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 JUNE 30, 2000
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-4743
------
STANDARD MOTOR PRODUCTS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-1362020
-------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(718) 392-0200
--------------
(Registrant's telephone number, including area code)
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
-----------
COMMON STOCK PAR
----------------
JULY 31, 2000 VALUE $2.00 PER SHARE 12,445,179
------------- --------------------- ----------
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL AND OTHER INFORMATION
JUNE 30, 2000
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 PAGE NO.
------ --------
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999 3 & 4
CONSOLIDATED STATEMENTS OF EARNINGS AND
RETAINED EARNINGS for the Three-Month and Six-Month
periods ended June 30, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS for the
Six-Month periods ended June 30, 2000 and 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 11
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12 - 14
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II - OTHER INFORMATION
---------------------------
ITEM 1
Legal Proceedings 15
ITEM 4
Submission of Matters to a Vote of Security Holders 15
ITEM 6
Exhibits and Reports on Form 8-K 16
Signature 16
2
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
2000 1999
---------------------------------------------------------------------------------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,081 $ 40,380
Accounts and notes receivable, net of
allowance for doubtful accounts and
discounts of $7,215 (1999 - $4,611) (Note 6) 193,813 119,635
Inventories (Note 2) 222,082 188,400
Deferred income taxes 13,827 13,830
Prepaid expenses and other current assets 13,974 12,448
-------- --------
Total current assets 449,777 374,693
-------- --------
Property, plant and equipment, net of
Accumulated depreciation (Note 3) 106,056 106,578
Goodwill, net 40,705 41,619
Other assets 30,690 33,131
-------- --------
Total assets $627,228 $556,021
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for shares and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
2000 1999
-----------------------------------------------------------------------------------------------------
(Unaudited)
Current liabilites:
<S> <C> <C>
Notes payable (Note 4) $ 87,711 $ 2,645
Current portion of long-term debt (Note 5) 14,773 28,912
Accounts Payable 62,970 41,708
Sundry payables and accrued expenses 56,950 64,826
Accrued customer returns 28,369 22,698
Payroll and commissions 8,588 8,098
- -------- -------
Total current liabilites 259,361 168,887
- -------- -------
Long-term debt (Note 5) 152,182 163,868
Postretirement benefits other than pensions
and other accrued liabilities 20,322 19,748
- -------- -------
Total liabilities 431,865 352,503
- -------- -------
Commitments and contingencies (Notes 4, 5, 8, 10 and 12)
Stockholders' equity (Notes 5, 7, 8, 9 and 10):
Common stock - par value $2.00 per share
Authorized - 30,000,000 shares
Issued - 13,324,476 shares in 2000 and 1999
(including 1,568,197 and 598,154 shares held
as treasury shares in 2000 and
1999, respectively) 26,649 26,649
Capital in excess of par value 2,541 2,957
Retained earnings 189,550 184,848
Accumulated other comprehensive income 667 714
- -------- -------
219,407 215,168
Less: treasury stock - at cost 24,044 11,650
- -------- -------
Total stockholders' equity 195,363 203,518
- -------- -------
Total liabilities and stockholders' equity $627,228 $556,021
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Dollars in thousands, except for shares and per share data)
(Unaudited)
For Three-Months Ended For Six-Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $176,285 $205,714 $323,044 $382,503
Cost of sales 118,619 140,625 218,059 264,194
---------- ---------- ---------- ----------
Gross profit 57,666 65,089 104,985 118,309
Selling, general and administrative expenses 43,015 42,929 86,198 87,361
---------- ---------- ---------- ----------
Operating income 14,651 22,160 18,787 30,948
Other income (expense) - net 61 (516) 485 (829)
Interest expense 4,747 4,802 8,654 8,243
---------- ---------- ---------- ----------
Earnings before taxes, minority interest
and extraordinary item 9,965 16,842 10,618 21,876
Income taxes 2,956 4,768 3,185 6,016
Minority interest 27 (41) (12) (179)
---------- ---------- ---------- ----------
Earnings before extraordinary item 7,036 12,033 7,421 15,681
Extraordinary loss on early extinguishment of debt,
net of taxes - - (501) -
---------- ---------- ---------- ----------
Net earnings 7,036 12,033 6,920 15,681
Retained earnings at beginning of period 183,627 184,276 184,848 181,679
---------- ---------- ---------- ----------
190,663 196,309 191,768 197,360
