ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Standard Motor Products (referred to herein as the "Company" or "SMP") manufactures and distributes replacement parts for motor vehicles. The Company is now organized into two principal segments, each focused on a specific type of replacement part. The Engine Management Division consists primarily of ignition and emission parts, on-board computers, ignition wires, battery cables and fuel system parts. The Temperature Control Division consists primarily of air conditioning compressors, other air conditioning parts and heater parts. The Company sells its products primarily to warehouse distributors and large auto parts retail chains. SMP's customers consist of most of the top warehouse distributors and most of the leading auto parts retail chains, including Advance Auto Parts, AutoZone, Carquest and NAPA Auto Parts. The Company distributes parts under its own brand names, such as Standard, Blue Streak and Four Seasons, and also under private labels for key customers. In addition to its two principal operating segments, effective with the beginning of fiscal 2000, the Company considers its European Operations to be a separate operating segment along with its Canadian operations. Both the European and Canadian operations consist of Engine Management and Temperature Control related activities.
In January 1999, the Company acquired, through its European subsidiary Standard Motor Products Holdings Limited, 85% of the stock of Webcon UK Limited and, through its UK joint venture, Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited, for approximately $3.5 million. Webcon is an assembler and distributor of automotive fuel system components and other engine management and motor sport performance products. Injection Correction is a leading remanufacturer of engine computers and has developed a line of engine diagnostic equipment. The remaining 15% was acquired in January 2000.
In February 1999, the Company acquired the Eaglemotive unit of Mark IV Industries, Inc. for $12,400,000. Eaglemotive, located in Fort Worth, Texas when acquired, manufactures and distributes fan clutches and oil coolers. It has since been merged with the Company's Hayden operations in California.
In April 1999, the Company acquired Lemark Auto Accessories Limited, a UK based supplier of wire sets, for approximately $1,900,000.
In January 2000, the Company completed the purchase of Vehicle Air Condition Parts, located in England, which has subsequently been renamed "Four Seasons UK, LTD." The purchase will assist in distributing components for the repair of air conditioning systems. The total acquisition price was approximately $1.4 million. In addition, in July 2000, the Company completed the purchase of Automotive Heater Exchange SRL in Massa, Italy. The acquisitions are in alignment with the Company's strategy of growing the Company's Temperature Control sales in Europe.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The table below shows the Company's sales by operating segment and by major product group within each segment. The Company's two reportable operating segments are Engine Management and Temperature Control. Effective with the beginning of fiscal 2000, the Company reclassified certain European operations from the Engine Management and Temperature control segments to a separate segment, which currently does not meet the criteria of a reportable segment. Amounts in 1999 and 1998 have been reclassified to conform to the 2000 presentation.
The table below shows the Company's operating profit and identifiable assets by reportable operating segment.
"All Other" consists of items pertaining to the corporate headquarters function, as well as the Canadian and European business units that do not meet the criteria of a reportable operating segment.
(C) NARRATIVE DESCRIPTION OF BUSINESS
THE AUTOMOTIVE AFTERMARKET
A large, diverse number of manufacturers varying in product specialization and size makes up the automotive aftermarket industry. In addition to manufacturing, aftermarket companies also allocate resources towards an efficient distribution process and product engineering in order to maintain the flexibility and responsiveness on which their customers depend. The automotive aftermarket differs substantially from the original equipment manufacturer supply business. Aftermarket manufacturers must be efficient producers of small run lot sizes and do not have to provide systems engineering support. Aftermarket manufacturers also must distribute, with rapid turnaround times, products for a full range of vehicles on the road. While sales of original equipment manufacturer suppliers are tied closely to the North American production volumes of the "Big Three" automakers, aftermarket manufacturers tend to follow different trends (such as average vehicle age, increased pricing of new cars, total miles driven per year, environmental laws becoming more stringent and the quality of new cars and their related warranties).
The primary customers of the automotive aftermarket manufacturers are national and regional warehouse distributors, large retail chains, automotive repair chains and the dealer service networks of the original equipment vehicle manufacturers.
ENGINE MANAGEMENT DIVISION
In the Company's Engine Management Division, replacement parts for automotive ignition and emission control systems account for about 37% of the Company's 2000 revenues. These parts include distributor caps and rotors, electronic ignition control modules, voltage regulators, coils, switches, sensors and EGR valves. The Company is a basic manufacturer of many of the ignition parts it markets. These products cover a wide range of applications, from 30-year old vehicles to current models, both domestic and imports, including passenger cars and light trucks. The products also cover certain off-road and marine applications.
SMP offers products at three different price points under a "good-better-best" concept. It began by offering ignition parts under the "Standard" brand name that were equal in quality to original equipment parts installed on new vehicles. Soon afterward, the company pioneered the concept of offering higher quality parts, sold under the Blue Streak brand name, that were significantly better than original equipment. These products were priced at a premium. SMP now offers lower-priced lines under the Tru-Tech and Modern mechanic brand to compete with certain lower priced private labels.
Nearly all new vehicles are factory-equipped with computer-controlled engine management systems to control ignition, emission control and fuel injection. The on-board computers monitor inputs from many types of sensors located throughout the vehicle, and control a myriad of valves, switches and motors to manage engine and vehicle performance. The Company is a leader in the manufacture and sale of these engine management component parts, including remanufactured automotive computers. The shift from the traditional breaker-point ignition systems to electronic ignition systems started approximately 25 years ago. The shift was a response to pressures from the government and environmental groups to reduce national fuel consumption and the level of pollutants from auto exhaust. Electronic ignition systems enable the engine to improve fuel efficiency and reduce this level of hazardous fumes in exhaust gases. In 2000, electronic control modules and electronic voltage regulators comprised approximately 11% of the Company's total ignition and emission sales.
In 1992 the Company entered into a 50/50 joint venture, Blue Streak Electronics, Inc., in Canada to rebuild automotive engine management computers and mass air flow ("MAF") sensors. This joint ventures volume is sold primarily to SMP and has positioned the Company as a key supplier in the rapidly growing remanufactured electronics markets. In 1994, the Company vastly increased its offering of remanufactured computers and instituted a program to offer slower-moving items by overnight shipment from its factory. This has enabled the Company's customers to expand their coverage without increasing inventory investment. The joint venture has further expanded its product range to include temperature control computers, anti-lock brake system computers and air bag computers. In 1997 it launched an operation in Europe to serve that market and an operation in Florida to better serve the United States market in slow-moving items. In January 1999 Blue Streak Europe acquired Injection Correction UK LTD. Injection Correction is a remanufacturer of engine computers and has developed a line of engine diagnostic equipment.
The Company divides its electronic operations between product design and highly automated manufacturing operations in Orlando, Florida, and assembly operations, which are performed in assembly plants in Orlando and Hong Kong.
The Company's sales of sensors, valves, solenoids and related parts have increased steadily as automobile manufacturers equip their cars with more complex engine management systems. Stricter government emission laws are being implemented in various parts of the United States. Specifically, the most significant law is 1990's Federal Clean Air Act. The I/M 240 section of the Clean Air Act imposes strict emission control test standards on existing as well as new vehicles, by means of a dynamometer test. The law is widely expected to be gradually implemented throughout the United States. In the future, we expect these new laws to have a positive impact on sales of our ignition and emission controls parts. However, the timing of such impact will depend on how quickly government agencies implement these new procedures at state levels. Vehicles failing these new, more stringent tests have required repairs utilizing parts sold by the Company. In 2000, oxygen sensors comprised approximately 8% of total ignition and emission parts sales.
Wire and cable parts account for about 10% of the Company's 2000 revenues. These products include ignition (spark plug) wires, battery cables and a wide range of electrical wire, terminals, connectors and tools for servicing an automobile's electrical system.
The largest component of this product line is the sale of ignition wire sets. The Company has historically offered a premium brand of ignition wires and battery cables, which capitalize on the market's awareness of the importance of quality. With the growing customer interest in lower-priced products, the Company introduced a second line of wire and cable products in 1989. This line has steadily expanded to include import coverage, and in 1995 was reintroduced under the Tru-Tech brand name.
In 1999 the Company relocated two of its wire and cable operations, one in Dallas, TX and the other in Bradenton, FL, to a new facility in Reynosa, Mexico. The Mexican operation focuses on assembly and packaging of the economy wire sets while the premium line is manufactured at the Company's facility in Edwardsville, KS.
TEMPERATURE CONTROL DIVISION
The Company manufactures, re-manufactures, and markets a broad line of replacement parts for automotive temperature control systems (air conditioning and heating), primarily under the brand names Four Seasons, Murray, Everco, Factory Air, Trumark, NAPA and Carquest. In recent years Four Seasons has offered private label packaging to its larger accounts. The major product groups sold by this division are Compressors, Other Air Conditioning parts including small motors, fan clutches, dryers, evaporators, accumulators and hoses, and Heating Parts, including heater cores and valves. Total Temperature Control sales account for approximately 44% of the Company's 2000 revenues.
A major factor in the Temperature Control division's business is the federal regulation of chlorofluorocarbon refrigerants. United States legislation phased out production of domestic R-12 refrigerant (e.g., DuPont's Freon) completely by the end of 1995. As the law became effective, vehicle air conditioners needing repair or recharge were retro fitted to use the new R-134a refrigerant. New vehicles began to use the new refrigerants in 1993. Installers continue to seek training and certification in the new technology and the Company's Temperature Control division has taken the lead in providing this training and certification. Technological changes necessitate many new parts, as well as new service equipment. In anticipation of the CFC phaseout, in 1994 the Company reengineered its compressor line to be able to operate efficiently utilizing either R-12 or R-134a refrigerants, and remains a leader in providing retrofit kits for conversion of R-12 systems.
