ITEM 1. BUSINESS --------
(A) GENERAL DEVELOPMENT OF BUSINESS -------------------------------
Registrant manufactures replacement parts and automotive related items for the automotive industry. The Registrant's continuing operations consist of two product segments. The Engine Management segment consists primarily of ignition and electrical parts, emission and engine controls, on-board computers, sensors, ignition wires, battery cables, carburetor and fuel system parts. The Temperature Control segment consists primarily of air conditioning compressors, clutches, accumulators, filter/driers, blower motors, heater valves, heater cores, evaporators, condensers, hoses and fittings.
In March 1998 the Registrant completed the exchange of its brake business for the temperature control business of Moog Automotive, Inc., a subsidiary of Cooper Industries. This transaction involved an exchange of certain assets, assumption of certain liabilities, and payment of cash to achieve an equivalent exchange value. The Registrant filed the transaction with the Department of Justice and received regulatory approval of the exchange in December of 1997. The brake business is accounted for in the Registrant's consolidated financial statements as a discontinued operation. The Registrant's December 31, 1997 consolidated financial statements reflect a $14,500,000 loss on the disposal of the brake business, which consists of an estimated loss on the exchange of the business of $14,000,000 and a provision of $500,000 for anticipated losses until the completion of the disposal. No additional income or loss was recorded for the brake business in 1998.
In the fourth quarter of 1998, the Registrant completed the largest phase of its agreement to sell the Service Line business to R&B, Inc. This transaction involved the sale of selected assets of the Champ Service Line and the Pik-A-Nut Fastener Line. Completion of the smallest and final phase of the sale, for the assets of the Everco Brass and Brake Lines, was completed in the first quarter of 1999. The Service Line Business is accounted for in the Registrant's consolidated financial statements as a discontinued operation. The Registrant's December 31, 1997 consolidated financial statements reflect a loss on the disposal of the Service Line business of $12,500,000, consisting of an estimated loss on the sale of the business of $12,000,000 and a provision of $500,000 for anticipated operating losses until the closing of the sale. No additional income or loss was recorded for the service line business in 1998.
On October 19, 1998, the Registrant sold substantially all of the assets related to its Fuel Pump business to the Pierce Company, Inc. The Registrant's consolidated financial statements at December 31, 1998 reflect a loss on disposal of $1,500,000 pertaining to the Fuel Pump business.
In January 1999, the Registrant 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.
In February 1999, the Registrant acquired the Eaglemotive unit of Mark IV Industries, Inc. for $13,400,000. Eaglemotive, located in Fort Worth, Texas, manufactures and distributes fan clutches and oil coolers, and will compliment the Registrant's Temperature Control operations.
AUTOMOTIVE AFTERMARKET Factors favorably impacting the outlook for the ---------------------- automotive aftermarket include the growth in the number of vehicles on the road, an increase in the driving age population, an increase in longer duration vehicles and in the miles driven per year per vehicle, the high price of new cars, the attempt by retailers to displace traditional jobbers, and more stringent environmental laws. Conversely, the automotive aftermarket has been negatively impacted by the broader range in prices for replacement parts, the increased complexity of vehicle systems requiring a greater specialization of parts, higher quality new cars with longer service warranties and the effect of foreign imports and dealer versus non-dealer servicing. The net impact of these factors result in a forecast for the automotive aftermarket to grow at one to two percent over the next several years.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS ---------------------------------------------
DISTRIBUTION OF SALES The table below shows the registrant's sales by --------------------- operating segment.
In the year ended December 31, 1998, the registrant's five largest customers accounted for approximately 30% of sales. The loss of one or more of these customers could have an adverse effect on the Registrant's financial condition and results of operations.
OPERATING PROFIT AND IDENTIFIABLE ASSETS The table below shows the ---------------------------------------- registrant's operating profit and identifiable assets by reportable operating segment.
"All Other" consists of items pertaining to the corporate headquarters function, a business unit that does not meet the criteria of a reportable operating segment and businesses that have been sold.
IGNITION PARTS Replacement parts for automotive ignition and emission -------------- control systems account for about 40% of the Registrant's 1998 revenues. These parts include distributor caps and rotors, electronic ignition control modules, voltage regulators, coils, switches and sensors. The Registrant 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 import, including passenger car, truck, farm, off-road and marine applications.
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 Registrant is a leader in the manufacture and sale of these engine management component parts, including remanufactured automotive computers.
Electronic control modules and electronic voltage regulators comprise a significant portion of registrant's total ignition sales. The Registrant is one of the few aftermarket companies that manufactures these parts, and the first independent aftermarket supplier to manufacture the complex electronic control modules for DIS (distributor-less ignition systems). The Registrant's Electronic Business Unit consists of design work and highly-automated manufacturing operations, which are performed in Orlando, FL, and assembly operations, which are performed in Hong Kong and Puerto Rico.
The Registrant's sales of such parts as sensors, valves and solenoids have increased steadily as automobile manufacturers equip their cars with more complex engine management systems. New government emission laws such as the 1990 Federal Clean Air act are increasing automotive repair activity, creating an increase in parts sales. Although there is much controversy over how quickly these new procedures will be implemented, there is no doubt they will have a positive impact on sales of the registrant's products. The Registrant is a basic manufacturer of oxygen sensors, MAP (Manifold Absolute Pressure) sensors, throttle position sensors, coolant temperature sensors, air charge temperature sensors, EGR (Exhaust Gas Recirculation) valves, air pump check valves, idle air control valves and a number of different types of solenoids.
Oxygen sensors are a leading product in emission controls, with relatively few basic manufacturers. In September 1997, the Company acquired the oxygen sensor manufacturing business of AlliedSignal and has relocated the manufacturing assets from AlliedSignal's plant to a new facility in Wilson, North Carolina. This acquisition has improved the Company's position in this growing emissions market.
The joint venture entered into in 1992 with Blue Streak Electronics, Inc., A rebuilder of engine management computers and MAF sensors, has positioned the registrant as a key supplier in the fast growing remanufactured electronics market. In 1994, the registrant 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 Registrant's customers to expand their coverage without increasing inventory investment. In 1997 a branch of Blue Streak Electronics, Inc. Was opened in Boca Raton, Florida to meet the growing demand of the U.S. market for overnight repair of slower moving engine computers. This JV maintains a research and development facility in Haifa, Israel and is expanding further into European markets through its JV, Blue Streak Europe LTD., located in England. In January 1999 Blue Streak Europe acquired 100% of the stock of Injection Correction UK LTD. Injection Correction is a remanufacturer of engine computers and has developed a line of engine diagnostic equipment.
In 1996, the Registrant acquired a majority equity interest in Standard Motor Products Holdings Limited, and followed this action with 1999 acquisitions of majority stakes in Webcon Limited and, as mentioned above, Injection Correction Limited. These three companies, based in Great Britain, supply ignition components, fuel system components and rebuilt engine computers throughout the UK and Western Europe. They provide a solid base to increase sales in Europe, a market that is forecast to grow at a rate more than double that of the U.S.
Like most automotive aftermarket suppliers, the Registrant began by offering mechanical ignition parts which were equal in quality to O.E. (Original equipment parts installed on new vehicles). A number of decades ago, the Registrant pioneered the concept of offering an alternate higher level of quality, significantly better than O.E. And priced proportionately higher. These parts were sold under the Blue Streak brand. In recent years this has evolved to a "good-better-best" concept, and a lower priced line has been made available under the registrant's Tru-Tech brand.
WIRES AND CABLES Wire and cable parts account for about 11% of the ---------------- Registrant's 1998 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 Registrant 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 registrant 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.
The acquisition of Federal Parts Corporation in February 1996, the leading supplier of economy wire sets in the industry, expanded the Registrant's presence in the ignition wire business. The acquisition of Filko Automotive (January 1997) further expanded wire sales within its existing presence in the retail market.
FUEL SYSTEM PARTS Fuel system parts, including fuel pumps, account for ----------------- about 4% of the Registrant's 1998 revenues. The fuel pump business, with 1998 sales of approximately $6.7 Million, was sold to the Pierce Company, Inc. On October 19, 1998. As of January 1999, the Registrant manufactures and markets nearly 1500 parts for the maintenance and repair of automotive carburetors and fuel injection systems.
For several decades, the Registrant's most important fuel system product was the carburetor rebuilding kit. However, nearly all new cars are equipped with electronic fuel injection systems instead of carburetors. Therefore, sales of carburetor kits have been declining in recent years. Of the 23% decline in sales of fuel system parts over the past year, 10% is due to the decrease in fuel pump sales, and the remainder can be attributed to the reduced sales of carburetor kits. Partially offsetting these aforementioned decreases is the Registrant's sales of fuel injection parts, which have steadily increased. This segment of the business is expected to grow.
