UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549.
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER: 1-4743
STANDARD MOTOR PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 392-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $2.00 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filler. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting common stock based on the closing price
on the New York Stock Exchange on June 30, 2006 (the last business day of
registrant's most recently completed second fiscal quarter) of $8.34 per share
held by non-affiliates of the registrant was $127,467,075. For purposes of the
foregoing calculation only, all directors and officers have been deemed to be
affiliates, but the registrant disclaims that any of such are affiliates.
As of February 28, 2007, there were 18,679,884 outstanding shares of the
registrant's common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated herein by
reference from the registrant's definitive proxy statement relating to its
annual meeting of stockholders to be held on May 17, 2007.
-2-
EXPLANATORY NOTE
This Amendment No. 1 to our Annual Report on Form 10-K for the year ended
December 31, 2006, as originally filed on March 16, 2007 (the "Report"), is
being filed in response to comments received by us from the Staff of the
Securities and Exchange Commission (the "Staff"). This Amendment amends and
replaces in its entirety Item 8. Financial Statements And Supplementary Data to
include additional financial information regarding the Company's joint ventures
in note 8 of the notes of the consolidated financial statements and to include
the conformed signatures of Grant Thornton LLP, which signatures were originally
unintentionally omitted in the (a) Report of Independent Registered Public
Accounting Firm--Internal Controls over Financial Reporting, (b) Report of
Independent Registered Public Accounting Firm--Consolidated Financial
Statements, (c) Audit Report on Supplemental Schedule, and (d) Consent of
Independent Registered Public Accounting Firm. This Amendment amends and
replaces in its entirety Item 9A. Controls and Procedures to enhance our
disclosure regarding our disclosure controls and procedures.
We have included as exhibits to this Amendment new certifications of our
principal executive officer and principal financial and accounting officer.
Except to the extent expressly set forth herein, this Amendment speaks as of the
original filing date of our Report and has not been updated to reflect events
occurring subsequent to the original filing date other than those required to
reflect the effects of the comments received by the Staff. Accordingly, this
Amendment should be read in conjunction with our filings made with the
Securities and Exchange Commission subsequent to the filing of the Report,
including any amendments to those filings.
-3-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
Management's Report on Internal Control over Financial Reporting.............. 5
Report of Independent Registered Public Accounting Firm--Internal
Control Over Financial Reporting......................................... 6
Report of Independent Registered Public Accounting Firm--
Consolidated Financial Statements........................................ 8
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004......................................... 9
Consolidated Balance Sheets as of December 31, 2006
and 2005.................................................................10
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 ........................................11
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2006, 2005 and 2004.....................12
Notes to Consolidated Financial Statements....................................13
-4-
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Stockholders
Standard Motor Products, Inc.:
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of
the Exchange Act). Our internal control system was designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Because of these inherent limitations, internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation and presentation, and may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
We assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2006. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on our
assessment using those criteria, we concluded that, as of December 31, 2006, our
internal control over financial reporting is effective.
Our independent registered public accounting firm, Grant Thornton LLP, has
audited our consolidated financial statements for 2006 and has issued an
attestation report concurring with management's assessment of our internal
control over financial reporting. Grant Thornton's report appears on the
following pages of this "Item 8. Financial Statements and Supplementary Data."
-5-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
INTERNAL CONTROL OVER REPORTING
The Board of Directors and Shareholders
Standard Motor Products, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report On Internal Control Over Financial Reporting, that Standard
Motor Products, Inc. (a New York corporation) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Standard Motor
Products, Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
-6-
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Standard Motor Products, Inc.
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by COSO. Also in
our opinion, Standard Motor Products, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control--Integrated Framework issued
by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Standard Motor Products, Inc. as of December 31, 2006 and 2005, and the related
consolidated statements of operations, shareholder's equity and cash flows for
each of the three years in the period ended December 31, 2006, and our report
dated March 15, 2007, except for Note 8, as to which the date is January 2,
2008, expressed an unqualified opinion on those consolidated financial
statements and includes explanatory paragraphs relating to the application of
Statement of Financial Accounting Standards No. 123(R) as of January 1, 2006 and
No. 158 as of December 31, 2006.
/s/ GRANT THORNTON LLP
------------------------
New York, New York
March 15, 2007
-7-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM--
CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Standard Motor Products, Inc.:
We have audited the accompanying consolidated balance sheets of Standard Motor
Products, Inc. and Subsidiaries (a New York corporation) as of December 31, 2006
and 2005, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Standard Motor
Products, Inc. and Subsidiaries as of December 31, 2006 and 2005, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 12 to the consolidated financial statements, the Company
changed its method of accounting for share-based compensation effective January
1, 2006, in connection with the adoption of Statement of Financial Statement
Standards No. 123 (revised 2004) "Share-Based Payment."
As discussed in Notes 13 and 14 to the consolidated financial statements, the
Company changed its method of accounting for defined benefit pension and other
postretirement plans, effective as of December 31, 2006, in connection with the
adoption of Statement of Financial Statement Standards No. 158, "Employers'
Accounting for Defined Pension and Other Post Retirement Plans."
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Standard Motor
Products, Inc. and Subsidiaries' internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 15, 2007 expressed an unqualified
opinion thereon.
/s/ GRANT THORNTON LLP
------------------------
New York, New York
March 15, 2007, except for Note 8, as to which the date is January 2, 2008
-8-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
Net sales ...................................................... $ 812,024 $ 830,413 $ 824,283
Cost of sales .................................................. 606,803 644,433 629,290
------------ ------------ ------------
Gross profit ................................................ 205,221 185,980 194,993
Selling, general and administrative expenses ................... 168,050 166,556 178,852
Restructuring expenses ......................................... 1,856 5,342 11,449
Goodwill impairment charge ..................................... -- -- 6,429
------------ ------------ ------------
Operating income (loss) ..................................... 35,315 14,082 (1,737)
Other (expense) income, net .................................... (383) 2,648 2,861
Interest expense ............................................... 19,275 17,077 13,710
------------ ------------ ------------
Earnings (loss) from continuing operations before taxes ..... 15,657 (347) (12,586)
Provision (benefit) for income taxes ........................... 6,494 1,423 (3,679)
------------ ------------ ------------
Earnings (loss) from continuing operations ..................... 9,163 (1,770) (8,907)
Earnings (loss) from discontinued operation, net of income tax
of $809, $ 1,118 and $2,606 ................................. 248 (1,775) (3,909)
------------ ------------ ------------
Earnings (loss) before cumulative effect of accounting change 9,411 (3,545) (12,816)
Cumulative effect of accounting change, net of tax of $1,043 ... -- -- (1,564)
------------ ------------ ------------
Net earnings (loss) ......................................... $ 9,411 $ (3,545) $ (14,380)
============ ============ ============
Net earnings (loss) per common share - Basic:
Earnings (loss) from continuing operations ................ $ 0.50 $ (0.09) $ (0.46)
Discontinued operation .................................... 0.01 (0.09) (0.20)
Cumulative effect of accounting change .................... -- -- (0.08)
------------ ------------ ------------
Net earnings (loss) per common share - Basic ................... $ 0.51 $ (0.18) $ (0.74)
============ ============ ============
Net earnings (loss) per common share - Diluted:
Earnings (loss) from continuing operations ................ $ 0.50 $ (0.09) $ (0.46)
Discontinued operation .................................... 0.01 (0.09) (0.20)
Cumulative effect of accounting change .................... -- -- (0.08)
------------ ------------ ------------
Net earnings (loss) per common share - Diluted ................. $ 0.51 $ (0.18) $ (0.74)
============ ============ ============
Average number of common shares ................................ 18,283,707 19,507,818 19,331,358
============ ============ ============
Average number of common shares and dilutive common shares ..... 18,325,175 19,507,818 19,331,358
============ ============ ============
See accompanying notes to consolidated financial statements.
-9-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
2006 2005
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 22,348 $ 14,046
Accounts receivable, less allowances for discounts and doubtful accounts
of $9,465 and $9,574 in 2006 and 2005, respectively .................. 183,664 176,294
Inventories ............................................................ 233,970 243,297
Deferred income taxes .................................................. 14,011 14,081
Prepaid expenses and other current assets .............................. 7,845 7,972
--------- ---------
Total current assets .......................................... 461,838 455,690
Property, plant and equipment, net .......................................... 80,091 85,805
Goodwill and other intangibles, net ......................................... 56,289 67,402
Other assets ................................................................ 41,874 44,147
--------- ---------
Total assets .................................................. $ 640,092 $ 653,044
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable .......................................................... $ 139,799 $ 149,236
Current portion of long-term debt ...................................... 542 542
Accounts payable ....................................................... 53,783 52,535
Sundry payables and accrued expenses ................................... 24,510 24,466
Accrued customer returns ............................................... 21,705 22,346
Restructuring accrual .................................................. 703 1,286
Accrued rebates ........................................................ 20,769 24,017
Payroll and commissions ................................................ 16,714 11,494
--------- ---------
Total current liabilities ................................. 278,525 285,922
Long-term debt .............................................................. 97,979 98,549
Post-retirement medical benefits and other accrued liabilities .............. 51,678 45,962
Restructuring accrual ....................................................... 383 11,348
Accrued asbestos liabilities ................................................ 20,828 25,556
--------- ---------
Total liabilities ......................................... 449,393 467,337
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common Stock - par value $2.00 per share:
Authorized 30,000,000 shares, issued 20,486,036 shares ............. 40,972 40,972
Capital in excess of par value ......................................... 57,429 56,966
Retained earnings ...................................................... 112,481 109,649
Accumulated other comprehensive income ................................. 3,541 4,158
Treasury stock - at cost (2,109,816 and 2,315,645 shares in 2006
and 2005, respectively) ............................................ (23,724) (26,038)
--------- ---------
Total stockholders' equity ................................ 190,699 185,707
--------- ---------
Total liabilities and stockholders' equity ................ $ 640,092 $ 653,044
========= =========
See accompanying notes to consolidated financial statements.
-10-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) ............................................. $ 9,411 $ (3,545) $(14,380)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization .............................. 15,486 17,356 19,013
Increase to allowance for doubtful accounts ................ 405 655 404
Increase to inventory reserves ............................. 6,128 5,286 1,487
Loss on disposal of property, plant and equipment .......... 71 2,940 1,379
Loss on divestiture of European Temperature Control division 3,209 -- --
Gain on retirement of debt ................................. -- (1,258) --
Equity income from joint ventures .......................... (915) (955) (752)
Employee stock ownership plan allocation ................... 1,190 1,341 1,643
Stock-based compensation ................................... 848 -- --
Decrease (increase) in deferred income taxes ............... 328 (4,760) (6,243)
Increase (decrease) in tax valuation allowance ............. 1,875 3,074 (182)
(Earnings) loss on discontinued operations, net of tax ..... (248) 1,775 3,909
Cumulative effect of accounting change ..................... -- -- 1,564
Goodwill impairment charge ................................. -- -- 6,429
Change in assets and liabilities, net of effects from
acquisitions and divestitures:
(Increase) decrease in accounts receivable ................. (11,758) (25,597) 21,833
(Increase) decrease in inventories ......................... (701) 10,058 (5,350)
(Increase) in prepaid expenses and other current assets .... (43) (491) (82)
Decrease in other assets ................................... 313 1,237 3,662
Increase (decrease) in accounts payable .................... 7,693 2,760 (12,376)
Decrease in sundry payables and accrued expenses ........... (2,637) (6,968) (5,969)
Decrease in restructuring accrual .......................... (1,095) (5,516) (12,222)
Increase (decrease) in other liabilities ................... 4,129 370 (301)
-------- -------- --------
Net cash provided by (used in) operating activities .... 33,689 (2,238) 3,466
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and equipment ......... 995 2,164 1,734
Capital expenditures, net of effects from acquisitions .......... (10,080) (9,957) (9,774)
Payments for acquisitions, net of cash acquired ................. -- -- (2,906)
Proceeds from the divestiture of European Temperature
Control division ............................................. 3,119 -- --
-------- -------- --------
Net cash used in investing activities .................. (5,966) (7,793) (10,946)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreements .................. (9,082) 39,820 9,717
Principal payments and retirement of long-term debt ............. (570) (14,655) (3,341)
(Decrease) increase in overdraft balances ....................... (4,716) 3,288 834
Repurchase of shares held by Dana Corporation ................... -- (11,899) --
Proceeds from exercise of employee stock options ................ 738 169 972
Dividends paid .................................................. (6,579) (7,024) (6,955)
-------- -------- --------
Net cash (used in) provided by financing activities .... (20,209) 9,699 1,227
-------- -------- --------
Effect of exchange rate changes on cash ......................... 788 (556) 1,540
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ 8,302 (888) (4,713)
CASH AND CASH EQUIVALENTS at beginning of year .................. 14,046 14,934 19,647
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year ........................ $ 22,348 $ 14,046 $ 14,934
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ............................................... $ 19,224 $ 17,227 $ 13,741
======== ======== ========
Income taxes ........................................... $ 2,976 $ 3,456 $ 2,582
======== ======== ========
Non-cash investing and financing activities:
Reduction of restructuring accrual applied against goodwill $ 10,606 $ 1,243 $ 1,000
======== ======== ========
See accompanying notes to consolidated financial statements.