Less: cash dividends for period 1,113 1,051 2,218 2,102
---------- ---------- ---------- ----------
Retained earnings at end of period $189,550 $195,258 $189,550 $195,258
=========== =========== =========== ===========
PER SHARE DATA:
Net earnings per common share - basic:
Earnings per share before extraordinary item $0.59 $0.92 $0.61 $1.20
Extraordinary loss on early extinguishment of debt - - (0.04) -
---------- ---------- ---------- ----------
Net earnings per common share - basic $0.59 $0.92 $0.57 $1.20
=========== ========== =========== ===========
Net earnings per common share - diluted:
Earnings per share before extraordinary item $0.54 $0.91 $0.61 $1.19
Extraordinary loss on early extinguishment of debt - - (0.04) -
---------- ---------- ---------- ----------
Net earnings per common share - diluted $0.54 $0.91 $0.57 $1.19
=========== ========== =========== ===========
Average number of common shares 11,937,798 13,136,458 12,173,673 13,112,189
=========== ========== =========== ===========
Average number of common and dilutive shares 14,756,196 13,238,017 12,254,753 13,210,327
=========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Six-Months Ended
June 30,
-------------------------
2000 1999
----- ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,920 $ 15,681
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 9,251 8,729
Equity Loss (income) from joint ventures (343) 876
Employee Stock Ownership Plan Allocation 487 1,001
Extraordinary Loss on repayment of debt 865 -
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable, net (73,957) (117,236)
Increase in inventories (32,905) (4,758)
Increase in other current assets (1,523) (6)
Decrease in other assets 3,939 2,706
Increase in accounts payable 20,771 13,564
(Decrease) increase in sundry payables and accrued expenses (7,845) 15,465
Increase in other liabilities 5,672 3,756
------- --------
Net cash used in operating activities (68,668) (60,222)
------- --------
Cash flows from investing activities:
Proceeds from the sale of property, plant & equipment 657 -
Capital expenditures, net of effects from acquisitions (8,473) (7,288)
Payments for acquisitions, net of cash acquired (1,353) (17,381)
------- --------
Net cash used in investing activities (9,169) (24,669)
------- --------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 85,112 69,702
Principal payments and retirement of long-term debt (25,766) (5,652)
Purchase of treasury stock (13,842) (1,495)
Dividends paid (2,218) (2,102)
Proceeds from exercise of employee stock options - 1,311
------- --------
Net cash provided by financing activities 43,286 61,764
------- --------
Effect of exchange rate changes on cash 252 630
Net decrease in cash (34,299) (22,497)
Cash and cash equivalents at beginning of the period 40,380 23,457
------- --------
Cash and cash equivalents at end of the period $ 6,081 $ 960
======= =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,691 $ 7,995
======= =====
Income taxes $ 944 $ 76
======= =====
</TABLE>
See accompanying notes to consolidated financial statements.
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, 1999.
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 inter-company 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 1999 have been reclassified to conform
with the 2000 presentation.
NOTE 2
<TABLE>
<CAPTION>
INVENTORIES
-----------
(Dollars in Thousands)
June 30, 2000 (unaudited) December 31, 1999
--------------------------- -----------------
<S> <C> <C>
Finished Goods $127,498 $110,802
Work in Process 4,206 5,393
Raw Materials 90,378 72,205
------- -------
Total inventories $222,082 $188,400
======== ========
</TABLE>
NOTE 3
<TABLE>
<CAPTION>
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
(Dollars in thousands)
June 30, 2000 December 31, 1999
(unaudited)
---------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Land, buildings and improvements $60,449 $ 60,046
Machinery and equipment 100,326 99,223
Tools, dies and auxiliary equipment 10,891 10,691
Furniture and fixtures 32,375 24,783
Leasehold improvements 6,525 6,247
Construction in progress 10,987 12,986
-------- --------
221,553 213,976
Less: accumulated depreciation 115,497 107,398
-------- --------
Total property, plant and equipment - net $106,056 $106,578
======== ========
</TABLE>
7
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4
On November 30, 1998, the Company entered into a three-year revolving credit
facility with eight lending institutions, providing for an unsecured line of
credit of $110,000,000. The facility allows the Company to select from two
interest rate options, one based on a spread over the prime rate and the other
based on a spread over LIBOR. The spread above each interest rate option is
determined by the Company's ratio of Consolidated Debt to Earnings Before
Interest, Taxes, Depreciation and Amortization.
