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SMP 2019-06-30

Part I - Financial Information

Item 1. Consolidated Financial Statements

Note 1. Basis of Presentation

Note 2. Summary of Significant Accounting Policies

Note 3. Leases

Note 4. Business Acquisitions and Investments

Note 5. Restructuring and Integration Expenses

Note 6. Sale of Receivables

Note 7. Inventories

Note 8. Acquired Intangible Assets

Note 9. Credit Facilities and Long-Term Debt

Note 10. Stock-Based Compensation Plans

Note 11. Employee Benefits

Note 12. Fair Value Measurements

Note 13. Earnings per Share

Note 14. Industry Segments

Note 15. Net Sales

Note 16. Commitments and Contingencies

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Part II - Other Information

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 6. Exhibits

EX-31.1	ex31_1.htm
EX-31.2	ex31_2.htm
EX-32.1	ex32_1.htm
EX-32.2	ex32_2.htm

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, New York		11101
(Address of principal executive offices)		(Zip Code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $2.00 per share	SMP	New York Stock Exchange LLC

	Large Accelerated Filer  ☑	Accelerated Filer ☐
	Non-Accelerated Filer   ☐	Smaller reporting company   ☐
	Emerging growth company    ☐

PART I - FINANCIAL INFORMATION

		Page No.
Item 1.	Consolidated Financial Statements:
	Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2019 and 2018	3
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 2019 and 2018	4
	Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018	5
	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2019 and 2018	6
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months and Six Months Ended June 30, 2019 and 2018	7
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
Signatures		43

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands, except share and per share data)		2019				2018				2019				2018
		(Unaudited)								(Unaudited)
Net sales		$	305,172			$	286,636			$	588,938			$	548,462
Cost of sales			216,267				205,347				422,070				394,584
Gross profit			88,905				81,289				166,868				153,878
Selling, general and administrative expenses			60,536				57,750				120,536				115,467
Restructuring and integration expenses			644				231				644				3,067
Other income (expense), net			3				42				(3	)			313
Operating income			27,728				23,350				45,685				35,657
Other non-operating income, net			1,411				480				2,057				449
Interest expense			1,722				1,251				2,811				1,883
Earnings from continuing operations before taxes			27,417				22,579				44,931				34,223
Provision for income taxes			6,862				5,752				11,272				8,799
Earnings from continuing operations			20,555				16,827				33,659				25,424
Loss from discontinued operations, net of income taxes			(1,123	)			(882	)			(2,011	)			(1,490	)
Net earnings		$	19,432			$	15,945			$	31,648			$	23,934
Per Share Data:
Net earnings per common share – Basic:
Earnings from continuing operations		$	0.92			$	0.75			$	1.50			$	1.13
Discontinued operations			(0.05	)			(0.04	)			(0.09	)			(0.07	)
Net earnings per common share – Basic		$	0.87			$	0.71			$	1.41			$	1.06
Net earnings per common share – Diluted:
Earnings from continuing operations		$	0.90			$	0.73			$	1.47			$	1.11
Discontinued operations			(0.05	)			(0.04	)			(0.09	)			(0.07	)
Net earnings per common share – Diluted		$	0.85			$	0.69			$	1.38			$	1.04
Dividend declared per share		$	0.23			$	0.21			$	0.46			$	0.42
Average number of common shares			22,328,292				22,471,428				22,374,785				22,484,894
Average number of common shares and dilutive common shares			22,795,677				22,958,469				22,857,435				22,962,049

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)		2019				2018				2019				2018
		(Unaudited)								(Unaudited)
Net earnings		$	19,432			$	15,945			$	31,648			$	23,934
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			398				(5,935	)			1,093				(3,716	)
Pension and postretirement plans			(5	)			—				(10	)			(5	)
Total other comprehensive income (loss), net of tax			393				(5,935	)			1,083				(3,721	)
Comprehensive income		$	19,825			$	10,010			$	32,731			$	20,213