-11-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2006, 2005 AND 2004
CAPITAL ACCUMULATED
IN EXCESS OTHER
COMMON OF PAR RETAINED COMPREHENSIVE TREASURY
STOCK VALUE EARNINGS INCOME (LOSS) STOCK TOTAL
----- ----- -------- ------------- ----- -----
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 2003 ................ $ 40,972 $ 58,086 $141,553 $ 4,814 $(19,384) $226,041
Comprehensive Loss:
Net loss .............................. (14,380) (14,380)
Foreign currency translation adjustment 2,242 2,242
Unrealized gain on interest rate swap
agreements, net of tax of $127 ...... 383 383
Minimum pension liability adjustment .. (2,634) (2,634)
--------
Total comprehensive loss .............. (14,389)
Cash dividends paid ......................... (6,955) (6,955)
Exercise of employee stock options .......... (645) 1,617 972
Employee Stock Ownership Plan ............... (17) 1,660 1,643
BALANCE AT DECEMBER 31, 2004 ................ 40,972 57,424 120,218 4,805 (16,107) 207,312
-------- -------- -------- -------- -------- --------
Comprehensive Loss:
Net loss .............................. (3,545) (3,545)
Foreign currency translation adjustment (940) (940)
Unrealized gain on interest rate swap
agreements, net of tax of $108 26 26
Minimum pension liability adjustment .. 267 267
--------
Total comprehensive loss .............. (4,192)
Cash dividends paid ......................... (7,024) (7,024)
Exercise of employee stock options .......... (71) 240 169
Employee Stock Ownership Plan ............... (387) 1,728 1,341
Repurchase of shares held
by Dana Corporation ....................... (11,899) (11,899)
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2005 ................ 40,972 56,966 109,649 4,158 (26,038) 185,707
Comprehensive Income:
Net income ............................ 9,411 9,411
Foreign currency translation adjustment 1,300 1,300
Unrealized gain on interest rate swap
agreements, net of tax of $(198).. .. (298) (298)
Adoption of FASB Statement No. 158,
net of income taxes of $1,906 ......... (1,414) (1,414)
Additional minimum pension liability
adjustment .......................... (205) (205)
--------
Total comprehensive income ............ 8,794
Cash dividends paid ......................... (6,579) (6,579)
Exercise of employee stock options .......... (49) 787 738
Stock based compensation .................... 653 195 848
Employee Stock Ownership Plan ............... (141) 1,332 1,191
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2006 ................ $ 40,972 $ 57,429 $112,481 $ 3,541 $(23,724) $190,699
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
-12-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Standard Motor Products, Inc. (referred to hereinafter in these notes to
consolidated financial statements as "we," "us" or "our") is engaged in the
manufacture and distribution of replacement parts for motor vehicles in the
automotive aftermarket industry. The consolidated financial statements include
our accounts and all subsidiaries in which we have more than a 50% equity
ownership. Our investments in unconsolidated affiliates are accounted for on the
equity method. All significant intercompany items have been eliminated.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, we have made a
number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Some of the more
significant estimates include allowances for doubtful accounts, realizability of
inventory, goodwill and other intangible assets, depreciation and amortization
of long-lived assets, product liability, pensions and other post-retirement
benefits, asbestos and litigation matters, deferred tax asset valuation
allowance and sales return allowances. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
The Company does not generally require collateral for its trade accounts
receivable. Accounts receivable have been reduced by an allowance for amounts
that may become uncollectible in the future. These allowances are established
based on a combination of write-off history, aging analysis, and specific
account evaluations. When a receivable balance is known to be uncollectible, it
is written off against the allowance for doubtful accounts. Cash discounts are
provided based on an overall average experience rate applied to qualifying
accounts receivable balances.
INVENTORIES
Inventories are stated at the lower of cost (determined by means of the
first-in, first-out method) or market. Inventories are reduced by an allowance
for excess and obsolete inventories, based on the Company's review of on-hand
inventories. We provided for an inventory reserve of $35.4 million and $39.1
million as of December 31, 2006 and 2005, respectively.
We use cores (used parts) in our remanufacturing processes for air conditioning
compressors. The production of air conditioning compressors involves the
rebuilding of used cores, which we acquire either in outright purchases from
used parts brokers, or from returns pursuant to an exchange program with
customers. Under such exchange programs, we reduce our inventory, through a
charge to cost of sales, when we sell a finished good compressor, and put back
to inventory at standard cost through a credit to cost of sales the used core
exchanged when it is actually received from the customer.
-13-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes derivatives as either an asset or liability measured at
its fair value. For derivatives that have been formally designated as a cash
flow hedge (interest rate swap agreements), the effective portion of changes in
the fair value of the derivatives are recorded in "accumulated other
comprehensive income (loss)." Amounts in "accumulated other comprehensive income
(loss)" are reclassified into earnings in the "interest expense" caption when
interest expense on the underlying borrowings is recognized.
PROPERTY, PLANT AND EQUIPMENT
These assets are recorded at cost and are depreciated using the straight-line
method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE
-------------------------
Buildings and improvements................. 25 to 33-1/2 years
Building refurbishments.................... 10 years
Machinery and equipment.................... 7 to 12 years
Tools, dies and auxiliary equipment........ 3 to 8 years
Furniture and fixtures..................... 3 to 12 years
Leasehold improvements..................... Shorter of life of asset
or lease term
Major renewals and improvements of property, plant and equipment are
capitalized, and repairs and maintenance costs are expensed as incurred.
GOODWILL, OTHER INTANGIBLE AND LONG-LIVED ASSETS
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases.
Goodwill and certain other intangible assets having indefinite lives are not
amortized to earnings, but instead are subject to periodic testing for
impairment. Intangible assets determined to have definite lives are amortized
over their remaining useful lives.
Goodwill of a reporting unit is tested for impairment on an annual basis or
between annual tests if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying amount. To the
extent the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, we are required to perform a second step, as this is an
indication that the reporting unit goodwill may be impaired. In this step, we
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.
-14-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, we compare the carrying value of such
assets with finite lives to the estimated undiscounted future cash flows
expected from the use of the assets and their eventual disposition. When the
estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair
value and their carrying value.
NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which we incur
change-over costs to induce a new customer to switch from a competitor's brand.
In addition, change-over costs include the costs related to removing the new
customer's inventory and replacing it with Standard Motor Products inventory
commonly referred to as a stocklift. New customer acquisition costs are recorded
as a reduction to revenue when incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at year-end exchange
rates, and revenues and expenses are translated at average exchange rates during
the year. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income (loss) and remains there
until the underlying foreign operation is liquidated or substantially disposed
of. Where the U.S. dollar is the functional currency, transaction gains or
losses arising from the remeasurement of financial statements are recorded in
the statement of operations under the caption "other income (expense)."
REVENUE RECOGNITION
We recognize revenues when products are shipped and title has been transferred
to a customer, the sales price is fixed and determinable, and collection is
reasonably assured. For some of our sales of remanufactured products, we also
charge our customers a deposit for the return of a used core component which we
can use in our future remanufacturing activities. Such deposit is not recognized
as revenue but rather carried as a core liability. The liability is extinguished
when a core is actually returned to us. We estimate and record provisions for
cash discounts, quantity rebates, sales returns and warranties in the period the
sale is recorded, based upon our prior experience and current trends.
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Selling, general and administration expenses includes shipping costs and
advertising, which is expensed as incurred. Shipping and handling charges, as
well as freight to customers, are included in distribution expenses as part of
selling, general and administration expenses.
DEFERRED FINANCING COSTS
We have incurred costs in obtaining financing. These costs of $9.9 million as of
December 31, 2006 and 2005 were capitalized in other assets and are being
amortized over the life of the related financing arrangements through 2009. As
of December 31, 2006 and 2005, total accumulated amortization was $7 million and
$5.4 million, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The annual net post-retirement benefit liability and related expense under our
benefit plans are determined on an actuarial basis. Benefits are determined
primarily based upon employees' length of service.
-15-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income taxes are calculated using the asset and liability method in accordance
with the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities, as measured by the current enacted tax rates. The Company
establishes valuation allowances against deferred tax assets when it is more
likely than not that some portion or all of those deferred assets will not be
realized. The valuation allowance is intended in part to provide for the
uncertainty regarding the ultimate utilization of the Company's U.S. net
operating loss carry forwards, U.S. capital loss carryovers, U.S. foreign tax
credit carryovers, and foreign net operating loss carry forwards. Deferred tax
expense (benefit) is the result of changes in the deferred tax asset and
liability.
REPORTING OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes (a) net income, (b) the cumulative effect
of translating balance sheets of foreign subsidiaries to U.S. dollars, (c) the
effect of adjusting interest rate swaps to market, and (d) the recognition of
the unfunded status of pension and post-retirement benefit plans as well as
minimum pension liabilities. The last three are not included in the income
statement and are reflected as adjustments to shareholder's equity.
NET EARNINGS PER COMMON SHARE
We present two calculations of earnings per common share. "Basic" earnings per
common share equals net income divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share equals net
income divided by the sum of weighted average common shares outstanding during
the period plus potentially dilutive common shares. Potentially dilutive common
shares that are anti-dilutive are excluded from net earnings per common share.
The following is a reconciliation of the shares used in calculating basic and
dilutive net earnings per common share.
2006 2005 2004
------ ------ ------
(IN THOUSANDS)
Weighted average common shares ................... 18,284 19,508 19,331
Effect of potentially dilutive common shares ..... 41 -- --
------ ------ ------
Weighted average common equivalent shares
outstanding assuming dilution ................. 18,325 19,508 19,331
====== ====== ======
The average shares listed below were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for the
periods presented.
2006 2005 2004
------ ------ ------
(IN THOUSANDS)
Stock options and restricted shares ........... 991 1,249 1,192
====== ====== ======
Convertible debentures ........................ 2,796 2,796 2,796
====== ====== ======
-16-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ASBESTOS LITIGATION
In evaluating our potential asbestos-related liability, it is the accounting
policy of the Company to use an actuarial study that is prepared by a leading
actuarial firm with expertise in assessing asbestos-related liabilities. We
evaluate the estimate of the range of undiscounted liability to determine which
amount to accrue. If there is no amount within the range of settlement payments
that is more likely than any other, we record the low end of the range as the
liability associated with future settlement payments. Legal costs are expensed
as incurred.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash investments and accounts receivable.
We place our cash investments with high quality financial institutions and limit
the amount of credit exposure to any one institution. Although we are directly
affected by developments in the vehicle parts industry, management does not
believe significant credit risk exists. With respect to accounts receivable,
such receivables are primarily from warehouse distributors and major retailers
in the automotive aftermarket industry located in the United States. We perform
ongoing credit evaluations of our customers' financial conditions. Our five
largest individual customers, including members of a marketing group, accounted
for 51%, 52% and 50% of consolidated net sales in 2006, 2005 and 2004,
respectively. Two individual customers accounted for 18% and 14%, respectively,
of consolidated net sales in 2006, 18% and 15%, respectively, of consolidated
net sales in 2005, and 17% and 14%, respectively, of consolidated net sales in
2004. Substantially all of the cash and cash equivalents, including foreign cash
balances, at December 31, 2006 and 2005 were uninsured. Foreign cash balances at
December 31, 2006 and 2005 were $11.7 million and $3 million, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENT
Effective January 1, 2006, the Company adopted the provisions and accounts for
stock-based compensation in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R").
SFAS 123R requires that stock-based employee compensation be recorded as a
charge to earnings. We have adopted SFAS 123R using a modified prospective
application, under which prior periods are not revised for comparative purposes.
Under this application, we are required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS 123R, we applied Accounting Principles Board
Opinions ("APB") No. 25 and related interpretations to account for our stock
plans resulting in the use of the intrinsic value to value the stock. Under APB
25, we were not required to recognize compensation expense for the cost of stock
options. In accordance with the adoption of SFAS 123R, we recorded stock-based
compensation expense for the cost of incentive stock options, restricted stock
and performance-based stock granted under our stock plans. Stock-based
compensation expense for the year ended December 31, 2006 was $848,000 ($516,100
net of tax) or $0.03 per basic and diluted share. The adoption of SFAS 123R did
not have a material impact on our financial position, results of operation or
cash flows.
-17-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR UNCERTAIN TAX POSITIONS
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a threshold for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized upon adoption of
this Interpretation. FIN 48 also provides guidance on accounting for
derecognition, interest and penalties, and classification and disclosure of
matters related to uncertainty in income taxes. FIN 48 is effective for fiscal
years beginning after December 15, 2006 and, as a result, is effective for our
Company beginning January 1, 2007. FIN 48 will require adjustment to the opening
balance of retained earnings (or other components of shareholders' equity in the
statement of financial position) for the cumulative effect of the difference in
the net amount of assets and liabilities for all open tax positions at the
effective date. The Company is assessing the impact, if any, which the adoption
of FIN 48 will have on our consolidated financial position, results of
operations and cash flows.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. This statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, which for the Company is the year ending December 31, 2008.
The Company is assessing the impact, if any, which the adoption of SFAS 157 will
have on our consolidated financial position, results of operations and cash
flows.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)." SFAS 158 requires an employer to
recognize the funded status of their defined benefit pension or postretirement
plans on the consolidated balance sheet and to recognize changes in that funded
status in the year in which the changes occur through accumulated other
comprehensive income in shareholders' equity. This statement also requires an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. The Company adopted
the recognition and related disclosure provisions of SFAS No. 158,
prospectively, on December 31, 2006. The adoption of SFAS 158 resulted in an
increase to total assets of $1.2 million, an increase to total liabilities of
$2.6 million, and a decrease to shareholders' equity of $1.4 million. The
requirement to measure plan assets and benefit obligations as of the date of the
employer's fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008, or for the Company's year ending
December 31, 2008. The Company is presently evaluating the impact of the
measurement date change, which is not expected to be material.