TEMPERATURE CONTROL SYSTEMS The Registrant manufactures, re-manufactures, --------------------------- and markets a complete line of replacement parts for automotive climate control systems (air conditioning and heating), under the brand names Four Seasons, Murray, Everco, Factory Air, Trumark, API/ADI, Hayden, and Unimotor. Temperature Control also offers private label packaging to its larger accounts. 1998 Revenues from the Temperature Control Division account for approximately 46% of the Registrant's revenues.
In 1998, the Registrant completed its consolidation of Cooper Industries' Moog Automotive temperature control business and is now the industry's largest aftermarket supplier of automotive climate control products. The integration of manufacturing facilities acquired from Cooper should produce operational synergies that are expected to result in substantial cost savings. Production of all heat exchange products will be consolidated into the newly acquired Fort Worth, TX manufacturing facility. Blower motor and radiator fan production has been consolidated into Temperature Control's Unimotor facility in St. Thomas, Ontario.
Over the past few years, the Registrant has invested in the growing market for temperature control products through expanded manufacturing capabilities and acquisitions. During 1996, Temperature Control expanded its product offering by becoming the first aftermarket company ever to manufacture completely new air conditioning compressors. In 1997, Temperature Control offered more than ten models of new compressors manufactured in its Grapevine, TX. Facility. The 1995 acquisition of API/ADI in Cumming, Georgia, a manufacturer of steel filter dryers and accumulators, the start up of Unimotor, and the acquisition of Hayden, a basic manufacturer of fan clutches and transmission oil coolers located in Corona, California, broadened the Registrant's range of temperature control products to include powertrain cooling as well as interior climate control products. The acquisition of Eaglemotive Corporation in March 1999 will complement Hayden's product line and ensure a leading position in that market.
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 Registrant'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.
(C) NARRATIVE DESCRIPTION OF BUSINESS ---------------------------------
SALES AND DISTRIBUTION The Registrant sells its products primarily ---------------------- throughout the United States and Canada under its proprietary brand names and private labels to approximately 1,500 warehouse distributors and major retailers, who distribute to approximately 15,000 jobber outlets. The jobbers sell the Registrant's products primarily to professional mechanics, and secondarily to consumers who perform their own automobile repairs. The Registrant has a direct field sales force of approximately 280 persons. The acquisition of Standard Motor Products Holdings LTD., and the opening of a Temperature Control distribution center in France offer the Company further sales opportunities outside of North America.
The Registrant generates demand for its products by directing the major portion of its sales effort to its customers' customers (i.E. Jobbers and professional mechanics). In 1998 the registrant conducted approximately 4,000 instructional clinics, which teach mechanics how to diagnose and
repair complex new electronic ignition systems and automotive climate control systems. The registrant also publishes and sells service manuals to registered mechanics. In addition, the Registrant'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.
The Company continues to expand into the retail market by selling its products to large retail chains, such as Autozone, Pep Boys, Advance and many others. The Registrant expects continued growth in the retail market in future years.
SEASONALITY Historically, the Registrant'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 Registrant's products is typically the highest. It is anticipated that these quarterly fluctuations will become more pronounced in the future as a result of the divestiture of the brake business and the expansion of the more seasonal Temperature Control business.
PRODUCTION AND ENGINEERING The Registrant engineers, tools and -------------------------- manufactures many of the components for its products, except for certain commonly available small parts in climate control, fuel system products and certain very low volume products in all product lines. The Company also performs its own plastic and rubber molding operations, stamping operations, automated electronics assembly and a wide variety of other processes.
The Registrant has engineering departments staffed by 120 persons, approximately 65% of whom are graduate engineers. The departments perform product research and development and quality control and, wherever practical, design machinery for automation of the Registrant's factories.
As new models of automobiles, trucks, tractors, buses and other equipment are introduced, the Registrant engineers and manufactures replacement parts for them. The Registrant employs and trains tool and die makers needed in its manufacturing operations.
COMPETITION Although the Registrant is a leading independent manufacturer ----------- of automotive replacement parts and supplies, it faces substantial competition in all markets that it serves. A number of major manufacturers of replacement parts and supplies are divisions of companies having greater financial resources than those of the Registrant. In addition, automobile manufacturers supply virtually every replacement part sold by the Registrant.
The competitive factors affecting the Registrant's products are primarily product quality, customer service and price. The Registrant's business requires that it maintain inventory levels sufficient for the rapid delivery requirements of customers. Management believes that it is able to compete effectively and that its trademarks and trade names are well known and command respect in the industry.
BACKLOG Backlog is maintained at minimal levels by the Registrant. The ------- Registrant primarily fills orders, as received, from inventory and manufactures to maintain minimum inventory levels.
SUPPLIES The principal raw materials purchased by the Registrant consist -------- of brass, electronic components, fabricated copper (primarily in the form of magnet wire and insulated cable), ignition wire, stainless steel coils and rods, aluminum coils and rods, lead, rubber molding compound, and thermo-set and thermo plastic molding powders. All of these materials are purchased in the open market and are available from a number of prime suppliers.
Insurance the Registrant maintains basic liability coverage (general, product and automobile) of $1 million and umbrella liability coverage of
$50 million. Historically, the Registrant 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 Registrant's coverage.
EMPLOYEES The Registrant employs approximately 3,700 people in the United --------- States, Canada, Puerto Rico, Europe and Hong Kong. In addition, the Registrant has joint venture operations in Canada and France. Of these, approximately 2,300 are production employees. Long Island City, New York production employees are unionized. On October 1, 1998, the hourly workers at the Long Island City facility, which produces products for the Company's Engine Management Division, initiated a work stoppage. The Registrant's labor contract with such workers expired on such date and the Registrant and such workers did not agree on terms of a new contract. The workers returned to work on November 13, 1998 and have since been working without a contract. Production has been operating satisfactorily since their return. Discussions are continuing with the union. The Registrant is optimistic that a new contract will be negotiated without a further work stoppage, but is prepared to operate the facility with salaried and temporary workers if a work stoppage occurs, as it did during the 1998 stoppage. Edwardsville, Kansas production employees are covered by a United Auto Workers contract that expires April 7, 2000. The Registrant believes that its facilities are in favorable labor markets with ready access to adequate numbers of skilled and unskilled workers.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES ----------------------------------------------------------------------------
The Registrant sells its line of products primarily in the United States, with additional sales through Canada, Latin America, Europe and the Middle East. The table below shows the sales by geographic area for the last three years:
(U.S. DOLLARS IN THOUSANDS)
REVENUES --------------------------------------
United States $586,044 $493,823 $474,711 Canada 25,513 25,748 24,470 Other Foreign 37,863 40,252 14,226 -------- -------- -------- Total $649,420 $559,823 $513,407 ======== ======== ========
Export sales originating from the United States for the years ended December 31, 1998, 1997 and 1996 were $14,294,000, 15,843,000 and $12,243,000 respectively, and have been included in the category, Other Foreign.
ITEM 2.
ITEM 2. PROPERTIES ----------
The registrant maintains its executive offices and a manufacturing plant at 37-18 Northern Boulevard, Long Island City, NY.
The table below describes the registrant's principal physical properties. (For information with respect to rentals, see note 18 of Notes to Consolidated Financial Statements on page.).
ITEM 3.
ITEM 3. LEGAL PROCEEDING ----------------
Currently, there are no legal proceedings which management deems would have a material economic impact on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
None
PART II -------
ITEM 5:
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: -----------------------------------------------------------------
The Company's stock is listed on the New York Stock Exchange. The number of Shareholders of record of Common Stock on February 28, 1999 was approximately 685, including brokers who hold approximately 7,684,000 shares in street name. The quarterly market price and dividend information is presented in the following chart.
Price Range of Common Stock and Dividends
The Company's Common Stock is traded on the New York Stock Exchange under the symbol SMP. 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.
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. In the first two quarters of 1998 the Company suspended the dividend due 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.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
PART II (CONTINUED) -------------------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES - In 1998, cash provided by operations amounted - ------------------------------- to $108,711,000. This compares favorably to 1997 and 1996 when cash provided by (used in) operations was $71,692,000 and $(21,153,000) respectively. The strong cash flow performance resulted primarily from net earnings for 1998 of $22,257,000 and decreases in inventories and accounts receivable of $27,733,000 and $27,534,000 respectively. Cash used in investing activities in 1998 was $21,812,000, as capital expenditures and payments related to the Cooper transaction were partially offset by proceeds from the sale of businesses and property, plant and equipment. For the three years ended December 31, 1998, 1997 and 1996 capital expenditures totaled $15,325,000, $15,597,000 and 21,389,000 respectively. Cash used in financing activities in 1998 of $80,141,000 was primarily due to the repayment of $52,333,000 in borrowings from bank lines, and $27,046,000 in principal repayments on long-term financing. Dividends paid for the three years ended December 31, 1998, 1997 and 1996 were $2,092,000, $4,197,000 and $4,260,000 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.