In June 1995, the Company acquired Automotive Dryers, Inc and Air Parts, Inc. to become a more basic manufacturer of the major product supplied by the Temperature Control division and to gain access to the lower priced tier of the market through a new distribution channel. Automotive Dryers, Inc. manufacturers and distributes receiver filter dryers and accumulators for mobile air conditioning systems, and is the leading independent supplier of aftermarket evaporators and accumulators for high performance cars in the United States. Air Parts, Inc. is a distributor of a limited, no-frills line of parts for mobile air conditioning systems.
In December 1996, the Company acquired the Hayden Division of The Equion Corporation, a basic manufacturer of fan clutches and oil coolers. This acquisition expanded the profitable manufacturing base and greatly expanded the distribution channels for this key product line.
To further leverage our strong base with retailers, in 1996 the Company launched a small electric motor manufacturing and assembly facility in Ontario, Canada. This has enhanced the sale of parts requiring small motors.
In 1998, the Company exchanged its brake business for the Moog Automotive temperature control business of Cooper Industries. The Moog acquisition also expanded the Company's position in the small motor and heater parts markets. In 1999 it acquired Eaglemotive Corporation, manufacturer of fan clutches and oil coolers. In consolidating these two businesses with its existing operations, the Company has closed three manufacturing facilities and consolidated three distribution sites into one.
Temperature Control strengthened its presence in the international market by opening a new European distribution center in Strasbourg, France, which became fully operational in January of 1997. Four Seasons Europe will assure the rapid availability of the Company's Temperature Control products throughout Europe, Africa, and the Middle East. A joint venture with Valeo, SA, one of the largest European automotive equipment manufacturers was begun in April of 1997 to remanufacture air conditioner compressors for the developing European market.
In January 2000, the Company completed the purchase of Vehicle Air Conditioning Parts, located in England, which has subsequently been renamed "Four Seasons UK, LTD." The purchase will assist in distributing components for the repair of air conditioning systems. Total acquisition price was approximately $1.4 million. In addition, in July 2000, the Company completed the purchase of Automotive Heater Exchange SRL in Massa, Italy.
THE COMPETITION
The Company is among the largest manufacturers of replacement parts for product lines in our two divisions, namely Engine Management and Temperature Control. The Company competes primarily on the basis of product quality, price, customer service, product coverage, product availability, order turn-around time and order fill rate. Management believes the Company differentiates itself primarily through a value-added, knowledgeable salesforce; extensive product coverage; sophisticated parts cataloguing systems; and inventory levels sufficient to meet the rapid delivery requirements of customers.
Although the Company is a leading independent manufacturer of automotive replacement parts with strong brand name recognition, the Company faces substantial competition in all markets that it serves. Certain major manufacturers of replacement parts are divisions of companies having greater financial resources than those of SMP. In addition, automobile manufacturers supply virtually every replacement part sold by the Company, although these manufacturers generally supply parts only for cars they produce.
SALES AND DISTRIBUTION
The Company sells its products under proprietary brand names throughout the United States, Canada, Latin America, Europe and the Middle East. Products are distributed to warehouse distributors, including jobber outlets located throughout the United States and Canada. The jobbers sell the Company's products primarily to professional mechanics and to consumers who perform their own automobile repairs. In addition, the Company sells directly to large auto parts retail chains .
The Company has a direct sales force which generates demand for its products by directing the major portion of its sales effort to its customers' customers (i.e. jobbers and professional mechanics). The Company conducts instructional clinics, which teach mechanics how to diagnose and repair complex systems related to its products. It also publishes and sells related service manuals and video cassettes and provides a free technical information bulletin service to registered mechanics. The Company's Standard Plus Club, a professional service dealer network comprising approximately 13,000 members, offers technical and business development support and has a technical service telephone hotline which provides diagnostics and installation support.
In connection with the Company's sales activities, the Company offers several types of discounts and or allowances. These discounts and allowances, the Company believes to be common practice throughout the aftermarket automotive industry. First, the Company offers cash discounts for paying invoices in accordance with the discounted terms of the invoice. Secondly, the Company offers pricing discounts based on volume and different product lines purchased from the Company. In addition to the aforementioned discounts, allowances for warranty and overstock returns are provided.
CUSTOMERS
The Company's customer base is comprised largely of warehouse distributors, jobber outlets, retailers, other manufacturers and export customers. In addition to serving our traditional customer base, we have expanded into the retail market by commencing sales to large retail chains.
Members of one marketing group represent the Company's largest group of customers and accounted for approximately 15%, 14% and 13% of consolidated net sales for the years ended December 31, 2000, 1999 and 1998, respectively. One individual member of this marketing group accounted for 9%, 9% and 10% of net sales for the years ended December 31, 2000, 1999 and 1998, respectively. The Company's five largest individual customers, including members of this marketing group, accounted for 33%, 35% and 30% of net sales in 2000, 1999 and 1998, respectively.
The loss of one or more of these customers could have a material adverse impact on the Company's business, financial condition and results of operations.
BACKLOG
Backlog is maintained at minimal levels by the Company. The Company primarily fills orders, as received, from inventory and manufactures to maintain minimum inventory levels.
SEASONALITY
Historically, the Company's operating results have fluctuated by quarter, with the greatest sales and earnings occurring in the second and third quarters of the year. It is in these quarters that demand for the Company's products is typically the highest. It is anticipated that these quarterly fluctuations will become more pronounced in the future as the highly seasonal Temperature Control business comprises an increasing portion of the Company's total revenues.
This seasonality impacts profitability and working capital requirements. In addition, this seasonality offers significant operational challenges in the manufacturing and distribution functions. The Company traditionally offers a pre-season selling program (Spring promotion) to limit these challenges (e.g. rapid turnaround time of customer orders). The ultimate consumer (the car owner) wants a repair done correctly and quickly, and the Company's customers consider order turnaround time critical in evaluating SMP's performance.
The pre-selling program primarily consists of two types of incentives and relates to orders placed in the months of January through May. Customers are offered a choice of an "off-invoice" discount or "dating terms" that are established whereby longer payment terms are offered on a monthly basis with final remaining balances due no later than August of that year.
WORKING CAPITAL MANAGEMENT
Since the early 1990s, automotive aftermarket companies have been under increasing pressure to provide broad SKU coverage in response to parts and brand proliferation.
Since 1996, the Company has made significant changes to the inventory management system to reduce inventory requirements. The Company launched a new forecasting system in our Engine Management division that permitted a significant reduction in safety stocks. The Engine Management division also has introduced a new distribution system in the second half of 1999, which permits pack-to-order systems to be implemented. Such systems permit the Company to retain slow moving items in a bulk storage state until an order for a specific brand part is received. This system reduces the volume of a given part in inventory and reduces the labor requirements to package and repackage inventory.
In late 1997, we adopted Economic Value Added (EVA (R)) as our primary financial measurement for evaluating investments and foR determining incentive compensation. EVA is equal to net operating profits after economic taxes, less a charge for capital invested in the Company. The charge for invested capital is equal to the product of the total capital invested in the Company and the weighted average cost of capital for the Company's target blend of debt and equity (12% for the Company). The Company's management places emphasis on improving our financial performance, achieving operating efficiencies and improving asset utilization.
The Company's profitability and working capital requirements have become more seasonal with the increased sales mix of temperature control products. Our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales begin to be received. These increased working capital requirements are funded by borrowings from our lines of credit.
SUPPLIERS
The principal raw materials purchased by the Company consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), ignition wire, stainless steel coils and rods, aluminum coils and rods, lead, rubber molding compound, thermo-set and thermo plastic molding powders. Additionally, the Company uses components and cores (used parts) in its remanufacturing processes for computerized electronics and air conditioning compressors.
SMP purchases most materials in the open market, but does have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores, the Company obtains them either from exchanges with customers who return cores when purchasing remanufactured parts, or through direct purchases from a network of core brokers. The Company believes there is an adequate supply of primary raw materials and cores. In order to ensure a consistent, high quality, low cost supply of key components for each product line, the Company continues to develop its own sources through internal manufacturing capacity and/or acquisitions.
PRODUCTION AND ENGINEERING
The Company engineers, tools and manufactures many of the components for its products, except for certain commonly available small component parts from outside suppliers. The Company also performs its own plastic and rubber molding operations, stamping and machining operations, automated electronics assembly and a wide variety of other processes. In the case of remanufactured components, it conducts its own teardown, diagnostics, and rebuilding for computer modules and air conditioning compressors. This level of vertical integration has been found to provide advantages in terms of cost, quality and availability. The Company intends to selectively continue efforts toward further vertical integration to ensure a consistent quality and supply of low cost components.
In 1990 the Company adopted the "just-in-time" cellular manufacturing concept as a major program to lower costs and improve efficiency. The main thrust of cellular manufacturing is the reduction of work-in-process and finished goods inventory, and its implementation reduces the inefficient operations that burden many manufacturing processes. To date, the Company has substantially implemented the just-in-time manufacturing program at the majority of its manufacturing facilities and plans to convert the remaining facilities to cellular production over the next few years.
In 2000 the Company has started working on implementing a fully integrated enterprise resource planning (ERP) system. The implementation is expected to be fully completed in 2003. At that time, the system will encompass all aspects of the supply chain, including procurement, manufacturing, sales, distribution and finance, at all of the Company's facilities. It will also serve as the foundation upon which the Company can facilitate its E-commerce strategy.
INSURANCE
The Company maintains basic liability coverage (general, product and automobile) of $1 million and umbrella liability coverage of $50 million. Historically, the Company has not experienced casualty losses in any year in excess of its coverage. Management has no reason to expect this experience to change, but can offer no assurances that liability losses in the future will not exceed the Company's coverage.