-18-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The incremental effect of applying SFAS No. 158 on individual line items in the
consolidated balance sheet at December 31, 2006 was as follows (in thousands):
BEFORE AFTER
APPLICATION APPLICATION
OF OF
SFAS NO. 158 ADJUSTMENTS SFAS NO. 158
------------ ----------- ------------
Prepaid expenses and other current assets
(current) .................................. $ 7,861 $ (16) $ 7,845
Other assets (pension, deferred income
taxes - non-current) ...................... 40,658 1,216 41,874
--------
Total assets ................................. 638,892 1,200 640,092
--------
Sundry payables and accrued expenses
(pension, current) ......................... 25,610 (1,100) 24,510
Pension and post-retirement medical benefits
(non-current) .............................. 47,964 3,714 51,678
--------
Total liabilities ............................ 446,779 2,614 449,393
Accumulated other comprehensive income (loss) 4,955 (1,414) 3,541
--------
Total liabilities and stockholders' equity ... $638,892 $ 1,200 $640,092
========
QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
provides interpretive guidance on how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in the current
year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement ("rollover") and balance sheet
("iron curtain") approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach, no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings (deficit) as of the beginning of the fiscal year of
adoption. SAB 108 is effective for fiscal years ending on or after November 15,
2006, which for the Company is the year ending December 31, 2006. There was no
impact of adopting SAB 108 to our consolidated financial position, results of
operations and cash flows.
-19-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTRUCTURING AND INTEGRATION COSTS
RESTRUCTURING COSTS
In connection with our acquisition of substantially all of the assets and the
assumption of substantially all of the operating liabilities of Dana
Corporation's Engine Management Group ("DEM") in June 2003, we have reviewed our
operations and implemented integration plans to restructure the operations of
DEM. At the time, we announced that we would close seven DEM facilities, which
has subsequently occurred. As part of the integration and restructuring plans,
we accrued an initial restructuring liability of approximately $34.7 million at
June 30, 2003. Such amounts were recognized as liabilities assumed in the
acquisition and included in the allocation of the cost to acquire DEM.
Accordingly, such amounts resulted in additional goodwill being recorded in
connection with the acquisition. Subsequent to the acquisition, our estimate of
the restructuring liability was updated and revised downward at various points
in time, with a cumulative reduction to goodwill of $12.8 million as of December
31, 2006. As of December 31, 2006, the remaining restructuring accrual was $1.1
million as of December 31, 2006. We expect to pay most of the remaining amount
in 2007 and 2008.
Of the initial restructuring accrual, approximately $15.7 million related to
work force reductions and represented employee termination benefits. The accrual
amount primarily provides for severance costs relating to the involuntary
termination of employees, individually employed throughout DEM's facilities
across a broad range of functions, including managerial, professional, clerical,
manufacturing and factory positions. During the years ended December 31, 2006
and 2005, termination benefits of $0.2 million and $2.3 million, respectively,
have been charged to the restructuring accrual. As of December 31, 2006, the
reserve balance for workforce reductions was $0.5 million.
The initial restructuring accrual also included approximately $18 million
consisting of the net present value of costs associated with exiting certain
activities, primarily related to lease and contract termination costs, which
will not have future benefits. Specifically, our plans were to consolidate
certain of DEM operations into our existing plants. At December 31, 2005, we had
a sublease commitment for one facility with Dana through 2021. However, on March
3, 2006, Dana filed a voluntary petition for relief under Chapter 11 of the US
Bankruptcy Code. Pursuant to a court ruling in connection with Dana's Chapter 11
bankruptcy proceedings, effective March 31, 2006, we were released from, and no
longer have any obligations with respect to, such lease commitment for the
facility. We have accounted for the termination of such lease commitment as a
reduction of $10.5 million in our restructuring accrual, with a corresponding
reduction to goodwill established on the acquisition of DEM. In addition to the
above reduction, exit costs of $0.8 million were paid in 2006, leaving the exit
reserve balance for exit costs at $0.6 million as of December 31, 2006.
-20-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Selected information relating to the restructuring costs included in the
allocation of the cost to acquire DEM for the years ended December 31, 2006 and
2005 is as follows (in thousands):
Workforce Other Exit
Reduction Costs Total
--------- ----- -----
Restructuring liability at December 31, 2004 .. $ 4,250 $ 15,143 $ 19,393
Cash payments during 2005 ..................... (2,338) (3,178) (5,516)
Adjustments during 2005 ....................... (1,103) (140) (1,243)
-------- -------- --------
Restructuring liability as of December 31, 2005 $ 809 $ 11,825 $ 12,634
Cash payments during 2006 ..................... (184) (758) (942)
Adjustments during 2006 ....................... (153) (10,453) (10,606)
-------- -------- --------
Restructuring liability as of December 31, 2006 $ 472 $ 614 $ 1,086
======== ======== ========
INTEGRATION EXPENSES
For the year ended December 31, 2006 and 2005, we incurred integration expenses
of $1.9 million and $5.3 million, respectively. The 2006 amount primarily
relates to the costs of moving our European and Puerto Rico production
operations and the divestiture of a production unit of our Temperature Control
Segment. In the second quarter of 2005, the Company effected an asset write-down
for the outsourcing of some of its Temperature Control product lines resulting
in a $3.3 million integration expense. The remainder of the 2005 costs is
primarily due to the DEM integration.
On October 10, 2006, the Company announced plans to close its Puerto Rico
manufacturing facility related to our Engine Management Segment following the
expiration of the Internal Revenue Code Section 936 benefit and to further our
efforts in streamlining costs. These operations will be moved to other
manufacturing sites of the Company. The facility move and closure is planned to
occur in a phased manner over the next 18-24 months. In connection with this
closing, the Company will incur one-time termination benefits to be paid to
certain employees at the end of a specified requisite service period. The
Company estimates these termination benefits will amount to approximately $2
million which will be recognized as expense ratably over the requisite service
period. The Company also expects to incur approximately $2.4 million of various
expenses to move the production assets, close the Puerto Rico facility, and
relocate some employees. These expenses will be recognized as incurred. In 2006
we incurred expenses of $0.4 million included above for one-time termination
benefits.
Selected information relating to this exit activity is as follows (in
thousands):
Other
Workforce Exit
Reduction Costs Total
--------- ----- -----
Exit activity liability at December 31, 2006 ........ $-- $-- $--
Amounts provided for during 2006 .................... 387 35 422
Cash payments during 2006 ........................... -- -- --
---- ---- ----
Exit activity liability at December 31, 2006 ........ $387 $ 35 $422
==== ==== ====
-21-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 2006, we divested a majority portion of our European Temperature
Control business. The transaction involved the sale of all of our voting stock
of our subsidiaries in Italy and France. The proceeds from the divestiture were
approximately $3.1 million, and the Company incurred a loss on divestiture of
$3.2 (included in earnings from continuing operations before taxes - other
(expense) income, net). The major classes of assets and liabilities at the time
of sale were as follows: accounts receivable of $4 million, inventory of $3.9
million, accounts payable of $1.7 million, and accrued liabilities of $0.8
million. The European Temperature Control business was previously included in
our European segment.
3. ACCOUNTING FOR NEW CUSTOMER ACQUISITION COSTS
New customer acquisition costs refer to arrangements pursuant to which we incur
change-over-costs to induce a new or existing customer to switch from a
competitor's brand. In addition, change-over-costs include the costs related to
removing the new customer's inventory and replacing it with Standard Motor
Products inventory commonly referred to as a stocklift. New customer acquisition
costs were initially recorded as a prepaid asset and the related expense was
recognized ratably over a 12-month period beginning in the month following the
stocklift as an offset to sales. In the fourth quarter of 2004, we determined
that it was a preferable accounting method to reflect the customer acquisition
costs as a reduction to revenue when incurred.
4. SALES OF RECEIVABLES
Prior to November 18, 2005, the Company entered into agreements to sell
undivided interests in certain of its receivables to factoring companies, which
in turn have the right to sell an undivided interest to a financial institution
or other third parties. We entered these agreements at our discretion when we
determined that the cost of factoring was less than the cost of servicing our
receivables with existing debt. Pursuant to these agreements, we sold $240.7
million and $194.4 million of receivables during 2005 and 2004, respectively,
and none in 2006. We retained no rights or interest, and had no obligations,
with respect to the sold receivables. We do not service the receivables after
the sale.
The sale of receivables was accounted for as a sale in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The sold receivables were removed from the
balance sheet at the time of sale. The costs incurred in relation to the sale of
receivables were $3.4 million and $2.4 million in 2005 and 2004, respectively,
and are recorded in selling, general and administrative expense. Pursuant to an
amendment to our revolving credit facility in November 2005, we are prohibited
from accepting drafts under our customer draft programs after November 18, 2005.
5. INVENTORIES
DECEMBER 31,
-------------------------
2006 2005
-------- --------
(IN THOUSANDS)
Finished goods, net .......................... $169,183 $182,567
Work in process, net ......................... 4,654 4,235
Raw materials, net ........................... 60,133 56,495
-------- --------
Total inventories, net ................... $233,970 $243,297
======== ========
-22-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
2006 2005
-------- --------
(IN THOUSANDS)
Land, buildings and improvements ..................... $ 71,147 $ 70,748
Machinery and equipment .............................. 133,022 136,010
Tools, dies and auxiliary equipment .................. 24,270 22,447
Furniture and fixtures ............................... 29,255 28,634
Leasehold improvements ............................... 7,595 7,485
Construction in progress ............................. 5,732 6,552
-------- --------
271,021 271,876
Less accumulated depreciation ........................ 190,930 186,071
-------- --------
Total property, plant and equipment, net.............. $ 80,091 $ 85,805
======== ========
Depreciation expense was $13.4 million, $15 million and $16.8 million for 2006 ,
2005 and 2004, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
We test for impairment of our remaining goodwill at least annually. Under SFAS
No. 142, "Goodwill and Other Intangible Assets," we completed our annual
impairment test of goodwill as of December 31, 2006 and 2005, respectively, and
determined that our goodwill was not impaired.
For 2004, after completion of our annual impairment test of goodwill, we
determined that the carrying amounts of two of our reporting units exceeded the
corresponding fair values, which were determined based on the discounted
estimated future cash flows of the reporting units, the Company's weighted
average cost of capital and market multiples. As a result, we recorded an
impairment loss in the fourth quarter of 2004 of our remaining goodwill in our
Temperature Control and European segments of $4.8 million and $1.6 million,
respectively.
The changes in the carrying value of goodwill for our segments during the two
years ended December 31, 2006 are as follows (in thousands):
ENGINE TEMPERATURE
MANAGEMENT CONTROL EUROPE TOTAL
---------- ------- ------ -----
Balance as of December 31, 2004 ........ $ 50,337 $-- $ -- $ 50,337
Purchase accounting adjustments (Note 2) (1,243) -- -- (1,243)
Balance as of December 31, 2005 ........ $ 49,094 $-- $ -- $ 49,094
Purchase accounting adjustments (Note 2) (10,606) -- -- (10,606)
-------- ------ ------ --------
Balance as of December 31, 2006 ........ $ 38,488 $-- $ -- $ 38,488
======== ====== ====== ========
In connection with the acquisition of DEM, we completed the purchase price
allocation in June 2004. As a result, goodwill was reduced by $15.3 million in
2004 comprised of $16.1 million reclassified to other intangible assets based on
a fair market valuation and $0.8 million increase related to the acquired
inventory. During 2006 and 2005, goodwill was reduced $10.6 million and $1.2
million, respectively, based on a reduction in the restructuring cost estimate
that had been established in purchase accounting. (See Note 2)
-23-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER INTANGIBLE ASSETS
Other intangibles assets include computer software. Computer software, net of
amortization, was $4.5 million and $3.9 million as of December 31, 2006 and
2005, respectively. Computer software is amortized over its estimated useful
life of 3 to 10 years. Amortization expense for computer software was $1.0
million, $0.8 million and $1.5 million for the years ended December 31, 2006,
2005 and 2004, respectively.
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets associated with the acquisition of DEM,
as of December 31, 2006 and 2005, consist of (in thousands):
DECEMBER 31,
-----------------------
2006 2005
------- -------
Gross customer relationships ................... $10,000 $10,000
Trademarks and trade names ..................... 6,100 6,100
------- -------
16,100 16,100
Less accumulated amortization(1) ............... 2,778 1,667
------- -------
Net ............................................ $13,322 $14,433
======= =======
(1) Applies to the gross customer relationships.
Of the total purchase price, $16.1 million was allocated to intangible assets
consisting of customer relationships and trademarks and trade names; $10 million
was assigned to customer relationships and will be amortized on a straight-line
basis over the estimated useful life of 10 years; and the remaining $6.1 million
of acquired intangible assets was assigned to trademarks and trade names which
is not subject to amortization as they were determined to have indefinite useful
lives. Amortization expense for acquired intangible assets was $1.1 million,
$1.1 million and $0.6 million for the years ended December 31, 2006, 2005 and
2004, respectively.
Estimated amortization expense for the next five years is $1.1 million in each
year during 2007 through 2011.
8. OTHER ASSETS
DECEMBER 31,
----------------------
2006 2005
------- -------
(IN THOUSANDS)
Equity in joint ventures ......................... $ 2,483 $ 2,014
Deferred income taxes, net (Note 16) ............. 24,434 26,567
Deferred financing costs, net .................... 2,897 4,558
Other ............................................ 12,060 11,008
------- -------
Total other assets, net ..................... $41,874 $44,147
======= =======
Included in the above caption "Other" is a preferred stock investment of $1.5
million in a customer, which is carried at cost. Net sales to this customer
amounted to $37.4 million, $47.8 million and $65.3 million in 2006, 2005 and
2004, respectively.
-24-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2006, we have equity ownership investments in several joint
ventures located in Europe, Canada, and Israel. Our ownership interests in these
joint ventures are accounted for on the equity method. The two largest of our
joint ventures are Blue Streak Electronics, Ltd. ("BSE") located in Canada and
Testar Ltd. ("Testar") located in Israel. The investments and equity income in
our other joint ventures are not individually material. The following is a brief
description of each of the two largest of our joint ventures:
BLUE STREAK ELECTRONICS, LTD.
Since established in 1992, we have maintained a 50% ownership interest in this
joint venture. The joint venture remanufactures on-board computers for the
automobile aftermarket. The headquarters and manufacturing facility of BSE are
located in Canada. BSE has a fiscal year end of December 31.
