-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FErwJYv6kYvuSo8zP0EHYUuug3tmeS664amUFnqpzuug7WG+iKgtSjvXoI7YHESq nXDTBgL8iUEpTj9uZBV1Yg== 0000909012-05-000383.txt : 20050510 0000909012-05-000383.hdr.sgml : 20050510 20050510162436 ACCESSION NUMBER: 0000909012-05-000383 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MOTOR PRODUCTS INC CENTRAL INDEX KEY: 0000093389 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 111362020 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04743 FILM NUMBER: 05817051 BUSINESS ADDRESS: STREET 1: 37 18 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 BUSINESS PHONE: 7183920200 MAIL ADDRESS: STREET 1: 3718 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 10-Q 1 t301797.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 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) (718) 392-0200 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| As of the close of business on April 30, 2005, there were 19,833,728 outstanding shares of the registrant's Common Stock, par value $2.00 per share. ================================================================================ STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page No. -------- Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004.......... 3 Consolidated Statements of Operations and Retained Earnings (Unaudited) for the Three Months Ended March 31, 2005 and 2004.. 4 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2005 and 2004.............. 5 Notes to Consolidated Financial Statements (Unaudited).......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 23 Item 4. Controls and Procedures......................................... 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................... 27 Item 5. Other Information............................................... 27 Item 6. Exhibits........................................................ 28 Signature............................................................... 29 2 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except for shares and per share data)
March 31, December 31, 2005 2004 ----------- ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................. $ 8,795 $ 14,934 Accounts receivable, less allowance for discounts and doubtful accounts of $9,732 and $9,354 for 2005 and 2004, respectively ..... 198,843 151,352 Inventories ........................................................... 264,571 258,641 Deferred income taxes ................................................. 14,755 14,809 Prepaid expenses and other current assets ............................. 9,887 7,480 ---------- ---------- Total current assets .............................................. 496,851 447,216 ---------- ---------- Property, plant and equipment, net ........................................... 95,256 97,425 Goodwill and other intangibles, net .......................................... 69,475 69,911 Other assets ................................................................. 41,743 42,017 ---------- ---------- Total assets ...................................................... $ 703,325 $ 656,569 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable ......................................................... $ 146,439 $ 109,416 Current portion of long-term debt ..................................... 534 534 Accounts payable ...................................................... 69,809 46,487 Sundry payables and accrued expenses .................................. 22,046 31,241 Restructuring accrual ................................................. 5,767 6,999 Accrued rebates ....................................................... 21,950 24,210 Accrued customer returns .............................................. 22,607 23,127 Payroll and commissions ............................................... 9,518 10,442 ---------- ---------- Total current liabilities ...................................... 298,670 252,456 ---------- ---------- Long-term debt ............................................................... 114,101 114,236 Postretirement medical benefits and other accrued liabilities ................ 45,888 44,111 Restructuring accrual ........................................................ 11,301 12,394 Accrued asbestos liabilities ................................................. 25,985 26,060 ---------- ---------- Total liabilities .............................................. 495,945 449,257 ---------- ---------- Commitments and contingencies (Notes 6, 8, 10 and 12) Stockholders' equity: Common stock - par value $2.00 per share: Authorized - 30,000,000 shares; issued 20,486,036 shares ....... 40,972 40,972 Capital in excess of par value ........................................ 57,037 57,424 Retained earnings ..................................................... 119,117 120,218 Accumulated other comprehensive income ................................ 4,633 4,805 Treasury stock - at cost (952,808 and 1,067,308 shares in 2005 and 2004, respectively) ................................... (14,379) (16,107) ---------- ---------- Total stockholders' equity ................................. 207,380 207,312 ---------- ---------- Total liabilities and stockholders' equity ................. $ 703,325 $ 656,569 ========== ==========
See accompanying notes to consolidated financial statements. 3 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (In thousands, except for shares and per share data)
Three Months Ended March 31, ---------------------------- (Unaudited) 2005 2004 ---- ---- Net sales ....................................................... $ 207,326 $ 204,781 Cost of sales ................................................... 158,891 153,821 ------------ ------------ Gross profit ............................................... 48,435 50,960 Selling, general and administrative expenses .................... 42,076 47,328 Restructuring expenses .......................................... 524 1,367 ------------ ------------ Operating income ........................................... 5,835 2,265 Other income (expense), net ..................................... (215) 243 Interest expense ................................................ 3,775 3,234 ------------ ------------ Earnings (loss) from continuing operations before taxes .... 1,845 (726) Provision (benefit) for income tax ............................. 792 (181) ------------ ------------ Earnings (loss) from continuing operations ................. 1,053 (545) Loss from discontinued operation, net of tax .................... (407) (425) Net earnings (loss) ........................................ 646 (970) Retained earnings at beginning of period ........................ 120,218 141,553 ------------ ------------ 120,864 140,583 Less: cash dividends for period ................................. 1,747 1,729 ------------ ------------ Retained earnings at end of period .............................. $ 119,117 $ 138,854 ============ ============ PER SHARE DATA: Net earnings (loss) per common share - Basic: Earnings (loss) from continuing operations ................. $ 0.05 $ (0.03) Discontinued operation ..................................... (0.02) (0.02) ------------ ------------ Net earnings (loss) per common share - Basic .................... $ 0.03 $ (0.05) ============ ============ Net earnings (loss) per common share - Diluted: Earnings (loss) from continuing operations ................. $ 0.05 $ (0.03) Discontinued operation ..................................... (0.02) (0.02) ------------ ------------ Net earnings (loss) per common share - Diluted .................. $ 0.03 $ (0.05) ============ ============ Average number of common shares ................................. 19,440,356 19,233,543 ============ ============ Average number of common shares and dilutive common shares ...... 19,478,064 19,233,543 ============ ============
See accompanying notes to consolidated financial statements. 4 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Three Months Ended March 31, -------------------------- 2005 2004 ---- ---- (Unaudited) CASH FLOW FROM OPERATING ACTIVITIES Net earnings (loss) .......................................................... $ 646 $ (970) Adjustments to reconcile net earnings (loss) to net operating activities: Depreciation and amortization .............................................. 4,384 4,574 Loss on disposal of property, plant and equipment .......................... -- 7 Equity income from joint ventures .......................................... (8) (100) Employee stock ownership plan allocation ................................... 335 411 Loss from discontinued operation ........................................... 407 425 Change in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable, net ....................................... (47,491) (35,851) (Increase) decrease in inventories ......................................... (5,930) 2,045 Increase in prepaid expenses and other current assets ...................... (1,346) (2,120) Decrease in other assets ................................................... 234 1,285 Increase in accounts payable ............................................... 19,991 2,818 Decrease in sundry payables and accrued expenses ........................... (11,455) (1,933) Decrease in restructuring accrual .......................................... (2,325) (2,225) Increase (decrease) in other liabilities ................................... 