form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2011
or
o 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 incorporation or organization) |
|
(I.R.S. Employer 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)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o |
Accelerated Filer þ |
Non-Accelerated Filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of the close of business on October 31, 2011, there were 22,633,956 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In thousands, except share and per share data)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
236,220 |
|
|
$ |
227,540 |
|
|
$ |
700,455 |
|
|
$ |
637,939 |
|
Cost of sales
|
|
|
171,732 |
|
|
|
167,526 |
|
|
|
519,642 |
|
|
|
475,718 |
|
Gross profit
|
|
|
64,488 |
|
|
|
60,014 |
|
|
|
180,813 |
|
|
|
162,221 |
|
Selling, general and administrative expenses
|
|
|
41,680 |
|
|
|
41,991 |
|
|
|
122,336 |
|
|
|
120,459 |
|
Restructuring and integration expenses
|
|
|
275 |
|
|
|
1,388 |
|
|
|
743 |
|
|
|
3,430 |
|
Other income, net
|
|
|
258 |
|
|
|
1,436 |
|
|
|
789 |
|
|
|
1,952 |
|
Operating income
|
|
|
22,791 |
|
|
|
18,071 |
|
|
|
58,523 |
|
|
|
40,284 |
|
Other non-operating income, net
|
|
|
230 |
|
|
|
300 |
|
|
|
673 |
|
|
|
480 |
|
Interest expense
|
|
|
757 |
|
|
|
1,844 |
|
|
|
3,159 |
|
|
|
5,710 |
|
Earnings from continuing operations before taxes
|
|
|
22,264 |
|
|
|
16,527 |
|
|
|
56,037 |
|
|
|
35,054 |
|
Provision for income taxes
|
|
|
8,164 |
|
|
|
5,430 |
|
|
|
21,233 |
|
|
|
13,029 |
|
Earnings from continuing operations
|
|
|
14,100 |
|
|
|
11,097 |
|
|
|
34,804 |
|
|
|
22,025 |
|
Loss from discontinued operations, net of income taxes
|
|
|
(1,055 |
) |
|
|
(1,441 |
) |
|
|
(1,714 |
) |
|
|
(2,309 |
) |
Net earnings
|
|
$ |
13,045 |
|
|
$ |
9,656 |
|
|
$ |
33,090 |
|
|
$ |
19,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share – Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
0.62 |
|
|
$ |
0.49 |
|
|
$ |
1.53 |
|
|
$ |
0.98 |
|
Discontinued operations
|
|
|
(0.05 |
) |
|
|
(0.06 |
) |
|
|
(0.08 |
) |
|
|
(0.10 |
) |
Net earnings per common share – Basic
|
|
$ |
0.57 |
|
|
$ |
0.43 |
|
|
$ |
1.45 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share – Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
0.61 |
|
|
$ |
0.48 |
|
|
$ |
1.51 |
|
|
$ |
0.97 |
|
Discontinued operations
|
|
|
(0.04 |
) |
|
|
(0.06 |
) |
|
|
(0.08 |
) |
|
|
(0.10 |
) |
Net earnings per common share – Diluted
|
|
$ |
0.57 |
|
|
$ |
0.42 |
|
|
$ |
1.43 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.21 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares
|
|
|
22,863,048 |
|
|
|
22,597,117 |
|
|
|
22,812,851 |
|
|
|
22,528,108 |
|
Average number of common shares and dilutive common shares
|
|
|
23,042,981 |
|
|
|
23,472,411 |
|
|
|
23,299,363 |
|
|
|
22,604,344 |
|
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
(In thousands, except share and per share data)
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
14,898 |
|
|
$ |
12,135 |
|
Accounts receivable, less allowance for discounts and doubtful accounts of $7,036 and $6,779 for 2011 and 2010, respectively
|
|
|
137,521 |
|
|
|
104,986 |
|
Inventories, net
|
|
|
233,995 |
|
|
|
241,158 |
|
Deferred income taxes
|
|
|
15,184 |
|
|
|
18,135 |
|
Assets held for sale
|
|
|
216 |
|
|
|
216 |
|
Prepaid expenses and other current assets
|
|
|
7,085 |
|
|
|
8,076 |
|
Total current assets
|
|
|
408,899 |
|
|
|
384,706 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
60,114 |
|
|
|
60,666 |
|
Goodwill
|
|
|
14,304 |
|
|
|
1,437 |
|
Other intangibles, net
|
|
|
16,474 |
|
|
|
11,050 |
|
Deferred income taxes
|
|
|
11,956 |
|
|
|
21,347 |
|
Other assets
|
|
|
11,996 |
|
|
|
13,595 |
|
Total assets
|
|
$ |
523,743 |
|
|
$ |
492,801 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$ |
41,790 |
|
|
$ |
52,887 |
|
Current portion of long-term debt
|
|
|
107 |
|
|
|
12,402 |
|
Accounts payable
|
|
|
68,060 |
|
|
|
49,919 |
|
Sundry payables and accrued expenses
|
|
|
35,583 |
|
|
|
29,280 |
|
Accrued customer returns
|
|
|
32,626 |
|
|
|
23,207 |
|
Accrued rebates
|
|
|
29,344 |
|
|
|
23,668 |
|
Payroll and commissions
|
|
|
24,074 |
|
|
|
23,468 |
|
Total current liabilities
|
|
|
231,584 |
|
|
|
214,831 |
|
Long-term debt
|
|
|
221 |
|
|
|
307 |
|
Accrued postretirement benefits
|
|
|
5,918 |
|
|
|
21,044 |
|
Other accrued liabilities
|
|
|
16,779 |
|
|
|
21,944 |
|
Accrued asbestos liabilities
|
|
|
26,248 |
|
|
|
24,792 |
|
Total liabilities
|
|
|
280,750 |
|
|
|
282,918 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock – par value $2.00 per share: Authorized – 30,000,000 shares; issued 23,936,036 shares
|
|
|
47,872 |
|
|
|
47,872 |
|
Capital in excess of par value
|
|
|
78,723 |
|
|
|
77,471 |
|
Retained earnings
|
|
|
125,837 |
|
|
|
97,535 |
|
Accumulated other comprehensive income
|
|
|
4,396 |
|
|
|
716 |
|
Treasury stock – at cost 1,239,204 and 1,276,044 shares in 2011 and 2010, respectively
|
|
|
(13,835 |
) |
|
|
(13,711 |
) |
Total stockholders’ equity
|
|
|
242,993 |
|
|
|
209,883 |
|
Total liabilities and stockholders’ equity
|
|
$ |
523,743 |
|
|
$ |
492,801 |
|
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net earnings
|
|
$ |
33,090 |
|
|
$ |
19,716 |
|
Adjustments to reconcile net earnings to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,429 |
|
|
|
10,030 |
|
Increase (decrease) to allowance for doubtful accounts
|
|
|
(8 |
) |
|
|
778 |
|
Increase to inventory reserves
|
|
|
2,375 |
|
|
|
4,801 |
|
Amortization of deferred gain on sale of building
|
|
|
(786 |
) |
|
|
(786 |
) |
Gain on disposal of property, plant and equipment
|
|
|
(31 |
) |
|
|
(1,615 |
) |
Equity income from joint ventures
|
|
|
(327 |
) |
|
|
(116 |
) |
Employee stock ownership plan allocation
|
|
|
1,885 |
|
|
|
1,225 |
|
Stock-based compensation
|
|
|
1,541 |
|
|
|
1,256 |
|
Decrease in deferred income taxes
|
|
|
12,457 |
|
|
|
5,585 |
|
Decrease in unrecognized tax benefit
|
|
|
(454 |
) |
|
|
(1,084 |
) |
Loss on discontinued operations, net of tax
|
|
|
1,714 |
|
|
|
2,309 |
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(30,583 |
) |
|
|
(47,166 |
) |
Decrease (increase) in inventories
|
|
|
8,615 |
|
|
|
(35,769 |
) |
Decrease in prepaid expenses and other current assets
|
|
|
349 |
|
|
|
481 |
|
Increase in accounts payable
|
|
|
8,507 |
|
|
|
20,683 |
|
Increase in sundry payables and accrued expenses
|
|
|
21,374 |
|
|
|
26,932 |
|
Net changes in other assets and liabilities
|
|
|
(12,859 |
) |
|
|
(2,324 |
) |
Net cash provided by operating activities
|
|
|
57,288 |
|
|
|
4,936 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of property, plant and equipment
|
|
|
35 |
|
|
|
11 |
|
Net cash received from the sale of land and buildings
|
|
|
— |
|
|
|
2,559 |
|
Divestiture of joint ventures
|
|
|
1,273 |
|
|
|
1,000 |
|
European distribution business
|
|
|
1,317 |
|
|
|
— |
|
Capital expenditures
|
|
|
(6,682 |
) |
|
|
(9,112 |
) |
Acquisitions of businesses and assets
|
|
|
(26,984 |
) |
|
|
(2,024 |
) |
Net cash used in investing activities
|
|
|
(31,041 |
) |
|
|
(7,566 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (repayments of) borrowings under line-of-credit agreements
|
|
|
(11,097 |
) |
|
|
3,228 |
|
Principal payments of long-term debt and capital lease obligations
|
|
|
(12,381 |
) |
|
|
(5,399 |
) |
Increase in overdraft balances
|
|
|
9,441 |
|
|
|
10,625 |
|
Purchase of treasury stock
|
|
|
(3,285 |
) |
|
|
— |
|
Proceeds from exercise of employee stock options
|
|
|
204 |
|
|
|
— |
|
Excess tax benefits related to the exercise of employee stock grants
|
|
|
154 |
|
|
|
— |
|
Adjustment to costs related to issuance of common stock
|
|
|
— |
|
|
|
36 |
|
