UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly Period Ended MARCH 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission file number 1-4743 STANDARD MOTOR PRODUCTS, INC. (Exact name of registrant as specified in its charter) NEW YORK 11-1362020 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 37-18 NORTHERN BLVD., LONG ISLAND CITY, N.Y. 11101 (Address of principal executive offices) (Zip Code) (718) 392-0200 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: DATE CLASS SHARES OUTSTANDING COMMON STOCK PAR APRIL 30, 2001 VALUE $2.00 PER SHARE 12,445,179 -------------- --------------------- ----------
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL AND OTHER INFORMATION MARCH 31, 2001 PART 1 - FINANCIAL INFORMATION ITEM 1 PAGE NO. CONSOLIDATED BALANCE SHEETS March 31, 2001 and December 31, 2000 3 & 4 CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS for the three-month periods ended March 31, 2001 and 2000. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS for the three-month periods ended March 31, 2001 and 2000 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 13 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II - OTHER INFORMATION ITEM 1 Legal Proceedings 15 ITEM 6 Exhibits and Reports on Form 8-K 16 Signature 16 2
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS ------ March 31, December 31, 2001 2000 - --------------------------------------------------------------------------------------------------------- (Unaudited) Current assets: <S> <C> <C> Cash and cash equivalents $ 4,216 $ 7,699 Accounts and notes receivable, net of allowance for doubtful accounts and discounts of $5,627 (2000 - $4,577) (Notes 4 and 6) 150,281 106,261 Inventories (Notes 2 and 4) 220,888 234,257 Deferred income taxes 12,466 12,482 Prepaid expenses and other current assets 13,407 12,060 ------------ ------------ Total current assets 401,258 372,759 ------------ ------------ Property, plant and equipment, net of accumulated depreciation (Notes 3 and 4) 103,729 104,536 Goodwill, net 40,516 40,685 Other assets 31,317 31,416 ------------ ------------ Total assets $ 576,820 $ 549,396 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 3
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for shares and per share data) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ March 31, December 31, 2001 2000 - --------------------------------------------------------------------------------------------------------- (Unaudited) Current liabilites: <S> <C> <C> Notes payable (Note 4) $ 89,081 $ 38,930 Current portion of long-term debt (Note 5) 13,481 13,643 Accounts payable 49,871 56,612 Sundry payables and accrued expenses 46,321 49,671 Accrued customer returns 17,566 17,693 Payroll and commissions 7,344 8,119 ------------ ------------ Total current liabilites 223,664 184,668 ------------ ------------ Long-term debt (Note 5) 138,665 150,018 Postretirement benefits other than pensions and other accrued liabilities 20,846 20,405 ------------ ------------ Total liabilities 383,175 355,091 ------------ ------------ Commitments and contingencies (Notes 4, 5, 8, 10 and 12) Stockholders' equity (Notes 5, 7, 8, 9 and 10): Common stock - par value $2.00 per share Authorized - 30,000,000 shares Issued - 13,324,476 shares in 2001 and 2000 (including 1,554,297 and 1,629,297 shares held as treasury shares in 2001 and 2000, respectively) 26,649 26,649 Capital in excess of par value 2,123 2,541 Retained earnings 189,820 190,253 Accumulated other comprehensive income (1,530) (591) ------------ ------------ 217,062 218,852 Less: treasury stock - at cost 23,417 24,547 ------------ ------------ Total stockholders' equity 193,645 194,305 ------------ ------------ Total liabilities and stockholders' equity $ 576,820 $ 549,396 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 4
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Dollars in thousands, except for shares and per share data) (Unaudited) For Three-Months Ended March 31, 2001 2000 --------------- ----------------- <S> <C> <C> Net sales $155,545 $146,759 Cost of sales 110,580 99,440 --------------- ----------------- Gross profit 44,965 47,319 Selling, general and administrative expenses 40,012 43,183 --------------- ----------------- Operating income 4,953 4,136 Other income (expense) - net 80 424 Interest expense 4,127 3,907 --------------- ----------------- Earnings before taxes, minority interest and extraordinary item 906 653 Income taxes 287 229 Minority interest - (39) --------------- ----------------- Earnings before extraordinary item 619 385 Extraordinary loss on early extinguishment of debt, net of taxes - 501 --------------- ----------------- Net earnings(loss) 619 (116) Retained earnings at beginning of period 190,253 184,848 --------------- ----------------- 190,872 184,732 Less: cash dividends for period 1,052 1,105 --------------- ----------------- Retained earnings at end of period $189,820 183,627 =============== ================= Per share data: Net earnings per common share - basic: Earnings per share before extraordinary item $0.05 $0.03 Extraordinary loss on early extinguishment of debt - (0.04) --------------- ----------------- Net earnings per common share - basic $0.05 ($0.01) =============== ================= Net earnings per common share - diluted: Earnings per share before extraordinary item $0.05 $0.03 Extraordinary loss on early extinguishment of debt - (0.04) --------------- ----------------- Net earnings per common share - diluted $0.05 ($0.01) =============== ================= Average number of common shares 11,714,346 12,409,547 =============== ================= Average number of common and dilutive shares 11,728,569 12,409,547 =============== ================= </TABLE> See accompanying notes to consolidated financial statements. 5