EMPLOYEES
The Company employs approximately 3,400 people in the United States, Mexico, Canada, Puerto Rico, Europe and Hong Kong. Of these, approximately 2,300 are production employees. In addition, the Company has joint venture operations in Canada and France. The Company now has binding labor agreements with the workers at all of its unionized facilities. Edwardsville, Kansas production employees are covered by a United Auto Workers contract that expires April 1, 2003. Long Island City, New York production employees are under a contract that expires October 1, 2001. The Company believes that its facilities are in favorable labor markets with ready access to adequate numbers of skilled and unskilled workers. In addition, the Company has joint venture operations in Canada and France.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company sells its line of products primarily in the United States, with additional sales through Canada, Latin America, Europe and the Middle East. The Company's sales are substantially denominated in dollars. The table below shows the sales by geographic area for the last three years:
(U.S. DOLLARS IN THOUSANDS)
Revenues ------------------------------------------------ 2000 1999 1998 ---- ---- ---- United States $527,188 $ 582,508 $ 586,044 Canada 26,553 27,331 25,513 Other Foreign 52,709 48,402 37,863 ------------------------------------------------ Total $606,450 $ 658,241 $ 649,420 ================================================
Export sales originating from the United States for the years ended December 31, 2000, 1999 and 1998 were $13,547,000, $11,774,000 and $14,294,000 respectively, and have been included in the category, Other Foreign.
ITEM 2.
ITEM 2. PROPERTIES
The Company maintains its executive offices and a manufacturing plant at 37-18 Northern Boulevard, Long Island City, NY.
The table below describes the Company's principal physical properties. (For information with respect to rentals, see note 17 of Notes to Consolidated Financial Statements).
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $500,000 (formerly $19,759,000) of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In addition, this former customer seeks $10,500,000 from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes that these matters will not have a material effect on the Company's consolidated financial statements taken as a whole.
The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, it is management's opinion that the final resolution of these matters will not have a material effect on the Company's consolidated financial statements taken as a whole.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5:
ITEM 5: MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: --------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange under the symbol SMP. The number of Shareholders of record of Common Stock on February 28, 2001 was approximately 583, including brokers who hold approximately 7,869,887 shares in street name. The following table shows the high and low sale prices on the composite tape of, and the dividend paid per share on, the Common Stock during the periods indicated.
- ----- ------- ------- ------- ---------- ----- ------- ------- ------- --------- 2000 QUARTER HIGH LOW DIVIDEND 1999 QUARTER HIGH LOW DIVIDEND - ---- ------- ---- --- -------- ---- ------- ---- --- ---------
1st $16.50 $12.63 $ 0.09 1st $25.00 $20.50 $0.08 2nd $15.70 $7.38 $ 0.09 2nd $25.25 $20.44 $0.08 3rd $10.63 $7.94 $ 0.09 3rd $29.62 $19.25 $0.09 4th $8.44 $6.44 $ 0.09 4th $19.62 $15.75 $0.09 - ----- ------- ------- ------- ---------- ----- ------- ------- ------- ---------
The Board of Directors will consider the payment of future dividends on the basis of earnings, capital requirements and the financial condition of the Company. The Company's loan agreements limit dividends and distributions by the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In 2000, cash used in operations amounted to $1.0 million, compared to cash provided by operations of $21.0 million in 1999 and $110.4 million in 1998. The decrease is primarily attributable to an increase in inventories as compared to 1999 and 1998, and a decrease in net earnings as compared to 1998.
In connection with the aforementioned increase in inventories and the related decrease in inventory turnover (1.8x in 2000 vs. 2.7x in 1999) the reasons are two-fold. First, with respect to the Temperature Control Segment, and as noted elsewhere, the related business is highly seasonal with sales of air conditioning parts being greatest in the second and third quarters of the year. This seasonality requires the build-up of inventory levels prior to the main selling season. As discussed in our comparison of the year 2000 vs. 1999, Temperature Control sales were significantly below the prior year and forecasted amounts. Although significant reductions were made to Temperature Control production levels in 2000, the short fall in net sales more than off-set such reductions. Second, with respect to the Engine Management Segment, in the third quarter of 2000, Engine Management successfully acquired a new major customer which required inventory levels to be increased in order to fill the initial "pipeline" of orders from such customer. In addition, the customer launch for new orders has extended into 2001, versus the fourth quarter of 2000, as originally planned. In order to achieve significant inventory reductions and in order to improve our working capital position, the Company has continued to monitor production levels in our Temperature Control business and reduced production and purchasing requirements for the Engine Management business.
Cash used in investing activities was $18.7 million in 2000, as capital expenditures and payments for acquisitions were partially offset by proceeds from the sale of property, plant and equipment. For the three years ended December 31, 2000, 1999 and 1998 capital expenditures totaled $16.7 million, $14.4 million and $15.3 million, respectively. Cash used by financing activities was $11.5 million in 2000, as $29.1 million of principal payments of long term debt and $14.3 million in repurchases of the Company's common stock more than off-set borrowings of $36.3 million under line of credit arrangements. Dividends paid for the three years ended December 31, 2000, 1999 and 1998 were $4.3 million, $4.5 million and $2.1 million, respectively. In the first two quarters of 1998 the Company suspended the dividend due to a deterioration in financial performance. The dividend was reinstated in the third quarter of 1998 as the Company's financial results and prospects greatly improved. In the third quarter of 1999, the Board of Directors increased the regular quarterly dividend from $.08 to $.09 per share.
On November 30, 1998, the Company entered into a new three year revolving credit facility with eight lending institutions, providing for a $110,000,000 unsecured line of credit. The facility allows the Company to select from two interest rate options, one based on a spread over the prime rate and the other based on a spread over LIBOR. The spread above each interest rate option is determined by the Company's ratio of Consolidated Debt to Earnings Before Interest, Taxes, Depreciation and Amortization. The terms of the revolving credit facility included, among other provisions, the requirement for a clean-down, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness. At December 31, 2000 the Company did not comply with certain covenant requirements for which the Company received waivers and amendments on March 14, 2001. With the revolving credit facility set to expire on November 30, 2001, the Company is currently negotiating with potential lenders to provide for a multi-year revolving credit facility. The Company is expecting to complete the placement of such a facility by April 30, 2001. Depending on the specific financing agreement, the Company may be required to repay and extinguish certain long-term debt obligations, as well as incur prepayment penalties. In addition, should a new financing agreement not be entered into prior to April 30, 2001, the Company is obligated to provide security interests in inventory and accounts receivable to the lending institutions party to the current revolving credit facility.
In connection with the Company's 10.22% senior note payable, at December 31, 1999, the Company did not comply with certain covenant requirements. The Company elected to prepay the balance on March 13, 2000. In connection with this prepayment, the Company reflected an extraordinary loss of approximately $0.5 million in the first quarter of 2000 related to prepayment penalties and the write-off of deferred loan costs.
On July 26, 1999, the Company issued 6.75% Convertible Subordinated Debentures in the aggregate principal amount of $90,000,000. The Debentures are convertible into approximately 2,796,000 shares of the Company's common stock, and mature on July 15, 2009. The proceeds from the Convertible Debentures were used to prepay an 8.6% senior note payable, reduce short term bank borrowings and repurchase a portion of the Company's common stock.
The Company sells certain accounts receivable to an independent financial institution, through its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three year agreement whereby it can sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement expires in March 2002. The terms of the agreement contain restrictive covenants, including the maintenance of defined levels of tangible net worth. At December 31, 2000 and 1999, net accounts receivables amounting to $25,000,000 and $20,000,000, respectively, had been sold under this agreement.
During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which the Company could repurchase shares of its common stock. During such years, $26.7 million (in aggregate) of common stock has been repurchased to meet present and future requirements of the Company's stock option programs and to fund the Company's ESOP. As of December 31, 2000 the Company has Board authorization to repurchase additional shares at a maximum cost of $1.7 million.
The Company expects capital expenditures for 2001 to be approximately $18 million, primarily for new machinery and equipment.
The Company's profitability and working capital requirements have become more seasonal with the increased 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. These increased working capital requirements are funded by borrowings from our lines of credit.
The Company anticipates that its present sources of funds will continue to be adequate to meet its near term needs.
COMPARISON OF 2000 TO 1999
Net sales in 2000 were $606.5 million, a decrease of $51.8 million or 7.9% when compared to 1999. Net sales in Temperature Control decreased by $58.3 million primarily due to a significant retail customer achieving substantial inventory reductions; loss of a major retail customer early in the year (contributed approximately $18.5 million to the overall decrease); and a very cool and wet summer in the northeast and mid-west. In connection with the lost customer, such customer was reacquired in the beginning of 2001. With respect to Engine Management, net sales in 2000 were $297.4 million, an increase of $5.6 million or 1.9% when compared to 1999. The increase reflects the successful acquisition of a major new customer in the third quarter of 2000 (contributed approximately $6.4 million of net sales for the year ended December 31, 2000).
As discussed in more detail in our comparison of 1999 to 1998, significant warranty and overstock returns in our Temperature Control Segment adversely impacted financial performance in 1999. With respect to warranty returns, after thorough analysis of related warranty claims, the Company has taken specific actions to reduce compressor warranty returns in 2000 and beyond. The Company has instituted new counterperson and installer training programs; increased emphasis on clinics and professional seminars for installers; and tightened rules for authorized warranty returns (this the Company believes to be the major improvement, which was previously not required).
Beginning in 2000, it is now a requirement that each and every compressor returned for warranty credit must have either a service repair work order or a purchase receipt providing proof that a number of additional auxiliary parts were replaced concurrently (i.e. accumulator, orifice tube, in-line filter, condenser) and that an air conditioning system flushing with an approved solvent was performed. Not performing a twelve step process, that we have defined, will void the warranty.