70 (1,818) ---------- ---------- Net cash used in operating activities ................................. (42,488) (33,452) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of property, plant and equipment .................... -- 50 Capital expenditures, net of effects from acquisitions ..................... (1,873) (1,964) Payments for acquisitions, net of cash acquired ............................ -- (984) ---------- ---------- Net cash used in investing activities ................................. (1,873) (2,898) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under line-of-credit agreements ............................. 37,023 27,047 Principal payments and retirement of long term debt ........................ (135) (236) Increase in overdraft balances ............................................. 3,331 9,554 Dividends paid ............................................................. (1,747) (1,729) Proceeds from exercise of employee stock options ........................... -- 192 ---------- ---------- Net cash provided by financing activities ............................. 38,472 34,828 ---------- ---------- Effect of exchange rate changes on cash ...................................... (250) (245) ---------- ---------- Net decrease in cash and cash equivalents .................................... (6,139) (1,767) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ......................... 14,934 19,647 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ............................... $ 8,795 $ 17,880 ========== ========== Supplemental disclosure of cash flow information Cash paid during the period for: Interest ................................................................ $ 5,472 $ 4,784 ========== ========== Income Taxes ............................................................ $ 1,563 $ 612 ========== ==========
See accompanying notes to consolidated financial statements. 5 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION Standard Motor Products, Inc. (referred to hereinafter in these notes to consolidated financial statements as the "Company," "we," "us," or "our") is engaged in the manufacture and distribution of replacement parts for motor vehicles in the automotive aftermarket industry. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership. Our investments in unconsolidated affiliates are accounted for on the equity method. All significant inter-company items have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year. Where appropriate, certain amounts in 2004 have been reclassified to conform with the 2005 presentation. NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SHARE-BASED PAYMENT In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R is a revision to SFAS No. 123, "Accounting for Stock-Based Compensation" and supercedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. SFAS 123R is effective for interim and annual financial statements beginning after June 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. On April 14, 2005, the SEC adopted a rule amendment that delayed the compliance dates for SFAS 123R such that we are now allowed to adopt the new standard no later than January 1, 2006. The Company is currently evaluating the impact SFAS 123R will have on its consolidated financial statements and will adopt such standard as required. 6 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3. RESTRUCTURING AND INTEGRATION COSTS RESTRUCTURING COSTS In connection with the acquisition of substantially all of the assets and the assumption of substantially all of the operating liabilities of Dana Corporation's Engine Management Group ("DEM"), 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, and we have subsequently ceased operations in all of these facilities. As part of the integration and restructuring plans, we accrued an initial restructuring liability of approximately $34.7 million at June 30, 2003 (subsequently reduced to $33.7 million during 2003). Such amounts were recognized as liabilities assumed in the acquisition and included in the allocation of the costs to acquire DEM. Accordingly, such amounts resulted in additional goodwill being recorded in connection with the acquisition. Of the total restructuring accrual, approximately $15.7 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 DEM employees, individually employed throughout DEM's facilities across a broad range of functions, including managerial, professional, clerical, manufacturing and factory positions. During the year ended December 31, 2004 and the three months ended March 31, 2005, termination benefits of $9.4 million and $1.1 million, respectively, have been charged to the restructuring accrual. As of March 31, 2005, the reserve balance was at $3.1 million. We expect to pay $2.8 million in 2005 for work force reductions. The restructuring accrual also includes approximately $18.0 million associated with exiting certain activities, primarily related to lease and contract termination costs, which will not have future benefits. Specifically, our plans are to consolidate certain of DEM operations into our existing plants. At March 31, 2005, seven facilities have ceased operating activities for which we have lease commitments through 2021. Exit costs of $1.2 million were paid as of March 31, 2005 leaving a reserve balance at $14.0 million as of March 31, 2005. Selected information relating to the remaining restructuring costs is as follows (in thousands):
Workforce Other Reduction Exit Costs Totals ----------------------------------- Restructuring liability at December 31, 2004 ....... $ 4,250 $ 15,143 $ 19,393 Cash payments during first three months of 2005 .... 1,149 1,176 2,325 -------- -------- -------- Restructuring liability as of March 31, 2005 ....... $ 3,101 $ 13,967 $ 17,068 ======== ======== ========
INTEGRATION EXPENSES During the first quarter of 2005 and 2004, we incurred $524,000 and $1.4 million, respectively, of costs related primarily to the DEM integration. These costs primarily related to equipment and inventory move costs, employee stay bonuses and other facility consolidation costs. NOTE 4. CHANGE IN ACCOUNTING PRINCIPLE ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS New customer acquisition costs refer to arrangements pursuant to which we incur change over costs to induce a new or existing customer to switch from a competitor's brand. In addition, change over costs include the costs related to removing the new customer's inventory and replacing it with Standard Motor Products inventory commonly referred to as a stocklift. New customer acquisition costs were initially 7 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) recorded as a prepaid asset and the related expense was recognized ratably over a 12-month period beginning in the month following the stocklift as an offset to sales. In the fourth quarter of 2004, we determined that it was a preferable accounting method to reflect the customer acquisition costs as a reduction to revenue when incurred. In accordance with APB No. 20, "Accounting Changes" and FAS No. 3, the change in accounting for new customer acquisition costs effective as of October 1, 2004 is reflected in the following unaudited quarterly 2004 results as if the change had occurred on January 1, 2004 with the quarterly results for the first quarter of 2004 restated as if the new policy had been in effect throughout 2004 (in thousands, except per share data): 1st Quarter (Restated) (Unaudited) ----------- 2004 Net sales, as reported ................................ $ 204,781 Cumulative effect at January 1, 2004 .................. (2,605) Effect of change in accounting for new customer acquisition costs, net of tax effects .............. 148 New sales, as adjusted ................................ 202,324 Net loss, as reported ................................. (970) Cumulative effect at January 1, 2004, net of tax effects ............................................ (1,564) Effect of change in accounting for new customer acquisition costs, net of tax effects .............. 89 Net loss, as adjusted ................................. (2,445) Basic net loss per share, as reported ................. (0.05) Cumulative effect at January 1, 2004, net of tax effects ............................................ (0.08) Effect of change in accounting for new customer acquisition costs, net of tax effects .............. -- Basic net loss per share, as adjusted ................. (0.13) Diluted net loss per share, as reported ............... (0.05) Cumulative effect at January 1, 2004, net of tax effects ............................................ (0.08) Effect of change in accounting for new customer acquisition costs, net of tax effects .............. -- Diluted net loss per share, as adjusted ............... (0.13) NOTE 5. INVENTORIES March 31, December 31, 2005 2004 (unaudited) ------------------------- (in thousands) Finished goods, net .................... $195,074 $192,017 Work in process, net ................... 4,505 4,691 Raw materials, net ..................... 64,992 61,933 -------- -------- Total inventories, net ............. $264,571 $258,641 ======== ======== 8 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6. 