FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended SEPTEMBER 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-4743
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STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(718) 392-0200
--------------
(Registrant's telephone number, including area code)
NONE
----
(Former name, former address and former fiscal year, if changed
since last report.)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
DATE CLASS SHARES OUTSTANDING
---- ----- ------------------
OCTOBER 31, 1998 COMMON STOCK 13,056,350
- ---------------- ------------ ----------
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL AND OTHER INFORMATION
SEPTEMBER 30, 1998
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 PAGE NO.
- ------ --------
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997 3 & 4
CONSOLIDATED STATEMENTS OF EARNINGS AND
RETAINED EARNINGS for the Three Months and
Nine Months ended September 30, 1998 and 1997 5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME for the Three Months and Nine Months ended
September 30, 1998 and 1997 5
CONSOLIDATED STATEMENTS OF CASH FLOWS for the
Nine Months ended September 30, 1998 and 1997 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11 - 15
PART II - OTHER INFORMATION
---------------------------
ITEM 6
- ------
Exhibits and Reports on Form 8-K 15 - 16
Signature 17
2
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for shares and per share data)
<TABLE>
<CAPTION>
ASSETS
------
September 30, December 31,
1998 1997
- ----------------------------------------------------------------------------------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 46,295 $ 16,809
Accounts and notes receivable, net of
allowance for doubtful accounts and
discounts of $22,135 (1997 - $18,654) 181,845 151,026
Inventories (Note 2) 151,609 189,006
Deferred income taxes 22,005 22,005
Prepaid expenses and other current assets 9,356 11,630
------------ -------------
Total current assets 411,110 390,476
Property, plant and equipment, net of
accumulated depreciation (Note 3) 109,233 126,024
Goodwill, net 40,145 30,674
Other assets (Note 8) 25,473 29,963
------------ -------------
Total assets $ 585,961 $ 577,137
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for shares and per share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
Current liabilities:
<S> <C> <C>
Notes payable $ 17,251 $ 55,897
Current portion of long-term debt (Note 6) 17,966 24,373
Accounts payable 38,741 36,421
Sundry payables and accrued expenses 82,872 67,224
Accrued customer returns 29,725 17,955
Payroll and commissions 13,853 11,180
----------------- ---------------
Total current liabilities 200,408 213,050
Long-term debt (Note 6) 160,947 159,109
Deferred income taxes 3,192 3,124
Postretirement benefits other than pensions
and other accrued liabilities 18,721 18,436
----------------- ---------------
Total liabilities 383,268 393,719
Minority interest (278) (364)
Commitments and contingencies
Stockholders' equity (Notes 5) :
Common stock-par value $2.00 per share
Authorized - 30,000,000 shares
Issued - 13,324,476 shares in 1998 and 1997
(including 281,126 and 247,781 shares held as
treasury shares in 1998 and 1997, respectively) 26,649 26,649
Capital in excess of par value 2,604 2,763
Loan to Employee Stock Ownership Plan (ESOP) 0 (1,665)
Retained earnings 181,332 161,514
Accumulated other comprehensive income (loss) (1,626) (454)
----------------- ---------------
208,959 188,807
Less: treasury stock-at cost 5,988 5,025
----------------- ---------------
Total stockholders' equity 202,971 183,782
----------------- ---------------
Total liabilities and stockholders' equity $ 585,961 $ 577,137
================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Dollars in thousands, except for shares and per share data)
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 201,293 $ 155,246 $ 536,104 $ 456,161
Cost of sales 138,885 105,308 366,834 309,185
--------------- --------------- --------------- ---------------
Gross profit 62,408 49,938 169,270 146,976
Selling, general and administrative expenses 45,026 38,867 130,706 121,591
--------------- --------------- --------------- ---------------
Operating income 17,382 11,071 38,564 25,385
Other income (expense) - net (1,734) 521 (1,387) 1,115
--------------- --------------- --------------- ---------------
15,648 11,592 37,177 26,500
Interest expense 4,346 3,601 12,826 10,930
--------------- --------------- --------------- ---------------
Earnings from continuing operations
before taxes and minority interest 11,302 7,991 24,351 15,570
Minority interest (64) (77) (198) (255)
Income taxes (Note 4) 1,664 997 3,287 2,968
--------------- --------------- --------------- ---------------
Earnings from continuing operations 9,574 6,917 20,866 12,347
