10-K 1 form10k.htm STANDARD MOTOR PRODUCTS, INC 10-K 12-31-2013

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ____ to ____
 
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)
 
 
Registrant’s telephone number, including area code:
(718) 392-0200
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Name of each exchange on which registered
Common Stock, par value $2.00 per share
New York Stock Exchange
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No  þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
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 Act).  Yes o No  þ

The aggregate market value of the voting common stock based on the closing price on the New York Stock Exchange on June 28, 2013 (the last business day of registrant’s most recently completed second fiscal quarter) of $34.34 per share held by non-affiliates of the registrant was $694,692,859.  For purposes of the foregoing calculation only, all directors and officers have been deemed to be affiliates, but the registrant disclaims that any of such are affiliates.
 
As of February 24, 2014, there were 22,956,157 outstanding shares of the registrant’s common stock, par value $2.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report is incorporated herein by reference from the registrant’s definitive proxy statement relating to its annual meeting of stockholders to be held on May 15, 2014.


STANDARD MOTOR PRODUCTS, INC.

INDEX
 
PART I.
 
Page No.
 
 
 
Item 1.
3
 
 
 
Item 1A.
13
 
 
 
Item 1B.
20
 
 
 
Item 2.
21
 
 
 
Item 3.
22
 
 
 
Item 4.
23
 
 
 
PART II.
 
 
 
 
 
Item 5.
23
 
 
 
Item 6.
26
 
 
 
Item 7.
28
 
 
 
Item 7A.
44
 
 
 
Item 8.
45
 
 
 
Item 9.
87
 
 
 
Item 9A.
87
 
 
 
Item 9B.
88
 
 
 
PART III.
 
 
 
 
 
Item 10.
88
 
 
 
Item 11.
88
 
 
 
Item 12.
88
 
 
 
Item 13.
88
 
 
 
Item 14.
88
 
 
 
PART IV.
 
 
 
 
 
Item 15.
89
 
 
 
 
90
2

PART I

In this Annual Report on Form 10-K, “Standard Motor Products,” “we,” “us,” “our” and the “Company” refer to Standard Motor Products, Inc. and its subsidiaries, unless the context requires otherwise. This Report, including the documents incorporated herein by reference, 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,” “strategies” 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, changes in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our receivables factoring arrangements; 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; the performance of the aftermarket and original equipment service markets; changes in the product mix and distribution channel mix; economic conditions; successful integration of acquired businesses; our ability to achieve benefits from our cost savings 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 Risk Factors, 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.

ITEM 1. 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 specific lines of replacement parts.  Our Engine Management Segment manufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicle systems.  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 Corporation and NAPA Auto Parts, as well as many of the leading auto parts retail chains, such as Advance Auto Parts, Inc., AutoZone, Inc., O’Reilly Automotive, Inc., Canadian Tire Corporation Limited and The Pep Boys Manny, Moe & Jack. Our customers also include national program distribution groups, such as Federated Auto Parts Distributors, Inc., Auto Value and All Pro/Bumper to Bumper (Aftermarket Auto Parts Alliance, Inc.), Automotive Distribution Network LLC and The National Pronto Association, and specialty market distributors. We distribute parts under our own brand names, such as Standard®, BWD®, Intermotor®, GP Sorensen®, TechSmart®, OEM®, LockSmart®, Four Seasons®, Factory Air®, EVERCO®, ACi®, Imperial®, COMPRESSORWORKS®, TORQFLO® and Hayden® and through private labels, such as CARQUEST®, Duralast®, Duralast Gold®, Import Direct®, Master Pro®, Murray®, NAPA®, Cold Power®, NAPA® Echlin®, Mileage Plus®, NAPA® Temp Products™ and NAPA® Belden®.
3

Business Strategy

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. The key elements of our strategy are as follows:
 
· Maintain Our Strong Competitive Position in the Engine Management and Temperature Control Businesses.  We are one of the leading independent manufacturers and distributors serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control. We believe that our success is attributable to our emphasis on product quality, the breadth and depth of our product lines for both domestic and import vehicles, and our reputation for outstanding customer service.
 