<TABLE> <CAPTION> STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) For the Three-Months Ended March 31, ---------------------------- 2001 2000 ------------ ---------- Cash flows from operating activities: <S> <C> <C> Net earnings (loss) $ 619 $ (116) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 4,828 4,729 Equity income from joint ventures (120) (127) Employee Stock Ownership Plan Allocation 133 419 Extraordinary Loss on repayment of debt - 865 Change in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable, net (44,020) (28,615) Decrease (Increase) in inventories 13,369 (29,013) (Decrease) Increase increase in other current assets (767) 190 Decrease in other assets 369 1,940 (Decrease) Increase in accounts payable (6,741) 29,201 (Decrease) in sundry payables and accrued expenses (3,351) (3,621) (Decrease) increase in other liabilities (401) (1,069) ------------ ---------- Net cash used in operating activities (36,082) (25,217) ------------ ---------- Cash flows from investing activities Proceeds from the sale of property, plant & equipment - 650 Capital expenditures, net of effects from acquisitions (3,430) (6,405) Payments for acquisitions, net of cash acquired (796) (1,353) ------------ ---------- Net cash used in investing activities (4,226) (7,108) ------------ ---------- Cash flows from financing activities: Net borrowings under line-of-credit agreements 50,151 29,884 Principal payments and retirement of long-term debt (11,515) (25,526) Purchase of treasury stock - (8,117) Dividends paid (1,052) (1,105) ------------ ---------- Net cash provided by (used in) financing activities 37,584 (4,864) ------------ ---------- Effect of exchange rate changes on cash (759) 6 Net decrease in cash and cash equivalents (3,483) (37,183) Cash and cash equivalents at beginning of the period 7,699 40,380 ------------ ---------- Cash and cash equivalents at end of the period $ 4,216 $3,197 ============ ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 4,640 $5,418 ============ ========== Income taxes $ 170 $1,371 ============ ========== </TABLE> See accompanying notes to consolidated financial statements. 6
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 The accompanying unaudited financial information should be read in conjunction with the consolidated financial statements, including the notes thereto, for the year ended December 31, 2000. The consolidated financial statements include the accounts of the Company and all domestic and international companies in which the Company has more than a 50% equity ownership. The Company's investments in unconsolidated affiliates are accounted for on the equity method. All significant inter-company items have been eliminated. 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. Where appropriate, certain amounts in 2000 have been reclassified to conform with the 2001 presentation. In June 1998 and June 2000, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. Adoption of these pronouncements on January 1, 2001 had no effect on the Company's consolidated financial statements taken as a whole since the Company does not have any significant derivative instruments. NOTE 2 INVENTORIES ----------- (Dollars in Thousands) March 31, 2001 December 31, 2000 (unaudited) -------------- ----------------- Finished Goods $148,713 $165,381 Work in Process 4,236 3,552 Raw Materials 67,939 65,324 ------ ------ Total inventories $220,888 $234,257 ======== ======== NOTE 3 PROPERTY, PLANT AND EQUIPMENT ----------------------------- (Dollars in thousands) March 31, 2001 December 31, 2000 (unaudited) -------------- ----------------- Land, buildings and improvements $60,627 $60,435 Machinery and equipment 102,889 101,884 Tools, dies and auxiliary equipment 12,357 12,035 Furniture and fixtures 33,101 33,164 Leasehold improvements 7,470 7,475 Construction in progress 13,453 12,328 -------- -------- 229,897 227,321 Less: accumulated depreciation and amortization 126,168 122,785 --------- -------- Total property, plant and equipment - net $103,729 $104,536 ======== ======== 7
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 On November 30, 1998, the Company entered into a three-year revolving credit facility with eight lending institutions, providing for an unsecured line of credit of $110,000,000. The facility allows the Company to select from two interest rate options, one based on a spread over the prime rate and the other based on a spread over LIBOR. The spread above each interest rate option is determined by the Company's ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization. The terms of the revolving credit facility, as amended, include, among other provisions, the requirement for a clean-down, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness. At March 31, 2001, borrowings under this facility amounted to $85 million. With the current revolving credit facility set to expire on November 30, 2001, the Company, effective April 27, 2001 entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new revolving credit facility. The term of the new credit agreement is for a period of five years and provides for a line of credit up to $225,000,000. The initial proceeds have been used to refinance approximately $97 million of the outstanding indebtedness under the Company's aforementioned existing bank line of credit, the 7.56% senior note of $52 million, a $25 million accounts receivable sales arrangement and the Canadian