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. Effective June 30, 2003, in connection with our acquisition of DEM, we amended and restated our credit agreement to provide for an additional $80 million commitment. This additional commitment increases the total amount available for borrowing under the revolving credit facility to $305 million from $225 million, and extends the term of the credit agreement from 2006 to 2008. Availability under our revolving credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets, which includes the purchased assets of DEM. After taking into effect outstanding borrowings under the revolving credit facility, there was an addition $74.1 million available for us to borrow pursuant to the formula at March 31, 2005. Our credit agreement also permits dividends and distributions by us provided specific conditions are met. At December 31, 2004 and March 31, 2005, the interest rate on the Company's revolving credit facility was 4.4% and 4.7%, 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 the revolving credit facility, classified as current liabilities, were $103.6 million and $139.3 million at December 31, 2004 and March 31, 2005, respectively. The Company maintains cash management systems in compliance with its credit agreements. Such systems require the establishment of lock boxes linked to blocked accounts whereby cash receipts are channeled to various banks to insure pay-down of debt. Agreements also classify such accounts and the cash therein as additional security for loans and other obligations to the credit providers. 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 in the credit agreement, 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. We subsequently received a waiver of compliance with the EBITDA covenant for the fiscal quarters ending September 30, 2004 and December 31, 2004, and received a waiver of compliance with the fixed charge coverage ratio for the quarter ended December 31, 2004. In March 2005, we amended our revolving credit facility to provide, among other things, for the following: (1) borrowings of the Company are no longer collateralized by the assets, including accounts receivable, inventory and fixed assets, of our Canadian subsidiary; (2) the specified levels of fixed charge coverage has been modified for 2005 and thereafter; (3) our Canadian subsidiary was released from its obligations under a guaranty and security agreement; and (4) the Company's pledge of stock of its Canadian subsidiary to the lenders was reduced from a 100% to a 65% pledge of stock. At March 31, 2005, we were not in compliance with the minimum fixed charge coverage ratio contained in our revolving credit facility. However, we received a waiver of compliance of such covenant for the quarter ended March 31, 2005. The waiver was part of an amendment to our revolving credit facility, which provided, among other things, for the following: (1) the specified levels of fixed charge coverage has been modified for the remainder of 2005 and thereafter; and (2) there is a limit on our ability to redeem drafts prior to the maturity date thereof under our customer draft programs. In addition, a foreign subsidiary of the Company has a revolving credit facility. The amount of short-term bank borrowings outstanding under this facility was $5.8 million and $7.1 million at December 31, 2004 9 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) and March 31, 2005, respectively. The weighted average interest rates on these borrowings at December 31, 2004 and March 31, 2005 were 6.9% and 7.3%, 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 at the option of the holder. We may, at our option, redeem some or all of the convertible debentures at any time on or after July 15, 2004, for a redemption price equal to the issuance price plus accrued interest. In addition, if a change in control, as defined in the agreement, occurs at the Company, we will be required to make an offer to purchase the convertible debentures at a purchase price equal to 101% of their aggregate principal amount, plus accrued interest. The convertible debentures are subordinated in right of payment to all of the Company's existing and future senior indebtedness. 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 (in thousands): December 31, --------------------- 2005 2004 ---- ---- 6.75% convertible subordinated debentures ............ $ 90,000 $ 90,000 Unsecured promissory note ............................ 15,125 15,125 Mortgage loan ........................................ 9,265 9,381 Other ................................................ 245 264 -------- -------- 114,635 114,770 Less current portion ................................. 534 534 -------- -------- Total non-current portion of long-term debt ..... $114,101 $114,236 ======== ======== Maturities of long-term debt during the five years ending December 31, 2005 through 2009 are $0.5 million, $0.6 million, $0.6 million, $15.7 million and $90.6 million, respectively. The Company had deferred financing cost in other assets of $5.2 million and $4.9 million as of December 31, 2004 and March 31, 2005, respectively. These costs are related to the Company's revolving credit facility, the convertible subordinated debentures and a mortgage loan agreement, and these costs are being amortized over three to eight years. 10 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss), net of income tax expense is as follows (in thousands): Three Months Ended March 31, ------------------ 2005 2004 ---- ---- Net earnings (loss) as reported ..................... $ 646 $ (970) Foreign currency translation adjustments ............ (393) (166) Minimum pension liability adjustment ................ 71 -- Change in fair value of interest rate swap agreements 150 (71) ----- ------- Total comprehensive earnings (loss), net of taxes ... $ 474 $(1,207) ===== ======= Accumulated other comprehensive income is comprised of the following (in thousands): March 31, December 31, 2005 2004 ----------------------- Foreign currency translation adjustments ... $ 7,629 $ 8,022 Unrealized loss on interest rate swap agreement, net of tax ................. 422 272 Minimum pension liability, net of tax ...... (3,418) (3,489) ------- ------- Total accumulated other comprehensive income $ 4,633 $ 4,805 ======= ======= NOTE 8. STOCK-BASED COMPENSATION PLAN Under SFAS No. 123, "Accounting for Stock-Based Compensation," 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 interpretations. Stock options granted are exercisable at prices equal to the fair market value or greater of our common stock on the dates the options were granted; therefore, no compensation cost has been recognized for any stock options granted. There were no stock options granted during the three months ended March 31, 2005 and 2004. If we accounted for stock-based compensation using the fair value method of SFAS, as amended by Statement No. 148, the effect on net earnings (loss) and basic and diluted earnings (loss) per share would have been as follows (in thousands, except per share amounts): Three Months Ended March 31, ------------------------ 2005 2004 ---- ---- Net earnings (loss) as reported .................. $ 646 $ (970) Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects .. (129) (65) ---------- ---------- Pro forma net earnings (loss) .................... $ 517 $ (1,035) ========== ========== Earnings (loss) per share: Basic - as reported .......................... $ 0.03 $ (0.05) ========== ========== Basic - pro forma ............................ $ 0.03 $ (0.05) ========== ========== Diluted - as reported ........................ $ 0.03 $ (0.05) ========== ========== Diluted - pro forma .......................... $ 0.03 $ (0.05) ========== ========== 11 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) At March 31, 2005, under our stock option plans there were an aggregate of (a) 1,434,785 shares of common stock authorized for grants, (b) 1,128,535 shares of common stock granted, and (c) 306,250 shares of common stock available for future grants. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS 123R requires companies to expense the value of employee stock options and similar awards. SFAS 123R is effective for interim and annual financial statements beginning after June 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. On April 14, 2005, the SEC adopted a rule amendment that delayed the compliance dates for SFAS 123R such that we are now allowed to adopt the new standard no later than January 1, 2006. The Company is currently evaluating the impact SFAS 123R will have on its consolidated financial statements and will adopt such standard as required. NOTE 9. EARNINGS PER SHARE The following are reconciliations of the earnings available to common stockholders and the shares used in calculating basic and dilutive net earnings per common share (in thousands, except share amounts): Three Months Ended March 31, ----------------------------- 2005 2004 ---- ---- Earnings (loss) from continuing operations $ 1,053 $ (545) Loss from discontinued operations ........ (407) (425) ------------ ------------ Net earnings (loss) available to common stockholders .................. $ 646 $ (970) ============ ============ Weighted average common shares outstanding - basic .................. 19,440,356 19,233,543 Dilutive effect of stock options ......... 37,708 -- ------------ ------------ Weighted average common shares outstanding - diluted ................ 