With respect to overstock returns, 1999 was adversely impacted by the Company's decision to accept customer returns in connection with the Company's decision to discontinue the offering of certain Temperature Control products (discussed in more detail in our 1999 to 1998 comparison). The year 2000 was absent of any such significant decision. In addition, during 2000, the Company placed further restrictions on the amounts that customers can return as overstock returns.
Gross margins, as a percentage of net sales, increased to 31.4% in 2000 from 29.2% in 1999. Temperature Control gross margins were positively impacted by reduced customer returns and an increase in net pricing. Engine Management margins were positively impacted by increased sales volume, increases in net pricing and certain cost reductions activities discussed below.
In connection with cost reduction activities, the year 2000 was benefited by the consolidation of three distribution centers into one in our Temperature Control Segment; merging our existing fan clutch operations in our Temperature Control Segment; and moving two U.S. manufacturing plants to a single facility in Mexico in the Engine Management Segment. The aforementioned initiatives improved operating income of Temperature Control and Engine Management Segments by approximately $2.0 million and $1.5 million, respectively.
Selling, general and administrative expenses (SG&A) decreased approximately $2.8 million in 2000, primarily a result of the cost reduction efforts described in the previous paragraph and an $1.7 million decrease in bad debt expense as compared to 1999.
Operating Income increased by $1.1 million, or 3.8% in 2000. Results of the Engine Management Division, as compared to a year ago, reflected an increase in operating income of $11.9 million due to higher sales, favorable overhead absorption and cost reduction activities. Operating Income at the Temperature Control Division decreased by $5.8 million, primarily due to the net sales decrease reasons cited above. The Company has strengthened its controls and procedures for accepting authorized customer warranty returns in 2000, and has completed the consolidation of its manufacturing and distribution facilities. These changes have had a favorable impact on 2000 results and are expected to provide future benefits.
Other income, net, was approximately $.5 million, comparing favorable to other expense, net of $1.6 million in 1999. This is primarily the result of our 1999 decision to exit the Heat Battery joint venture in Canada, further discussed in our comparison of 1999 to 1998.
Interest expense increased by approximately $2.1 million to $18 million in 2000, primarily do to higher average borrowings resulting from elevated inventory levels and decreased sales.
Income tax expense decreased from $3.3 million in 1999 to $2.9 million in 2000. The effective tax rate also decreased from 28% in 1999 to 22% in 2000 due to a increase in earnings from the Company's Puerto and Hong Kong subsidiaries, which have lower tax rates than the United States statutory rate.
On March 13, 2000, the Company prepaid the entire outstanding balance of the 10.22% senior note payable in the amount of $14,000,000. In connection with this prepayment, the Company incurred an extraordinary loss of $501,000 net of taxes, for prepayment penalties and the write-off of deferred loan costs.
COMPARISON OF 1999 TO 1998
Net sales in 1999 were $658.2 million, an increase of $8.8 million or 1.4% from the comparable period in 1998. The Company's 1999 results include twelve months of sales of the temperature control business acquired from Cooper Industries (Moog Automotive), while 1998 results reflect nine months. Excluding revenues from acquisitions not present in 1998, sales decreased by $57.4 million or 8.8%, as compared to 1998. Net Sales in our Temperature Control Division increased by $30.0 million, however, after giving consideration to acquisitions not present in 1998, net sales decreased by $21.0 million, or 7.1%, as compared to 1998. The decrease is primarily a function of a higher level of warranty and overstock returns; non-recurring costs of approximately $7 million (before income taxes) associated with the consolidating and balancing of Four Seasons and Cooper inventories in the field (discussed below); and the negative impact of mild weather conditions on automotive air conditioning and heating product gross sales. With respect to our Engine Management Division, net sales decreased by $34.3 million as compared to 1998. Net sales declines in the Engine Management Division reflect the continued weakness in the automotive aftermarket and reduced orders from a major customer, as this customer absorbed inventory acquired from APS Holding Corporation, a former customer currently in bankruptcy proceedings.
With respect to the Company and specifically our Temperature Control Segment, the product that contributes most significantly to defective returns is the air conditioning compressor. The air conditioning compressor, not unlike electronic components, is subject to failure when an incomplete or inadequate repair job is done by the person servicing the automobile. A large percentage of warranty returns historically have been received by the Company in the fourth quarter of any given year. This is because of the seasonal nature of the Company's Temperature Control business. The fourth quarter of 1999 was unusually high in dollars and was above the Company's estimates. The Company believes that the major cause of the increase in warranty returns was two fold: (1) an increasing level of improper installations. In many cases, after subsequent examination, it was found that an incomplete repair job on the vehicles was performed either by neglecting to "flush" the air conditioning system of contaminants, failure to notice defects elsewhere in the system or failure to replace auxiliary parts, and (2) a mild summer resulting in customers returning compressors as "allegedly defective" that otherwise may not have been returned.
With respect to overstock returns, approximately $7 million relates to the Company's decision to discontinue the offering of certain Temperature Control products, previously sold by Moog Automotive under the brand names of Murray and Everco (estimated to be 75% of total) and certain other products sold by the Company under the Four Seasons brand name (estimated to be 25% of remaining total). With the acquisition of Moog Automotive in 1998, the Company's brand offerings increased and in turn so did catalogue and inventory challenges. Traditionally, in these types of situations, the Company has two choices; expand the product offering in the brands absent such products or to discontinue the product offerings; the Company decided the latter. In connection with decisions, such as these, products on the customer's shelves are negatively impacted. The investment in these products need to be absorbed by either the Company's customers or by the Company allowing the customers to return such product as an "overstock return." The Company decided the latter.
Gross margins, as a percentage of net sales, decreased to 29.2% in 1999 from 31.7% in 1998. On an overall basis, this decline reflects a higher mix of Temperature Control products with lower average gross margins than Engine Management products. Temperature Control gross margins were negatively impacted by the customer returns and non-recurring costs discussed above and by discounts related to a pre-season selling program which was not present in 1998. Engine Management margins were negatively impacted by reduced sales volume and the related unfavorable changes in overhead absorption at certain facilities. As a result, gross profit on a consolidated basis decreased in 1999 by $13.5 million as compared to 1998.
Selling, general and administrative expenses (SG&A) increased approximately $0.9 million in 1999, primarily a result of SG&A expenses related to entities acquired in 1999, not present in 1998 and $1 million related to severance payments primarily associated with personnel reductions in the corporate headquarters function. Such reductions are part of the Company's cost reduction initiatives. As a percentage of net sales, SG&A decreased from 24.9% to 24.7%. This decrease reflects the Company's continued focus on cost reduction programs implemented in 1998, the integration of Cooper Industries' temperature control business into the existing Four Seasons infrastructure and lower compensation costs related to the Company's EVA incentive compensation program and retirement/profit sharing program.
Operating Income decreased by $14.4 million, or 32.7% in 1999, primarily due to the decline in gross profit discussed above. Results of the Engine Management Division, as compared to a year ago, reflected a reduction in operating income of $4.8 million due to lower sales and the negative impact on overhead absorption. The underabsorption of overhead experienced at certain facilities has also been impacted by the divestiture of the Service Line business, which shared these facilities. Plans are being considered to reduce these costs in 2000.
Operating Income at the Temperature Control Division decreased by $2.3 million, or 11.5%, primarily for the reasons cited above. The Company has strengthened its controls and procedures for accepting authorized customer warranty returns in 2000, and has completed the consolidation of its manufacturing and distribution facilities. These changes are expected to have a favorable impact on 2000 results and beyond.
Other expense, net, decreased from $1.7 million in 1998 to $1.6 million in 1999, as gains from selling certain administrative and distribution facilities offset costs incurred in connection with the Company's decision to exit its Heat Battery joint venture in Canada, Centaur Thermal Systems, Inc. (Centaur). Through a 50/50 joint venture relationship with a ATS Automation Tooling Systems, Inc. (a Canadian Corporation) the Company set out a goal to commercialize sales to the original equipment market; a market to which the Company had only limited success in supplying products on an aftermarket basis (dealer accessory only) . Centaur's main business operation was manufacturing and selling heat batteries for automobiles. Although Centaur had reached some limited commercial success, as an aftermarket accessory, dating back to 1997, sales were limited with no large successes going into the fourth quarter of 1999. In the fourth quarter of 1999, it was mutually agreed to between the joint venture participants, that due to lack of significant commercial success and recurring losses, the joint venture would close. In connection with this decision, we recorded an approximate $4.0 million charge relating to writing down the Company's investment to net realizable value. Beyond our investment, only insignificant costs were expended. This action is part of the Company's cost reduction efforts.
Interest expense decreased by approximately $0.5 million to $16.0 million in 1999, primarily due to more favorable borrowing rates.
Income tax expense decreased from $3.6 million in 1998 to $3.3 million in 1999. However, the effective tax rate increased from 14% in 1998 to 28% in 1999 due to a decrease in earnings from the Company's Puerto Rico and Hong Kong subsidiaries, which have lower tax rates than the United States statutory rate.
On July 26, 1999 the Company prepaid the entire outstanding balance of the 8.6% senior note payable in the amount of $37,143,000. In connection with this prepayment, the Company incurred an extraordinary loss of $1,060,000, net of taxes, for prepayment penalties and the write-off of deferred loan costs.
IMPACT OF INFLATION
Although inflation is not a significant issue, the Company's management believes it will be able to continue to minimize any adverse effect of inflation on earnings. This will be achieved principally by cost reduction programs and, where competitive situations permit, selling price increases.
FUTURE RESULTS OF OPERATIONS
The Company continues to face competitive pressures. In order to sell at competitive prices while maintaining profit margins, the Company is continuing to focus on overhead and cost reductions. However, the Company's main focus currently is to reduce inventory levels requiring reductions in production and purchasing levels. Gross margins have been, and will continue to be negatively impacted resulting from underabsorbed overhead.