--------------- --------------- --------------- ---------------
Income from operations of
discontinued Brake Group 0 1,272 0 2,104
Income (loss) from operations
of discontinued Service Line Group 0 (272) 0 (950)
--------------- --------------- --------------- ---------------
Earnings from discontinued operations 0 1,000 0 1,154
--------------- --------------- --------------- ---------------
Net earnings 9,574 7,917 20,866 13,501
--------------- --------------- --------------- ---------------
Retained earnings beginning of period 172,806 203,718 161,514 200,235
--------------- --------------- --------------- ---------------
182,380 211,635 182,380 213,736
Less: cash dividends for period 1,048 1,050 1,048 3,151
--------------- --------------- --------------- ---------------
Retained earnings at end of period $ 181,332 $ 210,585 $ 181,332 $ 210,585
=============== =============== =============== ===============
PER COMMON SHARE DATA:
- ----------------------
Net earnings from continuing operations:
Basic $ 0.73 $ 0.53 $ 1.59 $ 0.94
Diluted 0.72 0.53 1.58 0.94
Net earnings:
Basic $ 0.73 $ 0.60 $ 1.59 $ 1.03
Diluted 0.72 0.60 1.58 1.03
Dividends $ 0.08 $ 0.08 $ 0.08 $ 0.24
Average number of common shares 13,080,996 13,131,515 13,086,736 13,131,515
-------------- -------------- ----------- --------------
Average number of common and
dilutive common shares 13,222,161 13,170,085 13,182,674 13,132,097
-------------- -------------- ----------- --------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net earnings $ 9,574 $ 7,917 $ 20,866 $ 13,501
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment (1,037) 70 (1,172) 146
--------------- --------------- ------------- --------------
Comprehensive income $ 8,537 $ 7,987 $ 19,694 $ 13,647
=============== =============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 20,866 $ 13,501
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 13,703 14,252
Loss on disposal of property, plant & equipment 226 3
Change in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accounts receivable, net (32,008) (54,619)
(Increase) decrease in inventories 54,417 46,542
(Increase) decrease in other assets 2,389 6,204
Increase (decrease) in accounts payable 3,088 9,909
Increase (decrease) in other current assets and liabilities 2,505 (1,690)
Increase (decrease) in sundry payable and accrued expenses 29,149 4,364
-------- --------
Net cash provided by operating activities: 94,335 38,466
-------- --------
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 201
Capital expenditures, net of effects from acquisitions (11,738) (11,410)
Proceeds from divestitures 4,160
Payments for acquisitions, net of cash acquired -- (16,313)
-------- --------
Net cash used in investing activities (7,377) (27,723)
-------- --------
Cash flows from financing activities:
Net borrowings (payments) under line-of-credit agreements (53,121) (19,804)
Proceeds from issuance of long-term debt 700 11,894
Principal payments of long-term debt (4,184) (2,904)
Reduction of loan to ESOP 1,665 1,680
Proceeds from exercise of employee stock options 1,040 29
Purchase of treasury stock (2,161) (153)
Dividends paid (1,048) (3,151)
-------- --------
Net cash provided by (used in) financing activities (57,109) (12,409)
-------- --------
Effect of exchange rate changes on cash (363) 139
-------- --------
Net increase (decrease) in cash 29,486 (1,527)
Cash and cash equivalents at beginning of period 16,809 4,666
-------- --------
Cash and cash equivalents at end of period $ 46,295 $ 3,139
======== ========
Non-cash investing and financing activities: Assets and liabilities assumed in
exchange transaction:
Current assets $ 61,051 $ --
Property, plant and equipment 11,600 --
Other assets 11,645 --
Current liabilities (5,108) --
-------- --------
Net assets assumed 79,188 --
-------- --------
Assets and liabilities divested in exchange transaction:
Current assets 40,330 --
Property, plant and equipment, net 27,968 --
Other assets 1,181 --
Current liabilities (4,288) --
-------- --------
Net assets divested 65,191 --
-------- --------
Notes payable (excess net fair value of assets assumed) $ 13,997 $ --
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 13,560 $ 14,975
Income taxes $ 237 $ 2,741
</TABLE>
6
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The accompanying unaudited financial information should be read in conjunction
with the consolidated financial statements, including the notes thereto, for the
year ended December 31, 1997.
The consolidated financial statements include the accounts of the Company and
all domestic and international companies in which the Company has more than a
50% equity ownership. The Company's investments in unconsolidated affiliates are
accounted for on the equity method. All significant intercompany items have been
eliminated.