TESTAR, LTD.
Since established in 1995, we have maintained a 50% ownership interest in this
joint venture. The headquarters and manufacturing facility of Testar are located
in Israel. The joint venture produces software products for use in on-board
computers for the automobile aftermarket. Testar has a fiscal year end of
December 31.
The following is summarized selected financial information from our joint
ventures (in thousands):
AGGREGATED FINANCIAL INFORMATION AS OF DECEMBER 31,
------------------------------------------------
2006 2005 2004 2003
-------- -------- -------- --------
Current Assets ......................................... $ 10,445 $ 10,720 $ 11,013 $ 9,885
Non-Current Assets ..................................... 2,928 2,928 3,532 3,355
Current Liabilities .................................... 6,197 6,583 9,027 8,741
Non-Current Liabilities ................................ 1,635 2,067 639 356
FOR THE YEAR ENDED DECEMBER 31,
2006 2005 2004 2003
-------- -------- -------- --------
Net Sales .............................................. $ 14,256 $ 14,846 $ 15,733 $ 12,947
Costs and Expenses ..................................... 12,256 13,016 13,794 12,440
-------- -------- -------- --------
Net Income ............................................. $ 2,000 $ 1,830 $ 1,939 $ 507
======== ======== ======== ========
BLUE STREAK ELECTRONICS, LTD, AS OF DECEMBER 31,
------------------------------------------
2006 2005 2004 2003
-------- -------- -------- --------
Current Assets ......................................... $ 5,223 $ 5,687 $ 4,582 $ 5,070
Non-Current Assets ..................................... 2,661 2,645 3,138 2,955
Current Liabilities .................................... 3,855 4,372 3,891 4,578
Non-Current Liabilities ................................ -- -- -- --
FOR THE YEAR ENDED DECEMBER 31,
2006 2005 2004 2003
-------- -------- -------- --------
Net Sales .............................................. $ 7,563 $ 8,541 $ 9,149 $ 7,474
Costs and Expenses ..................................... 6,875 7,573 7,965 6,781
-------- -------- -------- --------
Net Income ............................................. $ 688 $ 968 $ 1,184 $ 693
======== ======== ======== ========
-25-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TESTAR, LTD. AS OF DECEMBER 31,
-----------------------------------------
2006 2005 2004 2003
-------- -------- -------- --------
Current Assets ......................................... $ 213 $ 1,078 $ 1,077 $ 1,147
Non-Current Assets ..................................... 7 11 11 12
Current Liabilities .................................... 69 113 93 139
Non-Current Liabilities ................................ 42 22 25 20
FOR THE YEAR ENDED DECEMBER 31,
2006 2005 2004 2003
-------- -------- -------- --------
Net Sales .............................................. $ 520 $ 1,389 $ 1,299 $ 1,278
Costs and Expenses ..................................... 454 496 456 559
-------- -------- -------- --------
Net Income ............................................. $ 66 $ 893 $ 843 $ 719
======== ======== ======== ========
ALL OTHER AS OF DECEMBER 31,
-------------------------------------------
2006 2005 2004 2003
-------- -------- -------- --------
Current Assets ......................................... $ 5,009 $ 3,955 $ 5,354 $ 3,668
Non-Current Assets ..................................... 260 272 383 388
Current Liabilities .................................... 2,273 2,098 5,043 4,024
Non-Current Liabilities ................................ 1,593 2,045 614 336
FOR THE YEAR ENDED DECEMBER 31,
2006 2005 2004 2003
-------- -------- -------- --------
Net Sales .............................................. $ 6,173 $ 4,916 $ 5,285 $ 4,195
Costs and Expenses ..................................... 4,927 4,947 5,373 5,100
-------- -------- -------- --------
Net Income (Loss) ...................................... $ 1,246 $ (31) $ (88) $ (905)
======== ======== ======== ========
-26-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CREDIT FACILITIES AND LONG-TERM DEBT
Total debt consists of (in thousands):
DECEMBER 31,
----------------------
2006 2005
-------- --------
CURRENT
Revolving credit facilities (1) .................... $139,799 $149,236
Current portion of mortgage loan ................... 542 542
-------- --------
140,341 149,778
-------- --------
LONG-TERM DEBT
6.75% convertible subordinated debentures .......... 90,000 90,000
Mortgage loan ...................................... 8,416 8,912
Other .............................................. 105 179
Less current portion of long-term debt ............. 542 542
-------- --------
97,979 98,549
-------- --------
Total debt ..................................... $238,320 $248,327
======== ========
(1) Consists of the revolving credit facility, the Canadian term loan and
the European revolving credit facility.
Maturities of long-term debt during the five years ending December 31, 2007
through 2011 are $0.5 million, $0.6 million, $90.6 million, $0.6 million and
$0.7 million, respectively.
The Company had deferred financing cost of $2.9 million and $4.5 million as of
December 31, 2006 and 2005, respectively. These costs related to the Company's
revolving credit facility, the convertible subordinated debentures and a
mortgage loan agreement, and these costs are being amortized in the amount of
$1.7 million in 2007, $0.7 million in 2008, $0.2 million in 2009 and $0.3
million for the period 2010-2018.
REVOLVING CREDIT FACILITY
We are parties to an agreement with General Electric Capital Corporation, as
agent, and a syndicate of lenders for a secured revolving credit facility. The
term of the credit agreement is through 2008 and provides for a line of credit
up to $305 million. Availability under our revolving credit facility is based on
a formula of eligible accounts receivable, eligible inventory and eligible fixed
assets. After taking into account outstanding borrowings under the revolving
credit facility, there was an additional $82.5 million available for us to
borrow pursuant to the formula at December 31, 2006. Our credit agreement also
permits dividends and distributions by us provided specific conditions are met.
At December 31, 2006, the interest rate on the Company's revolving credit
facility was 7.8%. Direct borrowings under our revolving credit facility bear
interest at the prime rate plus the applicable margin (as defined) or, at our
option, the LIBOR rate plus the applicable margin (as defined). Outstanding
borrowings under the revolving credit facility (inclusive of the Canadian term
loan described below), which are classified as current liabilities, was $133.3
million at December 31, 2006. The Company maintains cash management systems in
compliance with its credit agreements. Such systems require the establishment of
lock boxes linked to blocked accounts whereby cash receipts are channeled to
various banks to insure pay-down of debt. Agreements also classify such accounts
and the cash therein as additional security for loans and other obligations to
the credit providers. Borrowings are collateralized by substantially all of our
-27-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets, including accounts receivable, inventory and fixed assets, and those of
certain of our subsidiaries. The terms of our revolving credit facility provide
for, among other provisions, financial covenants requiring us, on a consolidated
basis, (1) to maintain specified levels of fixed charge coverage at the end of
each fiscal quarter (rolling twelve months) through 2008, and (2) to limit
capital expenditure levels for each fiscal year through 2008. The terms of our
revolving credit facility also provide, among other things, for the prohibition
of accepting drafts under our customer draft programs after November 18, 2005.
CANADIAN TERM LOAN
In December 2005, our Canadian subsidiary entered into a credit agreement with
GE Canada Finance Holding Company, for itself and as agent for the lenders, and
GECC Capital Markets, Inc., as lead arranger and book runner. The credit
agreement provides for, among other things, a $7 million term loan, which term
loan is guaranteed and secured by us and certain of our wholly-owned
subsidiaries and which term loan is coterminous with the term of our revolving
credit facility. The $7 million term loan is part of the $305 million available
for borrowing under our revolving credit facility.
REVOLVING CREDIT FACILITY--EUROPE
Our European subsidiary has a revolving credit facility. The amount of
short-term bank borrowings outstanding under this facility was $6.5 million and
$7 million at December 31, 2006 and 2005, respectively. The weighted average
interest rates on these borrowings at December 31, 2006 and 2005 were 6.3% and
6.5%, respectively. At December 31, 2006, there was an additional $0.8 million
available for our European subsidiary to borrow.
SUBORDINATED DEBENTURES
In July 1999, we completed a public offering of convertible subordinated
debentures amounting to $90 million. The convertible debentures carry an
interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009.
The convertible debentures are convertible into 2,796,120 shares of our common
stock at the option of the holder. We may, at our option, redeem some or all of
the convertible debentures at any time on or after July 15, 2004, for a
redemption price equal to the issuance price plus accrued interest. In addition,
if a change in control, as defined in the agreement, occurs at the Company, we
will be required to make an offer to purchase the convertible debentures at a
purchase price equal to 101% of their aggregate principal amount, plus accrued
interest. The convertible debentures are subordinated in right of payment to all
of the Company's existing and future senior indebtedness.
MORTGAGE LOAN AGREEMENT
In June 2003, we borrowed $10 million under a mortgage loan agreement. The loan
is payable in monthly installments. The loan bears interest at a fixed rate of
5.5% maturing in July 2018. The mortgage loan is secured by a building and
related property.
10. INTEREST RATE SWAP AGREEMENTS
We do not enter into financial instruments for trading or speculative purposes.
The principal financial instruments we have used in the past for cash flow
hedging purposes are interest rate swaps. We have entered into interest rate
swap agreements to manage our exposure to interest rate changes. The swaps
effectively convert a portion of our variable rate debt under the revolving
credit facility to a fixed rate, without exchanging the notional principal
amounts.
-28-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 2003, we entered into an interest rate swap agreement with a notional
amount of $25 million that matured in October 2006. Under this agreement, we
received a floating rate based on the LIBOR interest rate, and paid a fixed rate
of 2.45% on the notional amount of $25 million. As of December 31, 2005 we had
recorded a liability of $0.2 million associated therewith. The net offset was
recorded in accumulated other comprehensive income. Following the maturity of
the swap agreement, none of these amounts remain outstanding as of December 31,
2006.
If, at any time, the swaps were determined to be ineffective, in whole or in
part, due to changes in the interest rate swap or underlying debt agreements,
the fair value of the portion of the interest rate swap determined to be
ineffective would have been recognized as gain or loss in the statement of
operations in the "interest expense" caption for the applicable period. There
has not been any gain or loss reported in the statement of operations during the
years ending December 31, 2006, 2005 or 2004.
11. STOCKHOLDERS' EQUITY
We have authority to issue 500,000 shares of preferred stock, $20 par value, and
our Board of Directors is vested with the authority to establish and designate
any series of preferred, to fix the number of shares therein and the variations
in relative rights as between each series. In December 1995, our Board of
Directors established a new series of preferred shares designated as Series A
Participating Preferred Stock. The number of shares constituting the Series A
Preferred Stock is 30,000. The Series A Preferred Stock is designed to
participate in dividends, ranks senior to our common stock as to dividends and
liquidation rights and has voting rights. Each share of the Series A Preferred
Stock shall entitle the holder to one thousand votes on all matters submitted to
a vote of the stockholders of the Company. No such shares were outstanding at
December 31, 2006.
As of December 31, 2006, we have Board authorization to repurchase additional
shares at a maximum cost of $1.7 million. During 2006, we did not repurchase any
shares of our common stock.
Accumulated other comprehensive income is comprised of the following (in
thousands):
DECEMBER 31,
------------------
2006 2005
------- -------
Foreign currency translation adjustments ................. $ 8,382 $ 7,082
Unrealized gain on interest rate swap
agreement, net of tax .................................. -- 298
Initial adoption of FASB Statement No. 158,
net of income taxes .................................... (1,414) --
Minimum pension liability ................................ (3,427) (3,222)
------- -------
Total accumulated other comprehensive income ............. $ 3,541 $ 4,158
======= =======
In January 1996, our Board of Directors adopted a Shareholder Rights Plan
("Rights Plan"). Under the Rights Plan, the Board declared a dividend of one
Preferred Share Purchase Right ("Right") for each of our outstanding common
shares. The dividend was payable on March 1, 1996 to the shareholders of record
as of February 15, 1996. The Rights were attached to and automatically traded
with the outstanding shares of our common stock. The Rights were exercisable
only upon the occurrence of certain events. In February 2006, the Rights Plan
expired according to its stated terms.
-29-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION PLANS
We have five stock-based compensation plans. Under the 1994 Omnibus Stock Option
Plan, as amended, which terminated as of May 25, 2004, we were authorized to
issue options to purchase 1,500,000 shares. The options become exercisable over
a three to five year period and expire at the end of five years following the
date they become exercisable. Under the 2004 Omnibus Stock Plan, which
terminates as of May 20, 2014, we were authorized to issue options to purchase
500,000 shares. The options become exercisable over a three to five year period
and expire at the end of ten years following the date of grant. Under the 1996
Independent Directors' Stock Option Plan and the 2004 Independent Directors'
Stock Option Plan, we were authorized to issue options to purchase 50,000 shares
under each plan. The options become exercisable one year after the date of grant
and expire at the end of ten years following the date of grant. Under the 2006
Omnibus Incentive Plan, which was approved by our shareholders in May 2006, we
are authorized to issue equity awards of up to 700,000 shares. Equity awards
forfeited under the previous stock option plans and incentive plan are eligible
to be granted again under the 2006 Omnibus Incentive Plan with respect to the
equity awards so forfeited. At December 31, 2006, under our stock option plans,
there were an aggregate of (a) 1,030,948 shares of common stock authorized for
grants, (b) 990,898 shares of common stock granted, and (c) no shares of common
stock available for future grants. At December 31, 2006, under our 2006 Omnibus
Incentive Plan, there were an aggregate of (a) 700,000 shares of common stock
authorized for grants, (b) 94,100 shares of common stock granted, and (c)
605,900 shares of common stock available for future grants.