At December 31, 2000 the Company did not comply with certain covenant requirements for which the Company received waivers and amendments on March 14, 2001. With the revolving credit facility set to expire on November 30, 2001, the Company is currently negotiating with potential lenders to provide for a multi-year revolving credit facility. The Company is expecting to complete the placement of such a facility by April 30, 2001. Depending on the specific financing agreement, the Company may be required to repay and extinguish certain long-term debt obligations, as well as incur prepayment penalties. In addition, should a new financing agreement not be entered into prior to April 30, 2001, the Company is obligated to provide security interests in inventory and accounts receivable to the lending institutions party to the current revolving credit facility.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 and June 2000, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS Nos. 133 and 138 also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS Nos. 133 and 138 are effective for fiscal years beginning after June 15, 2000. The adoption of SFAS Nos. 133 and 138 will not have an effect on the Company's consolidated financial statements.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued in September 2000, and replaces SFAS No. 125. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The adoption of SFAS No. 140 will not have an effect on the Company's consolidated financial statements.
In May 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitle, "Accounting for Certain Sales Incentives" (the "Guidelines"), which addresses when sales incentives and discounts should be recognized, as well as where the related revenues and expenses should be classified in the financial statements. The Guidelines, as amended in November 2000, are effective for the second quarter ending June 30, 2001, and would be applied retroactively for purposes of comparability. The adoption of these guidelines is not expected to have a significant effect on the Company's consolidated financial statements.
In March 2000, the FASB issued SFAS Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB Opinion No. 25" (the "Interpretation"). The Interpretation provides guidance for issues that have arisen in the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion No. 25"). The Interpretation, which became effective July 1, 2000, applies prospectively to new awards, exchanges of awards, modifications to outstanding awards and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee, which apply to awards issued after December 15, 1998. The implementation of the Interpretation by the Company on July 1, 2000 had no impact on the Company's consolidated financial statements.
In December 1999, the staff of the United States Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," as amended by SAB 101A and SAB 101B ("SAB 101"). SAB 101 outlines basic criteria that must be met to recognize revenue and provides guidelines for disclosure related to revenue recognition policies. SAB 101 was required to be implemented in the fourth quarter of 2000. The adoption of SAB 101 did not have an effect on the Company's consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in both foreign currency exchange rates and interest rates. The Company's exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than a subsidiary's functional currency. Similarly, the Company is exposed to market risk as the result of changes in interest rates which may affect the cost of its financing. The Company does not use any significant derivative instruments, such as foreign exchange forward contracts, foreign currency options, interest rate swaps and interest rate agreements, to manage these risks, nor does it hold or issue derivative or other financial instruments for trading purposes.
EXCHANGE RATE RISK
The Company has exchange rate exposure, primarily, with respect to the Canadian Dollar and the British Pound. The Company's financial instruments which are subject to this exposure amount to approximately $6.3 million, which includes $13.0 million of indebtedness, $10.2 million in accounts payable and $16.9 million of accounts receivable. The potential immediate loss to the Company that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on the earnings or cash flows of the Company. 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 the Company's foreign-currency denominated revenues.
INTEREST RATE RISK
At December 31, 2000 the Company had approximately $203 million in loans and financing outstanding, of which approximately $155 million bear interest at fixed interest rates and approximately $48 million bear interest at variable rates of interest. The Company invests its excess cash in highly liquid short-term investments. Due to the fact that the majority of the Company's debt is at fixed rates with various maturities and due to the short-term nature of cash investments, the potential loss to the Company over one year, that would have resulted from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial assets and liabilities on December 31, 2000 would not be expected to have a material impact on the earnings or cash flows of the Company. However, due to seasonality with respect to the Company's short-term financing, which is at variable rates, the market risk may be higher at various points throughout the year. The Company's existing three year credit facility provides a $110 million unsecured line of credit, subject to a borrowing base as defined and consists of two variable based interest options. Depending upon the level of borrowings, under this credit facility, which may at times approach $110 million, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have a material impact on the earnings or cash flows of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Standard Motor Products, Inc.:
We have audited the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Standard Motor Products, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
New York, New York February 23, 2000, except as to the second and third paragraphs of note 7 which are as of March 14, 2001
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (the "Company") is engaged in the manufacture and sale of automotive replacement parts. The consolidated financial statements include the accounts of the Company and all subsidiaries in which the Company has more than a 50% equity ownership. The Company's investments in unconsolidated affiliates are accounted for on the equity method. All significant intercompany items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Some of the more significant estimates include allowances for doubtful accounts, inventory valuation reserves, depreciation and amortization of long-lived assets, deferred tax asset valuation allowance and sales return allowances. Actual results could differ from those estimates.
RECLASSIFICATIONS
Where appropriate, certain amounts in 1999 and 1998 have been reclassified to conform with the 2000 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
At December 31, 2000 and 1999, held-to-maturity securities amounted to $7,200,000. Held-to-maturity securities consist primarily of U.S. Treasury Bills and corporate debt securities which are reported at unamortized cost which approximates fair value. As of December 31, 2000, the held-to-maturity securities mature within three years.
The first-in, first-out method is used in computing realized gains or losses.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at cost and are depreciated using the straight-line method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE -------------- Buildings and Improvements 10 to 33-1/2 years Machinery and equipment 7 to 12 years Tools, dies and auxiliary equipment 3 to 8 years Furniture and fixtures 3 to 12 years Leasehold improvements 10 years or life of lease
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Accumulated amortization at December 31, 2000 and 1999, was $12,797,000 and $9,293,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year end exchange rates and revenues and expenses are translated at average exchange rates during the year. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss).
REVENUE RECOGNITION
The Company recognizes revenues from product sales upon shipment to customers. The Company estimates and records provisions for cash discounts, quantity rebates, sales returns and warranties, in the period the sale is recorded, based upon its prior experience.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net postretirement benefit liability and related expense under the Company's benefit plans are determined on an actuarial basis. The Company's current policy is to pay these benefits as they become due. Benefits are determined primarily based upon employees' length of service.
INCOME TAXES
Income taxes are calculated using the liability method in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
NET EARNINGS PER COMMON SHARE
The Company presents two calculations of earnings per common share. "Basic" earnings per common share equals net income divided by weighted average common shares outstanding during the period. "Diluted" earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus potentially dilutive common shares. Potentially dilutive common shares that are anti-dilutive are excluded from net income per common share.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Following is a reconciliation of the shares used in calculating basic and dilutive net earnings per common share.
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Weighted average common shares 11,934 13,073 13,077 Effect of stock options 41 72 90 - -------------------------------------------------------------------------------- Weighted average common equivalent shares outstanding assuming dilution 11,974 13,146 13,168 - --------------------------------------------------------------------------------
The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Stock options 861 552 -- Convertible debentures 2,796 1,165 -- - --------------------------------------------------------------------------------
STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance with the provisions of SFAS No. 123 "Accounting for Stock Based Compensation." As permitted by this statement, the Company has chosen to continue to apply the intrinsic value-based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations including FAB interpretation No. 44, "Accounting for certain transactions involving stock compensation and interpretation of APB No. 25," issued in March 2001. Accordingly, no compensation expense has been recognized for options granted. As required, the Company provides pro forma net income and pro forma earnings per share disclosures for stock option grants, as if the fair value based method defined in SFAS No. 123 had been applied. (See Note 10)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. With respect to accounts receivable, such receivables are primarily from warehouse distributors and major retailers in the automotive aftermarket industry located in the United States. The Company performs ongoing credit evaluations of its customers' financial conditions. Members of one marketing group represent the Company's largest group of customers and accounted for approximately 15%, 14% and 13%, of consolidated net sales for the years ended December 31, 2000, 1999 and 1998, respectively. One individual member of this marketing group accounted for 9%, 9% and 10% of net sales for the years ended December 31, 2000, 1999 and 1998, respectively. The Company's five largest individual customers, including members of this marketing group, accounted for 33%, 35% and 30% of net sales in 2000, 1999, and 1998, respectively.
2. ACQUISITIONS
In January 2000, the Company completed the purchase of Vehicle Air Conditioning Parts, located in England, which has subsequently been named "Four Seasons UK, LTD." In July 2000, the Company completed the purchase of Automotive Heater Exchange SRL in Massa, Italy. In addition, during 2000, the Company increased its ownership percentage in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, from 74.25% to 80.05%. In aggregate, approximately $2.7 million was incurred in connection with these acquisitions. Such acquisitions had an immaterial effect on net earnings.
During 1999, the Company acquired and accounted for as a purchase, the following business: In January 1999, the Company acquired 85% of the stock of Webcon UK Limited, and, through its UK joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited located in Sunbury-on-Thames England, for approximately $3,500,000. The remaining 15% was acquired in January 2000. The acquisition increased consolidated net sales by approximately $12 million in 1999 and had an immaterial effect on net earnings for the year ended December 31, 1999.
In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $12,400,000. The acquisition increased consolidated net sales by approximately $22 million in 1999 and had an immaterial effect on net earnings for the year ended December 31, 1999.
In April 1999, the Company acquired Lemark Auto Accessories Limited, located in Redditch, England, for approximately $1,900,000. The acquisition increased consolidated net sales by approximately $3 million and had an immaterial effect on net earnings for the year ended December 31, 1999.