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. These rates should compare favorably with the short term credit rates obtained by the Company during most of 1998 and as such should result in lower interest costs in 1999 compared to 1998. Also in 1999, the Company will explore various options for raising additional long term capital to fund future growth opportunities and further strengthen its balance sheet.
At December 31, 1997, the Company was not in compliance with certain covenant requirements associated with certain long term notes payable; however the Company received the appropriate waivers and certain amendments were made to the note agreements. The amendments contained, among other things, provisions for the payment of up front fees of 1.5% and an increase in the interest rates on each note payable of 1.25%. The increased interest rate was reduced by 50 basis points when the Company refinanced its short-term credit facility on November 30, 1998 and a further reduction is possible as the Company's balance sheet is strengthened.
In 1999, the Company's required long term debt repayments will be approximately $22,404,000.
Total debt (current and non-current) at December 31, 1998 decreased by $79,671,000 as compared to December 31, 1997. This was mainly due to decreased requirements to support inventories and accounts receivable. The Company continues to aggressively pursue ways to reduce inventories. Significant efforts are focusing on pack-to-order systems and improved requirements forecasting systems. Pack-to-order systems retain parts in a bulk state until an order is received for a specific brand of product.
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The Company expects capital expenditures for 1999 to be approximately $20,000,000, primarily for new machinery and equipment. The Company anticipates that its present sources of funds and the new multi-year facility entered into during 1998 will continue to be adequate to meet its near term needs.
The reductions in capital employed by the Company, coupled with our increased earnings has resulted in a significant year-over-year improvement in Economic Value Added ("EVA"). The Company has expanded its EVA focus to ensure that capital is invested wisely in programs that exceed our cost of capital and improve our asset utilization.
COMPARISON OF 1998 TO 1997 - -------------------------- Net sales in 1998 were $649,420,000, an increase of $89,597,000 or 16.0% from the comparable period in 1997. Excluding revenues from acquisitions not present in 1997, total net sales increased by $11,597,000, or 2.1%, as compared to 1997. Sales increases in the Temperature Control division, reflecting market share gains, product line expansions and the impact of an extremely hot summer were partially offset by sales declines in the Engine Management division reflecting the weakness in the automotive aftermarket and reduced sales to APS, one of the Company's largest customers, as it worked its way through bankruptcy proceedings. Sales remain focused in the U.S., as 90% of sales were to domestic customers. Sales to Canada, Europe and other export markets remained relatively flat in 1998.
Cost of goods sold increased by $63,463,000 from $380,335,000 to $443,798,000. Gross margins, as a percentage of net sales, decreased from 32.1% to 31.7%. This decline reflects a higher mix of temperature control products with lower average gross margins than engine management products. Gross margins also were negatively affected by the Cooper transaction due to the higher carrying cost of the acquired inventory compared with comparable products produced by the Company's existing temperature control business. The majority of this inventory was sold in 1998 and temperature control gross margins should improve in 1999.
Selling, general and administrative expenses (SG&A) in 1998, excluding bad debt expenses, increased by $1,604,000, or 1.0%, while net sales increased 16%. As a percentage of net sales, SG&A expenses excluding bad debt expenses decreased from 28.1% to 24.5%. The 3.6 point improvement in SG&A expenses resulted primarily from lower new customer acquisition costs and the partial integration of the Cooper Industries' temperature control business into the existing Temperature Control infrastructure. Selling expenses also were reduced, as a further restructuring of the sales force was completed.
Other income (expense), net, decreased by $2,420,000, primarily due to losses related to the Company's joint ventures.
The Company's earnings before interest and taxes increased to $42.5 million from $10.5 million in 1997. This increase was a direct result of the cost reductions discussed above, combined with the non-recurrence of the $10.5 million in bad debt expense recorded in 1997, due to the bankruptcy filing of APS, Inc.
Interest expense increased by $2,261,000 to $16,419,000 resulting from several factors including; interest costs related to discontinued operations in 1997 and higher average interest rates in 1998 partially offsetting lower outstanding borrowings during 1998. When including interest expense related to discontinued operations, interest expense decreased by $2,156,000, primarily as a result of lower outstanding borrowings.
In 1998, the Company focused significant attention on reducing debt and strengthening its balance sheet. Total debt was reduced by $79,671,000, and the Company succeeded in completing a multi-year
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committed revolving credit line. In addition, receivables were reduced by $29,018,000, inventories were reduced by $14,914,000 and cash and short term investments increased by $6,648,000. The progress made in asset management and debt reduction is reflected by a reduction in the Company's total debt to capitalization percentage from 56.6% in 1997 to 43.8% in 1998.
Income tax expense related to continuing operations in 1998 was $3,577,000, compared to a benefit of $2,417,000 in 1997, when the Company posted a net loss. Earnings from the Company's Puerto Rico and Hong Kong subsidiaries resulted in a 1998 effective tax rate that is lower than the statutory corporate rate in the U.S.
The Company has largely completed its restructuring program and is now entirely focused on the two product lines where it is a market leader. In 1999 and into the year 2000, it is anticipated that the full impact of our cost reduction programs will take effect and that synergies from the consolidation of the Cooper temperature control business and other acquisitions will begin to be fully realized and provide further earnings benefits.
COMPARISON OF 1997 TO 1996 - -------------------------- Net sales in 1997 were $559,823,000, up 9.0% from sales of $513,407,000 in 1996. Excluding revenues from acquisitions not present in 1996, net sales remained relatively flat as compared to 1996. Sales increases in the Temperature Control division, reflecting market share gains and product line expansions, were offset by sales declines in the Engine Management division reflecting the general weakness in the automotive aftermarket.
Cost of goods sold increased $45,223,000 from $335,112,000 to $380,335,000. Gross margins, as a percentage of net sales, decreased from 34.7% to 32.1%. This decline reflects a higher mix of temperature control products and non-traditional business which have lower gross margins and reduced manufacturing efficiencies, as production schedules were lowered to reduce inventories.
Selling, general and administrative expenses from continuing operations in 1997, excluding bad debt expenses, increased by 2.0% or $23,400,000 and as a percentage of net sales from continuing operations, increased from 26.1% to 28.1%. The increase in these expenses resulted primarily from a $3,000,000 provision for severance payments related to personnel reductions, higher new customer acquisition costs, increases in overhead costs as a result of the Filko acquisition (these costs are reduced significantly in 1998 as Filko has been integrated into the Company) and finally due to increases in costs to support the Company's high technology O.E. programs. Bad debt expenses from continuing operations, increased significantly in 1997 as a result of the bankruptcy filing of APS, Inc., a major customer. The Company continued to supply APS, Inc. on a limited basis in 1998, but did not subject itself to any additional exposure.
Other income (expense), net, from continuing operations decreased by $712,000 primarily due to lower interest income as available cash early in 1997 was used to reduce short term borrowings under credit lines.
Interest expense from continuing operations, increased by $1,100,000 to $14,200,000 resulting from higher average interest rates.
Taxes based on earnings, from continuing operations, reflect a benefit of $2,417,000 for 1997 as compared to expense of $9,400,000 for 1996. The significant decrease in tax expense is a result of the losses incurred by the Company during 1997. The current year tax benefit recognized was a function of the significant
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losses from the Company's U.S. operations being partially offset by earnings of the Company's Puerto Rico and Hong Kong subsidiaries, which have lower tax rates than the U.S. statutory rate. The combination of the foreign earnings and domestic losses results in a favorable effective tax rate of 65.2% against losses.
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 reduction. The Company has completed much of its restructuring program, and is now focused on the two industry segments in which it can become the market leader. The Company anticipates that significant synergies will continue to develop from the consolidation of Cooper Industries' temperature control business with the Company's existing temperature control business. These synergies began to develop during 1998 and should have a material favorable impact on the 1999 and 2000 results. Additional cost reductions in other areas that were implemented in 1998 should have significant benefits in 1999. These actions, coupled with the continued focus on EVA, will ensure that the Company invests only in programs that exceed the cost of capital and focus on improving margins and asset utilization.
YEAR 2000 - The Company is currently working to resolve the potential impact of - --------- the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures.
The Company has established a comprehensive response to its Year 2000 exposure. Generally, the Company has Year 2000 exposure in two areas: (i) its information technology ("IT") systems and (ii) its non-IT systems. At June 1998, the Company had completed an inventory of its internal IT systems and made a preliminary determination of which programs were or were not Year 2000 compliant. During the period ending December 1998, the Company tested each significant IT system which is believed to be Year 2000 compliant. In some cases, Year 2000 issues will be corrected in the development of new programs, which enhance or provide new functionality to these financial and management operating systems. The Company expects the cost of this effort will be approximately $1.4 million, which includes the costs for new computers and related equipment. The Company expects to substantially complete Year 2000 testing and remediation on its IT and non-IT systems by June 1999.