Payments of debt issuance cost
|
|
|
(400 |
) |
|
|
(56 |
) |
Dividends paid
|
|
|
(4,788 |
) |
|
|
(3,376 |
) |
Net cash (used in) provided by financing activities
|
|
|
(22,152 |
) |
|
|
5,058 |
|
Effect of exchange rate changes on cash
|
|
|
(1,332 |
) |
|
|
361 |
|
Net increase in cash and cash equivalents
|
|
|
2,763 |
|
|
|
2,789 |
|
CASH AND CASH EQUIVALENTS at beginning of period
|
|
|
12,135 |
|
|
|
10,618 |
|
CASH AND CASH EQUIVALENTS at end of period
|
|
$ |
14,898 |
|
|
$ |
13,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
2,340 |
|
|
$ |
3,919 |
|
Income taxes
|
|
$ |
10,354 |
|
|
$ |
1,529 |
|
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Nine Months Ended September 30, 2011
(Unaudited)
(In thousands)
|
|
Common Stock
|
|
|
Capital in Excess of Par Value
|
|
|
Retained Earnings
|
|
|
Accumulated Other Comprehensive Income
|
|
|
Treasury Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$ |
47,872 |
|
|
$ |
77,471 |
|
|
$ |
97,535 |
|
|
$ |
716 |
|
|
$ |
(13,711 |
) |
|
$ |
209,883 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
33,090 |
|
|
|
|
|
|
|
|
|
|
|
33,090 |
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500 |
) |
|
|
|
|
|
|
(1,500 |
) |
Pension and retiree medical adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,180 |
|
|
|
|
|
|
|
5,180 |
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,770 |
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
(4,788 |
) |
|
|
|
|
|
|
|
|
|
|
(4,788 |
) |
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,285 |
) |
|
|
(3,285 |
) |
Stock-based compensation and related tax benefits
|
|
|
|
|
|
|
683 |
|
|
|
|
|
|
|
|
|
|
|
1,012 |
|
|
|
1,695 |
|
Stock options and related tax benefits
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
204 |
|
Employee Stock Ownership Plan
|
|
|
|
|
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
1,966 |
|
|
|
2,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
$ |
47,872 |
|
|
$ |
78,723 |
|
|
$ |
125,837 |
|
|
$ |
4,396 |
|
|
$ |
(13,835 |
) |
|
$ |
242,993 |
|
See accompanying notes to consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
Standard Motor Products, Inc. (referred to hereinafter in these notes to the consolidated financial statements as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of replacement parts for motor vehicles in the automotive aftermarket industry with an increasing focus on the original equipment service market.
The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership. Our investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest. All significant inter-company items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.
Immaterial Correction Related to Prior Periods
During the year ended December 31, 2010, we identified an immaterial correction related to our classification in the consolidated statements of operations of gains/losses on the sale of long-lived assets. As a result, we have adjusted certain prior period amounts within continuing operations on the consolidated statements of operations for the three and nine months ended September 30, 2010. Such correction was limited to classification within continuing operations on the consolidated statements of operations and did not impact the consolidated balance sheet, consolidated statements of cash flows or the consolidated statements of changes in stockholders’ equity and comprehensive income. See Note 1 of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010 for additional information.
Note 2. Summary of Significant Accounting Policies
The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. We have made a number of estimates and assumptions in the preparation of these consolidated financial statements. We can give no assurance that actual results will not differ from those estimates. 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 postretirement benefits, asbestos, environmental and litigation matters, the valuation of deferred tax assets and sales return allowances.
The impact and any associated risks related to significant accounting policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Recently Issued Accounting Pronouncements
Presentation of Comprehensive Income
In June 2011, the FASB amended Accounting Standard Codification (“ASC”) 220, Comprehensive Income. The amendment eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. In accordance with the amendment an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in one continuous statement or in two separate, but consecutive, statements. Additionally, reclassification adjustments from other comprehensive income to net income will be presented on the face of the financial statements. The amendment is effective for annual reporting periods beginning after December 15, 2011, which for us is January 1, 2012 with full retrospective application required. As a result, the adoption of this standard will change how we present other comprehensive income, as it is currently presented as part of our consolidated statement of changes in stockholders’ equity.
Goodwill Impairment Testing
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. The new standard is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, which for us is January 1, 2012. Early adoption is permitted. We will consider this new standard when conducting our annual impairment test of goodwill.
In December 2010, the FASB issued ASU 2010-28, which updated ASC 350, Intangibles – Goodwill and Other. Pursuant to ASC 350, goodwill is tested for impairment using a two-step approach. Initially, the fair value of a reporting unit is compared to its carrying amount. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit; a second step of comparing the carrying amount to its implied fair value is required, as this is an indication that the reporting unit goodwill may be impaired. The new standard sets forth a requirement that the second step test must be performed in circumstances where a reporting unit has a zero or negative carrying amount and there are qualitative factors which indicate that it is more likely than not that an impairment exists. The new standard is effective for annual reporting periods beginning after December 15, 2010, which for us was January 1, 2011. Currently, none of our reporting units have a zero or negative carrying amount. As a result, the adoption of this standard will not have an immediate impact on the manner in which we conduct our impairment testing.
Revenue Arrangements with Multiple Deliverables
In October 2009, the FASB issued ASU 2009-13, which will update ASC 605, Revenue Recognition, and changes the accounting for certain revenue arrangements. The new standard sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010, which for us was January 1, 2011. The adoption of these provisions did not have a material impact on our consolidated financial position, results of operations and cash flows.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 3. Engine Controls Acquisition
In April 2011, we acquired the Engine Controls business of BLD Products, Ltd., a subsidiary of Qualitor Inc., for $27 million in cash funded by our revolving line of credit. As part of the acquisition, we acquired certain assets and assumed certain liabilities of BLD’s Engine Controls business in Holland, Michigan, and acquired 100% of the equity of Novo Products Inc. located in Ocala, Florida. The acquired business is a manufacturer of a range of products including fuel pressure regulators, air by-pass valves, idle air control valves, and PCV valves. Revenues generated from the acquired business were approximately $18 million for the year-ended December 31, 2010, of which approximately 40% of the volume was sold to us.