To maintain our strong competitive position in our markets, we remain committed to the following:
 
· providing our customers with broad lines of high quality engine management and temperature control products, supported by the highest level of customer service and reliability;
· continuing to maximize our production, supply chain and distribution efficiencies;
· continuing to improve our cost position through increased global sourcing and increased manufacturing in low cost regions; and
· focusing on our engineering development efforts including a focus on bringing more product manufacturing in house.
 
· Provide Superior Customer Service, Product Availability and Technical Support.  Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability, providing insightful customer category management, and providing technical support in a cost‑effective manner. In addition, our category management and technically skilled sales force professionals provide product selection, assortment and application support to our customers.
 
· Expand Our Product Lines.  We intend to increase our sales by continuing to develop internally, or through potential acquisitions, the range of Engine Management and Temperature Control products that we offer to our customers. We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture multiple product lines that incorporate the latest technologies.
 
· Broaden Our Customer Base.  Our goal is to increase our customer base by (a) continuing to leverage our manufacturing capabilities to secure additional original equipment business globally with automotive, industrial, marine, military and heavy duty vehicle and equipment manufacturers and their service part operations as well as our existing customer base including traditional warehouse distributors, large retailers, other manufacturers and export customers, and (b) supporting the service part operations of vehicle and equipment manufacturers with value added services and product support for the life of the part.
 
· Improve Operating Efficiency and Cost Position.  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 and cost position by:
 
· increasing cost‑effective vertical integration in key product lines through internal development;
· focusing on integrated supply chain management and customer collaboration initiatives;
· relocating manufacturing to our low-cost, off-shore plants;
4

· maintaining and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain materials and products from low cost regions such as those in Asia;
· enhancing company‑wide programs geared toward manufacturing and distribution efficiency; and
· focusing on company‑wide overhead and operating expense cost reduction programs, such as closing excess facilities and consolidating redundant functions.
 
· Cash Utilization.  We intend to apply any excess cash flow from operations and the management of working capital primarily to reduce our outstanding indebtedness, pay dividends to our shareholders, repurchase shares of our common stock, expand our product lines and grow revenues through potential acquisitions.

The Automotive Aftermarket

The automotive aftermarket industry is comprised of a large number of diverse manufacturers varying in product specialization and size. In addition to manufacturing, aftermarket companies allocate resources towards an efficient distribution process and product engineering in order to maintain the flexibility and responsiveness on which their customers depend. Aftermarket manufacturers must be efficient producers of small lot sizes and do not have to provide systems engineering support. Aftermarket manufacturers also must distribute, with rapid turnaround times, products for a full range of vehicles on the road. The primary customers of the automotive aftermarket manufacturers are national and regional warehouse distributors, large retail chains, automotive repair chains and the dealer service networks of original equipment manufacturers (“OEMs”).
 
The automotive aftermarket industry differs substantially from the OEM supply business. Unlike the OEM supply business that primarily follows trends in new car production, the automotive aftermarket industry’s performance primarily tends to follow different trends, such as:
 
 
·
growth in number of vehicles on the road;
 
·
increase in average vehicle age;
 
·
change in total miles driven per year;
 
·
new and modified environmental regulations, including fuel-efficiency standards;
·
increase in pricing of new cars;
 
·
economic and financial market conditions;
 
·
new car quality and related warranties;
 
·
changes in automotive technologies;
 
·
change in vehicle scrap rates; and
 
·
change in average fuel prices.

Traditionally, the parts manufacturers of OEMs and the independent manufacturers who supply the original equipment (“OE”) part applications have supplied a majority of the business to new car dealer networks. However, certain parts manufacturers have become more independent and are no longer affiliated with OEMs, which has provided, and may continue to provide, opportunities for us to supply replacement parts to the dealer service networks of the OEMs, both for warranty and out‑of‑warranty repairs.

5

Financial Information about our Operating Segments

The table below shows our consolidated net sales by operating segment and by major product group within each segment for the three years ended December 31, 2013.  Our two major reportable operating segments are Engine Management and Temperature Control.
 