The terms of the revolving credit facility, as amended, include, among other
provisions, the requirement for a clean-down provision where during the period
from September 1 through December 31 of each year of the facility, the Company
must clean down to zero for 30 consecutive days and for a 30 day period
immediately prior to or immediately following the clean-down period the
outstanding loans cannot exceed $10,000,000. In addition, the facility requires
the maintenance of defined levels of tangible net worth, various financial
performance ratios and restrictions on capital expenditures, dividend payments,
acquisitions and additional indebtedness. At June 30, 2000, the Company did not
comply with a maximum leverage covenant requirement for which the Company
received amendments dated August 11, 2000. One of the amendments changes the
clean-down provision where during the period from October 1 through December 31,
2000, the Company is required to clean down the outstanding loans to $30 million
(vs. zero) for 30 consecutive days. At June 30, 2000, borrowings under the
Company's aggregate revolving credit facilities amounted to $87.7 million.
NOTE 5
<TABLE>
<CAPTION>
LONG-TERM DEBT
--------------
(Dollars in thousands)
June 30, 2000 December 31, 1999
(unaudited)
------------------- --------------------
Long Term Debt Consists of:
<S> <C> <C>
6.75% convertible subordinated debentures $ 90,000 $ 90,000
7.56% senior note payable 62,571 73,000
10.22% senior note payable -- 14,000
Canadian Credit Facility 6,748 6,811
5.0% Notes Payable - Honeywell 1,000 1,000
5.0% - 8.8% Facilities 4,063 4,941
7.5% - 10.5% Purchase Obligations 1,833 2,166
Other 740 862
------------------ -------------------
166,955 192,780
Less: current portion 14,773 28,912
------------------ -------------------
Total non-current portion of
long-term debt $152,182 $163,868
================== ===================
</TABLE>
On July 26, 1999, the Company completed a public offering of convertible
subordinated debentures amounting to $90,000,000. The Convertible Debentures
carry an interest rate of 6.75%, payable semi-annually, and will mature on July
15, 2009. The Debentures are convertible into 2,796,000 shares of the Company's
common stock.
Under the terms of the 7.56% senior note agreement, the Company is required to
repay the loan in seven equal annual installments beginning in 2000.
8
<PAGE>
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 (CONTINUED)
Under the terms of the $14,000,000 senior note agreement, the Company was
required to repay the loan in four varying annual installments from 2000 through
2003. The Company elected to prepay the balance on March 13, 2000. In connection
with this prepayment, the Company incurred an extraordinary loss for prepayment
penalties and the write-off of deferred loan costs amounting to $501,000, net of
taxes.
Under the terms of a Canadian (CDN) credit agreement, the Company is required to
repay the loan as follows: $2,000,000 CDN in 2000 and 2001 and a final payment
of $6,000,000 CDN in 2002. Subject to certain restrictions, the Company can make
prepayments without premium. The credit agreement has various interest rate
options.
Under the terms of the unsecured note agreement with Honeywell (formerly
AlliedSignal), the final payment of $1,000,000 is due in 2000.
The Company holds a 74.3% equity interest in Standard Motor Products Holdings
Limited, formerly Intermotor Holdings Limited, which 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 note agreements contain restrictive covenants which require the
maintenance of defined levels of working capital, tangible net worth and
earnings and limit, among other items, investments, indebtedness and
distributions for the payment of dividends and the acquisition of capital stock.
NOTE 6
The Company sells certain accounts receivable to an independent financial
institution, through its wholly owned subsidiary, SMP Credit Corp., a qualifying
special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three
year agreement whereby it can sell up to a $25 million undivided ownership
interest in a designated pool of certain of these eligible receivables. This
agreement expires in March 2002. The terms of the agreement contain restrictive
covenants, including the maintenance of defined levels of tangible net worth. At
June 30, 2000, net accounts receivables amounting to $25,000,000 had been sold
under this agreement.