Effective January 1, 2006, we adopted SFAS 123R, "Share-Based Payment," which
prescribes the accounting for equity instruments exchanged for employee and
director services. Under SFAS 123R, stock-based compensation cost is measured at
the grant date, based on the calculated fair value of the grant, and is
recognized as an expense over the service period applicable to the grantee. The
service period is the period of time that the grantee must provide services to
us before the stock-based compensation is fully vested. In March 2005, the SEC
issued Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment,"
relating to SFAS 123R. We have followed the SEC's guidance in SAB 107 in our
adoption of SFAS 123R.
Prior to January 1, 2006, we accounted for stock-based compensation to employees
and directors in accordance with the intrinsic value method under APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the intrinsic value method, no compensation expense was recognized in our
financial statements for the stock-based compensation, because the stock-based
compensation that we granted was incentive stock options and all of the stock
options granted had exercise prices equivalent to the fair market value of our
common stock on the grant date. We also followed the disclosure requirements of
SFAS 123, "Accounting for Stock-Based Compensation," as amended, "Accounting for
Stock-Based Compensation--Transition and Disclosure".
We adopted SFAS 123R using the modified prospective transition method. Under
this transition method, the financial statement amounts for the periods before
2006 have not been restated to reflect the fair value method of expensing the
stock-based compensation. The compensation expense recognized on or after
January 1, 2006 includes the compensation cost based on the grant-date fair
value estimated in accordance with: (a) SFAS 123 for all stock-based
compensation that was granted prior to, but vested on or after, January 1, 2006;
and (b) SFAS 123R for all stock-based compensation that was granted on or after
-30-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 1, 2006. Stock-based compensation expense was $848,000 ($516,100 net of
tax) or $0.03 per basic and diluted share for the year ended December 31, 2006.
Had we determined compensation cost based on the fair value at the grant date
for our pre-2006 stock option grants, our pro forma net income and net income
per common share would have been as follows (in thousands, except per share
data):
Year Ended Year Ended
December 31 December 31
2005 2004
------------ -----------
Net losses as reported ............................ $(3,545) $(14,380)
Less: Stock-based employee compensation expense
determined under fair value method
for all awards, net of related tax effects ...... 678 452
------- --------
Pro forma net losses .............................. $(4,223) $(14,832)
======= ========
Losses per share:
Basic - as reported ........................... $ (0.18) $ (0.74)
------- --------
Basic - pro forma ............................. $ (0.22) $ (0.77)
------- --------
Diluted - as reported ......................... $ (0.18) $ (0.74)
------- --------
Diluted - pro forma ........................... $ (0.22) $ (0.77)
------- --------
STOCK OPTION GRANTS
There were no stock options granted in the year ended December 31, 2006 and
options to purchase 280,500 shares of common stock were granted in the year
ended December 31, 2005. Accordingly, we have recognized compensation expense
for prior years' grants which vest after January 1, 2006 based on the grant-date
fair value, estimated in accordance with SFAS 123 which was used in our prior
pro forma disclosure. Further, the current year's expense reflects our estimate
of expected forfeitures which we determine to be immaterial, based on history
and remaining time until vesting of the remaining options.
The stock options granted prior to 2006 have been vesting gradually at annual
intervals. In our prior period SFAS 123 pro forma disclosures, our policy was to
calculate the compensation expense related to the stock-based compensation
granted to employees and directors on a straight-line basis over the full
vesting period of the grants.
Prior to this year, we provided pro forma net income and net income per common
share disclosures for stock option grants based on the fair value of the options
at the grant date. For purposes of presenting pro forma information, the fair
value of options granted was computed using the Black Scholes option pricing
model with the following assumptions applicable to each remaining unvested
annual grant:
YEAR OF GRANT: 2005 2004
------------- ---- ----
Expected option life.................... 3.9 years 3.9 years
Expected stock volatility............... 39.1% 38.6%
Expected dividend yield................. 3.4% 2.7%
Risk-free rate.......................... 4.0% 3.6%
Fair value of option.................... $2.72 $3.46
-31-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The expected term of the options is based on evaluations of historical and
expected future employee exercise behavior. The risk-free interest rate was
based on the US Treasury rates at the date of grant with maturity dates
approximately equal to the expected life at the grant date. Volatility was based
on historical volatility of the Company's common stock.
The following is a summary of the changes in outstanding stock options for the
year ended December 31, 2006:
Weighted
Average
Weighted Remaining
Average Contractual
Exercise Term
Shares Price (years)
------------------------------------
Outstanding at beginning of year ......... 1,249,226 $ 14.42 6.2
Expired .................................. (180,665) $ 20.43 0
Exercised ................................ (70,038) $ 10.55 0
Forfeited, Other ......................... (7,625) $ 12.76 5.8
--------------------------------------------------------------------------------
Outstanding at end of year ............... 990,898 $ 13.61 5.1
--------------------------------------------------------------------------------
Options exercisable at end of year ....... 861,148 $ 13.91 4.6
--------------------------------------------------------------------------------
The aggregate intrinsic value of all outstanding stock options was $1.9 million,
of which $1.4 million relates to options that are exercisable. The total
intrinsic value of options exercised was $0.3 million, $0 million and $0.7
million during the years ended December 31, 2006, 2005 and 2004, respectively.
The following is a summary of the changes in non-vested stock options for the
year ended December 31, 2006:
Weighted
Average Grant
Shares Date Fair Value
--------------------------
Non-vested shares at January 1, 494,426 $ 3.04
2006...................................
Forfeitures......................................... 5,000 $ 2.83
Vested.............................................. 359,676 $ 3.16
-------
Non-vested shares at December 31, 2006.............. 129,750 $ 2.72
=======
Stock option-based compensation expense in 2006 was $547,400 ($333,100 net of
tax), including $264,700 for unvested options. As of December 31, 2006, we have
$88,200 of unrecognized compensation cost related to non-vested stock options
granted, which will be recognized over a weighted-average period of 0.25 years.
RESTRICTED AND PERFORMANCE STOCK GRANTS
Under our 2006 Omnibus Incentive Plan, the Company is authorized to issue shares
of restricted and performance-based stock to eligible employees and directors.
Prior to the time a restricted share becomes fully vested or a performance share
is issued, the awardee cannot transfer, pledge, hypothecate or encumber such
shares. Prior to the time a restricted share is fully vested, the awardee has
all other rights of a stockholder, including the right to vote (but not receive
dividends during the vesting period). Prior to the time a performance share is
issued, the awardee shall have no rights as a stockholder. Restricted shares
-32-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
become fully vested upon the third and first anniversary of the date of grant
for employees and directors, respectively. Performance-based shares are subject
to a three year measuring period and the achievement of Company performance
targets and, depending upon the achievement of such performance targets, then
may become vested on the third anniversary of the date of grant. Management
believes it is probable that the performance targets will be achieved.
All shares and rights are subject to forfeiture if certain employment conditions
are not met. Under the plan, 700,000 shares are authorized to be issued. For the
year ended December 31, 2006, 95,225 restricted and performance-based shares
were granted (67,725 restricted shares and 27,500 performance-based shares). In
determining the grant date fair value for U.S. GAAP purposes, the stock price on
the date of grant, as quoted on the New York Stock Exchange, was reduced by the
present value of dividends expected to be paid on the shares issued and
outstanding during the requisite service period, discounted at a risk-free
interest rate. The risk-free interest rate is based on the U.S. Treasury rates
at the date of grant with maturity dates approximately equal to the restriction
or vesting period at the grant date. The fair value of the shares at the date of
grant is amortized to expense ratably over the restriction period. For the year
ended December 31, 2006, forfeitures are estimated at 2% for employees and 0%
for executives and directors, respectively, based on evaluations of historical
and expected future turnover.
The Company recorded compensation expense related to restricted shares and
performance-based shares of $164,200 ($99,900 net of tax) and $0 for the year
ended December 31, 2006 and 2005, respectively. The unamortized compensation
expense related to the Company's restricted and performance-based shares was
$506,200 at December 31, 2006 and is expected to be recognized over a weighted
average period of 2.3 and 0.3 years for employees and directors, respectively.
The Company's restricted and performance-based share activity was as follows for
the year ended December 31, 2006:
Weighted
Average Grant
Date Fair Value
Shares Per Share
----------- -----------------
Balance at January 1, 2006 ................ -- --
Granted ................................ 95,225 $ 7.21
Vested ................................. 200 $ 7.84
Forfeited .............................. 1,250 $ 6.90
-------
Balance at December 31, 2006 .............. 93,775 $ 7.21
=======
The weighted-average grant date fair value of restricted and performance-based
shares granted during the year ended December 31, 2006 was $676,600, or $7.21
per share. No restricted or performance-based shares were authorized, granted,
outstanding or vested during the years ended December 31, 2005 and 2004.
13. RETIREMENT BENEFIT PLANS
As discussed in Note 1, the Company adopted the provisions of SFAS No. 158 on
December 31, 2006. The adoption related to retirement benefit plans resulted in
a decrease to total assets of $0.1 million, a decrease to total liabilities $0.5
million, and an increase to shareholders' equity of $0.4 million. The
requirement to measure plan assets and benefit obligations as of the date of the
employer's fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008, or for the Company's year ending
December 31, 2008. The Company is presently evaluating the impact of the
measurement date change, which is not expected to be material.
-33-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We had a defined benefit pension plan covering certain former employees of our
former brake business. During 2002, a partial settlement of the plan occurred in
conjunction with the purchase of non-participating annuity contracts for plan
members. The final settlement under the plan has occurred as the remaining
assets under the plan have been distributed. All pension benefit obligations
have been satisfied, the projected benefit obligation under the plan was $0, and
the plan was closed out.
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 (in thousands):
DECEMBER 31,
--------------------
2006 2005
---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ................ $ -- $ --
Interest cost .......................................... -- --
Actuarial loss ......................................... -- --
Settlement ............................................. -- --
Benefits paid .......................................... -- --
------- --------
Benefit obligation at end of year ...................... $ -- $ --
======= ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ......... 587 594
Settlement ............................................. (610) --
Actual return on plan assets ........................... 23 (7)
Benefits paid .......................................... -- --
------- --------
Fair value of plan assets at end of year ............... $ 0 $ 587
------- --------
FUNDED STATUS .......................................... 0 $ 587
Unrecognized net actuarial loss ........................ 0 66
------- --------
Net amount recognized (prepaid benefit cost) ........... $ 0 $ 653
======= ========
Weighted average assumptions are as follows (in thousands):
DECEMBER 31,
------------------------
2006 2005 2004
---- ---- ----
Discount rates ................................... N/A N/A N/A
Expected long-term rate of return on assets ...... N/A N/A N/A
Components of net periodic (benefit) cost follow (in thousands):
DECEMBER 31,
--------------------------
2006 2005 2004
---- ---- ----
Interest cost ................................. $-- $-- $--
Return on assets .............................. -- -- --
Settlement .................................... -- -- --
Recognized actuarial (gain) loss .............. 1 33 116
----- ----- -----
Net periodic (benefit) cost ................... $ 1 $ 33 $116
===== ===== =====
-34-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, we participate in several multi-employer plans which provide
defined benefits to substantially all unionized workers. The Multi-employer
Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers
associated with multi-employer plans. The plan is administered by the Company,
and contributions are determined in accordance with the provisions of a
negotiated labor contract. We have not received information from the plans'
administrators to determine our share, if any, of unfunded vested benefits.
We and certain of our subsidiaries also maintain various defined contribution
plans, which include profit sharing and provide retirement benefits for other
eligible employees. The provisions for retirement expense in connection with the
plans are as follows (in thousands):
DEFINED
MULTI- CONTRIBUTION AND
EMPLOYER PLANS OTHER PLANS
Year ended December 31,
2006....................................... $ 445 $ 3,804
2005....................................... 434 3,759
2004....................................... 454 3,980
We have an Employee Stock Ownership Plan and Trust ("ESOP") for employees who
are not covered by a collective bargaining agreement. Employees were granted
118,500 shares, 114,500 shares, and 110,000 shares during 2006, 2005 and 2004,
respectively, under the terms of the ESOP. These shares were issued directly
from treasury stock.
In 2000, we created an employee benefits trust to which we contributed 750,000
shares of treasury stock. We are authorized to instruct the trustees to
distribute such shares toward the satisfaction of our future obligations under
employee benefit plans. The shares held in trust are not considered outstanding
for purposes of calculating earnings per share until they are committed to be
released. The trustees will vote the shares in accordance with its fiduciary
duties. During 2006, we committed 118,500 shares to be released leaving 182,000
shares remaining in the trust. The provision for expense in connection with the
ESOP was approximately $1.2 million in 2006, $1.3 million in 2005, and $1.6
million in 2004.
In August 1994, we established an unfunded Supplemental Executive Retirement
Plan (SERP) for key employees. Under the plan, these employees may elect to
defer a portion of their compensation and, in addition, we may at our discretion
make contributions to the plan on behalf of the employees. Such contributions
were $83,000 in 2006, $69,000 in 2005, and $79,000 in 2004.
-35-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 2001, we adopted a second unfunded SERP. The SERP is a defined
benefit plan pursuant to which we will pay supplemental pension benefits to
certain key employees upon retirement based upon the employees' years of service
and compensation. We use a January 1 measurement date for this plan.