 
 
Year Ended
December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
 
 
(Dollars in thousands)
 
Engine Management:
 
   
   
   
   
   
 
Ignition, Emission and Fuel System Parts
 
$
604,646
     
61.5
%
 
$
561,827
     
59.2
%
 
$
523,984
     
59.9
%
Wires and Cables
   
106,599
     
10.8
%
   
103,278
     
10.9
%
   
104,689
     
12.0
%
Total Engine Management
   
711,245
     
72.3
%
   
665,105
     
70.1
%
   
628,673
     
71.9
%
 
                                               
Temperature Control:
                                               
Compressors
   
135,456
     
13.8
%
   
137,389
     
14.5
%
   
123,785
     
14.1
%
Other Climate Control Parts
   
127,081
     
12.9
%
   
131,415
     
13.8
%
   
109,938
     
12.6
%
Total Temperature Control
   
262,537
     
26.7
%
   
268,804
     
28.3
%
   
233,723
     
26.7
%
 
                                               
All Other
   
9,922
     
1
%
   
15,007
     
1.6
%
   
12,229
     
1.4
%
 
                                               
Total
 
$
983,704
     
100
%
 
$
948,916
     
100
%
 
$
874,625
     
100
%

The following table shows our operating profit and identifiable assets by operating segment for the three years ended December 31, 2013.
 
 
 
Year Ended
December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
Operating
Income
(Loss)
   
 
Identifiable Assets
   
Operating
Income
(Loss)
   
 
Identifiable Assets
   
Operating
Income
(Loss)
   
 
Identifiable Assets
 
 
 
(In thousands)
 
Engine Management
 
$
96,335
   
$
384,712
   
$
69,578
   
$
362,824
   
$
56,261
   
$
372,410
 
Temperature Control
   
9,147
     
150,280
     
15,019
     
132,644
     
17,699
     
97,656
 
All Other
   
(18,619
)
   
80,531
     
(13,166
)
   
81,126
     
(9,061
)
   
80,656
 
Total
 
$
86,863
   
$
615,523
   
$
71,431
   
$
576,594
   
$
64,899
   
$
550,722
 

“All Other” consists of items pertaining to our corporate headquarters function and our Canadian business unit, each of which does not meet the criteria of a reportable operating segment.

Engine Management Segment

Breadth of Products. We manufacture a full line of engine management replacement parts including, electronic ignition control modules, fuel injectors, ignition wires, coils, switches, sensors, relays, EGR valves, distributor caps and rotors and many other engine management components primarily under our brand names Standard®, BWD®, Intermotor®, OEM®, LockSmart®,  TechSmart® and GP Sorensen®, and through private labels such as CARQUEST®, Duralast®, Duralast Gold®, Import Direct®, Master Pro®, NAPA®, Cold Power®, NAPA® Echlin®, Mileage Plus® and NAPA® Belden®. We are a basic manufacturer of many of the engine management parts we market.  Our strategy includes expanding our product lines through strategic acquisitions in addition to sourcing certain materials and products from low cost regions such as those in Asia.  In our Engine Management Segment, replacement parts for ignition, emission control and fuel systems accounted for approximately 61% of our consolidated net sales in 2013, 59% of our consolidated net sales in 2012 and 60% of our consolidated net sales in 2011.
 
Computer-Controlled Technology. Nearly all new vehicles are factory‑equipped with computer‑controlled engine management systems to monitor and control ignition, emission fuel injection, transmission and certain mechanical systems.  The on‑board computers monitor inputs from many types of sensors located throughout the vehicle, and control a myriad of valves, solenoids, coils, switches and motors to manage engine and vehicle performance. Computer-controlled engine management systems enable the engine to operate with improved fuel efficiency and reduced level of hazardous emissions.
6

Government emissions laws have been implemented throughout the majority of the United States. The Clean Air Act imposes strict emissions control test standards on existing and new vehicles, and remains the preeminent legislation in the area of vehicle emissions.  As many states have implemented required inspection/maintenance tests, the Environmental Protection Agency, through its rulemaking ability, has also encouraged both manufacturers and drivers to reduce vehicle emissions.  Automobiles must now comply with emissions standards from the time they were manufactured and, in most states, until the last day they are in use.  This law and other government emissions laws have had, and we expect it to continue to have, a positive impact on sales of our ignition and emission controls parts since vehicles failing these laws may require repairs utilizing parts sold by us. 
 