The Company is nearly complete with its interviews of suppliers, customers, financial institutions and others with which it conducts business to determine the extent to which the Company would be vulnerable to these third parties' failure to remediate their own potential year 2000 problems. The inability of the Company or these other significant business partners to adequately address the year 2000 issues could cause disruption of the Company's operations.
The Company does not presently anticipate that the cost to address the Year 2000 issue will have a material adverse effect on the Company's financial condition, results of operations or liquidity.
PART II (CONTINUED) -------------------
Although the Company expects its internal IT and non-IT systems to be Year 2000 compliant as described above, the Company intends to prepare a contingency plan that will specify what it plans to do if it or important external companies are not Year 2000 compliant in a timely manner. These contingency plans will address the most likely worst case Year 2000 scenarios. These plans are expected to be finalized during the second quarter of 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS - In 1998, the Financial Accounting - ------------------------------------ Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in values of derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company does not expect SFAS No. 133 to have a material impact on the Company's results of operations or financial position.
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 the Company' s functional currency, which is the U.S. dollar. 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 $12 million, which includes $21 million of indebtedness of the Company, $3 million in accounts payable and $12 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 be approximately $1.2 million. In addition, if such a change were to be sustained, the Company's cost of financing would increase in proportion to the change. 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. Since consistent and simultaneous unfavorable movements in both relevant exchange rates is unlikely, this assumption may overstate the impact of exchange rate fluctuations on the Company's results of operations.
INTEREST RATE RISK- At December 31, 1998 the Company had approximately $160 - ------------------ million in loans and financing outstanding, of which approximately $139 million bear interest at fixed interest rates and approximately $21 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
PART II (CONTINUED) -------------------
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, 1998 would not be expected to have a material impact on the earning or cash flows of the Company. However, due to seasonality with respect to the Company's short-term financing, which are 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, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
New York, New York March 2, 1999
-------------------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
-------------------------------
---------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Balance Sheets
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
--------------------------
---------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(In thousands)
See accompanying notes to consolidated financial statements.
----------------------------
---------------------- Standard Motor Products, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
See accompanying notes to consolidated financial statements.
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--------------------------------- 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. Actual results could differ from those estimates.
Reclassifications Where appropriate, certain amounts in 1996 and 1997 have been reclassified to conform with the 1998 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, 1998 and 1997, 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, 1998, the held-to-maturity securities mature within five 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, 1998 and 1997, was $5,906,000 and $4,402,000, 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 (see note 3).
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.
Income Taxes Deferred income taxes result from temporary differences in methods of recording certain revenues and expenses for financial reporting and income tax purposes (see Note 15).
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. "Dilutive" earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents. Common stock equivalents that are anti-dilutive are excluded from net income per common share. Following is a reconciliation of the shares used in calculating basic and dilutive net income per common share (net income as reported is the numerator in each calculation):
1998 1997 1996 - -------------------------------------------------------------------------------- Weighted average common shares outstanding 13,077,392 13,119,404 13,130,849 Effect of dilutive securities - options 90,450 -- -- - -------------------------------------------------------------------------------- Weighted average common equivalent shares outstanding- assuming dilution 13,167,842 13,119,404 13,130,849 - --------------------------------------------------------------------------------
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--------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd)
Comprehensive Income The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," on January 1, 1998. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income, minimum pension liability adjustments and foreign currency translation adjustments and is presented in the Consolidated Statements of Changes in Stockholders' Equity. This statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130.
Segment Reporting During 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments and for related disclosures about products, geographic areas and major customers. (See Note 16)
Pension and Other Postretirement Plans On January 1, 1998, the company adopted SFAS No. 132, "Employers Disclosures about Pension and Other Postretirement Benefits." This statement revises employers disclosures about pensions and other postretirement benefit plans. SFAS No. 132 does not change the method of accounting for such plans. (See notes 12 and 13.)
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." 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 11.)
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 13%, 14% and 16% of consolidated net sales (including sales of discontinued operations) for the years ended December 31, 1998, 1997 and 1996, respectively. One individual member of this marketing group accounted for 10%, 9% and 11% of net sales for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's five largest individual customers, including the members of this marketing group, accounted for 30%, 32% and 34% of net sales in 1998, 1997, and 1996 respectively.
2. Acquisitions - --------------- During 1998 and 1997, the Company acquired and accounted for as a purchase, three businesses as follows: In January 1997, the Company acquired the assets of the Filko Automotive division of F&B Manufacturing Company for approximately $7,900,000. Filko Automotive headquarters were located in Des Plaines, Illinois, when acquired but have been subsequently merged into the Standard Division by the end of 1997. The acquisition increased consolidated net sales by approximately $14,200,000 in 1998 and $19,000,000 in 1997 and had an immaterial effect on consolidated net earnings for the same periods. In September 1997, the Company acquired the oxygen sensor manufacturing business of AlliedSignal for approximately $10,200,000 and has relocated the manufacturing assets from AlliedSignal's plant to a new facility in North Carolina. The acquisition had an immaterial effect on consolidated net sales and consolidated net earnings for the years ended December 31, 1998 and 1997. In March 1998, the Company completed the exchange of its brake business for the Moog Automotive temperature control business of Cooper Industries. The total acquisition price amounted to $79,200,000, which included the exchange of certain net assets, principally inventory and property, plant and equipment and a cash payment of $13,997,000. On the basis of a pro forma consolidation, as if the Moog Automotive temperature control business had been acquired at the beginning of 1997, the Company's consolidated results would have been as follows:
Pro forma results ---------------------- (Dollars in thousands except per share data) 1998 1997 - --------------------------------------------------------------------------- Net sales $671,891 $685,570 - --------------------------------------------------------------------------- Net earnings (loss) from continuing operations $21,464 $(4,840) - --------------------------------------------------------------------------- Net earnings (loss) from continuing operations per common share $1.64 $(0.37) - ---------------------------------------------------------------------------
Such pro forma information does not purport to be indicative of the results of operations that would have actually been attained if the acquisition had been consummated as of January 1, 1997. In addition, the pro forma financial information does not purport to be indicative of future results of operations. The Company's acquisitions, with the exception of the exchange for the Moog Automotive temperature control business, 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
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--------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd)
at the dates of acquisition. In aggregate, the excess of the purchase price over the fair value of the net assets acquired during 1998 and 1997 was approximately $11,650,000 and $8,500,000 respectively. The operating results of these acquired businesses have been included in the consolidated financial statements from the date of each respective acquisition.