(In thousands, except share and per share data)		June 30, 2019				December 31, 2018
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	17,419			$	11,138
Accounts receivable, less allowances for discounts and doubtful accounts of $6,090 and $5,687 for 2019 and 2018, respectively			179,386				157,535
Inventories			375,258				349,811
Unreturned customer inventories			18,677				20,484
Prepaid expenses and other current assets			14,972				7,256
Total current assets			605,712				546,224
Property, plant and equipment, net of accumulated depreciation of $192,515 and $186,135 for 2019 and 2018, respectively			89,197				90,754
Operating lease right-of-use assets			35,648				—
Goodwill			77,728				67,321
Other intangibles, net			69,017				48,411
Deferred income taxes			39,825				42,334
Investments in unconsolidated affiliates			34,400				32,469
Other assets			18,000				15,619
Total assets		$	969,527			$	843,132
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable		$	130,000			$	43,689
Current portion of other debt			5,085				5,377
Accounts payable			89,149				94,357
Sundry payables and accrued expenses			34,280				31,033
Accrued customer returns			53,420				57,433
Accrued core liability			26,671				31,263
Accrued rebates			32,598				28,870
Payroll and commissions			22,737				20,564
Total current liabilities			393,940				312,586
Long-term debt			153				153
Noncurrent operating lease liabilities			28,613				—
Other accrued liabilities			20,452				18,075
Accrued asbestos liabilities			41,104				45,117
Total liabilities			484,262				375,931
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			105,347				102,470
Retained earnings			401,465				380,113
Accumulated other comprehensive income			(8,511	)			(9,594	)
Treasury stock – at cost (1,629,398 shares and 1,503,284 shares in 2019 and 2018, respectively)			(60,908	)			(53,660	)
Total stockholders’ equity			485,265				467,201
Total liabilities and stockholders’ equity		$	969,527			$	843,132

(In thousands)		Six Months Ended June 30,
		2019				2018
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	31,648			$	23,934
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization			12,744				11,706
Amortization of deferred financing cost			113				172
Increase to allowance for doubtful accounts			337				93
Increase to inventory reserves			1,552				1,553
Amortization of deferred gain on sale of building			—				(218	)
Equity (income) loss from joint ventures			(2,047	)			(125	)
Employee stock ownership plan allocation			1,260				1,278
Stock-based compensation			3,848				3,896
Decrease in deferred income taxes			2,547				502
Loss on discontinued operations, net of tax			2,011				1,490
Change in assets and liabilities:
Increase in accounts receivable			(26,622	)			(34,524	)
Increase in inventories			(19,691	)			(6,650	)
Increase in prepaid expenses and other current assets			(6,406	)			(2,988	)
Increase (decrease) in accounts payable			(6,994	)			15,684
Decrease in sundry payables and accrued expenses			(7,545	)			(9,115	)
Net change in other assets and liabilities			(6,261	)			(2,502	)
Net cash provided by (used in) operating activities			(19,506	)			4,186
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and investments in businesses			(38,427	)			(8,572	)
Net proceeds from sale of Grapevine, Texas facility			4,801				—
Capital expenditures			(7,578	)			(11,325	)
Other investing activities			46				16
Net cash used in investing activities			(41,158	)			(19,881	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements			86,311				31,529
Net borrowings (payments) of other debt and capital lease obligations			(355	)			758
Purchase of treasury stock			(10,738	)			(7,640	)
Increase in overdraft balances			1,691				1,990
Dividends paid			(10,296	)			(9,437	)
Net cash provided by financing activities			66,613				17,200
Effect of exchange rate changes on cash			332				(255	)
Net increase in cash and cash equivalents			6,281				1,250
CASH AND CASH EQUIVALENTS at beginning of period			11,138				17,323
CASH AND CASH EQUIVALENTS at end of period		$	17,419			$	18,573
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	2,516			$	1,656
Income taxes		$	13,785			$	9,622
Noncash investing activity:
Accrual for additional investment in China joint venture		$	—			$	1,373