Management acknowledges its responsibility for the preparation of the
accompanying interim consolidated financial statements which reflect all
adjustments considered necessary, in the opinion of management, for a fair
statement of the results of interim periods presented. The results of operations
for the interim periods are not necessarily indicative of the results of
operations for the entire year.
Where appropriate, certain amounts in 1997 have been reclassified to conform
with the 1998 presentation. Such reclassifications include amounts related to
the disposals of the Brake and Service Line businesses which have been accounted
for as discontinued operations and accordingly, their operating results are
segregated and reported separately in the accompanying consolidated statements
of operations.
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which became effective in January of 1998. This statement requires the
presentation of comprehensive income and its components in financial statements.
Accordingly, the Consolidated Statements of Comprehensive Income have been
included in the accompanying financial statements.
NOTE 2
INVENTORIES
-----------
(Dollars in thousands)
September 30, December 31,
1998 1997
-------------- --------------
(Unaudited)
Finished goods $ 98,021 $ 124,224
Work in process 4,438 5,392
Raw materials 49,150 59,390
-------------- --------------
Total inventories $ 151,609 $ 189,006
============== ==============
NOTE 3
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
(Dollars in thousands)
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
Land, buildings and improvements $ 63,633 $ 75,752
Machinery and equipment 87,491 104,178
Tools, dies and auxiliary equipment 8,916 10,029
Furniture and fixtures 20,830 22,841
Leasehold improvements 5,370 7,213
Construction in progress 18,682 8,840
------------- -------------
204,922 228,853
Less accumulated depreciation 95,689 102,829
------------- -------------
Total property, plant and
equipment - net $ 109,233 $ 126,024
============= =============
On March 28, 1998 the Company completed the exchange of its Brake business for
the Moog Automotive Temperature Control business of Cooper Industries. In
connection
7
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3, (CONTINUED)
with this exchange each party performed post closing reviews and several
adjustments have been made to the amounts which were originally recorded. In
addition, during the third quarter 1998, the Company revised the value of
certain assets acquired in the exchange to reflect their appropriate fair market
value and accordingly recorded goodwill for the differences.
NOTE 4
The provision for taxes is less than the normal statutory rate primarily because
earnings of a subsidiary operating in Puerto Rico, amounting to approximately
$5,576,000 and $7,673,000 for the nine months ended September 30, 1998 and 1997
and $1,813,000 and $2,658,000 for the three months ended September 30, 1998 and
1997, respectively, are exempt from United States income taxes and are partially
exempt from Puerto Rican income taxes.
In addition, the Company adjusted the valuation allowance applied against
deferred tax assets and realized certain tax benefits which reduced the
effective tax rate in 1998. In assessing the valuation allowance, the Company
reviewed the results of operations for the nine months ended September 30, 1998
and estimates regarding the future operations and the Company's ability to
generate sufficient taxable income to realize the deferred tax assets. The
Company will continue to evaluate its projected future results of operations and
consequently, further adjustments to the valuation allowance may be required.
NOTE 5
At September 30, 1998, the Company has principally two fixed stock-based
compensation plans. Under these plans, stock options to purchase common stock of
the Company are issued to certain employees and directors. These options become
exercisable and expire at various dates and have an exercise price, which is
equal to or greater than the stock's fair market value at the date of grant.
At September 30, 1998, 1,002,000 shares of authorized but unissued common stock
were reserved for issuance under the Company's stock option plans, of which
838,500 shares were subject to outstanding options. These outstanding options
were comprised of 636,000 options granted in prior years, plus 263,000 options
granted during the nine months ended September 30, 1998, less 58,000 exercised
and 2,500 forfeited during the nine months ended September 30, 1998.
At September 30, 1998, 334,250 outstanding options were vested. The unvested
outstanding options, in the amount of 504,250 will become vested in stages from
February 1999 through September 2001.
8
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6
LONG-TERM DEBT
--------------
(Dollars in thousands)
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
Long-term debt consists of:
8.06% senior note payable $ 73,000 $ 73,000
9.10% senior note payable 46,429 46,429
10.72% senior note payable 30,000 30,000
Credit Facility ($20 Million Canadian) 13,228 13,935
5.0% Notes Payable - AlliedSignal 5,000 5,000
5.53% - 10.08% Intermotor Facilities 6,894 7,524
6.38% - 9.06% Purchase Obligations 3,000 4,840
Credit Agreement --- 1,674
Other 1,362 1,080
------------- -------------
178,913 183,482
Less current portion 17,966 24,373
------------- -------------
Total noncurrent portion of
long-term debt $ 160,947 $ 159,109
============= =============
Under the terms of the $73,000,000 senior note agreement, the Company is
required to repay the loan in seven equal annual installments beginning in 2000.