3. Discontinued Operations - --------------------------
Brake Business In connection with the exchange transaction described in note 2, during the fourth quarter of 1997 the Company recorded a provision of $14,500,000, consisting of an estimated loss on the disposal of the Brake business of $14,000,000 and a provision of $500,000 for anticipated operating losses until the completion of the disposal. The income (loss) from operations of the discontinued Brake business included an allocation of consolidated interest based upon the ratio of net assets of the discontinued Brake business to the total net assets of the Company which are applicable to interest bearing expenses. The interest allocated to the discontinued Brake business amounted to $1,112,000, $5,183,000 and $4,594,000 for the years ended December 31, 1998, 1997, and 1996 respectively. The Company's 1998 results do not include any income or loss from the discontinued Brake business as these anticipated losses were included in the 1997 provision. The operating results of the discontinued Brake business are summarized as follows:
For the Years Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Sales $34,088 $164,202 $165,800 Income (loss) from operations before income taxes -- (568) (10,573) Income taxes -- -- (3,067) - -------------------------------------------------------------------------------- Income (loss) from operations -- (568) (7,506) - -------------------------------------------------------------------------------- Estimated loss on disposal -- (14,500) -- Income Taxes -- -- -- - -------------------------------------------------------------------------------- Net loss on disposal -- (14,500) -- - -------------------------------------------------------------------------------- Total loss on discontinued operation $ -- $(15,068) $ (7,506) - --------------------------------------------------------------------------------
The $14,500,000 loss associated with the disposal of the Brake business reflects no income tax benefit. As of December 31,1998, substantially all of the assets of the discontinued Brake business were either sold or disposed of. The net assets retained and held for sale as of December 31, 1997, were summarized as follows:
Held (In thousands) Total Retained for Sale - -------------------------------------------------------------------------------- Current Assets $77,266 $32,161 $45,105 Property, plant and equipment, net 28,952 465 28,487 Other non-current assets net of amortization 1,202 -- 1,202 Current Liabilities (22,253) (18,167) (4,086) Other Liabilities (12,447) (12,447) -- - -------------------------------------------------------------------------------- Net assets of the discontinued Brake business $72,720 $2,012 $70,708 - --------------------------------------------------------------------------------
Service Line Business In the fourth quarter of 1998, the Company completed the largest phase of its agreement to sell its Service Line business to R&B, Inc. This transaction involved the sale of selected assets of the Champ Service Line and the Pik-A-Nut Fastener Line. The final phase, involving the sale of the Everco Brass & Brake Line, acquired in the Moog automotive exchange, was completed in early 1999. In the fourth quarter of 1997, the Company recorded a provision of $12,500,000, consisting of an estimated loss on the sale of the business of $12,000,000 and a provision of $500,000 for anticipated operating losses until the closing of the sale. The loss from operations of the discontinued Service Line business included an allocation of consolidated interest based upon the ratio of net assets of the discontinued Service Line business to the total net assets of the Company which are applicable to interest bearing expenses. The interest allocated to the discontinued Service Line business amounted to $629,000, $975,000, and $1,110,000 for the years ended December 31, 1998, 1997, and 1996 respectively. The Company's 1998 results do not include any income or loss from the discontinued Service Line business as these anticipated losses were included in the 1997 provision. The operating results of the discontinued Service Line business are summarized as follows:
For the Years Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Sales ......................... $ 23,254 $ 39,147 $ 42,598 - -------------------------------------------------------------------------------- Income (loss) from operations before income taxes .............. -- (5,336) Income taxes ...................... -- -- (1,233) - -------------------------------------------------------------------------------- Loss from operations .............. -- (5,336) (1,702) - -------------------------------------------------------------------------------- Estimated loss on disposal ........ -- (12,500) -- Income taxes ...................... -- -- -- - -------------------------------------------------------------------------------- Net loss on disposal .............. -- (12,500) -- - -------------------------------------------------------------------------------- Total loss on discontinued operation ......................... $-- $(17,836) $ (1,702) - --------------------------------------------------------------------------------
The $12,500,000 loss associated with the disposal of the Service Line business reflects no income tax benefit. As of December 31,1998, substantially all of the assets of the discontinued Service Line business were either sold or disposed of. The net assets retained and held for sale as of December 31. 1997, were summarized as follows:
---------------------------------
--------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd)
Held (In thousands) Total Retained for Sale - -------------------------------------------------------------------------------- Current Assets ........................... $ 12,933 $ 5,196 $ 7,737 Property, plant and equipment, net ....... 662 -- 662 Other non-current assets net of amortization ..................... 184 184 -- Current Liabilities ...................... (8,020) (8,020) -- Other Liabilities ........................ -- -- -- - -------------------------------------------------------------------------------- Net assets of the discontinued Service Line Business .................... $ 5,759 $ (2,640) $ 8,399 - --------------------------------------------------------------------------------
4. Sale of Accounts Receivable - ------------------------------ The Company sells certain accounts receivable to its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. On March 19, 1997, SMP Credit Corp., entered into a two year agreement whereby it can sell up to a $25,000,000 undivided ownership interest in a designated pool of certain of these eligible receivables. At December 31, 1998 and 1997, net accounts receivables amounting to $25,000,000 had been sold under this agreement. These sales were reflected as reductions of trade accounts receivable in 1998 and 1997 and the related fees and discounting expense were recorded as other expense. The Company has received an extension of this agreement until April 30, 1999 while it completes negotiations on a three year renewal with similar terms and conditions.
5. Inventories - -------------- December 31, ------------------------ (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Inventories consist of: Finished goods ........................... $120,108 $124,224 Work in process .......................... 4,867 5,392 Raw materials ............................ 49,117 59,390 - -------------------------------------------------------------------------------- Total inventories ........................ $174,092 $189,006 - --------------------------------------------------------------------------------
6. Property, Plant and Equipment - -------------------------------- December 31, --------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Property, plant and equipment consist of the following:
Land, buildings and improvements ................. $ 64,080 $ 75,752 Machinery and equipment .......................... 88,282 104,178 Tools, dies and auxiliary equipment .............. 8,412 10,029 Furniture and fixtures ........................... 21,542 22,841 Leasehold improvements ........................... 5,130 7,213 Construction in progress ......................... 18,068 8,840 -------- -------- 205,514 228,853 Less accumulated depreciation and amortization ................................. 96,110 102,829 - -------------------------------------------------------------------------------- Total property, plant and equipment, net ................................... $109,404 $126,024 - --------------------------------------------------------------------------------
7. Other Assets - --------------- December 31, ---------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Other assets consist of the following: Marketable securities .............................. $37,200 $27,200 Unamortized customer supply agreements ............. 3,311 537 Equity in joint ventures ........................... 4,698 7,434 Deferred income taxes .............................. 4,169 -- Other .............................................. 11,031 14,792 - -------------------------------------------------------------------------------- Total other assets ................................. $30,409 $29,963 - --------------------------------------------------------------------------------
Included in Other is a preferred stock investment in a customer of the Company. Net sales to such customer amounted to $72,754,000, $72,529,000, and $76,283,000 in 1998, 1997, and 1996 respectively.
8. Notes Payable - Banks - ------------------------ During 1997 and the first quarter of 1998, the Company's domestic short-term facilities consisted primarily of one year uncommitted demand revolving credit agreements negotiated separately with each of its six lending institutions. The amount of short-term bank borrowings outstanding under those facilities was $52,900,000 at December 31, 1997. The weighted average interest rate at December 31, 1997 on those borrowings was 9.1%. On March 30, 1998 the Company entered into an eight month committed revolving credit facility with its then existing banking group and incurred commitment fees of approximately 1.25% of the facility. This facility provided for unsecured lines of credit in the aggregate amount of $108,500,000. On November 30, 1998, the Company entered into a new three year revolving credit facility. The new facility, with eight lending institutions, provides 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. The terms of this revolving credit facility include, among other provisions, the requirement for a clean-down to $10,000,000 or less, for any consecutive 30 days during each 12 month period of the facility, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness. There were no outstanding borrowings under this facility at December 31, 1998. The Company incurred commitment fees of approximately .70% of the total facility. A foreign subsidiary of the Company had a revolving credit facility during 1998 and 1997. The amount of short-term bank borrowings outstanding under that facility was $3,555,000 at December 31, 1998, and $2,997,000 at December 31, 1997. The weighted average interest rates on these borrowings at December 31, 1998 and 1997 were 8.4% and 7.7%, respectively. (continued on following page)
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--------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd)
9. Long-Term Debt - ----------------- December 31, ---------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Long-term debt consists of: 7.56% senior note ............................. $ 73,000 $ 73,000 8.60% senior note ............................. 37,143 46,429 10.22% senior note ............................ 21,500 30,000 Credit Facility ($17 million Canadian) ........ 10,960 13,935 7.50%-10.50% purchase obligations ............. 2,833 4,840 5.0%-8.8% Facilities .......................... 6,411 7,524 5.0% Notes Payable - AlliedSignal ............. 3,000 5,000 Credit Agreement (esop) ....................... -- 1,674 Other ......................................... 1,306 1,080 - -------------------------------------------------------------------------------- 156,153 183,482 Less current portion .......................... 22,404 24,373 - -------------------------------------------------------------------------------- Total noncurrent portion of long-term debt ................................ $133,749 $159,109 - --------------------------------------------------------------------------------
Under the terms of the $73,000,000 senior note agreement, the Company is required to repay the loan in seven equal annual installments beginning in 2000. Under the terms of the $37,143,000 senior note agreement, the Company is required to repay the remaining loan in four equal annual installments from 1999 through 2002. Under the terms of the $21,500,000 senior note agreement, the Company is required to repay the loan in five varying annual installments beginning in 1999. Subject to certain restrictions, the Company may make prepayments without premium. Under the terms of the $17,000,000 CDN credit agreement, the Company is required to repay the loan as follows: $7,000,000 CDN in 1999, $2,000,000 CDN in 2000, and 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 averaged 4.9% for 1998. The purchase obligations, due under agreements with municipalities, mature in annual installments through 2003, and are secured by properties having a net book value of approximately $13,390,000 at December 31, 1998. The Company holds a 73.4% equity interest in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, which has various existing credit facilities that mature by 2003. Under the terms of the unsecured note agreement with AlliedSignal, the Company is required to repay $2,000,000 in September 1999 with a final payment of $1,000,000 due in 2000. The proceeds of the Credit Agreement were loaned to the Company's Employee Stock Ownership Plan (ESOP) to purchase 1,000,000 shares of the Company's common stock to be distributed in accordance with the terms of the ESOP established in 1989 (see Note 12). In January 1998, the Company made the final required payment and as such the credit agreement has been paid in full. Maturities of long-term debt during the five years ending December 31, 1999 through 2003, are $22,404,000, $28,421,000, $27,282,000, $29,815,000 and $16,416,000 respectively. The senior note agreements contain restrictive covenants which require 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. At December 31, 1997, the Company did not comply with certain covenant requirements for which the Company received waivers and amendments on March 27, 1998. These amendments contained provisions for the payment of up front fees of 1.5% and an increase in the interest rate on each senior note by 1.25%. The increased interest rate was reduced by 0.50% based upon the refinancing of the Company's revolving credit facility on November 30, 1998 (see Note 8).