NOTE 7
Total comprehensive income was $6,783,000 and $12,455,000 for the three-month
periods ended June 30, 2000 and 1999, respectively, and $6,873,000 and
$16,644,000 for the six month periods ended June 30, 2000 and 1999,
respectively.
NOTE 8
At June 30, 2000, 1,369,154 shares of authorized but unissued common stock were
reserved for issuance under the Company's stock option plans, of which 1,190,325
shares were subject to outstanding options. 548,835 of these outstanding options
were vested at June 30, 2000.
9
<PAGE>
NOTE 9
Following are reconciliations of the earnings available to common stockholders
and the shares used in calculating basic and dilutive net income per common
share:
<TABLE>
<CAPTION>
For Three-Months Ended For Six-Months Ended
June 30, June 30,
-------------------------------------- ---------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before extraordinary item $7,036,000 $12,033,000 $7,421,000 $15,681,000
Extraordinary item -- -- (501,000) --
---------------- ----------------- ----------------- -----------------
Earnings available to common stockholders 7,036,000 12,033,000 6,920,000 15,681,000
Effect of convertible debentures 911,000 -- -- --
---------------- ----------------- ----------------- -----------------
Net earnings available to common
stockholders assuming $7,947,000 $12,033,000 $6,920,000 $15,681,000
dilution ================ ================= ================= =================
Weighted average common shares 11,937,798 13,136,458 12,173,673 13,112,189
Effect of convertible debentures 2,796,000 -- -- --
Effect of stock options 22,398 101,559 81,080 98,138
---------------- ----------------- ----------------- -----------------
Weighted average common
equivalent shares
outstanding 14,756,196 13,238,017 12,254,753 13,210,327
assuming dilution ================ ================= ================= =================
</TABLE>
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.
<TABLE>
<CAPTION>
For Three-Months Ended For Six-Months Ended
June 30, June 30,
-------------------------------------- ---------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Stock options 911,979 144,582 777,825 144,582
Convertible debentures -- -- 2,796,000 --
================ ================= ================= =================
</TABLE>
NOTE 10
In fiscal 2000, the Company created an employee benefits trust to which it
contributed 750,000 shares of treasury stock. The Company is authorized to
instruct the trustees to distribute such shares toward the satisfaction of the
Company's future obligations under Employee Benefit Plans. The shares held in
trust are not considered outstanding for purposes of calculating earnings per
share until they are committed to be released. The trustees will vote the shares
in accordance with its fiduciary duties. As of June 30, 2000, the Company had
not committed any shares to be released.
NOTE 11
The Company's two reportable operating segments are Engine Management and
Temperature Control. Effective with the beginning of fiscal 2000, the Company
reclassified certain European operations from the Engine Management and
Temperature control segments to a separate segment, which currently do not meet
the criteria of a reportable segment. Amounts in 1999 have been reclassified to
conform to the 2000 presentation.
<TABLE>
<CAPTION>
Industry Segment
(Dollars in thousands)
For the three-months ended June 30,
------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ---------------------------------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Engine Management $72,867 $10,000 $76,689 $8,711
Temperature Control 92,678 10,169 116,605 16,391
All Other 10,740 (5,518) 12,420 (2,942)
------------------ ----------------- ----------------- -----------------
Consolidated $176,285 $14,651 $205,714 $22,160
================== ================= ================= =================
</TABLE>
10
<PAGE>
NOTE 11 (CONTINUED)
<TABLE>
<CAPTION>
Industry Segment
(Dollars in thousands)
For the six-months ended June 30,
------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ---------------------------------------
NET SALES OPERATING INCOME NET SALES OPERATING INCOME
<S> <C> <C> <C> <C>
Engine Management $146,022 $17,574 $155,280 $15,644
Temperature Control 154,720 10,907 207,632 23,764
All Other 22,302 (9,694) 19,591 (8,460)
-------------- ---------- ---------- -------------
Consolidated $323,044 $18,787 $382,503 $30,948
============== ========== ========== =============
</TABLE>
All other consists of items pertaining to European and Canadian operations and
the corporate headquarters function which do not meet the criteria of a
reportable segment.