DECEMBER 31,
---------------------
2006 2005
------- -------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 5,495 $ 4,599
Service cost ......................................... 393 394
Interest cost ........................................ 284 255
Actuarial loss (gain) ................................ (530) 247
------- -------
Benefit obligation at end of year .................... $ 5,642 $ 5,495
======= =======
FUNDED STATUS ........................................ (5,642) (5,495)
Unrecognized prior service cost ...................... 690 801
Additional minimum pension liability ................. (1,029) (1,435)
Unrecognized net actuarial loss ...................... 912 1,559
------- -------
Net amount recognized (accrued benefit cost) ......... $(5,069) $(4,570)
======= =======
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
--------------------------
2006 2005 2004
---- ---- ----
Service cost .................................. $393 $394 $355
Interest cost ................................. 284 255 232
Amortization of prior service cost ............ 111 110 111
Amortization of unrecognized loss ............. 117 118 128
---- ---- ----
Net periodic benefit cost ..................... $905 $877 $826
==== ==== ====
Actuarial assumptions used to determine costs and benefit obligations
are as follows:
DECEMBER 31,
--------------------------------
2006 2005 2004
---- ---- -----
Discount rates .................... 5.75% 5.50% 5.75%
Salary increase ................... 4% 4% 4%
The following SERP benefit payments are expected to be paid (in thousands):
BENEFITS
------------------
2007................................................... $ 0
2008................................................... 351
2009................................................... 351
2010................................................... 351
2011................................................... 351
Years 2012 - 2016...................................... 1,754
The estimated net loss and prior service cost for the plan that is expected to
be amortized from accumulated other comprehensive income into pension costs
during 2007 are $0.1 million and $0.1 million, respectively.
-36-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our UK pension plan is comprised of a defined benefit plan and a defined
contribution plan. Effective April 1, 2001, the defined benefit plan was closed
to new entrants and existing active members ceased accruing any further
benefits.
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of our UK defined benefit plan:
DECEMBER 31,
--------------------
2006 2005
------- -------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year .............. $ 2,886 $ 3,412
Service cost ......................................... -- --
Interest cost ........................................ 168 157
Actuarial loss ....................................... -- (216)
Benefits paid ........................................ (125) (121)
Translation adjustment ............................... 381 (346)
------- -------
Benefit obligation at end of year .................... $ 3,310 $ 2,886
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ....... $ 2,678 $ 2,353
Settlement ........................................... 94 109
Actual return on plan assets ......................... 288 587
Benefits paid ........................................ (125) (121)
Expenses ............................................. -- (12)
Translation adjustment ............................... 353 (238)
------- -------
Fair value of plan assets at end of year ............. $ 3,288 $ 2,678
------- -------
FUNDED STATUS ........................................ (22) (208)
Unrecognized prior service cost ...................... -- --
Additional minimum pension liability ................. (1,974) (2,380)
Unrecognized net actuarial loss ...................... -- --
------- -------
Net amount recognized (accrued benefit cost) ......... $(1,996) $(2,588)
======= =======
Amounts recognized in the consolidated balance sheet consist of (in thousands):
DECEMBER 31,
-----------------------
2006 2005
------- -------
Current liabilities .............................. $ -- $ (208)
Non-current liabilities .......................... (22) --
Accumulated other comprehensive loss ............. (1,974) (2,380)
------- -------
Net amount recognized ............................ $(1,996) $(2,588)
======= =======
Amounts recognized in accumulated other comprehensive loss consist of (in
thousands):
DECEMBER 31,
--------------------
2006 2005
------ ------
Net actuarial (gain) loss .......................... $ -- $ --
Prior service cost (credit) ........................ 22 208
Additional minimum pension liability ............... 1,974 2,380
------ ------
Net amount recognized .............................. $1,996 $2,588
====== ======
-37-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information for the UK pension plan with accumulated benefit obligation in
excess of plan assets (in thousands):
DECEMBER 31,
---------------------
2006 2005
------ ------
Projected benefit obligation ..................... $3,310 $2,886
Accumulated benefit obligation ................... $3,310 $2,886
Fair value of plan assets ........................ $3,288 $2,678
Components of net periodic benefit cost follow (in thousands):
DECEMBER 31,
-----------------------------
2006 2005 2004
----- ----- -----
Service cost ............................... $-- $-- $--
Interest cost .............................. 168 157 171
Amortization of transition obligation ...... -- -- --
Amortization of prior service cost ......... -- -- --
Amortization of net actuarial loss ......... -- -- --
Recognized actuarial (gain) loss ........... (196) (145) (150)
----- ----- -----
Net periodic benefit cost .................. $ (28) $ 12 $ 21
===== ===== =====
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
----------------------------
2006 2005 2004
------- ------- ------
Discount rates ..................................... 5.23% 5.23% 5.23%
Inflation .......................................... 3.00% 3.00% 2.97%
The UK pension plan's weighted-average asset allocation by asset category are as
follows:
DECEMBER 31,
----------------------
2006 2005
---- ----
Equity securities ............................ 70% 78%
Bonds ........................................ 14% 20%
Property ..................................... 16% 0%
Cash ......................................... 0% 2%
---- ----
100% 100%
=== ===
The return on plan assets for 2006 was approximately 9.8%. The return on plan
assets for 2005 was approximately 28%.
-38-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
PENSION
BENEFITS
------------------
2007................................................. $ 98
2008................................................. 118
2009................................................. 137
2010................................................. 157
2011................................................. 176
Years 2012 - 2016.................................... $1,175
The provision for retirement expense in connection with the UK defined
contribution plan is as follows (in thousands):
DEFINED
CONTRIBUTION PLAN
-----------------
Year ended December 31,
2006.............................................. $ 289
2005.............................................. 305
2004.............................................. 313
14. POST-RETIREMENT MEDICAL BENEFITS
We provide certain medical and dental care benefits to eligible retired
employees. Our current policy is to fund the cost of the health care plans on a
pay-as-you-go basis.
Effective September 1, 2005, we restricted the eligibility requirements of
employees who can participate in this program, whereby all active participants
hired after 1995 are no longer eligible. In addition, in accordance with SFAS
No. 106, Employers' Accounting For Post-Retirement Benefits Other Than Pensions,
we recognized a curtailment gain of $3.8 million for our post-retirement plan
related to changes made to our plan which included the above eligibility
restriction. The curtailment accounting required us to recognize pro-rata
portion of the unrecognized prior service cost as a result of the changes.
In December 2003, the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (the "Medicare Reform Act") was signed into law. The Medicare Reform
Act expanded Medicare to include, for the first time, coverage for prescription
drugs. In connection with the Medicare Reform Act, the FASB issued FASB Staff
Position ("FSP") No. FAS 106-2, which provides guidance on accounting for the
effects of the new Medicare prescription drug legislation for employers whose
prescription drug benefits are actuarially equivalent to the drug benefit under
Medicare Part D and are therefore entitled to receive subsidies from the federal
government beginning in 2006. In January 2005, the Centers for Medicare and
Medicaid Services released final regulations implementing major provisions of
the Medicare Reform Act. The regulations address key concepts, such as defining
a plan, as well as the actuarial equivalence test for purposes of obtaining a
government subsidy. Pursuant to the guidance in FSP No. FAS 106-2, we have
assessed the financial impact of the regulations and concluded that our
post-retirement benefit plan will be qualified for the direct subsidies and,
consequently, our accumulated post-retirement benefit obligation decreased by
$6.8 million.
-39-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result of the reduced eligibility and Medicare subsidy explained above, we
are benefiting in 2006 from a reduction to our post-retirement benefit costs
through negative amortization of prior service costs.
As discussed in Note 1, the Company adopted the provisions of SFAS No. 158 on
December 31, 2006. The adoption related to post-retirement medical benefit plans
resulted in an increase to total assets of $1.3 million, an increase to total
liabilities $3.1 million, and a decrease to shareholders' equity of $1.9
million. The requirement to measure plan assets and benefit obligations as of
the date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008, or for the Company's
year ending December 31, 2008. The Company is presently evaluating the impact of
the measurement date change, which is not expected to be material.
The following table represents a reconciliation of the beginning and ending
benefit obligation and the funded status of the plan (in thousands):
DECEMBER 31,
-----------------------
2006 2005
-------- --------
Benefit obligation at beginning of year .......... $ 35,302 $ 46,960
Service cost ..................................... 807 2,924
Interest cost .................................... 2,050 2,330
Amendments ....................................... -- (20,667)
Actuarial loss ................................... 953 4,749
Benefits paid .................................... (920) (994)
-------- --------
Benefit obligation at end of year ................ $ 38,192 $ 35,302
-------- --------
Funded status .................................... $(38,192) $(35,302)
Unrecognized transition obligation ............... -- 34
Unrecognized prior service costs ................. -- (14,334)
Unrecognized net actuarial loss .................. -- 15,114
-------- --------
Accrued benefit cost ............................. $(38,192) $(34,488)
======== ========
Components of net periodic benefit cost following (in thousands):
DECEMBER 31
-------------------------------
2006 2005 2004
------- ------- -------
Service cost ................................ $ 807 $ 2,924 $ 3,486
Interest cost ............................... 2,050 2,330 2,389
Amortization of transition obligation ....... 4 30 42
Amortization of prior service cost .......... (2,868) (1,190) 124
Amortization of net actuarial loss .......... -- 6 5
Recognized actuarial (gain) loss ............ 1,481 1,056 663
------- ------- -------
Net periodic benefit cost ................... $ 1,474 $ 5,156 $ 6,709
SFAS 106 curtailment gain ................... -- (3,842) --
------- ------- -------
Total benefit cost ..................... $ 1,474 $ 1,314 $ 6,709
======= ======= =======
-40-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actuarial assumptions used to determine costs and benefit obligations are as
follows:
DECEMBER 31,
-------------------------
2006 2005 2004
----- ---- -----
Discount rate .................................... 5.75% 5.50% 5.75%
Current medical cost trend rate .................. 9% 9% 10%
Current dental cost trend ........................ 5% 5% 5%
Ultimate medical cost trend rate ................. 5% 5% 5%
Year trend rate declines to ultimate ............. 2011 2010 2009
Our measurement date for this plan is December 31.
The following benefit payments which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
NET
POST-RETIREMENT
BENEFITS
-------------------------
2007........................ $ 997
2008........................ 1,080
2009........................ 1,181
2010........................ 1,292
2011........................ 1,385
Years 2012 - 2016........... $ 9,273
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 2006 (in
thousands):
1-PERCENTAGE-
1-PERCENTAGE- POINT
POINT INCREASE DECREASE
----------------------------
Effect on total of service and
interest cost components................ $ 565 $ (453)
Effect on post retirement
benefit obligation........................... $ 6,762 $ (5,477)
The estimated net loss and prior service cost (credit) for the plan that is
expected to be amortized from accumulated other comprehensive income into
post-retirement medical benefits cost during 2007 are $1.2 million and ($2.9)
million, respectively.
15. OTHER INCOME (EXPENSE), NET
YEAR ENDED DECEMBER 31,
-------------------------------
2006 2005 2004
------- ------- -------
(IN THOUSANDS)
Interest and dividend income ................ $ 498 $ 311 $ 615
Gain on early retirement of debt ............ -- 1,258 --
Income from joint ventures (Note 8) ......... 915 956 753
Loss on divestiture of European
Temperature Control operations ............ (3,209) -- --
Gain (loss) on disposal of property,
plant and equipment ....................... (71) 160 --
(Loss) gain on foreign exchange ............. 646 (768) 731
Other income - net .......................... 838 731 762
------- ------- -------
Total other income (expense), net ....... $ (383) $ 2,648 $ 2,861
======= ======= =======
-41-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
2006 2005 2004
------- ------- -------
Current:
Domestic ................................. $ 968 $ 233 $(2,476)
Foreign ................................. 2,135 2,137 4,022
------- ------- -------
Total Current .............................. 3,103 2,370 1,546
Deferred:
Domestic ................................ 3,416 (1,074) (4,558)
Foreign ................................. (25) 127 (667)
------- ------- -------
Total Deferred ............................. 3,391 (947) (5,225)
------- ------- -------
Total income tax provision (benefit) ....... $ 6,494 $ 1,423 $(3,679)
======= ======= =======
We have not provided for U.S. income taxes on the undistributed earnings of our
foreign subsidiaries that are deferred from U.S. income taxation and that we
intend to be permanently reinvested. The Company has provided for U.S. income
tax regarding those undistributed earnings of our foreign subsidiaries subject
to current taxation under Subpart F of the Internal Revenue Code. Cumulative
undistributed earnings of foreign subsidiaries on which no U.S. income tax has
been provided were $35.9 million at the end of 2006, $36.1 million at the end of
2005 and $28.8 million at the end of 2004.
Earnings before income taxes for foreign operations (excluding Puerto Rico)
amounted to approximately $6.6 million, $6.8 million and $6.8 million in 2006,
2005 and 2004, respectively. Prior to 2006, U.S. income taxes on the earnings of
the Puerto Rican subsidiary were largely eligible for tax credits against such
U.S. income taxes. During 2006, such earnings became fully subject to U.S.
income taxes. Such earnings are partially exempt from Puerto Rican income taxes
under a tax exemption grant expiring in 2016.
Reconciliations between taxes at the United States federal income tax rate and
taxes at our effective income tax rate on earnings from continuing operations
before income taxes are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2006 2005 2004
------- ------- -------
U.S. federal income tax rate of 35% ........... $ 5,480 $ (121) $(4,405)
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal
income tax benefit ...................... 33 (121) (361)
State tax credits .......................... 8 (535) --
Non-deductible items, net .................. 246 241 174
Impact on deferred tax assets, Puerto Rico . (1,146) -- --
Income (benefit) taxes attributable
to foreign income ....................... (2) (1,115) 1,095
Change in valuation allowance .............. 1,875 3,074 (182)
------- ------- -------
Provision (benefit) for income taxes ....... $ 6,494 $ 1,423 $(3,679)
======= ======= =======
-42-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the components of the net deferred tax assets and
liabilities recognized in the accompanying consolidated balance sheets (in
thousands):
DECEMBER 31,
----------------------
2006 2005
-------- --------
Deferred tax assets:
Inventories ..................................... $ 9,922 $ 8,701
Allowance for customer returns .................. 7,285 8,298
Post-retirement benefits ........................ 13,261 12,889
Allowance for doubtful accounts ................. 3,495 3,375
Accrued salaries and benefits ................... 9,672 5,596
Net operating loss, capital loss and tax
credit carry forwards ........................ 21,136 24,928
Goodwill ........................................ 1,512 2,458
Accrued asbestos liabilities .................... 8,691 10,703
Other ........................................... 7,194 7,142
-------- --------
82,168 84,090
-------- --------
Valuation allowance ............................. (28,006) (26,131)
-------- --------
Total ........................................... $ 54,162 $ 57,959
======== ========
Deferred tax liabilities:
Depreciation .................................... $ 4,743 $ 7,270
Promotional costs ............................... 482 233
Goodwill ........................................ 514 444
Restructuring costs ............................. 8,620 7,659
Other ........................................... 1,358 1,705
-------- --------
Total ........................................... 15,717 17,311
-------- --------
Net deferred tax assets ............................ $ 38,445 $ 40,648
======== ========
The current net deferred tax assets are $14 million and $14.1 million for 2006
and 2005, respectively. The non-current net deferred tax assets are $24.4
million and $26.6 million for 2006 and 2005, respectively. The tax valuation
allowance was allocated to the current deferred tax assets in the amounts of
$10.3 million and $9.1 million in 2006 and 2005, respectively. The long term tax
deferred assets had a valuation allowance of $17.7 million and $17.1 million in
2006 and 2005, respectively.