10. 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, 1998. 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
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--------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd)
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. On December 22, 1998 the Board of Directors authorized the repurchase by the Company of up to an additional 300,000 shares of its common stock at a cost of up to $7,000,000, to be used to meet present and future requirements of its stock option programs. As of December 31, 1998, 78,400 shares were repurchased at a cost of $1,881,000.
11. Stock Options - ----------------- The Company has principally two fixed stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, the Company is authorized to issue 400,000 stock options. The options become exercisable over a four year period and expire at the end of five years following the date they become exercisable. The 1994 Omnibus Stock Option Plan was amended during 1997 to increase the number of shares authorized for issuance to 1,000,000 shares. 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, 1998, in aggregate 969,000 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 (loss) per share would have changed to the pro forma amounts as follows:
(Dollars in thousands except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Earnings As reported $ 22,257 $ (34,524) $ 14,658 (loss) Pro forma $ 21,610 $ (34,849) $ 14,544 Basic Earnings As reported $ 1.70 $ (2.63) $ 1.12 (loss) per share Pro forma $ 1.65 $ (2.66) $ 1.11
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 1998, 1997 and 1996 respectively: expected volatility of 33.5%, 33.5% and 25.5%, expected life of 4.3 years, 4.4 years and 4.4 years, dividend yield of 1.5%, 1.5% and 2.0% and risk free interest rate of 5.2%, 5.6% and 6.0% 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 12/31/98 Contractual Life Exercise Price (Years) - -------------------------------------------------------------------------------- $13.63 - $14.50 6,000 8.3 $ 13.77 $16.00 - $16.94 314,000 3.9 $ 16.34 $20.50 - $23.72 473,000 6.2 $ 21.80
Options Exercisable - --------------------------------------------------------------------------------
Range of Number Exercisable Weighted-Average Exercise Prices at 12/31/98 Exercise Price
- -------------------------------------------------------------------------------- $13.63 - $23.59 334,500 $17.34
12. Employee Benefit Plans - --------------------------
The Company has a defined benefit pension plan covering certain former employees of the Company's discontinued Brake business (see Note 3). 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) 1998 1997 - -------------------------------------------------------------------------------- Change in benefit obligations: Benefit obligation at beginning of year ....... $ 10,109 $ 10,036 Service cost .................................. 97 188 Interest cost ................................. 665 672 Actuarial gain ................................ (121) (33) Benefits paid ................................. (835) (754) - -------------------------------------------------------------------------------- Benefit Obligation at End of Year ............. $ 9,915 $ 10,109 - -------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year ........................... $ 11,120 $ 10,418 Actual return on plan assets .................. 1,399 1,456 Employer contributions ........................ -- -- Benefits paid ................................. (835) (754) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year ...... $11,684 $11,120 - -------------------------------------------------------------------------------- Funded status ................................. $ 1,769 $ 1,011 Unrecognized prior service cost ............... -- 263 Unrecognized net actuarial gain ............... (2,083) (1,452) Unrecognized transition cost .................. -- 72 - -------------------------------------------------------------------------------- (Accrued)/prepaid benefit cost ................ $ (314) $ (106) ================================================================================
(continued on following page)
----------------------------
--------------------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd)
December 31, Weighted-average assumptions: 1998 1997 1996 - -------------------------------------------------------------------------------- Discount rates ................................. 6.75% 7.00% 7.00% Expected long-term rate of return on assets ...................................... 8.00% 8.00% 8.00% - --------------------------------------------------------------------------------
December 31, ------------------------------ (In thousands) ................................. 1998 1997 1996 - -------------------------------------------------------------------------------- Components of Net Periodic benefit cost Service cost ................................... 97 188 219 Interest cost .................................. 665 672 653 Return on assets ............................... (816) (1,456) (1,135) Amortization of prior service cost ............. 19 70 70 Recognized actuarial (gain)/loss ............... (72) 655 373 - -------------------------------------------------------------------------------- Net periodic (benefit) cost .................... (107) 129 180 - --------------------------------------------------------------------------------
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, providing retirement benefits for other eligible employees. The provisions for retirement expense in connection with the plans are as follows: Defined Multi- Contribution employer Plans and Other Plans - -------------------------------------------------------------------------------- Year-end December 31, 1998 $ 302,000 $4,350,000 1997 $ 365,000 $2,840,000 1996 $ 383,000 $2,175,000
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 (see Note 9), 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, 1997 and 1996, 106,900, 98,000, and 96,800 shares were allocated to the employees, leaving no unallocated shares in the ESOP trust at December 31, 1998. Contributions to the ESOP are based on a predetermined formula which is primarily tied into dividends earned by the ESOP and loan repayments. The provision for expense in connection with the ESOP was approximately $1,664,000, in 1998, $1,406,000 in 1997, and $1,391,000 in 1996. The expense was calculated by subtracting dividend and interest income earned by the ESOP, which amounted to approximately $1,000, $274,000, and $289,000, for the years ended December 31, 1998, 1997 and 1996, respectively, from the principal repayment on the outstanding bank loan. Interest costs amounted to approximately $56,000, $208,000, and $360,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1997, indebtedness of the ESOP to the Company in the amount of $1,665,000, is shown as a deduction from stockholders' equity in the consolidated balance sheets. Dividends paid on ESOP shares are recorded as reductions in retained earnings in the consolidated balance sheets. 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 not significant in 1998, 1997 and 1996.
13. 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) 1998 1997 - -------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year .......... $ 15,783 $ 20,888 Service cost ..................................... 975 671 Interest cost .................................... 1,082 1,139 Amendments ....................................... 1,410 -- Curtailments ..................................... -- (2,120) Actuarial (gain)/loss ............................ (844) (4,319) Benefits paid .................................... (778) (476) - -------------------------------------------------------------------------------- Benefit obligation at end of year ................ $ 17,628 $ 15,783 ================================================================================ Funded status .................................... $(17,628) $(15,783) Unrecognized prior service cost .................. 1,286 -- Unrecognized net actuarial (gain)/loss ...................................... (766) -- - -------------------------------------------------------------------------------- (Accrued)/prepaid benefit cost ................... $(17,108) $(15,783) ================================================================================
Weighted-Averag Assumptions as of December 31 1998 1997 - -------------------------------------------------------------------------------- Discount rates . . . . . . . . . . . . . . . . . 6.75% 7.0%
For measurement purposes, an 8% and 9% annual rate of increase in the per capita cost of covered medical benefits was assumed for 1998 and 1997 respectively. The rate was assumed to decrease gradually to 5% in 2002 and remain at that level thereafter. A 6.5% annual rate of increase in the per
------------------------
---------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd.)
capita cost of covered dental benefits was assumed for 1998. The rate was assumed to decrease gradually to 5% in 2001 and remain at that level thereafter.