19, 478,064 19,233,543 ============ ============ The shares listed below were not included in the computation of diluted earnings (loss) per share because to do so would have been anti-dilutive for the periods presented. Three Months Ended March 31, ----------------------------- 2005 2004 ---- ---- Stock options 897,043 681,473 Convertible debentures 2,796,120 2,796,120 NOTE 10. EMPLOYEE BENEFITS In 2000, we created an employee benefits trust to which we contributed 750,000 shares of treasury stock to the trust. We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under employee benefit plans. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with their fiduciary duties. During the first quarter of 2005, we committed 114,500 shares to be released leaving 300,500 shares remaining in the trust. 12 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. During March 2005, contributions were $79,000 for calendar year 2004. In October 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. We use a January 1 measurement date for this plan. 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 components of net period benefit cost for the three months ended March 31 of our US and UK deferred benefit plans are as follows (in thousands): Pension Benefits Postretirement Benefits ------------------------------------------ 2005 2004 2005 2004 ------ ------ ------ ------ Service cost ........................ $ 130 $ 113 $ 910 $ 871 Interest cost ....................... 131 80 549 455 Amortization of prior service cost .. 40 28 31 31 Actuarial net loss .................. 5 37 1 20 Amortization of unrecognized loss ... -- -- 1 -- ------ ------ ------ ------ Net periodic benefit cost ........... $ 306 $ 258 $1,492 $1,377 ====== ====== ====== ====== NOTE 11. INDUSTRY SEGMENTS Our three reportable operating segments are Engine Management, Temperature Control and Europe. Three Months Ended March 31, ------------------------------------------------- 2005 2004 ------------------------------------------------- OPERATING OPERATING INCOME INCOME NET SALES (LOSS) NET SALES (LOSS) --------- --------- --------- --------- (in thousands) Engine Management ....... $140,441 $ 10,080 $141,665 $ 9,093 Temperature Control ..... 53,562 1,557 51,194 (1,168) Europe .................. 10,945 (479) 10,269 (221) All Other ............... 2,378 (5,323) 1,653 (5,439) -------- -------- -------- -------- Consolidated ............ $207,326 $ 5,835 $204,781 $ 2,265 ======== ======== ======== ======== NOTE 12. COMMITMENTS AND CONTINGENCIES In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed on or after September 1, 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 1, 2001 and the amounts paid for indemnity and defense thereof. At December 31, 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 13 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 2004 and March 31, 2005, approximately 3,700 cases and 3,780 cases, respectively, were outstanding for which we were responsible for any related liabilities. We expect the outstanding cases to increase gradually due to recent legislation in certain states mandating minimum medical criteria before a case can be heard. Since inception in September 2001, the amounts paid for settled claims are $2.4 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, we update the actuarial study during the third quarter of each year. The most recent update to the actuarial study was performed as of August 31, 2004 using methodologies consistent with the September 2002 study. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $28 to $63 million for the period through 2049. The change from the prior year study was a $1.5 million increase for the low end of the range and a $7.9 million decrease for the high end of the range. As a result, in September 2004, an incremental $3 million provision was added to the asbestos accrual increasing the reserve to approximately $28.2 million. Legal costs, which are expensed as incurred, are estimated to range from $22 to $27 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. On November 30, 2004, we were served with a summons and complaint in the U.S. District Court for the Southern District of New York by The Coalition For A Level Playing Field, which is an organization comprised of a large number of auto parts retailers. The complaint alleges antitrust violations by the Company and a number of other auto parts manufacturers and retailers and seeks injunctive relief and unspecified monetary damages. The Company is in the process of preparing its answer to the complaint. 14 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, strenuously deny all of the plaintiff's allegations of wrongdoing and believe we have meritorious defenses to the plaintiff's claims. We intend to defend vigorously this lawsuit. We are involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of any asbestos-related matters or any other litigation or product liability matter cannot be determined, based on our understanding and evaluation of the relevant facts and circumstances, it is our opinion that the final outcome of these matters will not have a material adverse effect on our business, financial condition or results of operations. We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time of the product depending on the nature of the product. As of March 31, 2005 and 2004, we have accrued $13.0 million and $14.7 million, respectively, for estimated product warranty claims included in accrued customer returns. The accrued product warranty costs are based primarily on historical experience of actual warranty claims. Warranty expense for the three months ended March 31, 2005 and 2004 were $11.1 million and $12.1 million, respectively. The following table provides the changes in our product warranties (in thousands): Three Months Ended March 31, ------------------------- 2005 2004 ---- ---- Balance, beginning of period ..................... $ 13,194 $ 13,987 Liabilities accrued for current year sales ....... 11,127 12,064 Settlements of warranty claims ................... (11,339) (11,313) ---------- ---------- Balance, end of period ........................... $ 12,982 $ 14,738 ========== ========== 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS REPORT CONTAINS HISTORICAL INFORMATION AND 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 AND ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, 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 MATTERS (INCLUDING, WITHOUT LIMITATION, THOSE RELATED TO ESTIMATES TO ASBESTOS-RELATED CONTINGENT LIABILITIES); 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. IN ADDITION, HISTORICAL INFORMATION SHOULD NOT BE CONSIDERED AS AN INDICATOR OF FUTURE PERFORMANCE. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS REPORT. BUSINESS OVERVIEW We are a leading independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry. 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 was to restructure and to integrate the DEM business into our existing Engine Management Business, which we have substantially accomplished. Under the terms of the acquisition, we paid Dana Corporation $93.2 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 was approximately $130.5 million. In connection with the acquisition, we have reviewed our operations and implemented integration plans to restructure the operations of DEM. As part of the integration and restructuring plans, we closed seven of the nine acquired DEM facilities, and we estimated 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. Based on our most recent estimates of the total restructuring costs, approximately $15.7 million relates to work force reductions and employee termination benefits. This amount primarily represents severance costs relating to the involuntary termination of DEM employees individually employed throughout DEM facilities across a broad range of functions, including managerial, professional, clerical, manufacturing and factory positions. As of March 31, 2005, the reserve balance was at $3.1 million, and we expect to 16 pay $2.8 million in 2005 for work force reductions. Termination benefits of $1.1 million were paid in the first quarter of 2005. The restructuring costs also include approximately $18.0 million associated with exiting certain activities, primarily related to lease and contract termination costs. Exit costs of $1.2 million were paid in the first quarter of 2005 leaving the exit reserve balance at $14.0 million as of March 31, 2005. The DEM acquisition in 2003 was strategic and continues to be our primary focus in 2005. The critical goals we established for a successful integration were to (1) maintain the DEM customer base; (2) reduce excess capacity by closing seven of the acquired facilities in a 12 to 18 month timeframe; and (3) complete the transition for $30-35 million of cash outlays in restructuring and integration costs during this same period. The integration has proceeded on schedule, and all DEM operations including manufacturing, distribution, MIS, finance, sales and marketing have been transferred to SMP locations. As planned, we have exited seven of the acquired nine facilities, and this has been accomplished within our original time frame of twelve to eighteen months. The integration moves have been completed within budget, and thus far we have maintained all the DEM customers. On February 3, 2004, we acquired inventory from the Canadian distribution operation of DEM for approximately $1.0 million. We have relocated such inventory into our distribution facility in Mississauga, Canada. SEASONALITY. Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control segment of our business. In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather. 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. INVENTORY MANAGEMENT. We face inventory management issues as a result of warranty and overstock returns. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications. In addition to warranty returns, we also permit our customers to return products to us within customer-specific limits 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. 17 INTERIM RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 TO THE THREE MONTHS ENDED MARCH 31, 2004 SALES. Consolidated net sales in the first quarter of 2005 were $207.3 million, an increase of $2.5 million or 1.2%, compared to $204.8 million in the first quarter of 2004. Net sales increased modestly in Temperature Control and Europe Segments offset by a $1.2 million decrease in Engine Management sales. GROSS MARGINS. Gross margins were 23.4% in the first quarter of 2005 compared to 24.9% in the first quarter of 2004. The decrease was primarily from Engine Management gross margins at 22.8% in the first quarter of 2005 compared to 27.1% in the first quarter of 2004. The margins were negatively impacted by added costs from outside purchases to maintain customer fill levels and inefficiencies from new hires in the new facilities. The Engine Management margins are expected to improve going forward from the benefit of planned price increases, material cost savings and improved labor efficiencies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses (SG&A) decreased by $5.3 million to $42.1 million in the first quarter of 2005, compared to $47.3 million in the first quarter of 2004. The reduction in SG&A expenses was attributable to synergies from the DEM integration. The most significant reduction was in distribution expenses as we exited the 677,000 square foot Nashville, Tennessee distribution center during the second half of 2004. As a percentage of net sales, SG&A expenses decreased to 20.3% in the first quarter of 2005 from 23.1% in the first quarter of 2004. INTEGRATION EXPENSES. Integration expenses in the first quarter of 2005 were $524,000, compared to $1.4 million in the first quarter of 2004 primarily from the DEM integration. OPERATING INCOME. Operating income was $5.8 million in the first quarter of 2005, compared to $2.3 million in the first quarter of 2004. The increase was primarily due to the reduction in SG&A expenses slightly offset by lower gross margins explained above. OTHER INCOME (EXPENSE), NET. Other expense, net decreased to $215,000 in the first quarter of 2005, compared to other income, net of $243,000 in the first quarter of 2004 primarily due to reduced income from disposal of property, plant and equipment, foreign exchange impact and other net expenses. INTEREST EXPENSE. Interest expense increased by $541,000 in the first quarter 2005 compared to the same period in 2004, due to higher borrowings and higher average borrowing costs. INCOME TAX PROVISION. The effective tax rate for continuing operations increased from 25% in the first quarter of 2004 to 43% in first quarter of 2005, primarily due to lower earnings from our Puerto Rico operations which has a lower tax jurisdiction and slightly higher losses from our European Segment for which no income tax benefit is being recorded. LOSS FROM DISCONTINUED OPERATION. Losses from discontinued operation reflect legal expenses associated with our asbestos-related liability. We recorded $407,000 and $425,000 as a loss from discontinued operation in the first quarter of 2005 and 2004, respectively. As discussed more fully in note 12 of our notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos-containing products. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. During the first quarter of 2005, cash used in operations amounted to $42.5 million, compared to $33.5 million in the same period of 2004. The increase is primarily attributable to an increase in inventory and accounts receivable and a decrease in sundry payables and accrued expenses, offset by an increase in accounts payable. 18 INVESTING ACTIVITIES. Cash used in investing activities was $1.9 million in the first quarter of 2005, compared to $2.9 million in the same period of 2004. The decrease is primarily due to the 2004 payment of the inventory acquisition from the Canadian distribution of Dana Corporation. FINANCING ACTIVITIES. Cash provided by financing activities was $38.5 million in the first quarter of 2005, compared to $34.8 million in the same period of 2004. The increase is primarily due to an increase in borrowings under our line of credit offset by a decrease in our overdraft balances. 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. Effective June 30, 2003, in connection with our acquisition of DEM, we amended and restated our credit agreement to provide for an additional $80 million commitment. This additional commitment increases the total amount available for borrowing under our revolving credit facility to $305 million from $225 million, and extends the term of the credit agreement from 2006 to 2008. Availability under our revolving credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets, which includes the purchased assets of DEM. We expect such availability under the revolving credit facility to be sufficient to meet our ongoing operating and integration costs. Our credit agreement also permits dividends and distributions by us provided specific conditions are met. Direct borrowings under our revolving credit facility bear interest at the prime rate plus the applicable margin (as defined in the credit agreement) or the LIBOR rate plus the applicable margin (as defined in the credit agreement), 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. 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 earnings before interest, taxes, depreciation and amortization (EBITDA) as defined in the amendments to the credit agreement, 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. We subsequently received a waiver of compliance with the EBITDA covenant for the fiscal quarters ending September 30, 2004 and December 31, 2004 and received a waiver of compliance with the fixed charge coverage ratio for the fiscal quarter ending December 31, 2004. In March 2005, we amended our revolving credit facility to provide, among other things, for the following: (1) borrowings of the Company are no longer collateralized by the assets, including accounts receivable, inventory and fixed assets, of our Canadian subsidiary; (2) the specified levels of fixed charge coverage has been modified for 2005 and thereafter; (3) our Canadian subsidiary was released from its obligations under a guaranty and security agreement; and (4) the Company's pledge of stock of its Canadian subsidiary to the lenders was reduced from a 100% to a 65% pledge of stock. At March 31, 2005, we were not in compliance with the minimum fixed charge coverage ratio contained in our revolving credit facility. However, we received a waiver of compliance of such covenant for the quarter ended March 31, 2005. The waiver was part of an amendment to our revolving credit facility, which provided, among other things, for the following: (1) the specified levels of fixed charge coverage has been modified for the remainder of 2005 and thereafter; and (2) there is a limit on our ability to redeem drafts prior to the maturity date thereof under our customer draft programs. In connection with out acquisition of DEM, on June 30, 2003 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 December 31, 2008. The promissory note may be prepaid in whole or in part of any time without penalty. 19 On June 27, 2003, we borrowed $10 million under a mortgage loan agreement. The loan is payable in equal monthly installments. The loan bears interest at a fixed rate of 5.50% maturing in July 2018. The mortgage loan is secured by the related building and 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. In 2004 and the first quarter of 2005, we also received the benefit from accelerating accounts receivable collections from customer draft programs. While this program was new in 2004, we cannot ensure such programs will remain going forward. An amendment to our revolving credit facility limits our ability to redeem drafts prior to the maturity date thereof under our customer draft programs. We anticipate that our present sources of funds will continue to be adequate to meet our near term needs. 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. On July 26, 1999, we issued convertible debentures, payable semi-annually, in the aggregate principal amount of $90 million. The debentures carry an interest of 6.75%, payable semi-annually, 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 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 was repurchased to meet present and future requirements of our stock option programs and to fund our Employee Stock Option Plan (ESOP). As of March 31, 2005, we have Board authorization to repurchase additional shares at a maximum cost of $1.7 million. During 2004, 2003 and 2002 and the first quarter of 2005, 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, 2004. There have been no significant changes to this information at March 31, 2005.