Credit Facility of $5 million. The Company expects to record an extraordinary loss of approximately $2.7 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable and eligible inventory. Direct borrowings will bear interest at the Prime Rate plus the applicable margin (as defined) or the applicable LIBOR Rate plus the applicable margin (as defined), at the option of the Company. Borrowings are collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, capital expenditures, liens and acquisitions. NOTE 5 LONG-TERM DEBT (Dollars in thousands) March 31, 2001 December 31, 2000 (unaudited) --------------- ------------------ Long Term Debt Consists of: 6.75% convertible subordinated debentures $ 90,000 $ 90,000 7.56% senior note payable 52,143 62,571 Canadian Credit Facility 5,075 5,335 Other 4,928 5,755 --------------- ------------- 152,146 163,661 Less: current portion 13,481 13,643 --------------- ------------- Total non-current portion of Long-term debt: $ 138,665 150,018 =============== ============= On July 26, 1999, the Company completed a public offering of convertible subordinated debentures amounting to $90,000,000. The Convertible Debentures carry an interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009. The Debentures are convertible into 2,796,000 shares of the Company's common stock. Under the terms of the 7.56% senior note agreement, the Company was required to repay the loan in seven equal annual installments beginning in 2000. As noted above, this senior note was paid off as part of the new revolving credit facility described in Note 4. 8
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 (CONTINUED) Under the terms of a Canadian (CDN) credit agreement, the Company was required to repay the loan as follows: $2,000,000 CDN in 2001 and a final payment of $6,000,000 CDN in 2002. Subject to certain restrictions, the Company can make prepayments without premium. The credit agreement had various interest rate options. As noted above, this credit agreement was paid off as part of the new revolving credit facility described in Note 4. Certain note agreements contain restrictive covenants which require the maintenance of defined levels of working capital, tangible net worth and earnings and limit, among other items, investments, indebtedness and distributions for the payment of dividends and the acquisition of capital stock. NOTE 6 The Company sells certain accounts receivable to an independent financial institution, through its wholly owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999 SMP Credit Corp. entered into a three year agreement whereby it can sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement expires in March 2002. The terms of the agreement contain restrictive covenants, including the maintenance of defined levels of tangible net worth. At March 31, 2001, net account receivables amounting to $25,000,000 had been sold under this agreement. As noted above, this agreement was terminated as part of the new revolving credit facility described in Note 4. NOTE 7 Total comprehensive (loss) income was ($320,000) and $90,000 for the three-month periods ended March 31, 2001 and 2000, respectively. NOTE 8 At March 31 2001, in aggregate 1,369,154 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans. 9
NOTE 9 Following are reconciliations of the earnings available to common stockholders and the shares used in calculating basic and dilutive net earnings per common share: For Three-Months Ended March 31, ------------ -- ---------------- 2001 2000 ---- ---- Earnings before extraordinary item $619,000 $385,000 Extraordinary item -- (501,000) ------------ ---------------- Earnings available to common stockholders 619,000 (116,000) Effect of convertible debentures -- -- ------------ ---------------- Net earnings available to common stockholders assuming dilution $619,000 $(116,000) ============ ================ Weighted average common shares 11,714,346 12,409,547 Effect of convertible debentures -- -- Effect of stock options 14,223 -- ------------ ---------------- Weighted average common equivalent shares outstanding assuming dilution 11,728,569 12,409,547 ============ ================ The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. For Three-Months Ended March 30, -------------- -- --------------- 2001 2000 ---- ---- Stock options 1,390,075 806,991 Convertible debentures 2,796,120 2,796,120 ============== =============== NOTE 10 In fiscal 2000, the Company created an employee benefits trust to which it contributed 750,000 shares of treasury stock. The Company is authorized to instruct the trustees to distribute such shares toward the satisfaction of the Company's future obligations under Employee Benefit Plans. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with its fiduciary duties. During March of 2001, the Company committed 75,000 shares to be released. NOTE 11 The Company's two reportable operating segments are Engine Management and Temperature Control. Industry Segment (Dollars in thousands) For the three-months ended March 31, -------------------------------------------------- 2001 2000 ----------------------------- ------------------------- Operating Operating ----------- ---------- Net Sales Income Net Sales Income --------- ------ --------- ------ Engine Management $75,010 $6,722 $73,155 $7,574 Temperature Control 70,958 715 62,042 738 All Other 9,577 (2,484) 11,562 (4,176) ----------- --------- ----------- --------- Consolidated $155,545 $4,953 $146,759 $4,136 =========== ========= =========== ========= 10