December 31, --------------- (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost ..................... $ 975 $ 671 837 Interest cost .................... 1,082 1,139 1,419 Amortization of prior service cost 124 0 0 Recognized actuarial (gain)/loss . (78) (235) 408 - -------------------------------------------------------------------------------- Net periodic benefit cost ........ $ 2,103 $ 1,575 2,664 Curtailment (gain) ............... 0 (1,492) 0 - -------------------------------------------------------------------------------- Total benefit cost ............... $ 2,103 $ 83 2,664 - --------------------------------------------------------------------------------
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 1998:
1-Percentage- 1-Percentage- (In thousands) Point Increase Point Decrease - --------------------------------------------------------------------------------
Effect on total of service and interest cost components .............. $ 327 $(274)
Effect on postretirement benefit obligation ............................ $2,209 $(1,882)
14. Other Income (Expense), Net - ------------------------------- (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------------
Other income (expense), net consists of: Interest and dividend income .... $ 1,856 $ 898 $ 1,668 (Loss) on sale of accounts receivable (Note 4) ............. (1,410) (1,358) (1,266) Income (loss) from joint ventures (2,078) 1,335 1,336 Other - net ..................... 210 123 (28) - -------------------------------------------------------------------------------- Total other income (expense), net $(1,422) $ 998 $ 1,710 ================================================================================
15. Taxes Based on Earnings - --------------------------------------------------------------------------------
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: - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- 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 ..... 0.7 4.6 1.1 Non-deductible items, net ......... 0.6 2.3 0.1 Benefits of income subject to taxes at lower than the U.S. federal rate (18.3) (87.8) (7.4) (Decrease) increase in valuation allowance ......................... (4.2) 50.7 -- Other ............................. -- -- (0.6) - -------------------------------------------------------------------------------- Effective tax rate ................ 13.8% (65.2)% 28.2% ================================================================================
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) 1998 1997 - ---------------------------------------------------------------- Deferred tax assets: Accrued costs related to disposal of discontinued operations ........... $ 983 7,584 Inventories ........................ 8,495 11,647 Allowance for customer returns ..... 6,023 6,733 Postretirement benefits ............ 6,725 6,825 Allowance for doubtful accounts .... 1,545 7,070 Accrued salaries and benefits ...... 3,347 4,125 Other .............................. 12,361 8,540 Valuation allowance ................ (14,171) (15,271) - ---------------------------------------------------------------- Total .............................. $ 25,308 $ 37,253 ================================================================ Deferred tax liabilities: Depreciation ....................... $ 4,032 10,796 Promotional costs .................. 1,054 1,610 Other .............................. 4,330 5,966 - ---------------------------------------------------------------- Total .............................. 9,416 18,372 ================================================================ Net deferred tax assets ............ $ 15,892 $ 18,881 ================================================================
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. 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 $12,159,000 at the end of 1998, $17,562,000 at the end of 1997, and $11,858,000 at the end of 1996. Earnings from continuing operations, before income taxes, for foreign operations (including Puerto Rico) amounted to approximately $19,000,000, $16,000,000 and $14,000,000 in 1998, 1997 and 1996 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 $.20 per share in 1998 (1997 - $.26; 1996 - $.27). Foreign income taxes amounted to approximately $2,525,000, $2,136,000, and $1,639,000 for 1998, 1997 and 1996, respectively.
16. 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
--------------------------
---------------------- Standard Motor Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements (cont'd.)
competes. The Engine Management Division consists primarily of ignition and electrical parts, emission and engine controls, on-board computers, sensors, ignition wires, battery cables, carburetor and fuel system parts. The Temperature Control Division consists primarily of air conditioning compressors, clutches, accumulators, filter/driers, blower motors, heater valves, heater cores, evaporators, condensers, hoses and fittings. 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, 1998 ------------------------------------ Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $348,664 $297,144 $ 3,612 $649,420 - -------------------------------------------------------------------------------- Depreciation and amortization 10,068 4,473 2,733 17,274 - -------------------------------------------------------------------------------- Operating income 32,243 19,672 (7,984) 43,931 - -------------------------------------------------------------------------------- Investment in equity affiliates 105 516 4,077 4,698 - -------------------------------------------------------------------------------- Capital expenditures 10,597 4,598 130 15,325 - -------------------------------------------------------------------------------- Total Assets $311,716 $183,197 $ 26,643 $521,556 - --------------------------------------------------------------------------------
For the year ended December 31, 1997 ------------------------------------ Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $365,824 $187,918 $ 6,081 $559,823 - -------------------------------------------------------------------------------- Depreciation and amortization 9,948 3,284 5,748 18,980 - -------------------------------------------------------------------------------- Operating income 28,179 7,302 (26,026) 9,455 - -------------------------------------------------------------------------------- Investment in equity affiliates 1,105 396 5,933 7,434 - -------------------------------------------------------------------------------- Capital expenditures 9,679 3,138 2,780 15,597 - -------------------------------------------------------------------------------- Total Assets $317,162 $107,406 $ 152,569 $577,137 - --------------------------------------------------------------------------------
For the year ended December 31, 1996 ------------------------------------ Engine Temperature Other (In thousands) Management Control Adjustments Consolidated - -------------------------------------------------------------------------------- Net Sales $353,409 $156,423 $ 3,575 $513,407 - -------------------------------------------------------------------------------- Depreciation and amortization 7,960 2,160 6,206 16,326 - -------------------------------------------------------------------------------- Operating income 43,149 13,712 (12,127) 44,734 - -------------------------------------------------------------------------------- Investment in equity affiliates 1,144 -- 5,009 6,153 - -------------------------------------------------------------------------------- Capital expenditures 12,024 6,461 2,904 21,389 - -------------------------------------------------------------------------------- Total Assets $317,761 $120,912 $ 186,133 $624,806 - --------------------------------------------------------------------------------
Other Adjustments consists of items pertaining to the corporate headquarters function, a Canadian business unit that does not meet the criteria of a reportable operating segment under SFAS No. 131 and businesses that have been sold. The following table reconciles the measure of profit used in the previous disclosure to the Company's consolidated Earnings (loss) from continuing operations before taxes:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Operating income ................ $ 43,931 $ 9,455 $44,734 Other income (expense) .......... (1,422) 998 1,710 Interest expense ................ 16,419 14,158 13,091 - -------------------------------------------------------------------------------- Earnings (loss) from continuing operations before taxes and minority interest ............... $ 26,090 $ (3,705) $33,353 ================================================================================
Geographic Information for the Year Ended December 31,
Revenues --------------------- (In thousands) 1998 1997 1996 ================================================================================ United States $586,044 $493,823 $474,711 Canada 25,513 25,748 24,470 Other Foreign 37,863 40,252 14,226 - -------------------------------------------------------------------------------- Total $649,420 $559,823 $513,407 ================================================================================
Long Lived Assets ---------------------
(In thousands) 1998 1997 1996 ================================================================================ United States $125,627 $126,854 $121,126 Canada 3,719 8,615 17,377 Other Foreign 19,290 21,229 22,833 - -------------------------------------------------------------------------------- Total $148,636 $156,698 $161,336 ================================================================================
Revenues are attributed to countries based upon the location of the customer
17. Fair Value of Financial Instruments - ---------------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents
The carrying amount approximates fair value because of the short maturity of those instruments.
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:
(In thousands)
December 31, 1998 Carrying Fair Amount Value - --------------------------------------------------- Cash and cash equivalents $ 23,457 $ 23,457 Marketable securities ... 7,200 7,200 Long-term debt .......... (156,153) (143,938) - --------------------------------------------------- (In thousands) December 31, 1997 Carrying Fair Amount Value - --------------------------------------------------- Cash and cash equivalents $ 16,809 $ 16,809 Marketable securities ... 7,200 7,200 Long-term debt .......... (183,482) (175,053) - ---------------------------------------------------
----------------------------
18. Commitments and Contingencies - ------------------------------------- Total rent expense for the three years ended December 31, 1998 was as follows: Real (In thousands) Total Estate Other - -------------------------------------------------------------------------------- 1998 $5,747 $3,619 $2,128 1997 7,437 4,593 2,844 1996 6,568 3,244 3,324
At December 31, 1998, 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) 1999 $ 4,525 2000 3,288 2001 3,233 2002 2,407 2003 1,844 Thereafter 3,644 - -------------------------------------------------------------------------------- $18,941 - --------------------------------------------------------------------------------
At December 31, 1998, the Company had outstanding letters of credit aggregating approximately $2,300,000. 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. The Company is involved in various litigation 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 position and results of operations.
19. Quarterly Financial Data (Unaudited) ----------------------------------------
(In thousands, except per share amounts)
Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended ............. 1998 1998 1998 1998 - -------------------------------------------------------------------------------- Net Sales ................. $ 113,316 $ 201,293 $ 208,766 $126,045 - -------------------------------------------------------------------------------- Gross Profit .............. 36,352 62,408 63,072 43,790 - -------------------------------------------------------------------------------- Earnings from continuing operations ..... 1,391 9,574 8,639 2,653 - -------------------------------------------------------------------------------- Earnings (loss) from discontinued operations ... -- -- -- -- - -------------------------------------------------------------------------------- Net Earnings .............. $ 1,391 $ 9,574 $ 8,639 $ 2,653 - -------------------------------------------------------------------------------- Net Earnings from continuing operations per common share: Basic ..................... $ .11 $ .73 $ .66 $ .20 Diluted ................... $ .11 $ .72 $ .65 $ .20 - -------------------------------------------------------------------------------- Net Earnings per common share: Basic ..................... $ .11 $ .73 $ .66 $ .20 Diluted ................... $ .11 $ .72 $ .65 $ .20 - --------------------------------------------------------------------------------
(In thousands, except per share amounts) Dec. 31, Sept. 30, June 30, Mar. 31, Quarter Ended 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Net Sales ...................... $ 103,662 $155,246 $163,181 $137,734 - -------------------------------------------------------------------------------- Gross Profit ................... 32,512 49,938 53,458 43,580 - -------------------------------------------------------------------------------- Earnings (loss) from continuing operations .......... (13,967) 6,917 5,571 (141) - -------------------------------------------------------------------------------- Earnings (loss) from discontinued operations (34,057) 1,000 947 (794) - -------------------------------------------------------------------------------- Net Earnings (loss) ............ $ (48,024) $ 7,917 $ 6,518 $ (935) - -------------------------------------------------------------------------------- Net Earnings (loss) from continuing operations per common share: Basic .......................... $ (1.07) $ .53 $ .42 $ (.01) Diluted ........................ $ (1.07) $ .53 $ .42 $ (.01) - -------------------------------------------------------------------------------- Net Earnings (loss) per common share: Basic .......................... $ (3.67) $ .60 $ .50 $ (.07) Diluted ........................ $ (3.67) $ .60 $ .50 $ (.07) - --------------------------------------------------------------------------------
The fourth quarter of 1997 reflects several unfavorable year-end adjustments including a $10,500,000 increase in bad debt expense for continuing operations and a $2,500,000 increase in bad debt expense for discontinued operations related to the bankruptcy filing of a significant customer, APS, Inc., a $3,000,000 provision for severance payments related to personnel reductions, and the estimated loss on disposal of $27,000,000 associated with the Brake and Service Line businesses (see Note 3).