Under the terms of the $46,429,000 senior note agreement, the Company is
required to repay the remaining loan in five equal annual installments from 1998
through 2002.
Under the terms of the $30,000,000 senior note agreement, the Company is
required to repay the loan in seven varying annual installments beginning in
1998. Subject to certain restrictions, the Company may make prepayments without
premium beginning in 1998.
Under the terms of the $20,000,000 CDN credit agreement, the Company is required
to repay the loan with three equal annual installments of $2,000,000 CDN
beginning in 1999 with a final payment of $14,000,000 CDN due in 2002. Subject
to certain restrictions, the Company can make prepayments without premium. The
credit agreement has various interest rate options.
Under the terms of the unsecured note agreement with AlliedSignal the $5,000,000
is to be repaid in two equal annual installments of $2,000,000 beginning in 1998
with a final payment of $1,000,000 due in 2000. A $2,000,000 repayment was made
on October 1, 1998.
The Company acquired a 73.4% equity interest in Intermotor Holdings Limited
during 1996. Intermotor has various existing credit facilities which mature by
2003.
The purchase obligations, due under agreements with municipalities, mature in
annual installments through 2003, and are secured by certain property, plant,
and equipment.
Certain loan agreements contain restrictive covenants which require the
maintenance, on a quarterly basis, of minimum working capital and tangible net
worth, as defined, and limit, among other items, investments, indebtedness and
distributions for the payment of dividends and the acquisition of capital stock.
9
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7
In October 1997, the Company signed a letter of intent to sell its Service Line
business to R & B, Inc. Closing on the sale of this business was scheduled in
three separate phases. The initial phases, which included the closing on the
Champ and APS Service Line and the Pik-A-Nut Fastener Line, were completed on
September 1, 1998 and October 1, 1998, respectively. The smallest segment,
namely the Everco Brass and Brake lines, is anticipated to close by December 31,
1998.
On March 28, 1998, the Company completed the exchange of its Brake business for
the Moog Automotive Temperature Control business of Cooper Industries. The
excess of the purchase price (fair value of the net assets divested plus the
note payable) over the fair value of the identifiable net assets received
amounted to approximately $11,645,000 in goodwill.
During the year ended December 31, 1997 the Company provided for estimated
losses on the disposal of these discontinued operations, which included
anticipated operating losses prior to disposal.
These businesses have been classified as discontinued operations in the
accompanying financial statements and as such the operating losses associated
with these businesses have been applied against the provisions for operating
losses established during 1997.
The accompanying financial statements reflect the disposition of selected assets
of the Brake business and the acquisition of selected assets of Moog Automotive
Temperature Control business. These amounts have been adjusted based upon the
completion of post closing reviews performed by both parties.
In July 1998, the Company signed a letter of intent to sell the assets of its
fuel pump business to The Pierce Company, Inc., a leading manufacturer of fuel
pumps. During the second quarter ended June 30, 1998 the Company recorded a
$1,500,000 provision to write down the assets of the fuel pump business to their
estimated net realizable value. This provision is anticipated to fully provide
for any loss incurred from the divestiture and consequently it is not expected
that any additional loss will be incurred upon the completion of the sale. The
Company completed the transaction in October 1998 and as such will reflect the
divestiture in the fourth quarter results.
NOTE 8
Other assets primarily consist of deferred new customer acquisition costs,
certain held-to-maturity securities, unamortized customer supply agreements,
equity in joint ventures and pension assets.
NOTE 9
Following is a reconciliation of the shares used in calculating basic and
dilutive net income per common share:
FOR THREE MONTHS ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average common
shares outstanding 13,080,996 13,131,515 13,086,736 13,131,515
Effect of dilutive
securities - options 141,165 38,570 95,938 582
---------- ---------- ---------- ----------
Weighted average common
equivalent shares
outstanding assuming
dilution 13,222,161 13,170,085 13,182,674 13,132,097
========== ========== ========== ==========
10
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 1998 the Company had stockholders' equity of $202,971,000
and working capital of $210,702,000. The Company expects capital expenditures
for the remainder of 1998 to be approximately $4,000,000, primarily for new
machinery and equipment.