In connection with the purchase, $7.2 million was allocated to customer relationships and will be amortized on a straight line basis over the estimated useful life of 10 years. Goodwill of $12.9 million was allocated to the Engine Management Segment and is deductible for income tax purposes. The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values (in thousands):
Purchase Price
|
|
|
|
|
$ |
26,984 |
|
Assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
Inventory
|
|
|
3,826 |
|
|
|
|
|
Other current assets
|
|
|
1,947 |
|
|
|
|
|
Property, plant and equipment, net
|
|
|
1,965 |
|
|
|
|
|
Intangible assets
|
|
|
7,200 |
|
|
|
|
|
Goodwill
|
|
|
12,867 |
|
|
|
|
|
Current liabilities
|
|
|
(821 |
) |
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$ |
26,984 |
|
Note 4. Restructuring and Integration Costs
The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of December 31, 2010 and September 30, 2011 and activity for the nine months ended September 30, 2011 consisted of the following (in thousands):
|
|
Workforce Reduction
|
|
|
Other Exit Costs
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
6,220 |
|
|
$ |
2,435 |
|
|
$ |
8,655 |
|
Restructuring and integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
239 |
|
|
|
504 |
|
|
|
743 |
|
Non-cash usage, including asset write-downs
|
|
|
-- |
|
|
|
(343 |
) |
|
|
(343 |
) |
Cash payments
|
|
|
(4,402 |
) |
|
|
(574 |
) |
|
|
(4,976 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
2,057 |
|
|
$ |
2,022 |
|
|
$ |
4,079 |
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Restructuring Costs
Voluntary Separation Program
During 2008 as part of an initiative to improve the effectiveness and efficiency of operations, and to reduce costs in light of economic conditions, we implemented certain organizational changes and offered eligible employees a voluntary separation package. The restructuring accrual relates to severance and other retiree benefit enhancements to be paid through 2015. Of the original restructuring charge of $8 million, we have $1.7 million remaining as of September 30, 2011 that is expected to be paid in the amounts of $0.4 million in 2011, $0.5 million in 2012 and $0.8 million for the period 2013-2015.
Activity, by segment, for the nine months ended September 30, 2011 related to the voluntary separation program, consisted of the following (in thousands):
|
|
Engine Management
|
|
|
Temperature Control
|
|
|
Other
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
970 |
|
|
$ |
321 |
|
|
$ |
915 |
|
|
$ |
2,206 |
|
Restructuring costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Cash payments
|
|
|
(167 |
) |
|
|
(54 |
) |
|
|
(311 |
) |
|
|
(532 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
803 |
|
|
$ |
267 |
|
|
$ |
604 |
|
|
$ |
1,674 |
|
Integration Expenses
Overhead Cost Reduction Program
Beginning in 2007 in connection with our efforts to improve our operating efficiency and reduce costs, we announced our intention to focus on company-wide overhead and operating expense cost reduction activities, such as closing excess facilities and reducing redundancies. Integration expenses remaining under this program to date relate primarily to the closure of our production operations in Corona, California and Edwardsville, Kansas. We expect that all payments related to the current liability will be made within twelve months.
Activity for the nine months ended September 30, 2011 related to our overhead cost reduction program, consisted of the following (in thousands):
|
|
Workforce Reduction
|
|
|
Other Exit Costs
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
853 |
|
|
$ |
686 |
|
|
$ |
1,539 |
|
Integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
194 |
|
|
|
309 |
|
|
|
503 |
|
Non-cash usage, including asset write-downs
|
|
|
-- |
|
|
|
(343 |
) |
|
|
(343 |
) |
Cash payments
|
|
|
(804 |
) |
|
|
(284 |
) |
|
|
(1,088 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
243 |
|
|
$ |
368 |
|
|
$ |
611 |
|
Reynosa Integration Program
During 2008, we closed our Long Island City, New York and Puerto Rico manufacturing facilities and integrated these operations in Reynosa, Mexico. In connection with the shutdown of the manufacturing operations at Long Island City, we incurred severance costs and costs associated with equipment removal, capital expenditures and environmental clean-up. As of September 30, 2011, the reserve balance related to environmental clean-up at Long Island City of $1.7 million is included in other exit costs.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
In connection with the shutdown of the manufacturing operations at Long Island City, we entered into an agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 365 (“UAW”). As part of the agreement, we incurred a withdrawal liability from a multi-employer plan. The pension plan withdrawal liability is related to trust asset under-performance in a plan that covers our former UAW employees at the Long Island City facility and was payable quarterly for 20 years at $0.3 million per year, which commenced in December 2008. In June 2011, we agreed to settle our pension withdrawal liability for $2.8 million and recorded a gain of $0.3 million in connection with the settlement.
Activity for the nine months ended September 30, 2011 related to the Reynosa integration program, consisted of the following (in thousands):
|
|
Workforce Reduction
|
|
|
Other Exit Costs
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
3,161 |
|
|
$ |
1,749 |
|
|
$ |
4,910 |
|
Integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
(225 |
) |
|
|
70 |
|
|
|
(155 |
) |
Cash payments
|
|
|
(2,877 |
) |
|
|
(165 |
) |
|
|
(3,042 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
59 |
|
|
$ |
1,654 |
|
|
$ |
1,713 |
|
Engine Controls Relocation
During April 2011, we acquired the Engine Controls business of BLD Products, Ltd., a subsidiary of Qualitor Inc. As a result of our acquisition, we will incur integration costs within our Engine Management Segment related to employee severance and the relocation of certain machinery and equipment to our Reynosa, Mexico manufacturing facility. We expect that all related payments will be made within twelve months.
Activity for the nine months ended September 30, 2011 related to the engine controls relocation program, consisted of the following (in thousands):
|
|
Workforce Reduction
|
|
|
Other Exit Costs
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
270 |
|
|
|
125 |
|
|
|
395 |
|
Cash payments
|
|
|
(189 |
) |
|
|
(125 |
) |
|
|
(314 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
81 |
|
|
$ |
-- |
|
|
$ |
81 |
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Integration activity, by segment, for the nine months ended September 30, 2011 related to our aggregate integration programs consisted of the following (in thousands):
|
|
Engine Management
|
|
|
Temperature Control
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
5,580 |
|
|
$ |
869 |
|
|
$ |
6,449 |
|
Integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
626 |
|
|
|
117 |
|
|
|
743 |
|
Non-cash usage, including asset write-downs
|
|
|
(343 |
) |
|
|
-- |
|
|
|
(343 |
) |
Cash payments
|
|
|
(3,611 |
) |
|
|
(833 |
) |
|
|
(4,444 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
2,252 |
|
|
$ |
153 |
|
|
$ |
2,405 |
|
Assets Held for Sale
As of September 30, 2011, we have reported $0.2 million as assets held for sale on our consolidated balance sheet related to the net book value of vacant land located in the U.K. Following plant closures resulting from integration activities, this facility had been vacant, and in July 2011, we signed an agreement to sell the property pending the procurement of satisfactory planning permission. We expect there will be a gain on the sale of the property and will record the resulting gain in other income (expense), net included in operating income (loss) in the consolidated statement of operations, upon completion of such sale.
Note 5. Sale of Receivables
From time to time, we sell undivided interests in certain of our receivables to financial institutions. We enter these agreements at our discretion when we determine that the cost of factoring is less than the cost of servicing our receivables with existing debt. Pursuant to these agreements, we sold $159 million and $449.7 million of receivables during the three months and nine months ended September 30, 2011, respectively. Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale. As such, these transactions are being accounted for as a sale. A charge in the amount of $2.3 million and $6.4 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months and nine months ended September 30, 2011, respectively, and $1.8 million and $4.8 million for the comparable periods in 2010.
Note 6. Inventories, net
Inventories, which are stated at the lower of cost (determined by means of the first-in, first-out method) or market, consist of (in thousands):
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
|
(In thousands)
|
|
Finished goods, net
|
|
$ |
148,383 |
|
|
$ |
162,885 |
|
Work in process, net
|
|
|
5,852 |
|
|
|
5,672 |
|
Raw materials, net
|
|
|
79,760 |
|
|
|
72,601 |
|
Total inventories, net
|
|
$ |
233,995 |
|
|
$ |
241,158 |
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 7. Credit Facilities and Long-Term Debt
Total debt outstanding is summarized as follows:
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revolving credit facilities
|
|
$ |
41,790 |
|
|
$ |
52,887 |
|
15% convertible subordinated debentures (1)
|
|
|
-- |
|
|
|
12,300 |
|
Other
|
|
|
328 |
|
|
|
409 |
|
Total debt
|
|
$ |
42,118 |
|
|
$ |
65,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of debt
|
|
$ |
41,897 |
|
|
$ |
65,289 |
|
Long-term debt
|
|
|
221 |
|
|
|
307 |
|
Total debt
|
|
$ |
42,118 |
|
|
$ |
65,596 |
|
|
(1)
|
On April 15, 2011, we settled at maturity the $12.3 million principal amount of our 15% convertible subordinated debentures with funds from our revolving credit facility.
|
Deferred Financing Costs
We had deferred financing cost of $4.1 million and $4.9 million as of September 30, 2011 and December 31, 2010, respectively. Deferred financing costs are related to our revolving credit facility and 15% convertible subordinated debentures. Deferred financing costs as of September 30, 2011 are being amortized in the amount of $0.3 million in 2011, $1.2 million in 2012, $1.2 million in 2013, $1.1 million in 2014 and $0.3 million in 2015.