NOTE 11 (CONTINUED) - -------------------------------------- All other consists of items pertaining to European and Canadian operations and the corporate headquarters function, which do not meet the criteria of a reportable operating segment. The following table reconciles the measure of profit used in the previous disclosure to the Company's consolidated Earnings before taxes, minority interest and extraordinary item: For Three-Months Ended March 30, -------------------------- 2001 2000 ---- ---- Operating income $4,953 $4,136 Other income (expense) 80 424 Interest expense 4,127 3,907 ----------- -------- Earnings before taxes, minority interest and extraordinary item $906 $653 =========== ======== NOTE 12 On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $500,000 (formerly $19,759,000) of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In addition, this former customer seeks $10,500,000 from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes this matter will not have a material effect on the Company's consolidated financial position or results of operations. The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, it is management's opinion that the final resolution of these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - --------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - ----------------------------------- THIS MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-Q. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During the first quarter of 2001, cash used in operations amounted to $36.1 million, as compared to $25.2 million in the same period of 2000. The increase is primarily attributable to higher accounts receivable due to the increase in sales and a reduction in accounts payable. This increase was partially offset by the Company's efforts to reduce inventory levels from their elevated levels at December 31, 2000. In connection with inventories and the related decrease in inventory turnover (1.9x in 2001 vs. 2.4x in 2000, on a rolling twelve month basis) the reasons are two-fold. First, with respect to the Temperature Control Segment, the related business is highly seasonal with sales of air conditioning parts being the greatest in the second and third quarters of the year. This seasonality requires the build-up of inventory levels prior to the main selling season. This combined with lower than anticipated 2000 sales, increased Temperature Control inventory levels. Second, with respect to the Engine Management Segment, in the third quarter of 2000, Engine Management successfully acquired a new major customer which required inventory levels to be increased in order to fill the initial "pipeline" of orders from such customer; the customer launch for new orders has extended in 2001, versus 2000, as originally planned. In order to achieve significant inventory reductions and in order to improve our working capital position, the Company has continued to monitor production levels on our Temperature Control business and reduced production and purchasing requirements for the Engine Management business. Cash used in investing activities was $4.2 million in the first quarter of 2001, as compared to $7.1 million in the same period of 2000. The decrease is primarily due to reductions in capital expenditures and acquisitions. Cash provided by financing activities was $37.6 million in the first quarter of 2001, as compared to cash used in financing activities of $4.9 million in the same period of 2000. The change is primarily due to increased borrowings under the short-term line of credit to finance the seasonal working capital needs of the Company and the elevated inventory levels discussed previously. Payments under the Company's long-term debt arrangements during the first quarter of 2001 amounted to $11.5 million. During the first quarter of 2000, long-term debt payments amounted to $25.5 million and reflected a $14 million prepayment of a 10.22% senior note. In connection with this prepayment, the Company reflected an extraordinary loss of approximately $0.5 million in the first quarter of 2000 related to prepayment penalties and the write-off of deferred loan costs. During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which the Company could repurchase shares of its common stock. During such years, $26.7 million (in the aggregate) of common stock has been repurchased to meet present and future requirements of the Company's stock option programs and to fund the Company's ESOP. As of March 31, 2001, the Company has Board authorization to repurchase additional shares at a maximum cost of $1.7 million. During the first quarter of 2001, the Company did not repurchase any shares of its common stock. During the first quarter of 2000, the Company repurchased approximately 648,700 shares at a cost of approximately $8.1 million. On November 30, 1998, the Company entered into a three-year revolving credit facility with eight lending institutions, providing for an $110,000,000 unsecured line of credit. The facility allows the Company to select from two interest rate options, one based on a spread over the prime rate and the other based on a spread over LIBOR. The spread above each interest rate option is determined by the Company's ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization. 12