---------------------------------------------------------------- (IN THOUSANDS) 2005 2006 2007 2008 2009 THEREAFTER TOTAL - ------------------------------------------------------------------------------------------------------------------------------- Principal payments of long term debt .............. $ 534 $ 586 $ 615 $ 15,695 $ 90,597 $ 6,743 $ 114,770 Operating leases ................ 7,079 6,421 5,358 4,621 3,720 19,784 46,983 Interest rate swap agreements.... -- (362) -- -- -- -- (362) Postemployee retirement funding ..................... 1,201 1,278 1,408 1,556 1,720 12,475 19,638 Severance payments related to integration .............. 3,999 251 -- -- -- -- 4,250 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total commitments ..... $ 12,813 $ 8,174 $ 7,381 $ 21,872 $ 96,037 $ 39,002 $ 185,279 ========== ========== ========== ========== ========== ========== ==========
20 CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2004. You should be aware that preparation of our consolidated quarterly financial statements in this Report requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. We can give no assurance that actual results will not differ from those estimates. REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement parts for motor vehicles from both our Engine Management and Temperature Control Segments. We recognize revenues when products are shipped and title has been transferred to a customer, the sales price is fixed and determinable, and collection is reasonably assured. We estimate and record provisions for cash discounts, quantity rebates, sales returns and warranties in the period the sale is recorded, based upon our prior experience and current trends. As described below, significant management judgments and estimates must be made and used in estimating sales returns and allowances relating to revenue recognized in any accounting period. INVENTORY VALUATION. Inventories are valued at the lower of cost or market. Cost is 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. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Specifically, our 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 March 31, 2005, the allowance for sales returns was $22.6 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 March 31, 2005, the allowance for doubtful accounts and for discounts was $9.7 million. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS. New customer acquisition costs refer to arrangements pursuant to which we incur change over costs to induce a new customer to switch from a competitor's brand. In addition, change over costs include the costs related to removing the new customer's inventory and replacing it with Standard Motor Products inventory commonly referred to as a stocklift. New customer acquisition costs were initially recorded as a prepaid 21 asset and the related expense was recognized ratably over a 12-month period beginning in the month following the stocklift as an offset to sales. In the fourth quarter of 2004, we determined that it was a preferable accounting method to reflect the customer acquisition costs as a reduction to revenue when incurred. We recorded a cumulative effect of a change in accounting for new customer acquisition costs totaling $2.6 million (or $1.6 million, net of tax effects) and recorded the amount as if the change in accounting principle had taken effect on October 1, 2004. 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 March 31, 2005, we had a valuation allowance of $23.1 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, if necessary, 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. RETIREMENT AND POSTRETIREMENT MEDICAL BENEFITS. Each year, we calculated the costs of providing retiree benefits under the provisions of SFAS 87, Employers' Accounting for Pensions, and SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions. The key assumptions used in making these calculations are disclosed in notes 11 and 12 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2004. 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. 22 In accordance with our accounting policy, we update the actuarial study during the third quarter of each year. The most recent update to the actuarial study was performed as of August 31, 2004 using methodologies consistent with the September 2002 study. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs, ranging from $28 to $63 million for the period through 2049. The change from the prior year study was a $1.5 million increase for the low end of the range and a $7.9 million decrease for the high end of the range. As a result, in September 2004, an incremental $3 million provision was added to the asbestos accrual increasing the reserve to approximately $28.2 million. Legal costs are estimated to range from $22 to $27 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 operation. Legal expenses associated with asbestos-related matters are expensed as incurred and recorded as a loss from discontinued operation 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 SHARE-BASED PAYMENT In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R is a revision to SFAS No. 123, "Accounting for Stock-Based Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. SFAS 123R is effective for interim and annual financial statements beginning after June 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. On April 14, 2005, the SEC adopted a rule amendment that delayed the compliance dates for SFAS 123R such that we are now allowed to adopt the new standard no later than January 1, 2006. The Company is currently evaluating the impact SFAS 123R will have on its consolidated financial statements and will adopt such standard as required. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than one of our subsidiary's functional currency. Similarly, we are exposed to market risk as the result of changes in interest rates, which may affect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. We have exchange rate exposure, primarily, with respect to the Canadian dollar and the British pound. As of December 31, 2004 and March 31, 2005, our financial instruments which are subject to this exposure 23 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. 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. We invest our excess cash in highly liquid short-term investments. Our percentage of variable rate debt to total debt was 49% at December 31, 2004 and 56% at March 31, 2005. Other than the aforementioned, there have been no significant changes to the information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K for the year ended December 31, 2004. ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. This evaluation also included consideration of our internal controls and procedures for the preparation of our financial statements as required under Section 404 of the Sarbanes-Oxley Act. Grant Thornton LLP, our independent registered public accounting firm, has provided us with an unqualified report on our consolidated financial statements for 2004. However, in the course of conducting its assessment of our internal controls and its audit of our financial statements for our year ended December 31, 2004, Grant Thornton advised management and the audit committee of our board of directors that it had identified the following material weaknesses in our internal controls: (1) There were insufficient personnel resources within the accounting and financial reporting function due to accounting staff (including senior level employees) turnover occurring in the fourth quarter of 2004. (2) There were deficiencies identified in the following areas of the Company's information technology function which, when considered in the aggregate, constitute a material weakness over financial reporting: o The Company's IT system is decentralized with disparate IT platforms, business solutions and software applications being utilized. o System maintenance policies and procedures (including an enhanced disaster recovery plan) require development and adoption. o Security of systems used for the entry and maintenance of accounting records requires additional documentation and scrutiny to ensure that appropriate access to such systems and the data contained therein is restricted. o A policy and procedure to address an overall security framework, including password usage, intrusion detection, system security monitoring and back-up recovery must be written and implemented. (3) There were deficiencies in the analysis and reconciliation of general ledger accounts which were indicative of a material weakness in controls over closing procedures, including the (a) month end cut off processes, and (b) the accounting and reporting of restructuring charges. 