,568,000 $ 813,000 $ 330,000 $ 1,702,000 $ 3,009,000 Allowance for discounts 1,314,000 9,615,000 800,000 9,729,000 2,000,000 --------------- --------------- -------------- -------------- --------------- $ 4,882,000 $ 10,428,000 $ 1,130,000 $ 11,431,000 $ 5,009,000 =============== =============== ============== ============== =============== Allowance for sales returns $ 16,341,000 $ 83,087,000 $ 7,013,000 $ 82,326,000 $ 24,115,000 =============== =============== ============== ============== =============== Allowance for inventory valuation $ 14,291,000 $ 5,613,000 $ 27,442,000 $ 5,543,000 $ 41,803,000 =============== =============== ============== ============== =============== YEAR ENDED DECEMBER 31, 2002: Allowance for doubtful accounts $ 2,917,000 $ 489,000 $ 162,000 $ -- $ 3,568,000 Allowance for discounts 1,445,000 8,611,000 -- 8,742,000 1,314,000 --------------- --------------- -------------- --------------- --------------- $ 4,362,000 $ 9,100,000 $ 162,000 $ 8,742,000 $ 4,882,000 =============== =============== ============== ============== =============== Allowance for sales returns $ 18,167,000 $ 73,030,000 $ -- $ 74,856,000 $ 16,341,000 =============== =============== ============== ============== =============== Allowance for inventory valuation $ 13,895,000 $ 1,265,000 $ -- $ 869,000 $ 14,291,000 =============== =============== ============== ============== =============== YEAR ENDED DECEMBER 31, 2001: Allowance for doubtful accounts $ 2,979,000 $ 598,000 $ -- $ 660,000 $ 2,917,000 Allowance for discounts 1,598,000 9,353,000 -- 9,506,000 1,445,000 --------------- --------------- -------------- --------------- --------------- $ 4,577,000 $ 9,951,000 $ -- $ 10,166,000 $ 4,362,000 =============== =============== ============== ============== =============== Allowance for sales returns $ 17,693,000 $ 94,122,000 $ -- $ 93,648,000 $ 18,167,000 =============== =============== ============== ============== =============== Allowance for inventory valuation $ 12,930,000 $ 4,387,000 $ -- $ 3,422,000 $ 13,895,000 =============== =============== ============== ============== ===============
(1) Allowance acquired through acquisition during the year ended December 31, 2003. 41