Our sales of sensors, valves, solenoids and related parts have increased as automobile manufacturers equip their cars with more complex engine management systems.

Wire and Cable Products. Wire and cable parts accounted for approximately 11% of our consolidated net sales in 2013, 11% of our consolidated net sales in 2012 and 12% of our consolidated net sales in 2011.  These products include ignition (spark plug) wires, battery cables and a wide range of electrical wire, terminals, connectors and tools for servicing an automobile’s electrical system.
 
The largest component of this product line is the sale of ignition wire sets. We have historically offered ignition wires and battery cables under premium brands, which capitalize on the market’s awareness of the importance of quality, along with “value” priced brands for older vehicle applications. We extrude high voltage wire for use in our ignition wire sets. The vertical integration of this critical component offers us the ability to achieve lower costs and a controlled source of supply and quality.

Temperature Control Segment

We manufacture, remanufacture and market a full line of replacement parts for automotive temperature control (air conditioning and heating) systems, engine cooling systems, power window accessories and windshield washer systems, primarily under our brand names of Four Seasons®, Factory Air®, EVERCO®, ACi®, Imperial®, COMPRESSORWORKS®, TORQFLO® and Hayden® and through private labels such as CARQUEST®, NAPA® Temp Products™, NAPA®, Cold Power® and Murray®.  The major product groups sold by our Temperature Control Segment are new and remanufactured compressors, clutch assemblies, blower and radiator fan motors, filter dryers, evaporators, accumulators, hose assemblies, expansion valves, heater valves, AC service tools and chemicals, fan assemblies, fan clutches, engine oil coolers, transmission coolers, window lift motors, motor/regulator assemblies and windshield washer pumps.  In April 2012, we acquired substantially all the assets of CompressorWorks, Inc. which distributes and manufactures a range of temperature control products including new compressors, fan clutches, and other AC system and engine cooling products.  Our temperature control products accounted for approximately 27% of our consolidated net sales in 2013, 28% of our consolidated net sales in 2012 and 27% of our consolidated net sales in 2011.
 
Our Temperature Control business continues to implement cost savings initiatives in response to offshore competitive price pressures.  We have consolidated excess manufacturing facilities and have implemented a program to improve our manufacturing efficiencies.  We are also continuing to improve our cost position through our global sourcing initiatives in low cost regions and by increasing our production of remanufactured and new AC compressors in our facility in Reynosa, Mexico, including the volumes acquired from CompressorWorks.
 
Today’s vehicles are being produced with smaller, more complex and efficient AC system designs.  If proper maintenance and repair procedures are followed, these newer systems are less prone to leak resulting in fewer AC system repairs.  Our Temperature Control Segment continues to be a leader in providing superior training to service dealers who require access to up-to-date knowledge in proper maintenance and repair for changing technologies utilized in today’s vehicles.  We believe that our training module (Diagnosing and Repairing the Top Automotive HVAC Problems) remains one of the most sought-after training clinics in the industry and among professional service dealers.
7

Financial Information about Our Foreign and Domestic Operations and Export Sales

We sell our line of products primarily in the United States, with additional sales in Canada, Europe, Asia and Latin America.  Our sales are substantially denominated in U.S. dollars.
 
The table below shows our consolidated net sales by geographic area for the three years ended December 31, 2013.
 
 
 
Year Ended
December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
(In thousands)
 
United States
 
$
884,380
   
$
865,861
   
$
791,625
 
Canada
   
51,853
     
50,215
     
52,497
 
Europe
   
10,657
     
8,093
     
9,496
 
Other foreign
   
36,814
     
24,747
     
21,007
 
Total
 
$
983,704
   
$
948,916
   
$
874,625
 

The table below shows our long‑lived assets by geographic area for the three years ended December 31, 2013.
 