24 While these material weaknesses did not have an effect on our reported results, they nevertheless constituted deficiencies in our disclosure controls. In light of these material weaknesses and the requirements enacted by the Sarbanes-Oxley Act of 2002 and the related rules and regulations adopted by the SEC, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2005, our disclosure controls and procedures needed improvement and were not effective at a reasonable assurance level. Despite those deficiencies in our disclosure controls, management believes that there were no material inaccuracies or omissions of material facts in this Report. Since the discovery of the material weaknesses in internal controls described above, management is strengthening the Company's internal control over financial reporting beyond what has existed in prior years, and we have taken various actions to improve our disclosure controls and procedures and to remediate our internal control over financial reporting including, but not limited to, the following: (1) We have engaged a search firm to assist us in the hiring of additional senior level accounting staff. We expect to fill such positions by the second or third quarters of 2005. In addition, in the first quarter of 2005, we hired a Financial Compliance Manager to assist us with our Sarbanes-Oxley compliance. (2) We have re-allocated resources to our accounting and finance department to strengthen our accounting function. In particular, in the first quarter of 2005 we have transferred one employee from our European operations to become our Engine Management Group Controller, and in the second quarter of 2005 we will be transferring one employee from our Canadian operations to serve in a senior level accounting position in our Engine Management division. In addition, in the fourth quarter of 2004 we have hired an outside consultant to assist us with our accounting function. (3) In 2004, we retained an independent third party consulting firm to assist us in the preparation, documentation and testing of our compliance with Section 404 of the Sarbanes-Oxley Act of 2002. We intend to continue to utilize this consulting firm with our Sarbanes-Oxley compliance efforts in 2005. (4) As part of our efforts to improve our IT function, we are in the process of: o Establishing an enterprise wide information technology strategy to synthesize the disparate IT platforms and to develop policies to unify the business solutions and software applications being employed; o Establishing a plan for uniform upgrades of workstations and software, including virus protection and software fixes; o Establishing a formal policy and procedure to address the overall security framework, including password usage, intrusion detection and system security monitoring; o Improving our security measures to safeguard our data, including enhancing our disaster recovery plan; o Improving our policies and procedures for system maintenance and handling back-up and recovery tapes; and o Utilizing a consulting firm to assist us with preparing an IT policy and procedures manual to document all of our updated IT procedures/standards on a company-wide basis. The continued implementation of the initiatives described above is among our highest priorities. We have discussed our corrective actions and future plans with our audit committee and Grant Thornton and, as of the date of this Report, we believe the actions outlined above should correct the above-listed material weaknesses in our internal controls. However, in designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and are subject to certain limitations, including the exercise of judgment by individuals, the inability to identify 25 unlikely future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to management in a timely manner. In addition, we cannot assure you that neither we nor our independent auditors will in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date. When in certain of the Company's prior filings under the Exchange Act officers of the Company provided conclusions regarding the effectiveness of our disclosure controls and procedures, they believed that their conclusions were accurate. However, after receiving and assessing the formal advice regarding our internal control over financial reporting that our independent auditors provided in the course of the audit of our financial statements for the year ended December 31, 2004, our Chief Executive Officer and Chief Financial Officer have reached the conclusions set forth above. We believe that the material weaknesses in our internal controls identified during our Sarbanes-Oxley testing review and described above do not materially affect the fairness or accuracy of the presentation of our financial condition and results of operation in our historical financial statements as set forth in this Report or in our reports previously filed with the SEC under the Exchange Act. (b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the quarter ended March 31, 2005 and subsequent to that date, we made and continue to make changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting, including the following: (1) Changes in our accounting personnel by (a) hiring a new Engine Management Group Controller and a Financial Compliance Manager, and (b) launching a search for additional senior level accounting staff. (2) Increased employee training and subscribed to an accounting research service in an effort to keep more current with accounting pronouncements and financial reporting matters. (3) Increased responsibilities of a consulting firm with the requisite experience and expertise to assist us in the implementation and compliance with Section 404 of the Sarbanes-Oxley Act. (4) Improved the documentation of our significant accounting and IT policies. We continue to review, document and test our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts will lead to various changes in our internal control over financial reporting. The certifications of the Company's Chief Executive Officer and Chief Financial Officer attached as Exhibits 31.1 and 31.2 to this Report include, in paragraph 4 of such certifications, information concerning the Company's disclosure controls and procedures and internal control over financial reporting. These officers believe these certifications to be accurate, because we did have procedures in place during the quarter ended March 31, 2005 to detect errors in our systems. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications. 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed on or after September 1, 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 1, 2001 and the amounts paid for indemnity and defense thereof. At 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, 2004 and March 31, 2005 approximately 3,700 cases and 3,780 cases, respectively, were outstanding for which we were responsible for any related liabilities. We expect the outstanding cases to increase gradually due to recent legislation in certain states mandating minimum medical criteria before a case can be heard. Since inception in September 2001, the amounts paid for settled claims are $2.4 million. We do not have insurance coverage for the defense and indemnity costs associated with these claims. On November 30, 2004, we were served with a summons and complaint in the U.S. District Court for the Southern District of New York by The Coalition For A Level Playing Field, which is an organization comprised of a large number of auto parts retailers. The complaint alleges antitrust violations by the Company and a number of other auto parts manufacturers and retailers and seeks injunctive relief and unspecified monetary damages. The Company is in the process of preparing its answer to the complaint. Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, strenuously deny all of the plaintiff's allegations of wrongdoing and believe we have meritorious defenses to the plaintiff's claims. We intend to defend vigorously this lawsuit. We are involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of any asbestos-related matters or any other litigation or product liability matter cannot be determined, based on our understanding and evaluation of the relevant facts and circumstances, it is our opinion that the final outcome of these matters will not have a material adverse effect on our business, financial condition or results of operations. ITEM 5. OTHER INFORMATION AMENDMENT TO CREDIT AGREEMENT On May 9, 2005, the Company and certain of its wholly owned subsidiaries entered into an amendment of its Amended and Restated Credit Agreement dated as of February 7, 2003, as further amended (the "Credit Agreement"), with General Electric Capital Corporation, as agent for the lenders, Bank of America, N.A., for itself and as syndicate agent, and GMAC Commercial Finance LLC, for itself and as documentation agent. The amendment provides for the following: (1) the specified levels of fixed charge coverage has been modified for the remainder of 2005 and thereafter; and (2) there is a limit on our ability to redeem drafts prior to the maturity date thereof under our customer draft programs. The description set forth above is qualified by the Waiver and Amendment No. 5 to the Amended and Restated Credit Agreement filed herewith as exhibit 10.16. 27 ITEM 6. EXHIBITS 10.16 Waiver and Amendment No. 5 to Amended and Restated Credit Agreement, dated as of May 9, 2005, among Standard Motor Products, Inc., as Borrower, and General Electric Capital Corp. and Bank of America, as Lenders. 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. 28 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANDARD MOTOR PRODUCTS, INC. (Registrant) Date: May 10, 2005 /s/ James J. Burke ------------------ James J. Burke Vice President Finance, Chief Financial Officer (Principal Financial and Accounting Officer) 29 STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX EXHIBIT NUMBER - ------ 10.16 Waiver and Amendment No. 5 to Amended and Restated Credit Agreement, dated as of May 9, 2005, among Standard Motor Products, Inc., as Borrower, and General Electric Capital Corp. and Bank of America, as Lenders. 31.2 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. 