Revolving Credit Facility
In November 2010, we entered into a Third Amended and Restated Credit Agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility. This restated credit agreement replaces our prior credit facility with General Electric Capital Corporation. The restated credit agreement (as amended in September 2011) provides for a line of credit of up to $200 million (inclusive of the Canadian revolving credit facility described below) and expires in March 2015. Direct borrowings under the restated credit agreement bear interest at the LIBOR rate plus the applicable margin (as defined), or floating at the index rate plus the applicable margin, at our option. The interest rate may vary depending upon our borrowing availability. The restated credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.
In September 2011, we amended our restated credit agreement (1) to extend the maturity date of our credit facility to March 2015, (2) to reduce the margin added to the LIBOR rate to 1.75% - 2.25%, (3) to reduce the margin added to the index rate to 0.75% - 1.25% and (4) to provide us with greater flexibility regarding permitted acquisitions and stock repurchases.
Borrowings under the restated credit agreement are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of certain of our subsidiaries. After taking into account outstanding borrowings under the restated credit agreement, there was an additional $121 million available for us to borrow pursuant to the formula at September 30, 2011. Outstanding borrowings under the restated credit agreement (inclusive of the Canadian revolving credit facility described below), which are classified as current liabilities, were $41.8 million and $52.9 million at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, the weighted average interest rate on our restated credit agreement was 2.1%, which consisted of $40 million in direct borrowings at 2% and an index loan of $1.8 million at 4%. At December 31, 2010, the weighted average interest rate on our restated credit agreement was 3.1%, which consisted of $52 million at 3.1% and an index loan of $0.9 million at 4.5%. During the nine months ended September 30, 2011 our average daily index loan balance was $5.4 million compared to $7.7 million for the nine months ended September 30, 2010 and $7.1 million for the year ended December 31, 2010.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
At any time that our average borrowing availability over the previous thirty days is less than $30 million or if our borrowing availability is $20 million or less, and until such time that we have maintained an average borrowing availability of $30 million or greater for a continuous period of ninety days, the terms of our restated credit agreement 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), and (2) to limit capital expenditure levels. As of September 30, 2011, we were not subject to these covenants. Availability under our restated credit agreement is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. Our restated credit agreement also permits dividends and distributions by us provided specific conditions are met.
Canadian Revolving Credit Facility
In May 2010, we amended our Canadian Credit Agreement with GE Canada Finance Holding Company, for itself and as agent for the lenders. The amended Canadian Credit Agreement provided for the conversion of the then existing $10 million line of credit into a revolving credit facility. The Canadian $10 million line of credit is part of the $200 million available for borrowing under our restated credit agreement with General Electric Capital Corporation.
In November 2010 and September 2011, we further amended our Canadian Credit Agreement to extend the maturity date of the agreement to March 2015 and modify certain provisions, including interest rates, to parallel the revolving credit provisions of the restated credit agreement (described above). The amended credit agreement is guaranteed and secured by us and certain of our wholly-owned subsidiaries. Direct borrowings under the amended credit agreement bear interest at the same rate as our restated credit agreement with General Electric Capital Corporation. As of September 30, 2011, we have no outstanding borrowings under the Canadian Credit Agreement.
Subordinated Debentures
In May 2009, we exchanged $12.3 million aggregate principal amount of our outstanding 6.75% convertible subordinated debentures due 2009 for a like principal amount of newly issued 15% convertible subordinated debentures due 2011. The convertible subordinated debentures were subordinated in right of payment to all of our existing and future senior indebtedness. On April 15, 2011, we settled at maturity the $12.3 million outstanding principal amount of the 15% convertible subordinated debentures with funds from our revolving credit facility.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Capital Leases
During 2010 and 2009, we entered into capital lease obligations related to certain equipment for use in our operations of $0.2 million and $0.4 million, respectively. As of September 30, 2011, our remaining capital lease obligations totaled $0.3 million. Assets held under capitalized leases are included in property, plant and equipment and depreciated over the lives of the respective leases or over their economic useful lives, whichever is less.
Note 8. Stock-Based Compensation Plans
We account for our stock-based compensation plans in accordance with the provisions of Accounting Standards Codification 718, “Stock Compensation,” which requires that a company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the statement of operations over the period during which an employee is required to provide service in exchange for the award.
Stock Option Grants
The following is a summary of the changes in outstanding stock options for the nine months ended September 30, 2011:
|
|
Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (Years) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
312,024 |
|
|
$ |
13.12 |
|
|
|
3.2 |
|
Expired
|
|
|
(49,324 |
) |
|
$ |
15.74 |
|
|
|
— |
|
Exercised
|
|
|
(17,000 |
) |
|
$ |
11.91 |
|
|
|
— |
|
Forfeited, other
|
|
|
(1,500 |
) |
|
$ |
14.23 |
|
|
|
3.0 |
|
Outstanding and exercisable at September 30, 2011
|
|
|
244,200 |
|
|
$ |
12.67 |
|
|
|
3.1 |
|
The aggregate intrinsic value of all outstanding stock options as of September 30, 2011 was $0.2 million. All outstanding stock options as of September 30, 2011 are fully vested and exercisable. The total intrinsic value of options exercised was $42,489 for the nine months ended September 30, 2011. There were no options granted in the nine months ended September 30, 2011.
Restricted and Performance Stock Grants
As part of the 2006 Omnibus Incentive Plan, we currently grant shares of restricted and performance-based stock to eligible employees and directors. Selected executives and other key personnel are granted performance awards whose vesting is contingent upon meeting various performance measures with a retention feature. Performance-based shares are subject to a three year measuring period and the achievement of performance targets and, depending upon the achievement of such performance targets, they may become vested on the third anniversary of the date of grant. Each period we evaluate the probability of achieving the applicable targets, and we adjust our accrual accordingly. Restricted shares granted to employees become fully vested upon the third anniversary of the date of grant; and for selected key executives certain restricted share grants vest 25% upon the attainment of age 60, 25% upon the attainment of age 63 and become fully vested upon the attainment of age 65. Restricted shares granted to directors become fully vested upon the first anniversary of the date of grant. Forfeitures on restricted stock grants are estimated at 5% for employees and 0% for executives and directors, respectively, based on our evaluation of historical and expected future turnover.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Our restricted and performance-based share activity was as follows for the nine months ended September 30, 2011:
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value Per Share |
|
Balance at December 31, 2010
|
|
|
364,800 |
|
|
$ |
10.68 |
|
Granted
|
|
|
203,750 |
|
|
|
12.21 |
|
Vested
|
|
|
(68,575 |
) |
|
|
6.69 |
|
Forfeited
|
|
|
(35,575 |
) |
|
|
7.34 |
|
Balance at September 30, 2011
|
|
|
464,400 |
|
|
$ |
12.19 |
|
We recorded compensation expense related to restricted shares and performance-based shares of $1,162,000 ($722,000 net of tax) and $874,000 ($550,000 net of tax) for the nine months ended September 30, 2011 and 2010, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $4.1 million at September 30, 2011, and is expected to be recognized as they vest over a weighted average period of 5.2 and 0.6 years for employees and directors, respectively.
Note 9. Employee Benefits
During the second quarter of 2011, we announced that our postretirement medical benefit plans to substantially all eligible U.S. and Canadian employees will terminate on December 31, 2016. There will be no change to the eligibility or plan provided to the 64 former union employees. The remeasurement of the postretirement medical benefit plans resulting from these benefit modifications generated a $14.4 million reduction in the accumulated postretirement benefit obligation and a $3.6 million curtailment gain. The remaining unrecognized prior service cost is being amortized on a straight-line basis over the remaining term of the plan. The $3.6 million curtailment gain is included in selling, general and administrative expenses in the consolidated statement of operations.