In the first and second quarters of 1998 the Company suspended the dividend due
to losses incurred in the fourth quarter of 1997. The Company decided to
reinstate the dividend in the third and fourth quarters of 1998. The declaration
of a dividend in succeeding quarters will be reviewed based upon achieving
targeted financial results.
On March 30, 1998, the Company entered into an agreement for a new $108,500,000
short-term bank facility consisting of two segments, Segment A $78,500,000 and
Segment B $30,000,000. Segment B in the amount of $30,000,000 was retired in
July 1998, due to the Company's favorable cash flow over the first half of 1998
and was no longer necessary to finance the Company's current needs. The
remaining Segment A, in the amount of $78,500,000, which has been syndicated to
a group of six banks expires on November 30, 1998. Prior to the expiration of
this facility, it is the Company's intent to enter into a multi-year committed
bank credit facility to meet its working capital requirements and to raise
additional capital to fund the future growth opportunities of the Company.
In March 1998, the Company completed the exchange of its Brake business for the
Moog Automotive Temperature Control business of Cooper Industries. The fair
value of the assets received in this exchange exceeded the fair value of the
assets disposed of by approximately $13,997,000 and results in an equal amount
payable to Cooper Industries. This amount has been paid as the Company sells the
acquired finished goods inventory to third parties. Cooper Industries will
retain a security interest in approximately $15,000,000 of such inventory,
however, such interest will decrease as payments are made. As of September 30,
1998 the Company made repayments of $10,961,000. The remaining balance of
$3,036,000 was paid in October 1998.
In addition, the Company received short-term financing of $22,500,000 from
Cooper Industries in April 1998 to fund part of the operations of the acquired
temperature control business for the first year. The repayment of the
$22,500,000 note payable is based on a proportional paydown formula related to
the bank paydown, under the new credit facility. As of September 30, 1998, the
Company made repayments of $12,000,000 and made an additional payment of
$5,500,000 in October 1998. The remaining balance of $5,000,000 is expected to
be repaid by December 31, 1998.
In October 1997, the Company signed a letter of intent to sell its Service Line
business to R & B, Inc. Closing on the sale of this business was scheduled in
three separate phases. The initial phases, which included the closing on the
Champ and APS Service Line and the Pik-A-Nut Fastener Line, were completed on
September 1, 1998 and October 1, 1998, respectively. The smallest segment,
namely the Everco Brass and Brake lines, is anticipated to close by December 31,
1998.
In July 1998, the Company signed a letter of intent to sell its fuel pump
business to The Pierce Company, Inc. The decision to sell the fuel pump business
is a direct result of the Company's continued efforts to concentrate on its core
businesses. The fuel pump business did not contribute to the Company's long term
goals or near term profitability. As a result of the divestiture, the capital
invested in this business will be redeployed into projects with higher potential
returns and which support the Company's long term goals. A provision for loss on
disposal, in the amount of $1,500,000, established during the second quarter of
1998, is anticipated to fully provide for any potential loss from the
divestiture. The Company completed the sale in October 1998 and as such will
reflect the divestiture in the results for the fourth quarter of 1998.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
During the nine-month period ended September 30, 1998 total debt after the
inclusion of $13,997,000 in new debt from the exchange with Cooper Industries,
decreased by $43,215,000. This decrease was primarily the result of the
effective management of all assets, which included reductions in inventory and
in various new customer acquisition costs. Inventories decreased by
approximately $37,397,000 during the nine-month period. Excluding the effects of
the exchange with Cooper Industries, which resulted in an additional $21,782,000
in inventory, these reductions would have been more significant. Deferred new
customer acquisition costs of $2,763,000 were $5,742,000 or 68% lower than the
balance at year end 1997. Accounts receivable increased for the nine-month
period by $30,819,000 primarily due to increased volume of the Climate Control
Group and the seasonal nature of its dating programs. However as compared to
September 30, 1997, accounts receivable decreased by approximately $34,706,000.
These reductions, coupled with the Company's continued implementation of various
cost reduction programs, have resulted in significant decreases in total debt,
while at the same time cash balances have increased by $29,486,000.
YEAR 2000
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the Year 1900 rather than the Year
2000, which could result in miscalculations or system failures.
The Company is currently in the process of assessing its exposure to the Year
2000 problem, and has established a comprehensive response to that exposure.