 
 
Year Ended
December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
(In thousands)
 
United States
 
$
135,834
   
$
137,240
   
$
125,189
 
Canada
   
1,526
     
1,658
     
1,626
 
Europe
   
11,310
     
4,161
     
2,322
 
Other foreign
   
10,497
     
3,897
     
3,661
 
Total
 
$
159,167
   
$
146,956
   
$
132,798
 

Sales and Distribution

In the traditional channel, we sell our products to warehouse distributors, who supply auto parts jobber stores. Jobbers in turn sell to professional technicians and to “do-it-yourselfers” who perform automotive repairs on their personal vehicles. In recent years, warehouse distributors have consolidated with other distributors, and an increasing number of distributors own their jobber stores. In the retail channel, customers buy directly from us and sell directly to professional technicians and “do-it-yourselfers” through their own stores. Retailers are also consolidating with other retailers and have begun to increase their efforts to sell to professional technicians adding additional competition in the “do-it-for-me,” or the professional technician segment of our industry.
 
As automotive parts grow more complex, “do-it-yourselfers” are less likely to service their own vehicles and may become more reliant on automotive dealerships and independent service dealer technicians.  In addition to new car sales, automotive dealerships sell OE brand parts and service vehicles.  The products available through the dealers are purchased through the original equipment service (“OES”) network.  Traditionally, the parts manufacturers of OEMs have supplied a majority of the OES network.  However, certain parts manufacturers have become independent and are no longer affiliated with OEMs.  In addition, many Tier 1 OEM suppliers are disinterested in providing service parts requirements for up to 15 years after the OE model has gone out of production.  As a result of these factors, there are additional opportunities for independent automotive aftermarket manufacturers like us to supply the OES network.
 
Our sales force is structured to meet the needs of our traditional and retail customers across the distribution channel, allowing us to provide customer service that we believe is unmatched by our competitors.  We also believe that our sales force is the premier direct sales force for our product lines due to our concentration of highly‑qualified, well‑trained sales personnel.  We provide our sales personnel extensive instruction at our training facility in Irving, Texas and provide an extensive continuing education program that allows our sales force to stay current on troubleshooting and repair techniques.  The continuing education courses along with monthly supplemental web-based training are an integral part of our sales force development strategy.
8

In addition to training our sales personnel in the function and application of our products, we thoroughly train our sales personnel in proven sales techniques.  Our traditional and retail customers, therefore, have come to depend on these sales personnel as a reliable source for technical information and to assist with sales to their customers (i.e., jobber stores, “do-it-yourselfers,” and professional technicians).  In this matter, we direct a significant portion of our sales efforts to our customers’ customers to generate demand for our products, and we believe that the structure of our sales force facilitates these efforts by enabling us to implement our sales and marketing programs uniformly throughout the distribution channel.  One of the ways we generate this demand is by offering instructional clinics, which teach over 60,000 technicians annually how to diagnose and repair vehicles equipped with complex systems related to our products.  To help our sales personnel to be teachers and trainers, we focus our recruitment efforts on candidates who have technical backgrounds as well as strong sales experience.
 
In connection with our sales activities, we offer a variety of strategic customer discounts, allowances and incentives to increase customer purchases of our products.  For example, we offer cash discounts for paying invoices in accordance with the specified discounted terms of the invoice, and we offer pricing discounts based on volume purchased from us and participation in our cost reduction initiatives.  We also offer rebates and discounts to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided.  We believe these discounts, allowances and incentives are a common practice throughout the automotive aftermarket industry, and we intend to continue to offer them in response to competitive pressures and to strategically support the growth of all our products.

Customers

Our customer base is comprised largely of warehouse distributors, large retailers, OE/OES customers, other manufacturers and export customers.  In 2013, our consolidated net sales to our major market channels consisted of $451.4 million to our retail customers, $396.1 million to our traditional customers, $75 million to our OE/OES customers, and $61.2 million to other customers.
 
Our five largest individual customers, including members of a marketing group, accounted for approximately 66% of our consolidated net sales in 2013, 64% of our consolidated net sales in 2012, and 62% of our consolidated net sales in 2011.  During 2013, NAPA Auto Parts, O’Reilly Automotive, Inc., and Advance Auto Parts, Inc. accounted for 19%, 18% and 15% of our consolidated net sales, respectively.  Net sales from each of the customers were reported in both our Engine Management and Temperature Control segments.