We performed an assessment regarding the realization of the net deferred tax
assets, which includes projecting future taxable income, and have increased the
valuation allowance by $1.9 million. The increase in the valuation allowance
specifically applied to the capital loss realized in the US during the year as
well as to European operating losses, given the uncertainty of realizing these
benefits in the future. The valuation allowance is intended in part to provide
for the uncertainty regarding the ultimate utilization of the Company's U.S. net
operating and capital loss carryovers, state tax credit carryovers, U.S. foreign
tax credit carryovers, foreign net operating loss carry forwards, and certain
long lived deferred tax assets stemming mainly from accrued asbestos liabilities
and post-retirement benefit obligations. Approximately $21 million of the
valuation allowance relates to US tax assets of $53 million. Approximately $97
million of taxable income will need to be generated to realize the deferred tax
asset. We believe it is more likely than not that we will be able to generate
this level of taxable income within 5 years based on the continuance of recently
improved trends. As such, with regard to the remaining net deferred tax assets,
we have determined that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the related
benefits. However, if we are unable to generate sufficient taxable income in the
future through our operations, increases in the valuation allowance may be
required.
-43-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2006, we have approximately $32.6 million of domestic and
foreign net operating loss carry forwards, of which $21.3 million will expire
between 2024 and 2025, with the remainder (foreign) having an indefinite carry
forward period. We also have foreign tax credit carry forwards of approximately
$1.1 million that will expire between 2010 and 2012, a capital loss carry
forward of approximately $2.8 million that will expire in 2011 and an
alternative minimum tax credit carry forward of approximately $6.2 million,
which has no expiration date.
17. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
Under the provisions of Statement of Financial Accounting Standards SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), we have three reportable operating segments, which are the major
product areas of the automotive aftermarket in which we compete. Engine
Management consists primarily of ignition and emission parts, wire and cable,
and fuel system parts. Temperature Control consists primarily of compressors,
other air conditioning parts and heater parts. The third reportable operating
segment is Europe, which consists of both Engine Management and Temperature
Control reporting units.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). The following tables
contain financial information for each reportable segment (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------
2006 2005 2004
--------- --------- ---------
Net sales:
Engine Management .................. $ 543,221 $ 547,008 $ 562,769
Temperature Control ................ 211,102 229,226 210,094
Europe ............................. 47,044 43,423 40,651
Other .............................. 10,657 10,756 10,769
--------- --------- ---------
Total ............................ $ 812,024 $ 830,413 $ 824,283
========= ========= =========
Depreciation and amortization:
Engine Management .................. $ 9,893 $ 9,992 $ 10,921
Temperature Control ................ 3,457 4,717 5,640
Europe ............................. 816 1,415 1,444
Other .............................. 1,320 1,232 1,008
--------- --------- ---------
Total ............................ $ 15,486 $ 17,356 $ 19,013
========= ========= =========
Operating profit (loss):
Engine Management .................. $ 41,249 $ 19,338 $ 24,549
Temperature Control ................ 11,954 11,936 (2,114)
Europe ............................. 46 (572) (2,034)
Other .............................. (17,934) (16,620) (22,138)
--------- --------- ---------
Total ............................ $ 35,315 $ 14,082 $ (1,737)
========= ========= =========
-44-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
--------- --------- ---------
Investment in equity affiliates:
Engine Management ................... $ -- $ -- $ --
Temperature Control ................. -- -- --
Europe .............................. 201 (202) (322)
Other ............................... 2,282 2,216 2,260
--------- --------- ---------
Total ............................. $ 2,483 $ 2,014 $ 1,938
========= ========= =========
Capital expenditures:
Engine Management ................... $ 7,481 $ 7,511 $ 7,513
Temperature Control ................. 1,339 1,813 1,383
Europe .............................. 1,215 623 793
Other ............................... 45 10 85
--------- --------- ---------
Total ............................... $ 10,080 $ 9,957 $ 9,774
========= ========= =========
Total assets:
Engine Management ................... $ 430,158 $ 438,116 $ 429,631
Temperature Control ................. 109,734 114,441 125,656
Europe .............................. 26,708 28,217 30,936
Other ............................... 73,492 72,270 70,346
--------- --------- ---------
Total ............................. $ 640,092 $ 653,044 $ 656,569
========= ========= =========
Reconciliation of segment operating profit (loss) to net income (loss):
YEAR ENDED DECEMBER 31,
--------------------------------
2006 2005 2004
-------- -------- --------
Operating profit (loss) ................... $ 35,315 $ 14,082 $ (1,737)
Other (expense) income .................... (383) 2,648 2,861
Interest expense .......................... 19,275 17,077 13,710
-------- -------- --------
Earnings (loss) from continuing operations
before taxes ........................... 15,657 (347) (12,586)
Income tax expense (benefit) .............. 6,494 1,423 (3,679)
-------- -------- --------
Earnings (loss) from continuing operations 9,163 (1,770) (8,907)
Discontinued operation, net of tax ....... 248 (1,775) (3,909)
Cumulative effect of accounting
change, net of tax ..................... -- -- (1,564)
-------- -------- --------
Net earnings (loss) ........................ $ 9,411 $ (3,545) $(14,380)
======== ======== ========
Our five largest individual customers, including members of a marketing group,
accounted for 51%, 52% and 50% of consolidated net sales in 2006, 2005 and 2004,
respectively. These net sales were generated from our Engine Management and
Temperature Control Segments.
-45-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Adjustments consist of items pertaining to our corporate headquarters
function, as well as our Canadian business unit that does not meet the criteria
of a reportable operating segment under SFAS 131.
REVENUE
YEAR ENDED DECEMBER 31,
------------------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
United States ............... $688,030 $716,358 $714,955
Canada ...................... 48,537 46,353 45,115
Europe ...................... 47,044 43,423 40,651
Other Foreign ............... 28,413 24,279 23,562
-------- -------- --------
Total .................... $812,024 $830,413 $824,283
======== ======== ========
LONG LIVED ASSETS
YEAR ENDED DECEMBER 31,
------------------------------------------
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
United States ............... $144,208 $161,451 $174,056
Europe ...................... 4,821 4,682 6,214
Canada ...................... 4,014 3,900 4,144
Other Foreign ............... 778 754 785
-------- -------- --------
Total ..................... $153,821 $170,787 $185,199
======== ======== ========
Revenues are attributed to countries based upon the location of the customer.
Long lived assets are attributed to countries based upon the location of the
assets.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments.
TRADE ACCOUNTS RECEIVABLE
The carrying amount of trade receivables approximates fair value because of
their short outstanding terms.
TRADE ACCOUNTS PAYABLE
The carrying amount of trade payables approximates fair value because of their
short outstanding terms.
SHORT TERM BORROWINGS
The carrying value of these borrowings equals fair market value because their
interest rate reflects current market rates.
-46-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on quoted market prices
or current rates offered to us for debt of the same remaining maturities.
INTEREST RATE SWAPS
The fair value of our financial instruments is based on market quotes and
represents the net amount required to terminate the position, taking into
consideration market rates and counterparty credit risk.
The estimated fair values of our financial instruments are as follows (in
thousands):
CARRYING AMOUNT FAIR VALUE
--------------- ----------
DECEMBER 31, 2006
Cash and cash equivalents .................. $ 22,348 $ 22,348
Trade accounts receivable .................. 183,664 183,664
Trade accounts payable ..................... 53,783 53,783
Short term borrowings ...................... 139,799 139,799
Long-term debt ............................. 98,521 94,584
Interest rate swaps ........................ -- --
DECEMBER 31, 2005
Cash and cash equivalents .................. $ 14,046 $ 14,046
Trade accounts receivable .................. 176,294 176,294
Trade accounts payable ..................... 52,535 52,535
Short term borrowings ...................... 149,236 149,236
Long-term debt ............................. 99,091 97,847
Interest rate swaps ........................ 496 496
20. COMMITMENTS AND CONTINGENCIES
Total rent expense for the three years ended December 31, 2006 was as follows
(in thousands):
TOTAL REAL ESTATE OTHER
2006...................................... $8,438 $5,983 $2,455
2005...................................... 9,928 6,970 2,958
2004...................................... 11,858 7,686 4,172
At December 31, 2006, we are obligated to make minimum rental payments through
2017, under operating leases, which are as follows (in thousands):
2007.................................................... $ 6,657
2008.................................................... 5,614
2009.................................................... 4,446
2010.................................................... 2,059
2011.................................................... 1,913
Thereafter.............................................. 8,582
-------
Total................................................... $29,271
=======
-47-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We also have lease and sub-lease agreements in place for various properties
under our control. We expect to receive operating lease payments from lessees
during the five years ending December 31, 2007 through 2012 of $0.7 million,
$0.6 million, $0.4 million, $0.2 million, and $0, respectively.
We generally warrant our products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time of
the product depending on the nature of the product. As of December 31, 2006 and
2005, we have accrued $11.7 million and $12.7 million, respectively, for
estimated product warranty claims included in accrued customer returns. The
accrued product warranty costs are based primarily on historical experience of
actual warranty claims. Warranty expense for each of the years 2006, 2005 and
2004 were $49.3 million, $50.3 million and $47.8 million, respectively.
The following table provides the changes in our product warranties (in
thousands):
DECEMBER 31,
-------------------------
2006 2005
---- ----
Balance, beginning of period...................... $ 12,701 $13,194
Liabilities accrued for current year sales........ 49,259 50,273
Settlements of warranty claims.................... (50,256) (50,766)
-------- -------
Balance, end of period............................ $ 11,704 $12,701
======== =======
LETTERS OF CREDIT. At December 31, 2006, we had outstanding letters of credit
with certain vendors aggregating approximately $2.2 million. The contract amount
of the letters of credit is a reasonable estimate of their value as the value
for each is fixed over the life of the commitment.
CHANGE OF CONTROL ARRANGEMENTS. We entered into Change in Control arrangements
with two key officers. In the event of a Change of Control (as defined in the
agreement), each executive will receive severance payments (as defined in the
agreement) and certain other benefits.
ASBESTOS. In 1986, we acquired a brake business, which we subsequently sold in
March 1998 and which is accounted for as a discontinued operation. When we
originally acquired this brake business, we assumed future liabilities relating
to any alleged exposure to asbestos-containing products manufactured by the
seller of the acquired brake business. In accordance with the related purchase
agreement, we agreed to assume the liabilities for all new claims filed on or
after September 1, 2001. Our ultimate exposure will depend upon the number of
claims filed against us on or after September 1, 2001 and the amounts paid for
indemnity and defense thereof. At December 31, 2006, approximately 3,270 cases
were outstanding for which we were responsible for any related liabilities. We
expect the outstanding cases to increase gradually due to recent legislation in
certain states mandating minimum medical criteria before a case can be heard.
Since inception in September 2001 through February 28, 2007, the amounts paid
for settled claims are approximately $5 million. We do not have insurance
coverage for the defense and indemnity costs associated with these claims.
In evaluating our potential asbestos-related liability, we have considered
various factors including, among other things, an actuarial study performed by a
leading actuarial firm with expertise in assessing asbestos-related liabilities,
our settlement amounts and whether there are any co-defendants, the jurisdiction
in which lawsuits are filed, and the status and results of settlement
discussions. As is our accounting policy, we engage actuarial consultants with
experience in assessing asbestos-related liabilities to estimate our potential
claim liability. The methodology used to project asbestos-related liabilities
and costs in the study considered: (1) historical data available from publicly
available studies; (2) an analysis of our recent claims history to estimate
likely filing rates into the future; (3) an analysis of our currently pending
claims; and (4) an analysis of our settlements to date in order to develop
average settlement values. The most recent actuarial study was performed as of
-48-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
August 31, 2006. Based upon all the information considered by the actuarial
firm, the actuarial study estimated an undiscounted liability for settlement
payments, excluding legal costs, ranging from $22.1 million to $53.9 million for
the period through 2050. The change from the prior year study was a $3.2 million
decrease for the low end of the range and a $2.6 million increase for the high
end of the range. Based on the information contained in the actuarial study and
all other available information considered by us, we concluded that no amount
within the range of settlement payments was more likely than any other and,
therefore, recorded the low end of the range as the liability associated with
future settlement payments through 2050 in our consolidated financial
statements, in accordance with generally accepted accounting principles.
Accordingly, a $3.4 million benefit was recorded to our discontinued operation,
and we adjusted our accrued asbestos liability to approximately $22.1 million.
Legal costs, which are expensed as incurred and reported in loss from
discontinued operation, are estimated to range from $11.6 million to $21.6
million during the same period.
