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| SMP > SEC Filings for SMP > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
This Report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 substantial leverage; economic and market conditions (including access to credit and financial markets); the performance of the aftermarket sector; 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, distributor and marketer of replacement parts for motor vehicles in the automotive aftermarket industry, with an increasing focus on the original equipment and original equipment service markets. 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 also sell our products in Europe through our European Segment.
We place significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization. We intend to continue to improve our operating efficiency, customer satisfaction and cost position by focusing on company-wide overhead and operating expense cost reduction programs, such as closing excess facilities and consolidating redundant functions.
Seasonality. Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and 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 borrowing 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 tightened the rules for authorized warranty returns, placed further restrictions on the amounts customers can return and instituted a program so that our management can 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 June 30, 2009 to Three Months Ended June 30, 2008
Sales. Consolidated net sales for the three months ended June 30, 2009 were $197.5 million, a decrease of $17.8 million, or 8.3%, compared to $215.3 million in the same period of 2008. The decrease in consolidated net sales resulted from decreases in net sales of $16.6 million, or 12.0%, in our Engine Management Segment, and $4.7 million, or 37.3%, in our European Segment offset by an increase of $4.2 million, or 6.8%, in our Temperature Control Segment. The Engine Management decrease in net sales is the result of lower sales volumes in our traditional markets as customers continued to maintain lower inventory levels in response to the economic environment and a decline in our OE / OES sales volumes. The reduction in sales in our European Segment is the result of a decrease in original equipment sales volumes and an unfavorable change in foreign currency exchange rates. The Temperature Control Segment increase in net sales is the result of incremental new customer sales volumes within our retail markets
Gross margins. Gross margins, as a percentage of consolidated net sales, increased to 23.5% in the second quarter of 2009, compared to 22.6% in the second quarter of 2008. The increase resulted primarily from an increase in Engine Management margins of 3.8 percentage points while margins in our Temperature Control Segment and European Segment decreased 2.3 percentage points and 0.9 percentage points, respectively. The increase in the Engine Management margins was primarily due to a reduction in our fixed overhead costs as a result of our cost reduction programs and the negative impact on prior year margins of unabsorbed overhead during our closure of two manufacturing facilities and start up and training costs at our new Mexico facility. Temperature Control's gross margin decrease resulted primarily from changes in product mix where sales of lower margin products have increased. The European Segment's decrease resulted primarily from lower sales volumes and a change in product mix with an increase in sales incentives offered.
Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased by $5.7 million to $36.8 million or 18.6% of consolidated net sales, in the second quarter of 2009, as compared to $42.5 million, or 19.7% of consolidated net sales in the second quarter of 2008. The decrease in SG&A expenses is due primarily to lower selling, marketing and distribution expenses, and the benefit recognized from the postretirement benefit plan amendment announced in May 2008.
Restructuring and integration expenses. Restructuring and integration expenses decreased to $1.2 million in the second quarter of 2009, compared to $1.4 million in the second quarter of 2008. The 2009 expense related primarily to demolition costs incurred at our European properties held for sale and other exit costs incurred in connection with the closure of our Edwardsville, Kansas manufacturing operations and Wilson, North Carolina facility. The 2008 expenses related primarily to charges incurred for severance and related costs in connection with the shutdown of our Long Island City, New York manufacturing operations.
Operating income. Operating income was $8.4 million in the second quarter of 2009, compared to $4.7 million in the second quarter of 2008. The increase of $3.7 million was due primarily to the positive impact of an increase in gross margins of our Engine Management Segment and lower SG&A expenses reflecting the impact of our postretirement benefit amendment and cost reduction programs implemented in the second half of 2008.
Other income, net. Other income, net was $3.4 million in the second quarter of 2009. In the second quarter, we redeemed our investment in the preferred stock of a third party issuer resulting in a pretax gain of $2.3 million.