The Company's acquisitions, were funded from cash and short term borrowings. Assets acquired in all of the acquisitions consisted primarily of inventory and property, plant and equipment. The purchase prices have been allocated to the assets acquired and liabilities assumed based on the fair value at the dates of acquisition. In aggregate, the excess of the purchase price over the fair value of the net assets acquired during 2000 and 1999 was approximately $2,566,000 and $5,687,000, respectively. The operating results of these acquired businesses have been included in the consolidated financial statements from the date of each respective acquisition.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SALE OF ACCOUNTS RECEIVABLe
The Company sells certain accounts receivable through its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999 SMP Credit Corp. and an independent financial institution entered into a three year agreement whereby SMP Credit Corp. can sell up to a $25,000,000 undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement expires in March 2002. The terms of the agreement contain restrictive covenants, including the maintenance of defined levels of tangible net worth. At December 31, 2000 and 1999, net accounts receivables amounting to $25,000,000 and $20,000,000, respectively, had been sold under this agreement. These sales were reflected as reductions of trade accounts receivable and the related fees and discounting expense were recorded as Other Expense.
4. INVENTORIES
December 31, -------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Inventories consist of: Finished goods $165,381 $110,802 Work in process 3,552 5,393 Raw materials 65,324 72,205 - -------------------------------------------------------------------------------- Total inventories $234,257 $188,400 - --------------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
December 31, -------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Property, plant and equipment consist of the following: Land, buildings and improvements $ 60,435 $ 60,046 Machinery and equipment 101,884 99,223 Tools, dies and auxiliary equipment 12,035 10,691 Furniture and fixtures 33,164 24,783 Leasehold improvements 7,475 6,247 Construction in progress 12,328 12,986 -------- -------- 227,321 213,976 Less accumulated depreciation and amortization 122,785 107,398 - -------------------------------------------------------------------------------- Total property, plant and equipment, net $104,536 $106,578 - --------------------------------------------------------------------------------
6. OTHER ASSETS
December 31, -------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Other assets consist of the following: Marketable securities $ 7,200 $ 7,200 Unamortized customer supply agreements 2,365 2,838 Equity in joint ventures 1,956 1,439 Deferred income taxes 8,859 6,614 Deferred loan costs 3,864 5,091 Other 7,172 9,949 - -------------------------------------------------------------------------------- Total other assets $31,416 $33,131 - --------------------------------------------------------------------------------
Included in Other is a preferred stock investment in a customer of the Company. Net sales to such customer amounted to $57,397,000, $58,041,000 and 72,754,000 in 2000, 1999, and 1998, respectively.
7. NOTES PAYABLE - BANKS
On November 30, 1998, the Company entered into a three year revolving credit facility with eight lending institutions, providing for a $110,000,000 unsecured line of credit, subject to a borrowing base as defined. This facility consists primarily of two interest rate options, one a function of LIBOR and the other a function of the prime rate. The spread above each interest rate option is determined by the Company's ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization (interest rate at December 31, 2000 was 9.75%). The Company incurred commitment fees of approximately .70% of the total facility. The terms of the revolving credit facility include, among other provisions, the requirement for a clean-down, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness.
At December 31, 2000 the Company did not comply with certain covenant requirements for which the Company received waivers and amendments dated March 14, 2001.
With the revolving credit facility set to expire on November 30, 2001, the Company is currently negotiating with potential lenders to provide for a multi-year revolving credit facility. The Company is expecting to complete the placement of such a facility by April 30, 2001. Depending on the specific financing agreement, the Company may be required to repay and extinguish certain long-term debt, as well as incur prepayment penalties. In addition, should a new financing agreement not be entered into prior to April 30, 2001, the Company is obligated to provide security interests in inventory and accounts receivable to lending institutions party to the current revolving credit facility. There were $35,000,000 outstanding borrowings under this facility at December 31, 2000.
In addition, a foreign subsidiary of the Company has a revolving credit facility. The amount of short-term bank borrowings outstanding under that facility was $3,930,000 and $2,645,000 at December 31, 2000 and 1999, respectively. The weighted average interest rates on these borrowings at December 31, 2000 and 1999 were 6.9% and 7.1%, respectively.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. LONG-TERM DEBT
December 31, ----------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Long-term debt consists of: 6.75% convertible subordinated debentures $ 90,000 $ 90,000 7.56% senior note 62,571 73,000 10.22% senior note -- 14,000 Canadian Credit Facility 5,335 6,811 Other 5,755 8,969 - -------------------------------------------------------------------------------- 163,661 192,780 Less current portion 13,643 28,912 - -------------------------------------------------------------------------------- Total non-current portion of long-term debt $150,018 $163,868 - --------------------------------------------------------------------------------
On July 26, 1999, the Company completed a public offering of convertible subordinated debentures amounting to $90,000,000. The Convertible Debentures carry an interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009. The Debentures are convertible into approximately 2,796,000 shares of the Company's common stock. The Company may, at its option, redeem some or all of the Debentures at any time on or after July 15, 2004, for a redemption price equal to the issuance price plus accrued interest. In addition, if a change in control, as defined, occurs at the Company, the Company 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 Company incurred fees in relation to the offering of approximately $3,400,000. Net proceeds from the offering were used to pre-pay a senior note payable, including prepayment penalties, repurchase a portion of the Company's common stock and pay down short term bank borrowings.
Under the terms of the 7.56% senior note agreement, the Company is required to repay the loan in seven equal annual installments beginning in 2000. The senior note agreement contains restrictive covenants which requires the maintenance of defined levels of working capital, tangible net worth and earnings and limit, among other items, investments, indebtedness and distributions for the payment of dividends and the acquisition of capital stock.
Under the terms of the 10.22% senior note agreement, the Company was required to repay the loan in four varying annual installments from 2000 through 2003. The Company elected to prepay the balance on March 13, 2000. In connection with this prepayment, the Company incurred an extraordinary loss for prepayment penalties and the write-off of deferred loan costs of approximately $501,000, net of taxes.
Under the terms of a Canadian (CDN) credit agreement, the Company is required to repay the loan as follows: $2,000,000 CDN in 2001 and a final payment of $6,000,000 CDN in 2002. Subject to certain restrictions, the Company can make prepayments without premium. The credit agreement has various interest rate options which at December 31, 2000 was 5.89%.
Maturities of long-term debt during the five years ending December 31, 2001 through 2005, are $13,643,000, $16,265,000, $11,776,000, $10,789,000 and $10,504,000, respectively.
9. STOCKHOLDERS' EQUITY
The Company has authority to issue 500,000 shares of preferred stock, $20 par value, and the Board of Directors is vested with the authority to establish and designate series of preferred, to fix the number of shares therein and the variations in relative rights as between series. On December 18, 1995, the Board of Directors established a new series of preferred shares designated as Series A Participating Preferred Stock. The number of shares constituting the Series A Preferred Stock is 30,000. The Series A Preferred Stock is designed to participate in dividends, ranks senior to the Company's common stock as to dividends and liquidation rights and has voting rights. Each share of the Series A Preferred Stock shall entitle the holder to one thousand votes on all matters submitted to a vote of the stockholders of the Company. No such shares were outstanding at December 31, 2000.
On January 17, 1996, the Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board declared a dividend of one Preferred Share Purchase Right (Right) for each outstanding common share of the Company. The dividend was payable on March 1, 1996, to the shareholders of record as of February 15, 1996. The Rights are attached to and automatically trade with the outstanding shares of the Company's common stock.
The Rights will become exercisable only in the event that any person or group of affiliated persons becomes a holder of 20% or more of the Company's outstanding common shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least 20% of the Company's outstanding common shares. Once the rights become exercisable they entitle all other shareholders to purchase, by payment of an $80.00 exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a 20% position is acquired and prior to the acquisition of a 50% position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of common stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration on February 28, 2006.
During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which the Company could repurchase shares of its common stock. During such years, $26.7 million (in aggregate) of common stock has been repurchased to meet present and future requirements of the Company's stock option programs and to fund the Company's ESOP. As of December 31, 2000 the Company has Board authorization to repurchase additional shares at a maximum cost of $1.7 million.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS
The Company has principally two fixed stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, as amended, the Company is authorized to issue $1,500,000 stock options. The options become exercisable over a three to five year period and expire at the end of five years following the date they become exercisable. Under the 1996 Independent Directors' Stock Option Plan, the Company is authorized to issue 50,000 stock options. The options become exercisable one year after the date of grant and expire at the end of ten years following the date of grant. At December 31, 2000, in aggregate 1,369,154 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans.
As permitted under SFAS No. 123, the Company continues to apply the provisions of APB Opinion No. 25 for stock-based awards granted to employees. Accordingly, no compensation cost has been recognized for the fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value method of SFAS No. 123, the Company's net earnings per share would have changed to the pro forma amounts as follows:
(Dollars in thousands except per share data) 2000 1999 1998 - -------------------------------------------------------------------------------- Net Earnings As reported $9,729 $7,625 $22,257 Pro forma $8,708 $6,648 $21,610 Basic Earnings As reported $ .82 $ .58 $ 1.70 per share Pro forma $ .73 $ .51 $ 1.65
For pro forma calculations, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998, respectively: expected volatility of 39.1%, 39.5% and 33.5%, expected life of 4.3 years, dividend yield of 3.8%, 1.8% and 1.5% and risk free interest rate of 4.6%, 6.6% and 5.2% for issued options.
A summary of the status of the Company's option plans follows:
OPTIONS OUTSTANDING - -------------------------------------------------------------------------------- NUMBER WEIGHTED-AVERAGE RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/00 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE - --------------------------------------------------------------------------------
$6.56 - $11.29 462 5.9 $9.86 $13.63 - $16.94 177 2.4 $16.25 $20.50 - $24.84 550 4.5 $22.37
OPTIONS EXERCISABLE - -------------------------------------------------------------------------------- RANGE OF NUMBER EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/00 EXERCISE PRICE - --------------------------------------------------------------------------------
$13.63 - $23.84 526 $19.89
11. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plan covering certain former employees of the Company's discontinued Brake business.