Competition

We are a leading independent manufacturer and distributor of replacement parts for product lines in Engine Management and Temperature Control. We compete primarily on the basis of product quality, product availability, customer service, product coverage, order turn‑around time, order fill rate, technical support and price. We believe we differentiate ourselves from our competitors primarily through:
 
  · a value‑added, knowledgeable sales force;
  · extensive product coverage in conjunction with market leading brands;
  · sophisticated parts cataloguing systems;
  · inventory levels and logistical systems sufficient to meet the rapid delivery requirements of customers; and
  · breadth of manufacturing capabilities.
 
In the Engine Management business, we are one of the leading independent manufacturers and distributors in the United States. Our competitors include ACDelco, Delphi Automotive PLC, Denso Corporation, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., Ltd., General Cable Corporation, United Components, Inc., Dorman Products, Inc. and several privately-owned companies importing products from Asia.
9

Our Temperature Control business is one of the leading independent manufacturers and distributors of a full line of temperature control products in North America and other geographic areas. ACDelco, Delphi Automotive PLC, Denso Corporation, Sanden International, Inc., Continental AG, Vista-Pro Automotive, LLC and several privately-owned companies are some of our key competitors in this market.
 
The automotive aftermarket is highly competitive, and we face substantial competition in all markets that we serve.  Our success in the marketplace continues to depend on our ability to offer competitive prices, improved products, superior customer service and expanded offerings in competition with many other suppliers to the aftermarket.  Some of our competitors may have greater financial, marketing and other resources than we do.  In addition, we face competition from automobile manufacturers who supply many of the replacement parts sold by us, although these manufacturers generally supply parts only for cars they produce through OE dealerships.

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, as we experienced in 2013, 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.

Working Capital Management

Automotive aftermarket companies have been under increasing pressure to provide broad SKU (stock keeping unit) coverage due to parts and brand proliferation. In response to this, we have made, and continue to make, changes to our inventory management system designed to reduce inventory requirements. We have a pack‑to‑order distribution system, which permits us to retain slow moving items in a bulk storage state until an order for a specific branded part is received. This system reduces the volume of a given part in inventory and reduces the labor requirements to package and repackage inventory. We also expanded our management system to improve inventory deployment, enhance our collaboration with customers on forecasts and inventory assortments, and further integrate our supply chain both to customers and suppliers.
 
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 and/or the result of installer error.  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.  In addition, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns.
 
In order to better control warranty and overstock return levels, we have in place procedures for authorized warranty returns, including for warranty returns which result from installer error, 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.
10

Our profitability and working capital requirements are seasonal due to our sales mix of Temperature Control products.  Our working capital requirements 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.  These increased working capital requirements are funded by borrowings from our revolving credit facility.

Suppliers

The principal raw materials purchased by us consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), steel magnets, laminations, tubes and shafts, stamped steel parts, copper wire, stainless steel coils and rods, aluminum coils, fittings, rods, cast aluminum parts, lead, steel roller bearings, rubber molding compound, thermo‑set and thermo plastic molding powders.  Additionally, we use components and cores (used parts) in our remanufacturing processes for air conditioning compressors.
 
We purchase materials in the U.S. and foreign open markets and have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores for air conditioning compressors, we obtain them either from exchanges with customers who return cores subsequent to purchasing remanufactured parts or through direct purchases from a network of core brokers. In addition, we acquire certain materials by purchasing products that are resold into the market, particularly by OEM sources and other domestic and foreign suppliers.
 
We believe there is an adequate supply of primary raw materials and cores. In order to ensure a consistent, high quality and low cost supply of key components for each product line, we continue to develop our own sources through an internal manufacturing capacity.  We are not dependent on any single commodity, however, there can be no assurance over the long term that increases in commodity prices will not materially affect our business or results of operations.  In addition, in August 2012, the U.S. Securities and Exchange Commission adopted a new rule requiring us to provide disclosure regarding the use of specified minerals, known as conflict minerals, which are mined from the Democratic Republic of the Congo and adjoining countries. Implementation of the new disclosure requirements could affect the sourcing and availability of some of the minerals used in the manufacture of our products, and may impose additional costs on us associated with complying with the disclosure requirements.