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) - ------------------------------------------- The terms of the revolving credit facility, as amended, include, among other provisions, the requirement for a clean-down, maintenance of defined levels of tangible net worth, various financial performance ratios and restrictions on capital expenditures, dividend payments, acquisitions and additional indebtedness. At March 31, 2001, borrowings under the Company's aggregate revolving credit facilities amounted to $89.1 million. With the current revolving credit facility set to expire on November 30, 2001, the Company, effective April 27, 2001 entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new revolving credit facility. The term of the new credit agreement is for a period of five years and provides for a line of credit up to $225,000,000. The initial proceeds have been used to refinance approximately $97 million of the outstanding indebtedness under the Company's aforementioned existing bank line of credit, the 7.56% senior note of $52 million, a $25 million accounts receivable sale arrangement and the Canadian Credit Facility of $5 million. The Company expects to record an extraordinary loss of approximately $2.7 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable and eligible inventory. Direct borrowings will bear interest at the Prime Rate plus the applicable margin (as defined) or the applicable LIBOR Rate plus the applicable margin (as defined), at the option of the Company. Borrowings will be collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, capital expenditures, liens and acquisitions. The Company's profitability and its working capital requirements have become more seasonal with the increased sales mix of temperature control products. Working capital requirements usually peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales begin to be received. These increased working capital requirements are funded by borrowings from our lines of credit. The Company anticipates that its present sources of funds will continue to be adequate to meet its near term needs. INTERIM RESULTS OF OPERATIONS - ----------------------------- COMPARISON OF THE THREE-MONTHS ENDED MARCH 30, 2001 TO THE - ----------------------------------------------------------- THREE-MONTHS ENDED MARCH 31, 2000 - --------------------------------- On a consolidated basis, net sales in the first quarter of 2001 were $155.5 million, an increase of $8.8 million, or 6%, from the first quarter of 2000. The increase resulted primarily from sales to new accounts in both Engine Management and Temperature Control divisions. Gross margins, as a percentage of net sales, decreased to 28.9% in the first quarter of 2001 from 32.2% in the first quarter of 2000. The overall decrease in gross margins was primarily due to inventory reduction programs. The reduction in gross margins was across all product lines as the Company targets a minimum $30 million inventory reduction during 2001. The Company expects continued pressure on gross margins throughout the second quarter and into the third quarter, as inventory levels are reduced. Selling, general and administrative expenses decreased by $3.2 million to $40.0 million in the first quarter of 2001, as compared to $43.2 million in the first quarter of 2000. This decrease reflects the focus on the Company's cost reduction efforts with benefits primarily in the marketing and distribution areas. Operating income increased by $0.8 million in the first quarter of 2001, as compared to the first quarter of 2000, primarily due to the increased sales and a focus on selling, general and administrative expenses. Other income, net, decreased in the first quarter 2001 due to lower investment-related income, as compared to the first quarter of 2000. Interest expense increased 0.2 million in the first quarter 2001 as compared to the same period in 2000, due to higher average borrowings. Income tax expense remained flat as compared to the first quarter of 2000. However, the effective tax rate decreased from 35% in the first quarter of 2000 to 32% in first quarter of 2001, due to a decrease in earnings from the Company's domestic subsidiaries. The 32% current effective tax rate reflects the Company's anticipated tax rate for the balance of the year. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ As a result of principal payments on long term debt and an increase in short term borrowings during the first quarter 2001, the Company's percentage of variable rate debt to total debt has increased from 23% at December 31, 2000 to 39% at March 31, 2001. Other than the aforementioned, there have been no significant changes to the information presented in Item 7A (Market Risk) of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 14
PART II - OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS - ------------------------- On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $500,000 (formerly $19,759,000) of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. In addition, this former customer seeks $10,500,000 from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes that these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, it is management's opinion that the final resolution of these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT(S) ---------- NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- 10.24 Credit Agreement dated April 27, 2001 among Standard Filed with this Motor Products, Inc. and subsidiaries, as Borrowers Document and GE Capital Corp. as Agent and Lender, GMAC Commercial Credit LLC, as Lender and Syndication Agent and Bank of America, N.A., as Lender and Documentation Agent. (b) REPORTS ON FORM 8-K ------------------- There were no reports on Form 8-K filed for this period. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANDARD MOTOR PRODUCTS, INC. ----------------------------- (Registrant) MAY 14, 2001 JAMES J. BURKE - ------------ ----------------------------- (Date) Vice President Finance, Chief Financial Officer 16