The following table represents a reconciliation of the beginning and ending benefit obligation, the fair value of plan assets and the funded status of the plan:
December 31, ----------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 9,271 $ 9,915 Interest cost 658 651 Actuarial gain (102) (511) Benefits paid (870) (784) - -------------------------------------------------------------------------------- Benefit Obligation at End of Year $ 8,957 $ 9,271 - -------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 12,755 $ 11,684 Actual return on plan assets 178 1,855 Benefits paid (870) (784) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 12,063 12,755 - -------------------------------------------------------------------------------- Funded status $ 3,106 $ 3,484 Unrecognized net actuarial gain (2,654) (3,489) - -------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 452 $ (5) - --------------------------------------------------------------------------------
December 31, ----------------------------- Weighted-average assumptions: 2000 1999 1998 - -------------------------------------------------------------------------------- Discount rates 7.50% 7.50% 6.75% Expected long-term rate of return on assets 8.00% 8.00% 8.00% - --------------------------------------------------------------------------------
December 31, ---------------------------- (In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC (BENEFIT) COST: Service cost $-- $-- $ 97 Interest cost 658 651 665 Return on assets (988) (900) (816) Amortization of prior service cost -- -- 19 Recognized actuarial (gain)/loss (127) (60) (72) - -------------------------------------------------------------------------------- Net periodic (benefit) cost $(457) $(309) $(107) - --------------------------------------------------------------------------------
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In addition, the Company participates in several multiemployer plans which provide defined benefits to substantially all unionized workers. The Multiemployer Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers associated with multiemployer plans. The Company has not received information from the plans' administrators to determine its share, if any, of unfunded vested benefits.
The Company and certain of its subsidiaries also maintain various defined contribution plans, which include profit sharing and provide retirement benefits for other eligible employees. The provisions for retirement expense in connection with the plans are as follows:
Multi- Defined Contribution employer Plans and Other Plans - -------------------------------------------------------------------------------- Years-end December 31, 2000 $344,000 $2,319,000 1999 $348,000 $2,332,000 1998 $302,000 $4,350,000 - --------------------------------------------------------------------------------
In January 1989 the Company established an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. The ESOP authorized the Trust to purchase up to 1,000,000 shares of the Company's common stock in the open market. In 1989, the Company entered into an agreement with a bank authorizing the Company to borrow up to $18,000,000 in connection with the ESOP. Under this agreement, the Company borrowed $16,729,000, payable in annual installments through 1998, which was loaned on the same terms to the ESOP for the purchase of common stock. During 1989, the ESOP made open market purchases of 1,000,000 shares at an average cost of $16.78 per share. In January 1998, the Company made the final required payment and the credit agreement has thus been paid in full.
During 1998, 106,900 shares were allocated to the employees, leaving no unallocated shares in the ESOP trust at December 31, 1998. During 2000 and 1999, 75,000 shares were granted to employees under the terms of the ESOP. These shares were funded directly from treasury stock.
In fiscal 2000, the Company created an employee benefits trust to which it contributed 750,000 shares of treasury stock. The company is authorized to instruct the trustees to distribute such shares toward the satisfaction of the Company's future obligations under employee benefit plans. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with its fiduciary duties. As of December 31, 2000, the Company had not committed any shares to be released.
The provision for expense in connection with the ESOP was approximately $1,032,000 in 2000, $1,739,000 in 1999, and $1,665,000 in 1998. The 2000 and 1999 expense was calculated based on the fair market value of the shares granted. The 1998 expense was calculated by subtracting dividend and interest income earned by the ESOP, which amounted to approximately $1,000 for the year ended December 31, 1998 from the principal repayment on the outstanding bank loan. Interest costs amounted to approximately $56,000 for the year ended December 31, 1998.
In August 1994 the Company established an unfunded Supplemental Executive Retirement Plan for key employees of the Company. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, the Company may at its discretion make contributions to the plan on behalf of the employees. Such contributions were $24,000, $98,000 and $87,000 in 2000, 1999 and 1998, respectively.
12. POSTRETIREMENT BENEFITS
The Company provides certain medical and dental care benefits to eligible retired employees. The Company's current policy is to fund the cost of the health care plans on a pay-as-you-go basis.
The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of the plan.
December 31, ----------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 18,369 $ 17,628 Service cost 1,377 1,284 Interest cost 1,152 1,221 Actuarial gain (2,586) (925) Benefits paid (865) (839) - -------------------------------------------------------------------------------- Benefit obligation at end of year $ 17,447 $ 18,369 - -------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Funded status $(17,447) $(18,369) Unrecognized prior service cost 1,038 1,162 Unrecognized net actuarial gain (3,996) (1,683) - -------------------------------------------------------------------------------- Accrued benefit cost $(20,405) $(18,890) - --------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, - -------------------------------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------- Discount rates 7.50% 7.50% - --------------------------------------------------------------------------------
For measurement purposes, a 10% and 7% annual rate of increase in the per capital cost of covered medical benefits was assumed for 2000 and 1999, respectively. The rate was assumed to decrease gradually to 5% in 2005 and remain at that level thereafter. A 5.5% annual rate of increase in the per capita cost of covered dental benefits was assumed for 2000. The rate was assumed to decrease gradually to 5% in 2001 and remain at that level thereafter.
December 31, ---------------------------------- (In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC (BENEFIT) COST: Service cost $ 1,377 $ 1,284 $ 975 Interest cos 1,152 1,221 1,082 Amortization of prior service cost 124 124 124 Recognized actuarial gain (275) (8) (78) - -------------------------------------------------------------------------------- Net periodic benefit cost $ 2,378 $ 2,621 $ 2,103 - --------------------------------------------------------------------------------
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for 2000:
1-Percentage- 1-Percentage- (In thousands) Point Increase Point Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 242 $(199) Effect on postretirement benefit obligation $1,311 $(1,107) - --------------------------------------------------------------------------------
13. OTHER INCOME (EXPENSE), NET
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Other income (expense), net consists of: Interest and dividend income $ 1,038 $ 1,637 $ 1,856 (Loss) on sale of accounts receivable (Note 3) (1,567) (1,281) (1,410) Income (loss) from joint ventures 702 (4,118) (2,078) Gain (loss) on disposal of property, plant and equipment 99 2,564 (226) Other - net 225 (366) 180 - -------------------------------------------------------------------------------- Total other income (expense), net $ 497 $(1,564) $(1,678) - --------------------------------------------------------------------------------
In connection with the Company's Heat Battery joint venture in Canada, in the fourth quarter of 1999, it was mutually agreed to between the joint venture participants, that due to lack of significant commercial success and recurring losses, the joint venture would close. In connection with this decision, the Company recorded an approximate $4.0 million charge relating to writing down the Company's investment to net realizable value.
Summarized financial information for the joint venture is as follows:
December 31, ------------------------- (In thousands) 1999 1998 - -------------------------------------------------------------------------------- Current assets $ 500 $ 2,000 Property, plant and equipment, net 4,500 5,000 Other assets 5,500 6,000 - -------------------------------------------------------------------------------- Total Assets $ 10,500 $ 13,000 - -------------------------------------------------------------------------------- Current liabilities $ 2,400 $ 2,800 Total shareholders equity 8,100 10,200 - -------------------------------------------------------------------------------- Total liabilities and equity $ 10,500 $ 13,000 - -------------------------------------------------------------------------------- Net Sales $ 622 $ 1,000 Gross Profit (loss) (1,500) (1,000) Net Loss $ 2,100 $ 5,600 - --------------------------------------------------------------------------------
14. INCOME TAXES
The income tax provision (benefit) consisted of the following:
2000 1999 1998 - -------------------------------------------------------------------------------- Current: Domestic $ 1,260 $ 4,376 $(1,879) Foreign 2,523 3,520 2,467 - -------------------------------------------------------------------------------- Total Current 3,783 7,896 588 - -------------------------------------------------------------------------------- Deferred: Domestic (1,103) (5,167) 2,931 Foreign 206 615 58 - -------------------------------------------------------------------------------- Total Deferred (897) (4,552) 2,989 - -------------------------------------------------------------------------------- Total Income Tax Provision $ 2,886 $ 3,344 $ 3,577 - --------------------------------------------------------------------------------
The Company has not provided for federal income taxes on the undistributed income of its foreign subsidiaries because of the availability of foreign tax credits and/or the Company's intention to permanently reinvest such undistributed income. Cumulative undistributed earnings of foreign subsidiaries on which no United States income tax has been provided were $27,452,000 at the end of 2000, $25,485,000 at the end of 1999, and $12,159,000 at the end of 1998.
Earnings before income taxes for foreign operations (including Puerto Rico) amounted to approximately $14,000,000, $13,000,000 and $19,000,000 in 2000, 1999 and 1998, respectively. Earnings of the Puerto Rico subsidiary are not subject to United States income taxes and are partially exempt from Puerto Rican income taxes under a tax exemption grant expiring on December 31, 2002. The tax benefits of the exemption, reduced by a minimum tollgate tax instituted in 1993, amounted to $.23 per share in 2000 (1999 - $.14; 1998 - $.20).