Generally, the Company has Year 2000 exposure in two areas: (i) its information
technology("IT") systems and (ii) its non-IT systems. At June, 1998, the Company
had completed an inventory of its internal IT systems and made a preliminary
determination of which programs were or were not Year 2000 compliant. During the
period ending December 1998, the Company intends to test each significant
program, both IT and non-IT, which is believed to be Year 2000 compliant and to
remediate all significant programs that are not Year 2000 compliant. In some
cases, Year 2000 issues will be corrected in the development of new programs,
which enhance or provide new functionality to these financial and management
operating systems. The Company estimates the cost of this effort to be
approximately $500,000 which includes the costs for new computers and related
equipment. The Company expects to substantially complete Year 2000 testing and
remediation on its IT and non-IT systems by June 1999.
The Company has recently begun interviewing its suppliers, customers, financial
institutions and others with which it conducts business to determine the extent
to which the Company would be vulnerable to these third parties' failure to
remediate their own potential Year 2000 problems. The inability of these other
significant business partners to adequately address the Year 2000 issues could
cause disruption of the Company's operations.
The Company does not presently anticipate that the cost to address the Year 2000
issue will have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
Although the Company expects its internal IT and non-IT systems to be Year 2000
compliant as described above, the Company intends to prepare a contingency plan
that will specify what it plans to do if it or important external companies are
not Year 2000 compliant in a timely manner. These contingency plans will address
the most likely worst case Year 2000 scenarios. These plans are expected to be
finalized during the second quarter of 1999.
12
<PAGE>
INTERIM RESULTS OF OPERATIONS
- -----------------------------
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998
TO THE THREE MONTHS ENDED
- --------------------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Net sales for the current quarter increased by $46,047,000 or 29.7% from the
comparable period in 1997. The acquisition of the Cooper Industries temperature
control business added approximately $35,000,000 in sales for the quarter.
Excluding these sales, revenues for the quarter increased by approximately
$11,047,000 or 7.1%. This increase is primarily due to the strong demand for our
temperature control products resulting from the very hot summer across the
United States.
The gross margin percentage for the third quarter of 1998 of 31.0% was below the
32.2% achieved during the third quarter of 1997. This decline was primarily the
result of higher manufacturing costs associated with the Cooper Industries
temperature control inventory which was acquired on March 28, 1998. The impact
of these higher costs is expected to be eliminated later in 1999 as the acquired
inventory is depleted and manufacturing synergies are fully implemented.
Selling, general and administrative (S.G. & A.) expenses increased by $6,159,000
over the comparable quarter in 1997, however, as a percent of net sales
decreased by 2.6 percentage points (22.4% versus 25.0% in 1997). These
fluctuations represent reductions in most areas of our businesses, however, the
reductions were offset by additional costs incurred to support the Cooper
Industries temperature control business. Specific cost reductions from the
consolidation of the Cooper Industries temperature control business will
continue with the full implementation scheduled to be completed by the year
2000.
Other income - net for the third quarter of 1998 was unfavorably impacted by a
$1,000,000 provision related to the write down of the Company's OE projects.
This write down was determined to be necessary based upon the Company's
continued analysis of the commercial viability of these projects. In addition
$1,000,000 in expenses were reclassified from selling, general and
administrative expense to other income-net, reflecting the reclassification of
the write down of the China joint venture which was recorded during the second
quarter of 1998.
Interest expense increased by $745,000 as compared to 1997, due to the
combination of interest costs being allocated to discontinued operations in the
prior year and higher interest rates during the current year. Including amounts
allocated to discontinued operations, interest expense of $4,501,000 in the
third quarter of 1998 was $805,000 lower than interest of a year ago, primarily
as a result of lower outstanding borrowings. Further reductions in interest
expense are expected in future periods as the Company's interest rates decline
as a result of its increased operating margins and improved asset management.
Taxes based on earnings increased by $667,000 primarily due to improved earnings
before taxes partially offset by tax benefits resulting from the adjustment to
the Company's valuation allowance against net deferred tax assets (see note 4).
In accordance with the accounting treatment as discontinued operations, the
operating losses associated with the discontinued businesses for the three and
nine month periods ended September 30, 1998 were applied against provisions,
established in the prior year, and as such did not affect net income for the
periods ended September 30, 1998.