The discount rate assumptions used to determine the remeasurement of the costs and benefit obligation related to our U.S. and Canadian postretirement plans were 1.87% and 3.75%, respectively. These rates reflect the shorter duration of our obligation as a result of the negative plan amendments.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The components of net periodic benefit cost for our defined benefit plans and postretirement benefit plans for the three months and nine months ended September 30, 2011 and 2010 were as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Pension Benefits
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Service cost
|
|
$ |
36 |
|
|
$ |
22 |
|
|
$ |
110 |
|
|
$ |
67 |
|
Interest cost
|
|
|
59 |
|
|
|
36 |
|
|
|
179 |
|
|
|
109 |
|
Amortization of prior service cost
|
|
|
30 |
|
|
|
40 |
|
|
|
84 |
|
|
|
120 |
|
Actuarial net (gain) loss
|
|
|
91 |
|
|
|
— |
|
|
|
275 |
|
|
|
— |
|
Net periodic benefit cost
|
|
$ |
216 |
|
|
$ |
98 |
|
|
$ |
648 |
|
|
$ |
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
1 |
|
|
$ |
47 |
|
|
$ |
75 |
|
|
$ |
143 |
|
Interest cost
|
|
|
35 |
|
|
|
290 |
|
|
|
516 |
|
|
|
903 |
|
Amortization of prior service cost
|
|
|
(1,642 |
) |
|
|
(2,257 |
) |
|
|
(4,873 |
) |
|
|
(6,772 |
) |
Amortization of transition obligation
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
Actuarial net loss
|
|
|
728 |
|
|
|
315 |
|
|
|
1,473 |
|
|
|
1,001 |
|
Curtailment gain
|
|
|
— |
|
|
|
— |
|
|
|
(3,647 |
) |
|
|
— |
|
Net periodic benefit cost
|
|
$ |
(878 |
) |
|
$ |
(1,604 |
) |
|
$ |
(6,454 |
) |
|
$ |
(4,722 |
) |
For the nine months ended September 30, 2011, we made employee benefit contributions of $0.9 million related to our postretirement plans. Based on current actuarial estimates, we believe we will be required to make approximately $1.1 million in contributions for 2011.
We maintain a 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. In March 2011, contributions of $0.2 million were made related to calendar year 2010.
We maintain 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 their fiduciary duties. During 2011, we contributed to the trust an additional 180,000 shares from our treasury and released 183,000 shares from the trust leaving 3,930 shares remaining in the trust as of September 30, 2011.
Note 10. Fair Value Measurements
We follow a three-level fair value hierarchy that prioritizes the inputs to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Level 3: Significant unobservable inputs that reflect assumptions that market participants would use in pricing an asset or liability.
The following is a summary of the carrying amounts and estimated fair values of our financial instruments at September 30, 2011 and December 31, 2010 (in thousands):
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
14,898 |
|
|
$ |
14,898 |
|
|
$ |
12,135 |
|
|
$ |
12,135 |
|
Deferred compensation
|
|
|
5,603 |
|
|
|
5,603 |
|
|
|
5,978 |
|
|
|
5,978 |
|
Short term borrowings
|
|
|
41,897 |
|
|
|
41,897 |
|
|
|
65,289 |
|
|
|
65,289 |
|
Long-term debt
|
|
|
221 |
|
|
|
221 |
|
|
|
307 |
|
|
|
307 |
|
For fair value purposes the carrying value of cash and cash equivalents approximates fair value due to the short maturity of those investments. The fair value of the underlying assets held by the deferred compensation plan are based on the quoted market prices of the funds in registered investment companies, which are considered Level 1 inputs. The carrying value of our revolving credit facilities, classified as short term borrowings, equals fair market value because the interest rate reflects current market rates. The fair value of our 15% convertible subordinated debentures, classified as current borrowings, is based upon the quoted market price, which is considered a Level 1 input.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 11. Earnings Per Share
The following are reconciliations of the earnings available to common stockholders and the shares used in calculating basic and dilutive net earnings per common share (in thousands, except per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Basic Net Earnings Per Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
14,100 |
|
|
$ |
11,097 |
|
|
$ |
34,804 |
|
|
$ |
22,025 |
|
Loss from discontinued operations
|
|
|
(1,055 |
) |
|
|
(1,441 |
) |
|
|
(1,714 |
) |
|
|
(2,309 |
) |
Net earnings available to common stockholders
|
|
$ |
13,045 |
|
|
$ |
9,656 |
|
|
$ |
33,090 |
|
|
$ |
19,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
22,863 |
|
|
|
22,597 |
|
|
|
22,813 |
|
|
|
22,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations per common share
|
|
$ |
0.62 |
|
|
$ |
0.49 |
|
|
$ |
1.53 |
|
|
$ |
0.98 |
|
Loss from discontinued operations per common share
|
|
|
(0.05 |
) |
|
|
(0.06 |
) |
|
|
(0.08 |
) |
|
|
(0.10 |
) |
Basic net earnings per common share
|
|
$ |
0.57 |
|
|
$ |
0.43 |
|
|
$ |
1.45 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
14,100 |
|
|
$ |
11,097 |
|
|
$ |
34,804 |
|
|
$ |
22,025 |
|
Interest income on debenture conversions (net of income tax expense)
|
|
|
– |
|
|
|
277 |
|
|
|
316 |
|
|
|
– |
|
Earnings from continuing operations plus assumed conversions
|
|
|
14,100 |
|
|
|
11,374 |
|
|
|
35,120 |
|
|
|
22,025 |
|
Loss from discontinued operations
|
|
|
(1,055 |
) |
|
|
(1,441 |
) |
|
|
(1,714 |
) |
|
|
(2,309 |
) |
Net earnings available to common stockholders plus assumed conversions
|
|
$ |
13,045 |
|
|
$ |
9,933 |
|
|
$ |
33,406 |
|
|
$ |
19,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
22,863 |
|
|
|
22,597 |
|
|
|
22,813 |
|
|
|
22,528 |
|
Plus incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of restricted stock and performance stock
|
|
|
163 |
|
|
|
55 |
|
|
|
168 |
|
|
|
76 |
|
Dilutive effect of stock options
|
|
|
17 |
|
|
|
– |
|
|
|
6 |
|
|
|
– |
|
Dilutive effect of convertible debentures
|
|
|
– |
|
|
|
820 |
|
|
|
312 |
|
|
|
– |
|
Weighted average common shares outstanding – Diluted
|
|
|
23,043 |
|
|
|
23,472 |
|
|
|
23,299 |
|
|
|
22,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations per common share
|
|
$ |
0.61 |
|
|
$ |
0.48 |
|
|
$ |
1.51 |
|
|
$ |
0.97 |
|
Loss from discontinued operations per common share
|
|
|
(0.04 |
) |
|
|
(0.06 |
) |
|
|
(0.08 |
) |
|
|
(0.10 |
) |
Diluted net earnings per common share
|
|
$ |
0.57 |
|
|
$ |
0.42 |
|
|
$ |
1.43 |
|
|
$ |
0.87 |
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The 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 or because they were excluded under the treasury method (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Stock options
|
|
|
227 |
|
|
|
317 |
|
|
|
238 |
|
|
|
317 |
|
Restricted shares
|
|
|
178 |
|
|
|
152 |
|
|
|
164 |
|
|
|
126 |
|
15% convertible subordinated debentures
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
820 |
|
Note 12. Comprehensive Income
Comprehensive income, net of income tax expense is as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Net earnings as reported
|
|
$ |
13,045 |
|
|
$ |
9,656 |
|
|
$ |
33,090 |
|
|
$ |
19,716 |
|
Foreign currency translation adjustment
|
|
|
(2,435 |
) |
|
|
1,060 |
|
|
|
(1,500 |
) |
|
|
337 |
|
Postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan amendment adjustment
|
|
|
– |
|
|
|
– |
|
|
|
8,596 |
|
|
|
– |
|
Reclassification adjustment for recognition of prior period amounts
|
|
|
(1,032 |
) |
|
|
(2,123 |
) |
|
|
(5,169 |
) |
|
|
(4,822 |
) |
Unrecognized amounts
|
|
|
435 |
|
|
|
189 |
|
|
|
1,753 |
|
|
|
601 |
|
Total comprehensive income
|
|
$ |
10,013 |
|
|
$ |
8,782 |
|
|
$ |
36,770 |
|
|
$ |
15,832 |
|
Note 13. Industry Segments
We have two major reportable operating segments, each of which focuses on a specific line of replacement parts. Our Engine Management Segment manufactures and distributes ignition and emission parts, ignition wires, battery cables and fuel system parts. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories and windshield washer system parts.