		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total
(In thousands)
Balance at March 31, 2019		$	47,872			$	104,467			$	387,170			$	(8,904	)		$	(57,565	)		$	473,040
Net earnings			—				—				19,432				—				—				19,432
Other comprehensive income, net of tax			—				—				—				393				—				393
Cash dividends paid			—				—				(5,137	)			—				—				(5,137	)
Purchase of treasury stock			—				—				—				—				(4,411	)			(4,411	)
Stock-based compensation			—				880				—				—				1,068				1,948
Employee Stock Ownership Plan			—				—				—				—				—				—
Balance at June 30, 2019		$	47,872			$	105,347			$	401,465			$	(8,511	)		$	(60,908	)		$	485,265

		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total
(In thousands)
Balance at March 31, 2018		$	47,872			$	102,646			$	359,232			$	(1,895	)		$	(48,346	)		$	459,509
Net earnings			—				—				15,945				—				—				15,945
Other comprehensive income, net of tax			—				—				—				(5,935	)			—				(5,935	)
Cash dividends paid			—				—				(4,716	)			—				—				(4,716	)
Purchase of treasury stock			—				—				—				—				(4,412	)			(4,412	)
Stock-based compensation			—				757				—				—				1,222				1,979
Balance at June 30, 2018		$	47,872			$	103,403			$	370,461			$	(7,830	)		$	(51,536	)		$	462,370

		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total
(In thousands)
Balance at December 31, 2018		$	47,872			$	102,470			$	380,113			$	(9,594	)		$	(53,660	)		$	467,201
Net earnings			—				—				31,648				—				—				31,648
Other comprehensive income, net of tax			—				—				—				1,083				—				1,083
Cash dividends paid			—				—				(10,296	)			—				—				(10,296	)
Purchase of treasury stock			—				—				—				—				(10,738	)			(10,738	)
Stock-based compensation			—				2,132				—				—				1,716				3,848
Employee Stock Ownership Plan			—				745				—				—				1,774				2,519
Balance at June 30, 2019		$	47,872			$	105,347			$	401,465			$	(8,511	)		$	(60,908	)		$	485,265

		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total
(In thousands)
Balance at December 31, 2017		$	47,872			$	100,057			$	357,153			$	(4,109	)		$	(47,319	)		$	453,654
Cumulative effect adjustment (Note 2)			—				—				(1,189	)			—				—				(1,189	)
Net earnings			—				—				23,934				—				—				23,934
Other comprehensive income, net of tax			—				—				—				(3,721	)			—				(3,721	)
Cash dividends paid			—				—				(9,437	)			—				—				(9,437	)
Purchase of treasury stock			—				—				—				—				(7,324	)			(7,324	)
Stock-based compensation			—				2,581				—				—				1,315				3,896
Employee Stock Ownership Plan			—				765				—				—				1,792				2,557
Balance at June 30, 2018		$	47,872			$	103,403			$	370,461			$	(7,830	)		$	(51,536	)		$	462,370

Note 1.  Basis of Presentation

Standard Motor Products, Inc. and subsidiaries (referred to as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of premium replacement parts for motor vehicles in the automotive aftermarket industry with a complementary focus on heavy duty, industrial equipment and the original equipment 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, 2018.  The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership, except in instances where the minority shareholder maintains substantive participating rights, in which case we follow the equity method of accounting.  Investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence.  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.

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, cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability exposures, asbestos, environmental and litigation matters, valuation of deferred tax assets, share based compensation and sales returns and other allowances.

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, 2018, except for changes made as a result of the adoption of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”), described under the heading, “Recently Issued Accounting Pronouncements” below and in Note 3, “Leases.”

Recently Issued Accounting Pronouncements

Standards that were adopted

Leases

Effective January 1, 2019, we adopted ASU 2016-02, Leases, (“ASU 2016-02”) using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption.  The most significant impact in adopting the new standard was the recognition of right-of-use (“ROU”) assets and lease liabilities on our consolidated balance sheet for operating leases, while the accounting for finance leases remained substantially unchanged.  The adoption of the new standard did not materially impact our consolidated statements of operations or cash flows.