13
<PAGE>
INTERIM RESULTS OF OPERATIONS
- -----------------------------
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
- -------------------------------------------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Net sales for the nine-month period increased by $79,943,000 or 17.5% from the
comparable period in 1997. The acquisition of Cooper Industries temperature
control business added approximately $72,000,000 in sales for the nine-month
period. Excluding these sales, total revenues increased by approximately
$7,943,000 or 1.7%. This increase is primarily due to strong demand for our
temperature control products being offset by slight decreases in sales of engine
management products.
The gross margin percentage for the nine month-period in 1998 of 31.6% was
slightly below the 32.2% achieved during the comparable period in 1997. This
decrease was primarily the result of higher manufacturing costs associated with
the Cooper Industries temperature control inventory which was acquired on March
28, 1998. The impact of these higher costs is expected to be eliminated in 1999
as the acquired inventory is depleted and manufacturing synergies are fully
implemented
Selling, general and administrative (S.G. & A) expenses increased by $ 9,115,000
over the comparable period in 1997, however, as a percentage of net sales, S.G.
& A expense decreased by 2.3 percentage points (24.4% versus 26.7% in 1997).
This fluctuation represents reductions in most areas of our businesses as the
effects of our cost reduction programs are being realized. The reductions were
offset by additional costs to support the Cooper Industries temperature control
business. It is expected that as various synergies develop these costs will be
further reduced.
Results of operations for the nine month-period ended September 30, 1998 were
unfavorably impacted by $2,910,000 in expenses related to the write down of
various assets of the Company's OE and fuel pump businesses. The write down of
approximately $1,410,000 for the Company's OE ventures was determined to be
necessary based upon the Company's continued analysis of the commercial
viability of these projects. As previously discussed, a provision of $1,500,000
was established in relation to the planned divestiture of the fuel pump
business. This provision is anticipated to provide for any potential loss on the
divestiture of that business.
Other income - net was unfavorably impacted for the period by $2,000,000 in
expenses related to the write down of the Company's joint venture interest in a
OE project and a China venture to estimated net realizable value. These write
downs were determined to be necessary based upon the Company's analysis of the
commercial viability of these projects.
Interest expense increased by $1,896,000, as compared to 1997, due to the
combination of interest costs being allocated to discontinued operations in the
prior year and higher interest rates during the current year. Including amounts
allocated to discontinued operations, interest expense of $14,567,000 for the
nine-month period ended September 1998 was $1,117,000 lower than interest of a
year ago, primarily as a result of lower outstanding borrowings. Further
reductions in interest expense are expected in future periods as the Company's
interest rates decline as a result of its increased operating margins and
improved asset management.
Taxes based on earnings for the nine months ended September 30, 1998 increased
by $319,000 as compared to 1997 primarily due to improved earnings before taxes
partially offset by tax benefits resulting from adjustments made to the
Company's valuation allowance against net deferred tax assets (see note 4).
In accordance with the accounting treatment as discontinued operations, the
operating losses associated with the discontinued businesses for the three and
nine- month periods ended September 30, 1998 were applied against provisions,
established in the prior year, and as such did not affect net income for the
periods ended September 30, 1998.
14
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which became effective in
January of 1998. This statement requires the presentation of comprehensive
income and its components in financial statements. Accordingly, the Consolidated
Statements of Comprehensive Income have been included in the accompanying
financial statements.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement requires the disclosure of information relating to
each of the Company's key operating segments, as well as, various geographic and
major customer data. In accordance with the provisions of the statement interim
financial statements in the initial year of application need not present these
disclosures and as such the accompanying financial statements do not reflect the
related disclosures. These disclosures will be reflected in the Company's 1998
Annual Report and in all subsequent interim financial statements.
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) EXHIBIT(S)
----------
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
<S> <C> <C>
2.1 Asset Exchange Agreement dated as of March 28, *
1998 among SMP Motor Products, LTD., Standard
Motor Products, Inc., Cooper Industries (Canada)
Inc., Moog Automotive Company and Moog
Automotive Products, Inc., without exhibits and
schedules to said agreement filed as an Exhibit of
Registrant's Current Report on Form 8-K dated
March 28, 1998, is incorporated herein by reference.