The following tables show our net sales and operating income by our operating segments (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine Management
|
|
$ |
165,182 |
|
|
$ |
153,577 |
|
|
$ |
489,305 |
|
|
$ |
443,489 |
|
Temperature Control
|
|
|
68,148 |
|
|
|
71,774 |
|
|
|
201,942 |
|
|
|
185,714 |
|
All Other
|
|
|
2,890 |
|
|
|
2,189 |
|
|
|
9,208 |
|
|
|
8,736 |
|
Consolidated
|
|
$ |
236,220 |
|
|
$ |
227,540 |
|
|
$ |
700,455 |
|
|
$ |
637,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine Management
|
|
$ |
5,948 |
|
|
$ |
5,016 |
|
|
$ |
16,416 |
|
|
$ |
14,024 |
|
Temperature Control
|
|
|
1,369 |
|
|
|
898 |
|
|
|
3,992 |
|
|
|
2,821 |
|
All Other
|
|
|
(7,317 |
) |
|
|
(5,914 |
) |
|
|
(20,408 |
) |
|
|
(16,845 |
) |
Consolidated
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Operating Profit
|
|
|
|
|
|
|
Engine Management
|
|
$ |
18,479 |
|
|
$ |
15,049 |
|
|
$ |
46,741 |
|
|
$ |
34,758 |
|
Temperature Control
|
|
|
7,636 |
|
|
|
5,443 |
|
|
|
17,833 |
|
|
|
12,747 |
|
All Other
|
|
|
(3,324 |
) |
|
|
(2,421 |
) |
|
|
(6,051 |
) |
|
|
(7,221 |
) |
Consolidated
|
|
$ |
22,791 |
|
|
$ |
18,071 |
|
|
$ |
58,523 |
|
|
$ |
40,284 |
|
Note 14. Commitments and Contingencies
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 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 2001 and the amounts paid for indemnity and defense thereof. At September 30, 2011, 2,095 cases were outstanding for which we may be responsible for any related liabilities. In the second quarter of 2011, we increased the number of outstanding cases to unbundle previously outstanding consolidated cases. Since inception in September 2001 through September 30, 2011, the amounts paid for settled claims are approximately $11.9 million. In September 2007, we entered into an agreement with an insurance carrier to provide us with limited insurance coverage for the defense and indemnity costs associated with certain asbestos-related claims. We submitted various asbestos-related claims for coverage under this agreement, receiving approximately $2.9 million in reimbursement for settlement claims and defense costs, and this agreement has now expired. In addition, in May 2010 we entered into an agreement with an excess insurance carrier to provide us with limited insurance coverage for defense and indemnity costs associated with asbestos-related claims. We have submitted claims to this carrier and have received $0.8 million in reimbursement for settlement claims and defense costs.
In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study performed by an independent 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 August 31, 2011. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $27.5 million to $66.5 million for the period through 2059. The change from the prior year study was a $1.8 million increase for the low end of the range and a $0.4 million decrease 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 2059 in our consolidated financial statements.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Accordingly, an incremental $1.3 million provision in our discontinued operation was added to the asbestos accrual in September 2011 increasing the reserve to approximately $27.5 million. According to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation in the accompanying statement of operations, are estimated to range from $26.2 million to $63 million during the same period.
We plan to perform an annual actuarial evaluation 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. We 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 - In November 2004, we were 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 us 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 recused himself, and a new judge has been assigned before whom further preliminary proceedings have been held culminating in a decision and order dated September 16, 2010 granting the motion to dismiss and, in view of an intervening change in pleading standards, deferring decision on whether to grant plaintiff leave to amend to allow an opportunity to propose curative amendments. On October 18, 2010, the plaintiff filed an amended complaint changing certain alleged claims relating to the Robinson-Patman Act. By Order dated October 26, 2010, the court directed that the Third Amended Complaint be deemed withdrawn and gave plaintiffs until November 9, 2010 to file a motion for leave to amend identifying the curative amendments to the Second Amended Complaint setting forth why the amendments accord with the rules. The motion was timely filed, opposed on December 9, 2010, which opposition was replied to on December 24, 2010. On September 29, 2011, the court dismissed the complaint with prejudice, and on October 27, 2011 the plaintiff filed an appeal. We believe that we have meritorious defenses to the plaintiff’s claims and will continue to vigorously oppose 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.
Warranties - 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 September 30, 2011 and 2010, we have accrued $14.9 million and $14.4 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.
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The following table provides the changes in our product warranties (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Balance, beginning of period
|
|
$ |
15,459 |
|
|
$ |
13,823 |
|
|
$ |
12,153 |
|
|
$ |
10,476 |
|
Liabilities accrued for current year sales
|
|
|
17,085 |
|
|
|
14,757 |
|
|
|
49,422 |
|
|
|
39,361 |
|
Settlements of warranty claims
|
|
|
(17,635 |
) |
|
|
(14,179 |
) |
|
|
(46,666 |
) |
|
|
(35,436 |
) |
Balance, end of period
|
|
$ |
14,909 |
|
|
$ |
14,401 |
|
|
$ |
14,909 |
|
|
$ |
14,401 |
|
Note 15. Subsequent Event
On October 25, 2011, we acquired all of the capital stock of Forecast Trading Corporation (“Forecast”) for approximately $44 million in cash funded by our revolving credit facility. Forecast has distribution facilities in Ft. Lauderdale, Florida and distributes a range of engine management products including ignition coils, ignition modules, switches and sensors, and filters. Revenues generated from the acquired business were approximately $28 million for the year ended December 31, 2010.
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties. Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, our significant indebtedness; economic and market conditions (including access to credit and financial markets); the performance of the aftermarket sector and the automotive sector generally; changes in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in the product mix and distribution channel mix; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs that cannot be recouped in product pricing; successful integration of acquired businesses; our ability to achieve cost savings from our restructuring initiatives; product liability and environmental matters (including, without limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties); as well as other risks and uncertainties, such as those described under Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC. Forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, historical information should not be considered as an indicator of future performance. The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report.
Business Overview
We are a leading independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry, with an increasing focus on the original equipment service market. We are organized into two major operating segments, each of which focuses on a specific line of replacement parts. Our Engine Management Segment manufactures ignition and emission parts, ignition wires, battery cables and fuel system parts. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories, and windshield washer system parts.
We sell our products primarily to warehouse distributors, large retail chains, original equipment manufacturers and original equipment service part operations in the United States, Canada and Latin America. Our customers consist of many of the leading warehouse distributors, such as CARQUEST and NAPA Auto Parts, as well as many of the leading auto parts retail chains, such as Advance Auto Parts, AutoZone, O’Reilly Automotive, Canadian Tire and Pep Boys. Our customers also include national program distribution groups and specialty market distributors. We distribute parts under our own brand names, such as Standard, BWD, Intermotor, Four Seasons, Factory Air, ACi, Imperial and Hayden and through private labels, such as CARQUEST, NAPA Echlin, NAPA Temp Products and NAPA Belden.
Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality original equipment and replacement products to the engine management and temperature control markets. Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates. We intend to continue to improve our operating efficiency, customer satisfaction and cost position by increasing cost-effective vertical integration in key product lines through internal development and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain products from low cost countries such as those in Asia.
Seasonality. Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year, with revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business. In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories. For example, a cool summer may lessen the demand for our Temperature Control products, while a hot summer may increase such demand. As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically 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 have yet to be received. During this period, our working capital requirements are typically funded by borrowings from our revolving credit facility.
Inventory Management. We face inventory management issues as a result of warranty and overstock returns. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications. In addition to warranty returns, we also permit our customers to return products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories. We accrue for overstock returns as a percentage of sales, after giving consideration to recent returns history.
In order to better control warranty and overstock return levels, we have in place procedures for authorized warranty returns, placed restrictions on the amounts customers can return and instituted a program to better estimate potential future product returns. In addition, with respect to our air conditioning compressors, which are our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not provide acceptable proof that complete air conditioning system repair was performed.
Discounts, Allowances and Incentives. In connection with our sales activities, we offer a variety of usual customer discounts, allowances and incentives. First, we offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice. Second, we offer pricing discounts based on volume and different product lines purchased from us. These discounts are principally in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale. For those customers that choose to receive a payment on a quarterly basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly. Finally, rebates and discounts are provided to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided. Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. We account for these discounts and allowances as a reduction to revenues, and record them when sales are recorded.
Interim Results of Operations:
Comparison of Three Months Ended September 30, 2011 to Three Months Ended September 30, 2010
Sales. Consolidated net sales for the three months ended September 30, 2011 were $236.2 million, an increase of $8.7 million, or 3.8%, compared to $227.5 million in the same period of 2010. Net sales increased primarily due to higher traditional and retail market sales in our Engine Management segment. Revenues remained strong in the quarter as our customers have increased purchases to meet demand as consumers have continued to maintain their primary vehicles for a longer period of time.