The following table reconciles the measure of profit used in the previous
disclosure to the Company's consolidated Earnings before taxes, minority
interest and extraordinary item:
<TABLE>
<CAPTION>
For Three-Months Ended For Six-Months Ended
June 30, June 30,
------------------------------------------ -------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income $14,651 $22,160 $18,787 $30,948
Other income (expense) 61 (516) 485 (829)
Interest expense 4,747 4,802 8,654 8,243
---------------- ----------------- ----------------- -----------------
Earnings before taxes
and minority interest $9,965 $16,842 $10,618 $21,876
================== ================= ================= =================
</TABLE>
NOTE 12
On January 28, 2000, a former significant customer of the Company currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including the Company. The claim
against the Company alleges $19,759,000 of preferential payments in the 90 days
prior to the related Chapter 11 bankruptcy petition. In addition, this former
customer seeks $10,500,000 from the Company for a variety of claims including
antitrust, breach of contract, breach of warranty and conversion. These latter
claims arise out of allegations that this customer was entitled to various
discounts, rebates and credits after it filed for bankruptcy. The Company
believes that these matters will not have a material effect on the Company's
consolidated financial position or results of operations.
The Company is involved in various other litigation matters arising in the
ordinary course of business. Although the final outcome of these matters cannot
be determined, it is management's opinion that the final resolution of these
matters will not have a material effect on the Company's consolidated financial
position or results of operations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
FORM 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
In the first six months of 2000, cash used in operations amounted to $68.7
million, as compared to $60.2 million in the same period of 1999. The change is
primarily attributable to a decrease in net sales of $59.5 million, as compared
to the same period in 1999. Lower than expected net sales have reduced net
earnings and negatively impacted inventory levels. Of the $59.5 million net
sales decrease, the Temperature control segment represents $52.9 million of such
decrease. The most significant contributor for this decrease is our retail
customers achieving substantial inventory reductions during the first six months
of this year. With respect to inventory levels, the Company anticipates a
decrease in Temperature Control inventories, as efforts are underway to more
closely align production levels with anticipated sales.
Cash used in investing activities was $9.2 million in the first six months of
2000, as capital expenditures and payments for acquisitions were partially
offset by proceeds from the sale of property, plant and equipment. In January
2000 the Company completed the purchase of Vehicle Air Conditioning Parts,
located in England, which has subsequently been renamed "Four Seasons UK, LTD."
The purchase will assist in distributing components for the repair of air
conditioning systems. Total acquisition price was approximately $1.4 million.
Cash provided by financing activities was $43.3 million in the first six months
of 2000, as compared to $61.8 million in the same period of 1999, the decrease
reflecting higher long-term debt payments and repurchase of company stock.
Payments under the Company's long-term debt arrangements during the first six
months of 2000 amounted to $25.8 million and reflected a $14 million prepayment
of a 10.22% senior note. In connection with this prepayment, the Company
reflected an extraordinary loss of approximately $0.5 million in the first
quarter of 2000 related to prepayment penalties and the write-off of deferred
loan costs.
In 1998 and 1999 the Board of Directors authorized three repurchase programs
under which the Company could repurchase a total of 1,050,000 shares of its
common stock at a cost of up to $22 million. The stock purchased is to be used
to meet present and future requirements of the Company's stock option programs
and to fund the Company's ESOP. On March 2, 2000 the Board of Directors
authorized an additional share repurchase program at a cost of up to $8 million.
During the first six months of 2000, the Company repurchased approximately 1.1
million shares at a cost of approximately $13.8 million. At June 30, 2000 the
Company may repurchase additional shares at a maximum aggregate cost of $2.2
million.
On November 30, 1998, the Company entered into a three-year revolving credit
facility with eight lending institutions, providing for an $110,000,000
unsecured line of credit. The facility allows the Company to select from two
interest rate options, one based on a spread over the prime rate and the other
based on a spread over LIBOR. The spread above each interest rate option is
determined by the Company's ratio of Consolidated Debt to Earnings Before
Interest, Taxes, Depreciation and Amortization.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
-------------------------------------------
The terms of the revolving credit facility, as amended, include, among other
provisions, the requirement for a clean-down provision where during the period
from September 1 through December 31 of each year of the facility, the Company
must clean down to zero for 30 consecutive days and for a 30 day period
immediately prior to or immediately following the clean-down period the
outstanding loans cannot exceed $10,000,000. In addition, the facility requires
the maintenance of defined levels of tangible net worth, various financial
performance ratios and restrictions on capital expenditures, dividend payments,
acquisitions and additional indebtedness. At June 30, 2000, the Company did not
comply with a maximum leverage covenant requirement for which the Company
received amendments dated August 11, 2000. One of the amendments changes the
clean-down provision where during the period from October 1 through December 31,
2000, the Company is required to clean down the outstanding loans to $30 million
(vs. zero) for 30 consecutive days. At June 30, 2000, borrowings under the
Company's aggregate revolving credit facilities amounted to $87.7 million.