10.17 Override and Amendment Agreement of March 27, 1998 *
amending the Note Agreement between the Registrant and the
American United Life Insurance Company, the Great
American Life Insurance Company, the Jefferson-Pilot
Life Insurance Company, the Ohio National Life Insurance Company,
the Crown Insurance Company, the Great-
West Life Insurance Company, the Security Mutual Life
Insurance Company, Woodmen Accident and Life Insurance
Company and Nomura Holding America, Inc. dated October 15,
1989 filed as an Exhibit of Registrant's Current Report on
Form 8-K dated March 28, 1998 is incorporated herein by
reference.
15
<PAGE>
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
10.18 Override and Amendment Agreement of March 27, 1998 amending *
the Note Agreement between the Registrant and Kemper
Investors Life Insurance Company, Federal Kemper Life
Assurance Company, Lumbermens Mutual Casualty Company,
Fidelity Life Association, American Motorists Insurance
Company, American Manufacturers Mutual Insurance
Company, Allstate Life Insurance Company, Teachers
Insurance & Annuity Association of America, and
Phoenix Home Life Mutual Insurance Company dated
November 15, 1992 filed as an Exhibit of Registrant's
Current Report on Form 8-K dated March 28, 1998 is
incorporated herein by reference.
10.19 Override and Amendment Agreement of March 27, 1998 *
amending the Note Agreement between the Registrant
Life and Metropolitan Insurance Company, the Travelers
Insurance Company, Connecticut Life Insurance Company,
CIGNA Property and Casualty Insurance Company, Life
Insurance Company of North America and American United
Life Insurance Company dated December 1, 1995 filed as an
Exhibit of Registrant's Current Report on Form 8-K
dated March 28, 1998 is incorporated herein by reference.
10.20 Revolving Credit and Guarantee Agreement dated March *
30, 1998 among Standard Motor Products, Inc., Reno
Standard Incorporated, Mardevco Credit Corp., Stanric,
Inc., The Chase Manhattan Bank, The Bank of New York,
Fleet Bank, National Association, NBD Bank, Canadian
Imperial Bank of Commerce and Comerica Bank filed as
an Exhibit of Registrant's Current Report on Form 8-K
dated March 28, 1998 is incorporated herein by reference.
10.21 1994 Omnibus Stock Option Plan of Standard Motor Products, *
Inc., as amended, is incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8
(333-51565), dated May 1, 1998.
10.22 Standard Motor Products, Inc. Independent Directors' Stock *
Option Plan, is incorporated by reference to the
Company's Registration Statement on Form S-8 (333-51619),
dated May 1, 1998.
27.1 Financial Data Schedule for September 30, 1998. Filed with
this Document
27.2 Restated Financial Data Schedule for September 30, 1997. Filed with
this Document
<FN>
* INCORPORATED HEREIN BY REFERENCE
</FN>
</TABLE>
(b) REPORTS ON FORM 8-K
(1) A Current Report on Form 8-K, dated March 28, 1998, was filed
for the acquisition and disposition of a significant amount of
assets and for certain other events.
(2) A Current Report on Form 8-K, dated May 14, 1998, amended the
previously filed Form 8-K dated March 28, 1998, to include pro
forma financial information as required.
16
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(Registrant)
NOVEMBER 13, 1998 /S/JAMES J. BURKE
- ----------------- -----------------
(Date) Director of Finance,
Chief Accounting Officer
17
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 46,295
<SECURITIES> 0
<RECEIVABLES> 181,845
<ALLOWANCES> (22,135)
<INVENTORY> 151,609
<CURRENT-ASSETS> 411,110
<PP&E> 109,233
<DEPRECIATION> (95,689)
<TOTAL-ASSETS> 585,961
<CURRENT-LIABILITIES> 200,408
<BONDS> 160,947
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0
26,649
<OTHER-SE> 176,322
<TOTAL-LIABILITY-AND-EQUITY> 585,961
<SALES> 536,104
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<CGS> 366,834
<TOTAL-COSTS> 366,834
<OTHER-EXPENSES> 127,949
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<INCOME-TAX> 3,287
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<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.58
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,137
<SECURITIES> 2
<RECEIVABLES> 216,551
<ALLOWANCES> (8,475)
<INVENTORY> 187,453
<CURRENT-ASSETS> 437,306
<PP&E> 127,489
<DEPRECIATION> (100,378)
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<CURRENT-LIABILITIES> 210,875
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26,649
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<CGS> 309,185
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<OTHER-EXPENSES> 119,597
<LOSS-PROVISION> 1,994
<INTEREST-EXPENSE> 10,930
<INCOME-PRETAX> 15,570
<INCOME-TAX> 2,968
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