20. Subsequent Events (Unaudited) - --------------------------------- In January 1999, the Company acquired through its European subsidiary Standard Motor Products Holding Ltd., 85% of the stock of Webcon UK Limited, and acquired through its UK joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited. The total acquisition price amounted to approximately $3,500,000 and was funded from the Company's operating cash flow. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $13,400,000. Located in Fort Worth, Texas, Eaglemotive assembles and distributes fan clutches and other cooling products to the automotive aftermarket. The acquisition was funded from operating cash and short term borrowings.
---------------------------
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ---------------------------------------------------- None.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
Information relating to Directors and Executive Officers is set forth in the 1999 Annual Proxy Statement.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS ----------------------------------------
Information relating to Management Remuneration and Transactions is set forth in the 1999 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 1999 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 1999 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, 1998 and 1997
Consolidated Statements of Operations - Years Ended December 31, 1998, 1997 & 1996
Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - - Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) The following financial schedule for the years 1998, 1997 and 1996 is submitted herewith:
Schedule Page
II. Valuation and Qualifying Accounts 26
Selected Quarterly Financial Data, for the Years Ended December 31, 1998 and 1997, are included herein by reference to Part II, Item 8.
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 20.
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, 1998.
STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------
2.1 Asset Exchange Agreement dated as of March 28, 1998 * among SMP Motor Products, LTD., Standard Motor Products, Inc., Cooper Industries (Canada) Inc., Moog Automotive Company and Moog Automotive Products, Inc., filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference
3.1 By-laws filed as an Exhibit of Registrant's annual * report on Form 10-K for the year ended December 31, 1986 is incorporated herein by reference.
3.2 Restated Certificate of Incorporation, dated July 31, * 1990, filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 is incorporated herein by reference.
3.3 Restated Articles of Incorporation, dated February * 15, 1996, filed as an Exhibit of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 is incorporated herein by reference.
3.4 Restated By-Laws dated May 23, 1996, filed as an * Exhibit of the Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
4.1 Registration of Preferred Share Purchase Rights filed * on Form 8-A on February 29, 1996 is incorporated herein by reference.
10.1 Note Purchase Agreement dated October 15, 1989 * between the Registrant and the American United Life Insurance Company, the General American Life Insurance Company, the Jefferson-Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Assurance Company, the Guarantee Mutual Life Company, the Security Mutual Life Insurance Company of Lincoln, Nebraska, and the Woodmen Accident and Life Company filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 is incorporated herein by reference.
STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------
10.2 Note Agreement of November 15, 1992 between the * Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual Insurance Company filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 is incorporated herein by reference.
10.3 Employee Stock Ownership Plan and Trust dated January * 1, 1989 filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 is incorporated herein by reference.
10.4 Supplemental Executive Retirement Plan dated August * 15, 1994 filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference.
10.5 1994 Omnibus Stock Option Plan of Standard Motor * Products, Inc. is incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 (33-58655).
10.6 Note Purchase Agreement dated December 1, 1995 * between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company filed as an Exhibit of Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 is incorporated herein by reference.
10.7 Credit Agreement of May 1, 1996 between the * Registrant and Canadian Imperial Bank of Commerce ("CIBC") filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
10.8 Letter Agreement dated September 25, 1996 amending * the Note Agreement between the Registrant and Canadian Imperial Bank of Commerce ("CIBC") filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------
10.9 Letter Agreement of September 30, 1996 amending the * Note Agreement between the Registrant and Mutual Life Insurance Company, Allstate Life Insurance Company, Teachers Insurance and Annuity Association of America and Phoenix Home Life Mutual Insurance Company dated November 15, 1992 filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996 is incorporated herein by reference.
10.10 Letter Agreement of November 22, 1996 amending the * Note Agreement between the Registrant and Mutual Life Insurance Company, Allstate Life Insurance Company, Teachers Insurance and Annuity Association of America, and Phoenix Home Life Mutual Insurance Company with amendment dated September 30, 1996, dated November 15, 1992, filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
10.11 1996 Independent Outside Directors Stock Option Plan * of Standard Motors Products, Inc. filed as an Exhibit of Registrant's annual report on Form 10-K for the year ended December 31, 1996 is incorporated herein by reference.
10.12 Letter Agreement of March 27, 1998 amending the Note * Agreement between the Registrant and the American United Life Insurance Company, the Great American Life Insurance Company, the Jefferson- Pilot Life Insurance Company, the Ohio National Life Insurance Company, the Crown Insurance Company, the Great-West Life Insurance Company, the Security Mutual Life Insurance Company, Woodmen Accident and Life Insurance Company and Nomura Holding America, Inc. dated October 15, 1989, filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference
10.13 Letter Agreement of March 27, 1998 amending the Note * Agreement * between the Registrant and Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Lumbermens Mutual Casualty Company, Fidelity Life Association, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, Allstate Life Insurance Company, Teachers Insurance & Annuity Association of America, and Phoenix Home Life Mutual InsuranceCompany dated November 15, 1992, filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference
STANDARD MOTOR PRODUCTS, INC. EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE NUMBER NUMBER - ------ ------
10.14 Letter Agreement of March 27, 1998 amending the Note * Agreement between the Registrant and Metropolitan Life Insurance Company, the Travelers Insurance Company, Connecticut Life Insurance Company, CIGNA Property and Casualty Insurance Company, Life Insurance Company of North America and American United Life Insurance Company dated December 1, 1995, filed as an Exhibit of Registrant's current report on Form 8-K dated March 28, 1998 is incorporated herein by reference
10.15 1994 Omnibus Stock Option Plan of Standard Motor * Products, Inc., as amended, is incorporated herein by reference to the Company's Registration Statement on Form S-8 (333-51565), dated May 1, 1998.
10.16 Standard Motor Products, Inc. Independent Directors' * Stock Option Plan, is incorporated herein by reference to the Company's Registration Statement on Form S-8 (333-51619), dated May 1, 1998.
10.17 Credit Agreement dated November 30, 1998 among E-1 Standard Motor Products, Inc., Chase Manhattan Bank and Canadian Imperial Bank of Commerce is included as Exhibit 10.17
21. List of Subsidiaries of Standard Motor Products, Inc. is included on Page 27.
23 Consent of Independent Auditors KPMG LLP, is included on Page 28.
27. Financial Data Schedule for 1998 is included on Page 29.
* Incorporated by reference.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC. ----------------------------- (REGISTRANT)
/S/ LAWRENCE I. SILLS --------------------- Lawrence I. Sills, President, Director, Chief Operating Officer
/S/ MICHAEL J. BAILEY --------------------- Michael J. Bailey, Senior Vice President, Administration and Finance, Chief Financial Officer
/S/ JAMES J. BURKE ------------------ James J. Burke, Director of Finance Chief Accounting Officer
Dated: New York, New York March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the Capacities and on the dates indicated:
March 31, 1999 /S/ LAWRENCE I. SILLS (Dated) --------------------- Lawrence I. Sills, President, Director, Chief Operating Officer
March 31, 1999 /S/ NATHANIEL L. SILLS (Dated) ---------------------- Nathaniel L. Sills Chairman, Director
March 31, 1999 /S/ ARTHUR D. DAVIS (Dated) ------------------- Arthur D. Davis, Director
March 31, 1999 /S/ MARILYN F. CRAGIN (Dated) --------------------- Marilyn F. Cragin, Director
March 31, 1999 /S/ SUSAN F. DAVIS (Dated) ------------------ Susan F. Davis, Director
March 31, 1999 /S/ ARTHUR S. SILLS (Dated) ------------------- Arthur S. Sills, Director
The Board of Directors and Stockholders Standard Motor Products, Inc.:
Under date of March 2, 1999, we reported on the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1998, as contained in the annual report on Form 10-K for the year 1998. 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 March 2, 1999
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996