The Company sells certain accounts receivable to an independent financial
institution, through its wholly owned subsidiary, SMP Credit Corp., a qualifying
special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three
year agreement whereby it can sell up to a $25 million undivided ownership
interest in a designated pool of certain of these eligible receivables. This
agreement expires in March 2002. The terms of the agreement contain restrictive
covenants, including the maintenance of defined levels of tangible net worth. At
June 30, 2000, net accounts receivables amounting to $25,000,000 had been sold
under this agreement.
The Company's profitability and working capital requirements have become more
seasonal with the increased sales mix of temperature control products. Working
capital requirements usually peak near the end of the second quarter, as the
inventory build-up of air conditioning products is converted to sales and
payments on the receivables associated with such sales begin to be received.
These increased working capital requirements are funded by borrowings from lines
of credit.
The Company anticipates that its present sources of funds will continue to be
adequate to meet its near term needs.
INTERIM RESULTS OF OPERATIONS
-----------------------------
COMPARISON OF THE THREE-MONTHS ENDED JUNE 30, 2000 TO THE THREE-MONTHS
----------------------------------------------------------------------
ENDED JUNE 30, 1999
-------------------
On a consolidated basis, net sales in the second quarter of 2000 were $176.3
million, a decrease of $29.4 million from the second quarter of 1999. Net Sales
in Temperature Control decreased by $23.9 million, primarily due to our retail
customers achieving substantial inventory reductions during the first six months
of this year. With respect to inventory levels, the Company anticipates a
decrease in Temperature Control inventories, as efforts are underway to more
closely align production levels with anticipated sales. Net sales declines in
Engine Management reflect the continued weakness in the automotive aftermarket.
Gross margins, as a percentage of net sales, increased to 32.7% in the second
quarter of 2000 from 31.6% in the second quarter of 1999. On an overall basis,
this increase reflects an increase in net pricing and a focus on cost reduction
programs.
Selling, general and administrative expenses (SG&A) remained relatively flat in
the second quarter of 2000, as compared to the second quarter of 1999.
Operating income decreased by $7.5 million in the second quarter of 2000, as
compared to the second quarter of 1999, primarily due to the net sales decline
in Temperature Control discussed above. Results of Engine Management as compared
to a year ago, reflect an increase in operating income of $1.3 million,
reflecting price increases and a continued focus on cost reduction programs.
Other income, net, increased in the first quarter 2000, as compared to the first
quarter of 1999, primarily due to the Company's 1999 fourth quarter decision to
exit its Heat Battery joint venture in Canada and earnings generated by other
equity investments.
The Company's effective tax rate increased from 28% in the second quarter in
1999 to 30% in 2000. The current effective tax rate reflects the Company's
anticipated tax rate for the balance of the year.
13
<PAGE>
INTERIM RESULTS OF OPERATIONS
-----------------------------
COMPARISON OF THE SIX-MONTHS ENDED JUNE 30, 2000 TO THE SIX-MONTHS
------------------------------------------------------------------
ENDED JUNE 30, 1999
-------------------
Net sales for the six-month period June 30, 2000, decreased by $59.5 million, to
$323 million, as compared to the same period in 1999. Temperature Control net
sales declined by $52.9 million to $154.7 million for the six month period June
30, 2000, as compared to the same period in 1999. Engine Management sales
decreased by $9.3 million to $146 million, primarily due to the general softness
in the automotive after-market.
Gross margins improved in 2000 to 32.5% compared to 30.9% in the same period in
1999, reflecting an increase in net pricing and the Company's overall cost
cutting measures.