Interest expense. Interest expense decreased by $1.3 million to $2.3 million in the second quarter of 2009 compared to $3.6 million in the same period in 2008 due to a reduction in average borrowing costs as a result of our debt reduction efforts which produced lower borrowings on our revolving credit facility and the repurchase of $45.1 million principal amount of our 6.75% convertible subordinated debentures during the final six months of 2008.
Income tax provision. The income tax provision in the second quarter of 2009 was $3.8 million compared to $1.9 million in the same period in 2008. The effective tax rate in the second quarter of 2009 was 40.5%. The income tax provision in the second quarter of 2008 includes the tax impact of the non-deductibility of a portion of the $5 million distribution to a participant in the unfunded supplemental executive retirement plan and a tollgate tax on our operations in Puerto Rico.
Loss from discontinued operation. Loss from discontinued operation, net of tax, reflects legal expenses associated with our asbestos related liability. We recorded $0.3 million as a loss from discontinued operation for the second quarter of 2009 and 2008. As discussed more fully in Note 13 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 Six Months Ended June 30, 2009 to Six Months Ended June 30, 2008
Sales. Consolidated net sales for the six months ended June 30, 2009 were $369.7 million, a decrease of $53.7 million, or 12.7%, compared to $423.4 million in the same period of 2008. The decrease in consolidated net sales resulted from declines in Engine Management net sales of $37.1 million or 13.2%, Temperature Control net sales of $5.1 million, or 4.6%, European Segment net sales of $8.4 million and $3.0 million of net sales in our Other Operating Segment, which consists primarily of our Canadian operations. The Engine Management decrease in net sales compared to the first six months of 2008 is the result of lower sales volumes in our traditional markets as a single large customer changed brands to a competitor and as customers have reduced and maintained lower inventory levels in response to the economic environment, and a decline in our OE / OES sales volumes. The decline in Temperature Control net sales is the result of a decline in volumes in our traditional market and an increase in cash discounts to encourage early payment. The reduction in sales in our European Segment resulted from a decrease in OES sales volumes and an unfavorable change in foreign currency exchange rates.
Gross margins. Gross margins, as a percentage of consolidated net sales, for the six months ended June 30, 2009 has held consistent at 23.6% compared to the same period of 2008, as a 1.6 percentage point increase in Engine Management margins was offset by a decrease in Temperature Control margins of 1.2 percentage points and a 2.2 percentage point decrease in margins in our European Segment. The increase in the Engine Management margins was primarily due to a reduction in our fixed overhead costs as a result of our cost reduction programs and the negative impact on prior year margins of unabsorbed overhead during our closure of two manufacturing facilities and start up and training costs at our new Mexico facility. Temperature Control's gross margin decrease resulted primarily from unfavorable manufacturing variances as inventory levels were reduced. The European Segment's decrease resulted from lower sales volumes and an increase in sales incentives offered in our traditional markets.
Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased by $13.6 million to $72.8 million or 19.7% of consolidated net sales, in the six months ended June 30, 2009, as compared to $86.4 million, or 20.4% of consolidated net sales in the second quarter of 2008. The decrease in SG&A expenses is due primarily to lower selling, marketing and distribution expenses, and the benefit recognized from the postretirement benefit plan amendment announced in May 2008.
Restructuring and integration expenses. Restructuring and integration expenses decreased to $2.4 million for the six months ended June 30, 2009, compared to $4.2 million in the same period of 2008. The 2009 expense related primarily to severance and other exit costs incurred in connection with the closure of our Edwardsville, Kansas manufacturing operations and Wilson, North Carolina facility and building demolition costs incurred at our European properties held for sale. The 2008 expenses related primarily to charges incurred for severance and related costs in connection with the shutdown of our Long Island City, New York manufacturing operations.
Operating income. Operating income was $12.1 million in the first six months of 2009, compared to $9.3 million in 2008. The increase of $2.8 million was due primarily to the positive impact of margins at our Engine Management Segment and lower operating expenses reflecting the impact of our postretirement benefit amendment and cost reduction programs implemented in the second half of 2008.