The following table summarizes net sales by segment for the quarters ended September 30, 2011 and 2010, respectively:
Three Months Ended
September 30,
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Other
|
|
|
Total
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
165,182 |
|
|
$ |
68,148 |
|
|
$ |
2,890 |
|
|
$ |
236,220 |
|
Gross margins
|
|
|
43,834 |
|
|
|
17,343 |
|
|
|
3,311 |
|
|
|
64,488 |
|
Gross margin percentage
|
|
|
26.5 |
% |
|
|
25.4 |
% |
|
|
– |
|
|
|
27.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
153,577 |
|
|
$ |
71,774 |
|
|
$ |
2,189 |
|
|
$ |
227,540 |
|
Gross margins
|
|
|
39,785 |
|
|
|
17,157 |
|
|
|
3,072 |
|
|
|
60,014 |
|
Gross margin percentage
|
|
|
25.9 |
% |
|
|
23.9 |
% |
|
|
– |
|
|
|
26.4 |
% |
Engine Management’s net sales increased $11.6 million, or 7.6%, to $165.2 million for the third quarter of 2011. The sales growth was driven primarily by stronger sales in the traditional and retail markets compared to the prior period. In addition, incremental sales of $2.2 million from our acquisition of the Engine Controls business of BLD Products, Ltd., which began shipping in May 2011, contributed to the increase in our traditional sales volumes.
Temperature Control’s net sales decreased $3.6 million, or 5%, to $68.1 million for the third quarter of 2011. The decrease in net sales as compared to the prior year resulted primarily from the timing of purchases made by both our retail and traditional customers, as customers in these markets purchased significantly higher volumes in the first six months of 2011 as compared to the first six months of 2010.
Gross margins. Gross margins, as a percentage of consolidated net sales, increased to 27.3% in the third quarter of 2011, compared to 26.4% in the third quarter of 2010. The increase resulted from improvements in margins in Engine Management of 0.6 percentage points and in Temperature Control of 1.5 percentage points. The Engine Management gross margin percentage was positively impacted by higher sales volumes including $2.2 million of incremental sales related to the acquisition of the BLD Engine Controls business which began shipping in May 2011. The gross margin percentage increase in Temperature Control compared to the prior year was primarily the result of a higher mix of compressor production volumes from our low cost manufacturing facility in Reynosa, Mexico.
Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) decreased by $0.3 million to $41.7 million or 17.6% of consolidated net sales, in the third quarter of 2011, as compared to $42 million or 18.5% of consolidated net sales in the third quarter of 2010. Lower selling, marketing and distribution expenses more than offset the $0.5 million increase in expenses related to the sale of receivables and increases in general and administrative expenses.
Restructuring and integration expenses. Restructuring and integration expenses decreased to $0.3 million in the third quarter of 2011, compared to $1.4 million in the third quarter of 2010. The 2011 expense related primarily to employee severance at our Grapevine, Texas facility, and employee severance and integration costs related to the acquisition of the Engine Controls business of BLD Products, Ltd. The 2010 expense related primarily to severance and lease termination costs incurred in connection with the announced closures of our Corona, California and Hong Kong, China manufacturing facilities.
Components of our restructuring and integration accruals, by segment, were as follows (in thousands):
|
|
Engine
Management
|
|
|
Temperature
Control
|
|
|
Other
|
|
|
Total
|
|
Exit activity liability at June 30, 2011
|
|
$ |
3,165 |
|
|
$ |
305 |
|
|
$ |
702 |
|
|
$ |
4,172 |
|
Restructuring and integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
122 |
|
|
|
153 |
|
|
|
-- |
|
|
|
275 |
|
Cash payments
|
|
|
(232 |
) |
|
|
(38 |
) |
|
|
(98 |
) |
|
|
(368 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
3,055 |
|
|
$ |
420 |
|
|
$ |
604 |
|
|
$ |
4,079 |
|
Other income, net. Other income, net decreased to $0.3 million in the third quarter of 2011 compared to $1.4 million in the same period in 2010. During 2011 and 2010, we recognized $0.3 million of deferred gain related to the sale-leaseback of our Long Island City, New York facility. In addition, in the third quarter of 2010, we recorded a $1.5 million gain on the sale our Reno, Nevada distribution facility and a $0.2 million loss on the disposal of equipment.
Operating income. Operating income was $22.8 million in the third quarter of 2011, compared to $18.1 million in the third quarter of 2010. The increase of $4.7 million was due to higher sales volumes, the increase in gross margins as a percentage of net sales, and lower restructuring and integration expenses and SG&A expenses.
Interest expense. Interest expense decreased by $1.1 million in the third quarter of 2011 compared to the same period in 2010 as average borrowings declined $34.8 million. This decrease includes the impact of the April 2011 maturity of the $12.3 million principal amount of the 15% convertible subordinated debentures and the July 2010 prepayment of the remaining $5.1 million outstanding principal amount of the 15% unsecured promissory notes.
Income tax provision. The income tax provision in the third quarter of 2011 was $8.2 million at an effective tax rate of 36.7% compared to $5.4 million at an effective tax rate of 32.9% for the same period in 2010. The effective tax rate in the third quarter of 2011 and 2010 was favorably impacted by the reversal of previously established reserves of $0.5 million and $1.1 million, respectively, related to certain business combinations and foreign transfer pricing as a result of the expiration of the statue of limitations for the 2007 and prior tax years. For further information, see Accounting for Income Taxes in the Summary of Significant Accounting Policies of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Loss from discontinued operation. Loss from discontinued operations, net of income tax, reflects adjustments made to our indemnity liability in line with information contained in actuarial studies obtained in August 2011 and 2010 and other information available and considered by us, and legal expenses incurred associated with our asbestos-related liability. During the third quarters of 2011 and 2010, we recorded a loss of $1.1 million and $1.4 million from discontinued operations, respectively. The loss from discontinued operations for the third quarter of 2011 and 2010 reflects a $1.3 million and $1.8 million pre-tax adjustment, respectively, to increase our indemnity liability in line with the August 2011 and 2010 actuarial studies, as well as legal fees incurred in litigation. As discussed more fully in Note 14 in the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
Comparison of Nine Months Ended September 30, 2011 to Nine Months Ended September 30, 2010
Sales. Consolidated net sales for the nine months ended September 30, 2011 were $700.5 million, an increase of $62.5 million, or 9.8%, compared to $637.9 million in the same period of 2010. Net sales increased primarily due to higher traditional and retail market sales in both our Engine Management and Temperature Control segments. Revenues remained strong as our customers have increased purchases to meet demand as consumers have continued to maintain their primary vehicles for a longer period of time.
The following table summarizes net sales and gross margins by segment for the nine months ended September 30, 2011 and 2010, respectively:
Nine Months Ended
September 30,
|
|
Engine Management
|
|
|
Temperature Control
|
|
|
Other
|
|
|
Total
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
489,305 |
|
|
$ |
201,942 |
|
|
$ |
9,208 |
|
|
$ |
700,455 |
|
Gross margins
|
|
|
123,850 |
|
|
|
47,269 |
|
|
|
9,694 |
|
|
|
180,813 |
|
Gross margin percentage
|
|
|
25.3 |
% |
|
|
23.4 |
% |
|
|
– |
|
|
|
25.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Engine Management
|
|
|
Temperature Control
|
|
|
Other
|
|
|
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
443,489 |
|
|
$ |
185,714 |
|
|
$ |
8,736 |
|
|
$ |
637,939 |
|
Gross margins
|
|
|
110,407 |
|
|
|
43,117 |
|
|
|
8,697 |
|
|
|
162,221 |
|
Gross margin percentage
|
|
|
24.9 |
% |
|
|
23.2 |
% |
|
|
– |
|
|
|
25.4 |
% |
Engine Management’s net sales increased $45.8 million, or 10.3%, to $489.3 million for the first nine months of 2011. Engine Management’s revenue growth was driven by overall strong demand for our products across all market channels. In addition, incremental sales of $4.3 million from our acquisition of the Engine Controls business of BLD Products, Ltd., which began shipping in May 2011, contributed to the increase in our traditional sales volumes.