Sales, general and administrative expenses (S,G & A) have decreased by $1.2
million dollars as compared to the same period in 1999, reflecting the Company's
overall cost cutting programs and lower compensation costs relative to the
Company's EVA incentive program and retirement/profit sharing program.
Operating income decreased by $12.2 million dollars in 2000 as compared to the
six month period in 1999, primarily due to the Temperature Control division
sales decline discussed previously. Engine Management division increased
operating income by $1.9 million in 2000, as compared to the same period in
1999, largely due to the cost-cutting measures and price increases discussed
previously.
Other income increased by $1.3 million to $485,000 in 2000, as compared to a
loss in 1999, because of the Company's decision to exit the Heat Battery joint
venture in December 1999 and earnings generated by other equity investments.
Interest expense increased by $411,000 to $8.7 million in 2000 compared to 1999
due to a mix of higher aggregate borrowings and an increase in variable
borrowing rates.
For the six month period, June 30, 2000, as compared to the same period in 1999,
the effective tax rate increased from 28% to 30%. The current effective tax rate
reflects the Company's anticipated tax rate for the balance of the year.
On March 13, 2000 the Company prepaid the entire outstanding balance of the
10.22 % senior note in the amount of $14 million. In connection with this
prepayment, the Company incurred an extraordinary loss of $.5 million, net of
taxes, for prepayment penalties and the write-off of deferred loan costs.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
As a result of principal payments on long term debt and an increase in short
term borrowings during the first quarter of 2000, the Company's percentage of
variable rate debt to total debt has increased from 7% at December 31, 1999 to
39% at June 30, 2000.
Other than the aforementioned, there have been no significant changes to the
information presented in Item 7A (Market Risk) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
14
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-------------------------
On January 28, 2000, a former significant customer of the Company currently
undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims
against a number of its former suppliers, including the Company. The claim
against the Company alleges $19,759,000 of preferential payments in the 90 days
prior to the related Chapter 11 bankruptcy petition. In addition, this former
customer seeks $10,500,000 from the Company for a variety of claims including
antitrust, breach of contract, breach of warranty and conversion. These latter
claims arise out of allegations that this customer was entitled to various
discounts, rebates and credits after it filed for bankruptcy. The Company
believes that these matters will not have a material effect on the Company's
consolidated financial position or results of operations.
The Company is involved in various other litigation matters arising in the
ordinary course of business. Although the final outcome of these matters cannot
be determined, it is management's opinion that the final resolution of these
matters will not have a material effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------------------
(a) May 18, 2000 Annual Meeting
(b) Directors Elected -- Nathaniel L. Sills
Lawrence I. Sills
Arthur D. Davis
Susan F. Davis
William H. Turner
John L. Kelsey
Robert J. Swartz
Marilyn F. Cragin
Arthur S. Sills
Robert M. Gerrity
Kenneth A. Lehman
(c) Proposals voted upon:
(I) Election of Directors:
VOTES FOR VOTES WITHHELD
--------- --------------
Nathaniel L. Sills 8,459,018 2,024,366
Lawrence I. Sills 8,470,705 2,024,251
Arthur D. Davis 8,472,744 2,024,085
Susan F. Davis 8,478,928 2,024,645
William H. Turner 8,481,782 2,024,632
John L. Kelsey 8,481,757 2,024,632
Robert J. Swartz 8,481,782 2,024,632
Marilyn F. Cragin 8,479,478 2,024,083
Arthur S. Sills 8,473,546 2,024,266
Robert M. Gerrity 8,476,979 2,024,632
Kenneth A. Lehman 8,476,688 2,024,928
(2) Managements Proposal to Amend the Company's 1994 Omnibus
Stock Option Plan
VOTED FOR VOTED AGAINST ABSTAINED
--------- ------------- ---------
8,013,930 2,435,182 196,335
(3) Shareholder Proposal Concerning Preferred Share Purchase
Rights
VOTED FOR VOTED AGAINST ABSTAINED
--------- ------------- ---------
3,465,087 6,374,962 66,284
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
27 Financial Data Schedule Filed with this Document
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for this period.
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)
AUGUST 11, 2000 JAMES J. BURKE
--------------- -------------------------------
(Date) Vice President Finance,
Chief Financial Officer
16