Other income, net. Other income, net decreased to $3.5 million for the six months ended June 30, 2009, compared to $20.4 million in the same period of 2008. During the first six months of 2009, we redeemed our investment in the preferred stock of a third party issuer resulting in a pretax gain of $2.3 million. During 2008, we completed the sale of our Long Island City, New York property for a purchase price of $40.6 million resulting in a recognized gain in 2008 of $21.3 million, offset partially by a $1.4 million charge related to the defeasance of our mortgage on the property.
Interest expense. Interest expense decreased by $2.9 million to $4.8 million in the six months ended June 30, 2009, compared to $7.7 million in the same period in 2008. The decline is due primarily to our debt reduction efforts which resulted in lower borrowings on our revolving credit facility and the repurchase of $45.1 million principal amount of our 6.75% convertible subordinated debentures during the last six months of 2008. Lower borrowings more than offset the increase in the interest rate on our revolving credit facility as a result of amendments made to the credit agreement. Our accounts receivable factoring programs initiated during the second quarter of 2008 with some of our larger customers in order to accelerate collection of accounts receivable balances and improved working capital management contributed to the lower year over year borrowings for the six months ended June 30, 2009.
Income tax provision. The income tax provision in the six months ended June 30, 2009 was $4.4 million at an effective tax rate of 40.6%, compared to $9.3 million and an effective tax rate of 42.6% for the same period in 2008. The 2008 rate was higher primarily due to the differences in the mix of domestic and foreign earnings as a result of the gain on the sale of the Long Island City, New York property, the tax impact of the non-deductibility of a portion of the $5 million distribution to a participant in the unfunded supplemental executive retirement plan, and a tollgate tax on our operations in Puerto Rico.
Loss from discontinued operation. Loss from discontinued operation, net of tax, reflects legal expenses associated with our asbestos related liability. We recorded $0.6 million as a loss from discontinued operation for the six months ended 2009 and 2008. As discussed more fully in Note 13 in the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
Liquidity and Capital Resources
Operating Activities. During the first six months of 2009, cash provided by operations amounted to $68.8 million compared to cash used in operations of $49.2 million in the same period of 2008. The year-over-year increase in cash provided by operations is primarily the result of the impact of our customer accounts receivable factoring program and improved inventory and working capital management.
Investing Activities. Cash used in investing activities was $2 million in the first six months of 2009, compared to cash provided by investing activities was $32 million in the first six months of 2008. Investing activities in 2009 included a $6 million payment to complete our core sensor asset purchase transaction entered into in 2008 offset by a $4 million cash receipt in connection with our December 2008 divestiture of certain of our joint venture equity ownerships and $3.9 million in proceeds received in connection with the redemption of preferred stock of a third-party issuer. Cash provided by investing activities in 2008 includes $37.3 million in net cash proceeds from the sale of our Long Island City, New York property. Capital expenditures in the first six months of 2009 were $3.9 million compared to $5.3 million in the comparable period last year.
Financing Activities. Cash used in financing activities was $61 million in the first six months of 2009, compared to cash provided by financing activities of $17.3 million in the same period of 2008. During the first six months of 2009, we reduced our borrowings under our revolving credit facilities by $58 million reflecting the impact of the accounts receivable factoring programs and improved working capital management. Dividends of $3.3 million were paid in the first six months of 2008. No dividends were paid in 2009.
In March 2007, we entered into a Second 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 June 2009) provides for a line of credit of up to $200 million (inclusive of the Canadian term loan described below) and expires in March 2013. 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 May 2009, we amended our restated credit agreement to permit the May 2009 exchange of $12.3 million principal amount of our outstanding 6.75% convertible subordinated debentures due 2009 for a like principal amount of our 15% convertible subordinated debentures due 2011 and to provide that, beginning October 15, 2010 and on a monthly basis thereafter, our borrowing availability will be reduced by approximately $2 million for the repayment, repurchase or redemption of the aggregate outstanding amount of our newly issued 15% convertible subordinated debentures.