32.3 Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.4 Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 30 EX-10.16 2 exh10-16.txt WAIVER AND AMENDMENT NO. 5 WAIVER AND AMENDMENT NO. 5 TO AMENDED AND RESTATED CREDIT AGREEMENT This WAIVER AND AMENDMENT NO. 5 (this "Amendment") is entered into as of this 9th day of May, 2005 by and among STANDARD MOTOR PRODUCTS, INC., a New York corporation ("SMP"), STANRIC, INC., a Delaware corporation ("SI"), MARDEVCO CREDIT CORP., a New York corporation ("MCC"),(SMP, SI and MCC are sometimes collectively referred to herein as "Borrowers" and individually as a "Borrower"), the other Credit Parties signatory to the Credit Agreement (as herein defined), lenders who are party to the Credit Agreement ("Lenders"), GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation, in its capacity as Agent for Lenders ("Agent"), BANK OF AMERICA, N.A., for itself, as Lender, and as Syndication Agent, and GMAC COMMERCIAL FINANCE LLC (as successor by merger to GMAC Commercial Credit LLC), for itself, as Lender, and as Documentation Agent. WHEREAS, pursuant to that certain Amended and Restated Credit Agreement dated as of February 7, 2003, by and among Borrowers, Credit Parties, Agent, Syndication Agent, Documentation Agent and Lenders (including all annexes, exhibits and schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"), Lenders have made Loans to, and incurred Letter of Credit Obligations on behalf of Borrowers; and WHEREAS, Borrowers have requested Agent and Requisite Lenders waive an Event of Default existing with respect to the Fixed Charge Coverage Ratio as of March 31, 2005 and to amend such covenant for subsequent fiscal periods, and Agent and Requisite Lenders are willing to do so on the terms and conditions hereafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in furtherance of the Borrowers' duties to give further assurances to the Agent and Lenders pursuant to the terms of the Credit Agreement, the parties hereto agree as follows: 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Credit Agreement. 2. WAIVER. Subject to the satisfaction of the conditions precedent set forth in Section 4 below Agent and Requisite Lenders hereby waive the Event of Default existing pursuant to Section 8.1(b) of the Credit Agreement solely as a result of Borrowers' failure to comply with the Minimum Fixed Charge Coverage Ratio contained in Annex G for the Fiscal Quarter ended on March 31, 2005. 3. AMENDMENTS TO CREDIT AGREEMENT. Subject to satisfaction of the conditions precedent set forth in Section 4 below, the Credit Agreement is hereby amended as follows: (a) Section 6.8(f) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(f) the sale of any (x) Sun Trust Drafts pursuant to the AutoZone/Sun Trust Program, and (y) Customer Drafts pursuant to the applicable Customer Programs; PROVIDED, HOWEVER, Borrowers shall not permit Early Draft Sales to exceed 15% of Borrowers total net sales for (a) the two (2) month period ending June 30, 2005, (b) the five (5) month period ending September 30, 2005, (c) the eight (8) month period ending December 31, 2005, (d) the eleven (11) month period ending March, 2006 and (e) the four Fiscal Quarters ending on the last day of each March, June, September and December thereafter." (b) Annex A of the Credit Agreement is hereby amended by adding the following defined term in its appropriate alphabetical order: "EARLY DRAFT SALES" shall mean the sale of SunTrust Drafts and Customer Drafts more than ten (10) days prior to the maturity date of such drafts to SunTrust Bank, or such other acceptable bank with whom Agent has entered into a satisfactory intercreditor agreement regarding the payment of the purchase price for the SunTrust Drafts and Customer Drafts being sold to such bank. (c) Annex E of the Credit Agreement is hereby amended by amending the first sentence of Section (a) to provide as follows: "(a) MONTHLY FINANCIALS. To Agent and Lenders, within thirty (30) days after the end of each Fiscal Month (other than January), financial information regarding Borrowers and their Subsidiaries, certified by the chief financial officer or treasurer of Borrower Representative, consisting of consolidated and consolidating (i) unaudited balance sheets as of the close of such Fiscal Month and the related statements of income and cash flows for that portion of the Fiscal Year ending as of the close of such Fiscal Month; (ii) unaudited statements of income and cash flows for such Fiscal Month, setting forth in comparative form the figures for the corresponding period in the prior year and the figures contained in the Projections for such Fiscal Year, all prepared (other than the Projections) in accordance with GAAP (subject to normal year-end adjustments); (iii) a summary of the outstanding balance of all Intercompany Notes as of the last day of that Fiscal Month; (iv) a summary of the total Net Sales as of the last day of that Fiscal Month for such Fiscal Month and for the Fiscal Year to date; and (v) a summary of the Early Draft Sales as of the last day of that Fiscal Month for such Fiscal Month and for the Fiscal Year to date." -2- (d) Annex G of the Credit Agreement is hereby amended by amending Section 2(b) in its entirety to provide as follows: "(b) MINIMUM FIXED CHARGE COVERAGE RATIO. Borrowers and their Subsidiaries on a consolidated basis shall have, at the end of each Fiscal Quarter set forth below, a Fixed Charge Coverage Ratio for the 12-month period then ended (or with respect to the Fiscal Quarters ending on or before December 31, 2005, the period commencing on January 1, 2005 and ending on the last day of such Fiscal Quarter) of not less than the following: FISCAL QUARTER FIXED CHARGE ENDING COVERAGE RATIO ------ -------------- June 30, 2005 1.10 to 1.00 September 30, 2005 1.10 to 1.00 December 31, 2005 and each 1.10 to 1.00" Fiscal Quarter ending thereafter 4. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective as of the date upon which Agent shall have received (i) ten (10) copies of this Amendment executed by Borrowers, Requisite Lenders and each of the Guarantors, and (ii) payment of an amendment fee of $100,000 which shall be paid to Agent for the ratable benefit of those Lenders that execute this Amendment on or before May 9, 2005 (which fee shall be charged by Agent to the Revolving Loan balance). 5. REPRESENTATIONS AND WARRANTIES. Borrowers hereby represent and warrant as follows: (a) This Amendment and the Credit Agreement, as amended hereby, constitute legal, valid and binding obligations of Borrowers and are enforceable against Borrowers in accordance with their respective terms. (b) Upon the effectiveness of this Amendment, each Borrower hereby reaffirms all covenants, representations and warranties made in the Credit Agreement as amended hereby and agree that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. (c) No Event of Default or Default has occurred and is continuing or would exist after giving effect to this Amendment. (d) Borrowers have no defense, counterclaim or offset with respect to the Credit Agreement. -3- 6. NO WAIVER. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Agent or any Lender, nor constitute a waiver of any provision of the Credit Agreement, or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 7. EFFECT ON THE CREDIT AGREEMENT. All references in the Credit Agreement and the other Loan Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAW RULES). 9. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 10. COUNTERPARTS; FACSIMILE. This Amendment may be executed in any number of several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -4- IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed and delivered by its duly authorized officer as of the date first set forth above. STANDARD MOTOR PRODUCTS, INC. By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- STANRIC, INC. By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- MARDEVCO CREDIT CORP. By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- (SIGNATURES CONTINUED ON NEXT PAGE) -5- GMAC COMMERCIAL FINANCE LLC, as Documentation Agent and Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- BANK OF AMERICA, N.A., as Syndication Agent and Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- GE BUSINESS CAPITAL CORPORATION, as Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- CONGRESS FINANCIAL CORPORATION, as Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- (SIGNATURES CONTINUED ON NEXT PAGE) -6- JP MORGAN CHASE BANK, as Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- HSBC BANK USA, NATIONAL ASSOCIATION, as Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- WELLS FARGO FOOTHILL, as Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- MERRILL LYNCH CAPITAL, a Division of MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., as Lender By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- (SIGNATURES CONTINUED ON NEXT PAGE) -7- CONSENTED TO: SMP MOTOR PRODUCTS LTD. By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- EAGLEMOTIVE CORPORATION By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- MOTORTRONICS, INC. By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- -8- EX-31.1 3 exh31-1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Lawrence I. Sills, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Standard Motor Products, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2005 /s/ Lawrence I. Sills --------------------- Lawrence I. Sills Chief Executive Officer EX-31.2 4 exh31-2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James J. Burke, certify that: 1. I have reviewed this report on Form 10-Q of Standard Motor Products, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's abilirecord, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 10, 2005 /s/ James J. Burke ------------------ James J. Burke Chief Financial Officer EX-32.1 5 exh32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Standard Motor Products, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence I. Sills, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Lawrence I. Sills - --------------------- Lawrence I. Sills Chief Executive Officer May 10, 2005 * A signed original of this written statement required by Section 906 has been provided to Standard Motor Products, Inc. and will be retained by Standard Motor Products, Inc. and furnished to the Securities and Exchange Commission on its staff upon request. EX-32.2 6 exh32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Standard Motor Products, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James J. Burke, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ James J. Burke - ------------------ James J. Burke Chief Financial Officer May 10, 2005 * A signed original of this written statement required by Section 906 has been provided to Standard Motor Products, Inc. and will be retained by Standard Motor Products, Inc. and furnished to the Securities and Exchange Commission on its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----