Temperature Control’s net sales increased $16.2 million, or 8.7%, to $201.9 million for the first nine months of 2011. The increase in sales was primarily from traditional and retail channels due to warm weather trends.
Gross margins. Gross margins, as a percentage of consolidated net sales, for the nine months ended September 30, 2011 increased to 25.8% compared to 25.4% the same period of 2010. The increase resulted from a 0.4 percentage point increase in Engine Management margins and a 0.2 percentage point increase in Temperature Control margins. The increase in the Engine Management margins was the result of a higher sales volumes and improving fixed overhead absorption resulting from increased production. The gross margin percentage increase in Temperature Control compared to the prior year was primarily the result of a higher mix of compressor production volumes from our low cost manufacturing facility in Reynosa, Mexico.
Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) increased by $1.9 million to $122.3 million or 17.5% of consolidated net sales, in the nine months ended September 30, 2011, as compared to $120.5 million or 18.9% of consolidated net sales in like period of 2010. The increase in SG&A expenses is due primarily to sales volume related increases to selling, marketing and distribution expenses and a $1.7 million increase in expenses related to the sale of receivables partially offset by a $3.6 million curtailment gain related to changes made to our domestic and Canadian postretirement plans.
Restructuring and integration expenses. Restructuring and integration expenses decreased to $0.7 million for the nine months ended September 30, 2011, compared to $3.4 million in the same period of 2010. The 2011 expense related primarily to employee severance and integration costs related to the acquisition of the Engine Controls business of BLD Products, Ltd. and integration expenses related to the wire and cable business. The 2010 expense related primarily to severance and lease termination costs incurred in connection with the announced closures of our Corona, California and Hong Kong, China manufacturing facilities and a charge related to the closure of our Long Island City building.
Other income, net. Other income, net decreased to $0.8 million for the nine months ended September 30, 2011 compared to $2.0 million for the same period in 2010. During 2011 and 2010, we recognized $0.8 million of deferred gain related to the sale-leaseback of our Long Island City, New York facility. In addition, in the first nine months of 2010, we recorded a $1.5 million gain on the sale our Reno, Nevada distribution facility, a $0.2 million gain on the sale of vacant land at one of our locations in the U.K. and a $0.4 million loss on the disposal of equipment.
Operating income. Operating income was $58.5 million in the first nine months of 2011, compared to $40.3 million in 2010. The increase of $18.2 million was due primarily to stronger traditional and retail market sales within our Engine Management and Temperature Control segments, the increase in gross margins as a percentage of net sales, lower restructuring and integration expenses, and the $3.6 million curtailment gain recorded as a result of our postretirement plan amendments offset, in part, by sales volume related increases to selling, marketing and distribution expenses.
Interest expense. Interest expense decreased by $2.5 million to $3.2 million in the nine months ended September 30, 2011, compared to $5.7 million in the same period in 2010 as average borrowings declined $25.3 million. This decrease includes the impact of the April 2011 maturity of the $12.3 million principal amount of the 15% convertible subordinated debentures and the July 2010 prepayment of the remaining $5.1 million outstanding principal amount of the 15% unsecured promissory notes.
Income tax provision. The income tax provision in the nine months ended September 30, 2011 was $21.2 million at an effective tax rate of 37.9%, compared to $13 million and an effective tax rate of 37.2% for the same period in 2010. The effective tax rate in the first nine months of 2011 and 2010 was favorably impacted by the reversal of previously established reserves of $0.5 million and $1.1 million, respectively, related to certain business combinations and foreign transfer pricing as a result of the expiration of the statue of limitations for the 2007 and prior tax years. For further information, see Accounting for Income Taxes in the Summary of Significant Accounting Policies of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Loss from discontinued operation. Loss from discontinued operations, net of income tax, reflects adjustments made to our indemnity liability in line with information contained in actuarial studies obtained in August 2011 and 2010 and other information available and considered by us, and legal expenses incurred associated with our asbestos-related liability. During the nine months ended September 30, 2011 and 2010, we recorded a loss of $1.7 million and $2.3 million from discontinued operations, respectively. The loss from discontinued operations for the nine months ended 2011 and 2010 reflects a $1.3 million and $1.8 million pre-tax adjustment, respectively, to increase our indemnity liability in line with the August 2011 and 2010 actuarial studies, as well as legal fees incurred in litigation. As discussed more fully in Note 14 in the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
Restructuring and Integration Costs
The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of December 31, 2010 and September 30, 2011 and activity for the nine months ended September 30, 2011 consisted of the following (in thousands):
|
|
Workforce Reduction
|
|
|
Other Exit Costs
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
6,220 |
|
|
$ |
2,435 |
|
|
$ |
8,655 |
|
Restructuring and integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
239 |
|
|
|
504 |
|
|
|
743 |
|
Non-cash usage, including asset write-downs
|
|
|
-- |
|
|
|
(343 |
) |
|
|
(343 |
) |
Cash payments
|
|
|
(4,402 |
) |
|
|
(574 |
) |
|
|
(4,976 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
2,057 |
|
|
$ |
2,022 |
|
|
$ |
4,079 |
|
Restructuring Costs
Voluntary Separation Program
During 2008 as part of an initiative to improve the effectiveness and efficiency of operations, and to reduce costs in light of economic conditions, we implemented certain organizational changes and offered eligible employees a voluntary separation package. The restructuring accrual relates to severance and other retiree benefit enhancements to be paid through 2015. Of the original restructuring charge of $8 million, we have $1.7 million remaining as of September 30, 2011 that is expected to be paid in the amounts of $0.4 million in 2011, $0.5 million in 2012 and $0.8 million for the period 2013-2015.
Activity, by segment, for the nine months ended September 30, 2011 related to the voluntary separation program, consisted of the following (in thousands):
|
|
Engine Management
|
|
|
Temperature Control
|
|
|
Other
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
970 |
|
|
$ |
321 |
|
|
$ |
915 |
|
|
$ |
2,206 |
|
Restructuring costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Cash payments
|
|
|
(167 |
) |
|
|
(54 |
) |
|
|
(311 |
) |
|
|
(532 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
803 |
|
|
$ |
267 |
|
|
$ |
604 |
|
|
$ |
1,674 |
|
Integration Expenses
Overhead Cost Reduction Program
Beginning in 2007 in connection with our efforts to improve our operating efficiency and reduce costs, we announced our intention to focus on company-wide overhead and operating expense cost reduction activities, such as closing excess facilities and reducing redundancies. Integration expenses remaining under this program to date relate primarily to the closure of our production operations in Corona, California and Edwardsville, Kansas. We expect that all payments related to the current liability will be made within twelve months.
Activity for the nine months ended September 30, 2011 related to our overhead cost reduction program, consisted of the following (in thousands):
|
|
Workforce Reduction
|
|
|
Other Exit Costs
|
|
|
Total
|
|
Exit activity liability at December 31, 2010
|
|
$ |
853 |
|
|
$ |
686 |
|
|
$ |
1,539 |
|
Integration costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts provided for during 2011
|
|
|
194 |
|
|
|
309 |
|
|
|
503 |
|
Non-cash usage, including asset write-downs
|
|
|
-- |
|
|
|
(343 |
) |
|
|
(343 |
) |
Cash payments
|
|
|
(804 |
) |
|
|
(284 |
) |
|
|
(1,088 |
) |
Exit activity liability at September 30, 2011
|
|
$ |
243 |
|
|
$ |
368 |
|
|
$ |
611 |
|
Reynosa Integration Program
During 2008, we closed our Long Island City, New York and Puerto Rico manufacturing facilities and integrated these operations in Reynosa, Mexico. In connection with the shutdown of the manufacturing operations at Long Island City, we incurred severance costs and costs associated with equipment removal, capital expenditures and environmental clean-up. As of September 30, 2011, the reserve balance related to environmental clean-up at Long Island City of $1.7 million is included in other exit costs.
In connection with the shutdown of the manufacturing operations at Long Island City, we entered into an agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 365 (“UAW”). As part of the agreement, we incurred a withdrawal liability from a multi-employer plan. The pension plan withdrawal liability is related to trust asset under-performance in a plan that covers our former UAW employees at the Long Island City facility and was payable quarterly for 20 years at $0.3 million per year, which commenced in December 2008. In June 2011, we agreed to settle our pension withdrawal liability for $2.8 million and recorded a gain of $0.3 million in connection with the settlement.
Activity for the nine months ended September 30, 2011 related to the Reynosa integration program, consisted of the following (in thousands):