In June 2009, we further amended our restated credit agreement (1) to extend the maturity date of our credit facility to March 20, 2013, (2) to reduce the aggregate amount of the revolving credit facility (inclusive of the Canadian term loan described below) from $275 million to $200 million, (3) to permit the settlement at maturity of our 6.75% convertible subordinated debentures due July 15, 2009, our 15% convertible subordinated debentures due April 15, 2011, and our 15% unsecured promissory notes due April 15, 2011; all with funds from our revolving credit facility subject to borrowing availability, (4) to establish a $10 million minimum borrowing availability requirement effective on the date of repayment of our 6.75% convertible subordinated debentures, and (5) to provide that, beginning October 15, 2010 and on a monthly basis thereafter our borrowing availability will be reduced by approximately $0.9 million for the repayment or repurchase of the aggregate outstanding amount of our newly issued 15% unsecured promissory notes due 2011. In addition, as of the date of the amendment the margin added to the index rate increased to between 2.25% - 2.75% and the margin added to the LIBOR rate increased to 3.75% - 4.25%, in each case depending upon the level of excess availability as defined in the restated credit agreement.
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 $98.2 million available for us to borrow pursuant to the formula at June 30, 2009, of which $32.1 million was reserved for repayment, repurchase or redemption, as the case may be, of the aggregate outstanding amount of our 6.75% convertible subordinated debentures, and $69.3 million available for us to borrow at July 15, 2009 after the settlement of the 6.75% convertible subordinated debentures. At June 30, 2009 and December 31, 2008, the interest rate on our restated credit agreement was 4.8% and 4.6%, respectively. Outstanding borrowings under the restated credit agreement (inclusive of the Canadian term loan described below), which are classified as current liabilities, were $85.8 million and $143.2 million at June 30, 2009 and December 31, 2008, respectively.
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 June 30, 2009, 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.
In June 2009, we amended our credit agreement with GE Canada Finance Holding Company, for itself and as agent for the lenders. The amended credit agreement provides for a line of credit of up to $10 million, of which $7 million is currently outstanding and which amount is part of the $200 million available for borrowing under our restated credit agreement with General Electric Capital Corporation (described above). The amended credit agreement is guaranteed and secured by us and certain of our wholly-owned subsidiaries and expires in March 2013. Direct borrowings under the amended credit agreement bear interest at the same rate as our restated credit agreement with General Electric Capital Corporation (described above).
Our European subsidiary has revolving credit facilities which, at June 30, 2009, provide for aggregate lines of credit up to $8.1 million. The amount of short-term bank borrowings outstanding under these facilities was $5.2 million on June 30, 2009 and $5.8 million on December 31, 2008. The weighted average interest rate on these borrowings on June 30, 2009 and December 31, 2008 was 6.4% and 6.2%, respectively.
In July 1999, we completed a public offering of 6.75% convertible subordinated debentures amounting to $90 million. The 6.75% convertible subordinated debentures carry an interest rate of 6.75%, payable semi-annually, and matured on July 15, 2009. The $90 million principal amount of the 6.75% convertible subordinated debentures was convertible into 2,796,120 shares of our common stock at the option of the holder.
From time to time, we repurchased the debentures in open market transactions, on terms that we believed to be favorable with any gains or losses as a result of the difference between the net carrying amount and the reacquisition price recognized in the period of repurchase. During the first six months of 2009, we repurchased $0.5 million principal amount of the 6.75% convertible subordinated debentures. In 2008, we repurchased $45.1 million principal amount of the debentures resulting in a gain on the repurchase of $3.8 million. 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 15% convertible subordinated debentures carry an interest rate of 15%, payable semi-annually, and will mature on April 15, 2011.
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