In adopting ASU 2016-02, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward our historical lease identification and lease classifications.  In addition, upon adoption, we evaluated all of our leases, and in particular our real estate leases, to determine the appropriate lease term.  In evaluating our leases, we determined that the lease term for one of our leases should be lengthened, as we concluded that it is reasonably certain that we will exercise the five-year renewal option in the lease.  The lease term for all of our other leases remained unchanged.

Additionally, we elected to apply the provisions of ASU 2018-11, Targeted Improvements, which allows us to initially apply the new lease requirements as of the effective date.  Comparative financial information for the prior periods presented were not restated but instead are reported under the accounting standards in effect in those prior periods.

Adoption of the new standard resulted in the following changes in our consolidated balance sheet as of January 1, 2019 (in thousands):

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		Balance at December 31, 2018				Adjustments Due to Adoption of ASU 2016-02				Balance at January 1, 2019
Balance Sheet
Operating lease right-of-use asset		$	—			$	38,580			$	38,580
Sundry payables and accrued expenses			31,033				7,232				38,265
Noncurrent operating lease liabilities			—				31,348				31,348

See Note 3 for further information regarding our adoption of ASU 2016-02.

Standards that are not yet adopted as of June 30, 2019

The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted as of June 30, 2019, and that could have an impact on our financial statements:

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Standard		Description		Date of adoption		Effects on the financial statements or other significant matters
ASU 2017-04, Simplifying the Test for Goodwill Impairment		This standard is intended to simplify the accounting for goodwill impairment.  ASU 2017-04 removes Step 2 of the test, which requires a hypothetical purchase price allocation.  A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.		January 1, 2020, with early adoption permitted		The new standard should be applied prospectively.  We will consider the new standard when performing our annual impairment test and evaluate when we will adopt the new standard.
ASU 2016-13, Financial Instruments – Credit Losses		This standard creates a single model to measure impairment on financial assets, which includes trade account receivables.  An estimate of expected credit losses on trade account receivables over their contractual life will be required to be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts.		January 1, 2020, with early adoption permitted		We do not anticipate that the adoption of this standard will have a material impact on the manner in which we estimate our allowance for doubtful accounts on trade accounts receivable, or on our consolidated financial statements.

Note 3.  Leases

Significant Accounting Policy

We determine if an arrangement is a lease at inception.  For operating leases, we include and report operating lease right-of-use (“ROU”) assets, sundry payables and accrued expenses, and noncurrent operating lease liabilities on our consolidated balance sheet for leases with a term longer than twelve months.  Finance leases are reported on our consolidated balance sheets in property, plant and equipment, current portion of other debt, and long-term debt.

Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the total lease payments over the lease term.  Our ROU assets represent the right to use an underlying leased asset over the existing lease term, and the corresponding lease liabilities represent our obligation to make lease payments arising from the lease agreement.  As most of our leases do not provide for an implicit rate, we use our secured incremental borrowing rate based on the information available when determining the present value of our lease payments.  Our lease terms may include options to terminate, or extend, our lease when it is reasonably certain that we will execute the option.  Lease agreements may contain lease and non-lease components, which are generally accounted for separately.  Operating lease expense is recognized on a straight-line basis over the lease term.

Quantitative Lease Disclosures

We have operating and finance leases for our manufacturing facilities, warehouses, office space, automobiles, and certain equipment.  Our leases have remaining lease terms of up to ten years, some of which may include one or more five-year renewal options.  We have included the five-year renewal option for one of our leases in our operating lease payments as we concluded that it is reasonably certain that we will exercise the option.  Leases with an initial term of twelve months or less are not recorded on the balance sheet.  Operating lease expense is recognized on a straight-line basis over the lease term.  Finance leases are not material.

The following tables provide quantitative disclosures related to our operating leases (in thousands):

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