We plan on performing a similar annual actuarial analysis during the third
quarter of each year for the foreseeable future. Given the uncertainties
associated with projecting such matters into the future and other factors
outside our control, we can give no assurance that additional provisions will
not be required. Management will continue to monitor the circumstances
surrounding these potential liabilities in determining whether additional
provisions may be necessary. At the present time, however, we do not believe
that any additional provisions would be reasonably likely to have a material
adverse effect on our liquidity or consolidated financial position.
ANTITRUST LITIGATION. On November 30, 2004, the Company was served with a
summons and complaint in the U.S. District Court for the Southern District of
New York by The Coalition For A Level Playing Field, which is an organization
comprised of a large number of auto parts retailers. The complaint alleges
antitrust violations by the Company and a number of other auto parts
manufacturers and retailers and seeks injunctive relief and unspecified monetary
damages. In August 2005, we filed a motion to dismiss the complaint, following
which the plaintiff filed an amended complaint dropping, among other things, all
claims under the Sherman Act. The remaining claims allege violations of the
Robinson-Patman Act. Motions to dismiss those claims were filed by us in
February 2006. Plaintiff filed opposition to our motions, and we subsequently
filed replies in June 2006. Oral arguments were originally scheduled for
September 2006, however the court adjourned these proceedings until a later date
to be determined. Subsequently, the judge initially assigned to the case excused
himself, and a new judge has been assigned. Although we cannot predict the
ultimate outcome of this case or estimate the range of any potential loss that
may be incurred in the litigation, we believe that the lawsuit is without merit,
deny all of the plaintiff's allegations of wrongdoing and believe we have
meritorious defenses to the plaintiff's claims. We intend to defend vigorously
this lawsuit.
OTHER LITIGATION. We are involved in various other litigation and product
liability matters arising in the ordinary course of business. Although the final
outcome of any asbestos-related matters or any other litigation or product
liability matter cannot be determined, based on our understanding and evaluation
of the relevant facts and circumstances, it is our opinion that the final
outcome of these matters will not have a material adverse effect on our
business, financial condition or results of operations.
-49-
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. QUARTERLY FINANCIAL DATA UNIT (UNAUDITED)
2006:
QUARTER ENDED DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2006 2006 2006 2006
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ........................... $ 169,019 $ 203,755 $ 229,174 $ 210,076
--------- --------- --------- ---------
Gross profit ........................ 45,952 49,332 56,706 53,231
--------- --------- --------- ---------
(Loss) earnings from continuing
operations ........................ (1,473) 2,583 5,455 2,598
--------- --------- --------- ---------
(Loss) income from discontinued
operation, net of taxes ........... (355) 1,656 (289) (764)
--------- --------- --------- ---------
Net (loss) earnings ................. $ (1,828) $ 4,239 $ 5,166 $ 1,834
--------- --------- --------- ---------
Net (loss) earnings from continuing
operations per common share:
Basic .......................... $ (0.08) $ 0.14 $ 0.30 $ 0.14
Diluted ........................ $ (0.08) $ 0.14 $ 0.30 $ 0.14
--------- --------- --------- ---------
Net (loss) earnings per common share:
Basic .......................... $ (0.10) $ 0.23 $ 0.28 $ 0.10
Diluted ........................ $ (0.10) $ 0.23 $ 0.28 $ 0.10
--------- --------- --------- ---------
2005:
QUARTER ENDED DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2005 2005 2005 2005
--------- --------- --------- ---------
Net sales ........................... $ 172,137 $ 224,438 $ 226,512 $ 207,326
--------- --------- --------- ---------
Gross profit ........................ 39,498 49,137 48,910 48,435
--------- --------- --------- ---------
(Loss) earnings from continuing
operations ........................ (5,705) 4,163 (1,281) 1,053
--------- --------- --------- ---------
Loss from discontinued operation,
net of taxes ...................... (535) (449) (384) (407)
--------- --------- --------- ---------
Net (loss) earnings ................. $ (6,240) $ 3,714 $ (1,665) $ 646
--------- --------- --------- ---------
Net (loss) earnings from continuing
operations per common share:
Basic .......................... $ (0.29) $ 0.21 $ (0.07) $ 0.05
Diluted ........................ $ (0.29) $ 0.21 $ (0.07) $ 0.05
--------- --------- --------- ---------
Net (loss) earnings per common share:
Basic .......................... $ (0.32) $ 0.19 $ (0.09) $ 0.03
Diluted ........................ $ (0.32) $ 0.19 $ (0.09) $ 0.03
--------- --------- --------- ---------
-50-
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as
of the end of the period covered by this Report. This evaluation also included
consideration of our internal controls and procedures for the preparation of our
financial statements as required under Section 404 of the Sarbanes-Oxley Act. In
the course of the controls evaluation, we reviewed data errors or control
problems identified and sought to confirm that appropriate corrective actions,
including process improvements, were being undertaken. In addition, subsequent
to the period covered by this Report, this evaluation considered the disclosures
made in this Amendment. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this Report.
As discussed in the Explanatory Note to this Amendment, we amended our Report to
include, among other things, the disclosure of additional financial information
regarding our joint ventures in note 8 to our consolidated financial statements
and correct typographical errors. Although we amended our Report, our Chief
Executive Officer and Chief Financial Officer still concluded that our
disclosure controls and procedures are effective at a reasonable assurance level
in timely alerting them to material information relating to us which is required
to be included in our periodic SEC filings.
The Company's evaluation of its disclosure controls and procedures is performed
on a quarterly basis so that the conclusions of management, including our Chief
Executive Officer and Chief Financial Officer, concerning the effectiveness of
the disclosure controls can be reported in our periodic reports on Forms 10-Q
and Forms 10-K. Many of the components of our disclosure controls are also
evaluated on an ongoing basis by both our internal audit and finance
organizations. The overall goals of these various evaluation activities are to
monitor our disclosure controls and to modify them as necessary. We intend to
maintain the disclosure controls as dynamic systems that we adjust as
circumstances merit. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer believe that the disclosure of additional information
regarding our joint ventures and the correction of certain typographical errors,
and the omission of these in the original filing of our Report, did not
materially impact our conclusion concerning the effectiveness of the design and
operation of our disclosure controls and procedures.
-51-
(b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Pursuant to Section 404 of the Sarbanes-Oxley Act, as part of this Report we
have furnished a report regarding our internal control over financial report as
of December 31, 2006. The report is under the caption "Management's Report on
Internal Control Over Financial Reporting" in "Item 8. Financial Statements and
Supplementary Data," which report is incorporated herein by reference.
(c) ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
Grant Thornton, our independent registered public accounting firm, has issued an
opinion as to management's assessment and as to the effectiveness of the
Company's internal control over financial reporting as of December 31, 2006. The
opinion is under the caption "Report of Independent Registered Public Accounting
Firm-Internal Control Over Financial Reporting" in "Item 8. Financial Statements
and Supplementary Data" for this attestation report, which is incorporated
herein by reference.
(d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
During the quarter ended December 31, 2006 and subsequent to that date, we have
not made changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
However, subsequent to the period covered by this Report, we have re-evaluated
our controls and have made additional changes in order to address the accounting
matters referred to above such as educating our staff, further consulting with
outside experts, and additional procedures to ensure uncover any errors and
omissions. We continue to review, document and test our internal control over
financial reporting, and may from time to time make changes aimed at enhancing
their effectiveness and to ensure that our systems evolve with our business.
These efforts will lead to various changes in our internal control over
financial reporting.
-52-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The Index to Consolidated Financial Statements of the Registrant
under Item 8 of this Report is incorporated herein by reference as
the list of Financial Statements required as part of this Report.
(2) The following financial schedule and related report for the years
2006, 2005 and 2004 is submitted herewith:
Report of Independent Registered Public Accounting Firm on
Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not
applicable or the information is included in the financial
statements or notes thereto.
(3) Exhibits.
The exhibit list in the Exhibit Index is incorporated
by reference as the list of exhibits required as part
of this Report.
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/ JAMES J. BURKE
---------------------------------
James J. Burke
Vice President, Finance and
Chief Financial Officer
New York, New York
January 3, 2008
-53-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
2.1 Asset Purchase Agreement, dated as of February 7, 2003, by and among
Dana Corporation, Automotive Controls Corp., BWD Automotive
Corporation, Pacer Industries, Inc., Ristance Corporation, Engine
Controls Distribution Services, Inc., as Sellers, and Standard Motor
Products, Inc., as Buyer (incorporated by reference to the Company's
Current Report on Form 8-K, filed on February 10, 2003).
3.1 Restated By-Laws, dated May 23, 1996, filed as an Exhibit of the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
3.2 Restated Certificate of Incorporation, dated July 31, 1990, filed as
an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
3.3 Certificate of Amendment of the Certificate of Incorporation, dated
February 15, 1996, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
4.1 Form of Subordinated Debenture Indenture (including form of
convertible debenture) (incorporated by reference to Exhibit 4.1 to
the Company's Amendment No. 2 to its Registration Statement on Form
S-3 (Registration No. 333-79177), filed on July 20, 1999).
10.1 Employee Stock Ownership Plan and Trust, dated January 1, 1989
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989).
10.2 Supplemental Executive Retirement Plan, dated August 15, 1994
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.3 1996 Independent Outside Directors Stock Option Plan of Standard
Motors Products, Inc. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.4 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended (incorporated by reference to the Company's Registration
Statement on Form S-8 (Registration No. 33-51565), filed on May 1,
1998).
10.5 1994 Omnibus Stock Option Plan of Standard Motor Products, Inc., as
amended and restated, (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 333-59524), filed
on April 25, 2001).
10.6 Supplemental Compensation Plan effective October 1, 2001 (incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001).
10.7 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and John Gethin (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
-54-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.8 Change of Control Agreement, dated December 12, 2001, between Standard
Motor Products, Inc. and James Burke (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001).
10.9 Amended and Restated Credit Agreement, dated as of February 7, 2003,
among Standard Motor Products, Inc., as Borrower and General Electric
Capital Corp. and Bank of America, as Lenders (incorporated by
reference to the Company's Current Report on Form 8-K filed on
February 10, 2003).
10.10 Amendment No. 1 to Amended and Restated Credit Agreement, dated June
27, 2003, among Standard Motor Products, Inc., as Borrower and General
Electric Capital Corp. and Bank of America, as Lenders (incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003).
10.11 Amendment No. 2 to Amended and Restated Credit Agreement, dated March
11, 2004, among Standard Motor Products, Inc., as Borrower, and
General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Quarterly Report in Form
10-Q for the quarter ended March 31, 2004).
10.12 Amendment No. 3 to Amended and Restated Credit Agreement, dated August
11, 2004, among Standard Motor Products, Inc., as Borrower, and
General Electric Capital Corp. and Bank of America, as Lenders
(incorporated by reference to the Company's Quarterly Report in Form
10-Q for the quarter ended September 30, 2004).
10.13 Waiver and Amendment No. 4 to Amended and Restated Credit Agreement,
dated as of March 31, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Annual Report in
Form 10-K for the year ended December 31, 2004).
10.14 Waiver and Amendment No. 5 to Amended and Restated Credit Agreement,
dated as of May 9, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Quarterly Report
in Form 10-Q for the quarter ended March 31, 2005).
10.15 Waiver and Amendment No. 6 to Amended and Restated Credit Agreement,
dated as of November 4, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Quarterly Report
in Form 10-Q for the quarter ended September 30, 2005).
10.16 Consent and Amendment No. 7 to Amended and Restated Credit Agreement,
dated as of December 29, 2005, among Standard Motor Products, Inc., as
Borrower, and General Electric Capital Corp. and Bank of America, as
Lenders (incorporated by reference to the Company's Current Report on
Form 8-K filed on January 3, 2006).
-55-
STANDARD MOTOR PRODUCTS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
10.17 Credit Agreement, dated as of December 29, 2005, among SMP Motor
Products, Ltd., as Borrower, (incorporated by reference to the
Company's Current Report on Form 8-K filed on January 3, 2006).
10.18 Repurchase and Prepayment Agreement, dated as of December 29, 2005,
between Standard Motor Products, Inc., and Dana Corporation
(incorporated by reference to the Company's Current Report on Form 8-K
filed on January 3, 2006).
10.19 Amendment to the Standard Motor Products, Inc. Supplemental
Compensation Plan, effective December 1, 2006 (incorporated by
reference to the Company's Annual Report in Form 10-K for the year
ended December 31, 2006).
10.20 Retention Bonus and Insurance Agreement, dated December 26, 2006,
between Standard Motor Products, Inc. and John Gethin (incorporated by
reference to the Company's Annual Report in Form 10-K for the year
ended December 31, 2006).
10.21 Retention Bonus and Insurance Agreement dated December 26, 2006,
between Standard Motor Products, Inc. and James Burke (incorporated by
reference to the Company's Annual Report in Form 10-K for the year
ended December 31, 2006).
21 List of Subsidiaries of Standard Motor Products, Inc. (incorporated by
reference to the Company's Annual Report in Form 10-K for the year
ended December 31, 2006).
23 Consent of Independent Registered Public Accounting Firm.
24 Power of Attorney (see signature page to Annual Report on Form 10-K)
(incorporated by reference to the Company's Annual Report in Form 10-K
for the year ended December 31, 2006).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
-56-
SCHEDULE II
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON SCHEDULE
Stockholders and Board of Directors
Standard Motor Products, Inc.
We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated balance sheets of
Standard Motor Products, Inc. and Subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006
referred to in our report dated March 15, 2007, except for Note 8, as to which
the date is January 2, 2008, which is included in the annual report to
security holders and incorporated by reference in Part II of this form. Our
report on the consolidated financial statements includes explanatory paragraphs,
relating to the application of Statement of Financial Accounting Standards No.
123(R) as of January 1, 2006 and No. 158 as of December 31, 2006. Our audit was
conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ GRANT THORNTON LLP
------------------------
New York, New York
March 15, 2007
-57-