Reconciliations between the U.S. federal income tax rate and the Company's effective income tax rate as a percentage of earnings from continuing operations before income taxes are as follows:
2000 1999 1998 - -------------------------------------------------------------------------------- U.S. federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in tax rate resulting from: State and local income taxes, net of federal income tax benefit 1.2 2.9 0.7 Non-deductible items, net 0.1 0.8 0.6 Benefits of income subject to taxes at lower than the U.S. federal rate (14.3) (11.0) (18.3) (Decrease) increase in valuation allowance -- -- (4.2) Other -- 0.1 -- - -------------------------------------------------------------------------------- Effective tax rate 22.0% 27.8% 13.8% - --------------------------------------------------------------------------------
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the accompanying consolidated balance sheets:
December 31, ------------------------ (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Deferred tax assets: Inventories $ 7,639 $ 7,382 Allowance for customer returns 7,332 11,532 Postretirement benefits 8,060 7,463 Allowance for doubtful accounts 1,604 1,766 Accrued salaries and benefits 3,342 2,981 Other 15,458 13,344 -------- -------- 43,435 44,468 Valuation allowance (14,171) (14,171) - -------------------------------------------------------------------------------- Total $ 29,264 $ 30,297 - -------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 4,717 $ 4,344 Promotional costs 915 1,652 Other 2,291 3,857 - -------------------------------------------------------------------------------- Total 7,923 9,853 - -------------------------------------------------------------------------------- Net deferred tax assets $ 21,341 $ 20,444
The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. However, if the Company is unable to generate sufficient taxable income in the future through its operations, increases in the valuation allowance may be required.
15. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of SFAS No. 131, the company has two reportable operating segments which are the major product areas of the automotive aftermarket in which the Company competes. The Engine Management Division consists primarily of ignition and emission parts; wires and cables; and fuel system parts. The Temperature Control Division consists primarily of compressors; other air conditioning parts and heater parts. The Company's two reportable operating segments are Engine Management and Temperature Control. Effective with the beginning of fiscal 2000, the Company reclassified certain European operations from the Engine Management and Temperature control segments to a separate segment, which currently does not meet the criteria of a reportable segment. Amounts in 1999 and 1998 have been reclassified to conform to the 2000 presentation. The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1). The following tables contain financial information for each reportable segment:
For the year ended December 31, 2000 ------------------------------------------------- Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - --------------------------------------------------------------------------------
Net Sales $297,386 $267,145 $ 41,919 $606,450 - -------------------------------------------------------------------------------- Depreciation and amortization 10,293 6,116 2,513 18,922 - -------------------------------------------------------------------------------- Operating income 37,964 11,537 (18,837) 30,664 - -------------------------------------------------------------------------------- Investment in equity affiliates 105 -- 1,851 1,956 - -------------------------------------------------------------------------------- Capital expenditures 8,914 6,454 1,284 16,652 - -------------------------------------------------------------------------------- Total Assets $265,336 $224,410 $ 59,650 $549,396 - --------------------------------------------------------------------------------
For the year ended December 31, 1999 -------------------------------------------------- Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $291,761 $325,449 $ 41,031 $658,241 - -------------------------------------------------------------------------------- Depreciation and amortization 8,535 5,949 2,746 17,230 - -------------------------------------------------------------------------------- Operating income 26,104 17,289 (13,849) 29,544 - -------------------------------------------------------------------------------- Investment in equity affiliates 105 272 1,062 1,439 - -------------------------------------------------------------------------------- Capital expenditures 7,118 7,026 279 14,423 - -------------------------------------------------------------------------------- Total Assets $253,346 $212,026 $ 90,649 $556,021 - --------------------------------------------------------------------------------
For the year ended December 31, 1998 ------------------------------------------------- Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $326,033 $295,436 $ 27,951 $649,420 - -------------------------------------------------------------------------------- Depreciation and amortization 8,336 4,193 4,745 17,274 - -------------------------------------------------------------------------------- Operating income 30,912 19,544 (6,525) 43,931 - -------------------------------------------------------------------------------- Investment in equity affiliates 105 516 4,077 4,698 - -------------------------------------------------------------------------------- Capital expenditures 10,274 4,594 457 15,325 - -------------------------------------------------------------------------------- Total Assets $282,628 $182,107 $ 56,821 $521,556 - --------------------------------------------------------------------------------
Other Adjustments consists of items pertaining to the corporate headquarters function, as well as Canadian and European business units that do not meet the criteria of a reportable operating segment under SFAS No. 131.
The following table reconciles the measure of profit used in the previous disclosure to the Company's consolidated Earnings before taxes and extraordinary item:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Operating income $ 30,664 $ 29,544 $ 43,931 Other income (expense) 497 (1,564) (1,678) Interest expense 18,045 15,951 16,419 - -------------------------------------------------------------------------------- Earnings before taxes and extraordinary item $ 13,116 $ 12,029 $ 25,834 - --------------------------------------------------------------------------------
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
GEOGRAPHIC INFORMATION FOR THE YEAR ENDED DECEMBER 31,
Revenues --------------------------------------- (In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- United States $527,188 $582,508 $586,044 Canada 26,553 27,331 25,513 Other Foreign 52,709 48,402 37,863 - -------------------------------------------------------------------------------- Total $606,450 $658,241 $649,420 - --------------------------------------------------------------------------------
Long Lived Assets --------------------------------------- (In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- United States $122,825 $125,766 $125,627 Canada 3,511 3,897 3,719 Other Foreign 18,885 18,534 19,290 - -------------------------------------------------------------------------------- Total $145,221 $148,197 $148,636 - --------------------------------------------------------------------------------
Revenues are attributed to countries based upon the location of the customer.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of those instruments.
MARKETABLE SECURITIES
The fair values of investments are estimated based on quoted market prices for these or similar instruments.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities.
The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 2000 CARRYING FAIR (In thousands) AMOUNT VALUE - -------------------------------------------------------------------------------- Cash and cash equivalents $ 7,699 $ 7,699 Marketable securities 7,200 7,200 Long-term debt $(163,661) $(107,174) - --------------------------------------------------------------------------------
DECEMBER 31, 1999 CARRYING FAIR) (In thousands) AMOUNT VALUE - -------------------------------------------------------------------------------- Cash and cash equivalents $ 40,380 $ 40,380 Marketable securities 7,200 7,200 Long-term debt $(192,780) $(158,768) - --------------------------------------------------------------------------------
17. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three years ended December 31, 2000 was as follows:
REAL (In thousands) TOTAL ESTATE OTHER - -------------------------------------------------------------------------------- 2000 $9,797 $7,217 $2,580 1999 8,176 5,124 3,052 1998 $5,747 $3,619 $2,128 - --------------------------------------------------------------------------------
At December 31, 2000, the Company is obligated to make minimum rental payments (exclusive of real estate taxes and certain other charges) through 2011, under operating leases for real estate, as follows:
(In thousands) - -------------------------------------------------------------------------------- 2001 $6,409 2004 3,756 2002 5,957 2005 3,305 2003 5,184 Thereafter 8,821 - -------------------------------------------------------------------------------- $33,432 - --------------------------------------------------------------------------------
The Company also has lease and sub-lease agreements in place for various properties under its control. The Company expects to receive operating lease payments from lessees during the five years ending December 31, 2001 through 2005 of $1,775,000, $1,723,000, $1,006,000, $580,000 and $571,000, respectively.
At December 31, 2000, the Company had outstanding letters of credit aggregating approximately $1,429,000. The contract amount of the letters of credit is a reasonable estimate of their value as the value for each is fixed over the life of the commitment.
On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $500,000 (formerly $19,759,000) of preferential payments in the 90 days prior to the related bankruptcy petition. In addition, this former customer seeks $10,500,000 from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes this matter will not have a material effect on the Company's consolidated financial statements taken as a whole.
The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, it is management's opinion that the final resolution of these matters will not have a material effect on the Company's financial statements taken as a whole.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The fourth quarter of 1999 reflects several unfavorable year-end adjustments including a $7,000,000 increase in sales returns expense related to the Company's decision to accept certain inventory returns related to discontinued product offerings in the Temperature Control business, $4,000,000 related to the Company's decision to close a joint venture in Canada; and $1,000,000 related to severance payments associated with certain personnel reductions in the Corporate headquarters function.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information relating to Directors and Executive Officers is set forth in the 2001 Annual Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Management Remuneration and Transactions is set forth in the 2001 Annual Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners and Management is set forth in the 2001 Annual Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions is set forth under "Certain Transactions" in the 2001 Annual Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
14(A). DOCUMENT LIST (1) Among the responses to this Item 14(a) are the following financial statements.
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - December 31, 2000 and
Consolidated Statements of Earnings - Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - - Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) The following financial schedule for the years 2000, 1999 and 1998 is submitted herewith:
SCHEDULE
II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not applicable or the information is included in the financial statements or notes thereto.
(3) Exhibits required by Item 601 of Securities and Exchange Commission Regulations S-K: See "Exhibit Index" beginning on page 24.
14(B). REPORTS ON FORM 8-K
No reports on Form 8-K were required to be filed for the three-months ended December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC. (COMPANY)
LAWRENCE I. SILLS ----------------------------------------------------- Lawrence I. Sills Chairman, Chief Executive Officer and Director
JAMES J. BURKE ----------------------------- James J. Burke Vice President, Finance; Chief Financial Officer
New York, New York March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the Capacities and on the dates indicated:
March 29, 2001 LAWRENCE I. SILLS ------------------------ Lawrence I. Sills Chairman, Chief Executive Officer and Director
March 29, 2001 ARTHUR D. DAVIS ------------------------ Arthur D. Davis, Vice Chairman and Director
March 29, 2001 MARILYN F. CRAGIN ------------------------- Marilyn F. Cragin, Director
March 29, 2001 SUSAN F. DAVIS -------------- Susan F. Davis, Director
March 29, 2001 ARTHUR S. SILLS Arthur S. Sills, Director
March 29, 2001 PETER J. SILLS -------------- Peter J. Sills, Director
The Board of Directors and Stockholders Standard Motor Products, Inc.:
Under date of February 23, 2001, except as to the second and third paragraphs of note 7, which are as of March 14, 2001, we reported on the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2000, and 1999, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 2000, as contained in the annual report on Form 10-K for the year 2000. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP New York, New York February 23, 2001, except as to the second and third paragraphs of note 7 which are as of March 14, 2001