Production and Engineering

We engineer, tool and manufacture many of the components used in the assembly of our products. We also perform our own plastic molding operations, stamping and machining operations, wire extrusion, automated electronics assembly and a wide variety of other processes. In the case of remanufactured components, we conduct our own teardown, diagnostics and rebuilding for air conditioning compressors. We have found this level of vertical integration provides advantages in terms of cost, quality and availability. We intend to continue selective efforts toward further vertical integration to ensure a consistent quality and supply of low cost components. In addition, our strategy includes sourcing an increasing number of finished goods and component parts from low cost regions such as those in Asia.

Employees

As of December 31, 2013, we employed approximately 3,400 people, with 1,900 people in the United States and 1,500 people in Mexico, Canada, Europe and Hong Kong.  Of the 3,400 people employed, approximately 1,700 are production employees. We operate primarily in non‑union facilities and have binding labor agreements with employees at other unionized facilities.  We have approximately 75 production employees in Edwardsville, Kansas who are covered by a contract with The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) that expires in April 2015.  We also have approximately 800 employees in Mexico who are covered under union agreements negotiated at various intervals.
11

We believe that our facilities are in favorable labor markets with ready access to adequate numbers of skilled and unskilled workers, and we believe our relations with our union and non‑union employees are good.

Insurance

We maintain basic liability coverage up to $2 million for automobile liability, general and product liability and $100 million for umbrella liability coverage.  We also maintain environmental insurance of $10 million, covering our existing U.S. and Canadian facilities.  We are currently monitoring our environmental remediation efforts at one of our facilities.  The environmental testing and any remediation costs at such facility may be covered by several insurance policies, although we can give no assurance that our insurance will cover any environmental remediation claims.  Historically, we have not experienced casualty losses in any year in excess of our coverage.  However, there can be no assurances that liability losses in the future will not exceed our coverage.

Available Information

We are a New York corporation founded in 1919. Our principal executive offices are located at 37‑18 Northern Boulevard, Long Island City, New York 11101, and our main telephone number at that location is (718) 392‑0200. Our Internet address is www.smpcorp.com.  We provide a link to reports that we have filed with the SEC.  However, for those persons that make a request in writing or by e-mail (financial@smpcorp.com), we will provide free of charge our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.  These reports and other information are also available, free of charge, at www.sec.gov.

12

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below.  These risks and uncertainties are not the only ones we face.  Additional risks and uncertainties not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business and results of operations.  If any of the stated risks actually occur, they could materially and adversely affect our business, financial condition or operating results.

Risks Related to Our Operations

We depend on a limited number of key customers, and the loss of any such customer, or a significant reduction in purchases by such customer, could have a material adverse effect on our business, financial condition and results of operations.

Our five largest individual customers, including members of a marketing group, accounted for approximately 66% of our consolidated net sales in 2013, 64% of our consolidated net sales in 2012, and 62% of our consolidated net sales in 2011.  During 2013, NAPA Auto Parts, O’Reilly Automotive, Inc., and Advance Auto Parts, Inc. accounted for 19%, 18% and 15% of our consolidated net sales, respectively.  The loss of one or more of these customers or, a significant reduction in purchases of our products from any one of them, could have a materially adverse impact on our business, financial condition and results of operations. In addition, any consolidation among our key customers, such as Advance Auto’s recent acquisition of CarQuest, may further exacerbate our customer concentration risk.
 
Also, we do not typically enter into long-term agreements with any of our customers.  Instead, we enter into a number of purchase order commitments with our customers, based on their current or projected needs.  We have in the past, and may in the future, lose customers or lose a particular product line of a customer due to the highly competitive conditions in the automotive aftermarket industry, including pricing pressures, consolidation of customers, or other business considerations.  A decision by any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to materially decrease the amount of products purchased from us, to change their manner of doing business with us, or to stop doing business with us, including a decision to source products directly from a low cost region such as Asia, could have a material adverse effect on our business, financial condition and results of operations.
 
Because our sales are concentrated, and the market in which we operate is very competitive, we are under ongoing pressure from our customers to offer lower prices, extend payment terms, increase marketing allowances and other terms more favorable to these customers.  These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers, and significantly increased our working capital needs.

Our industry is highly competitive, and our success depends on our ability to compete with suppliers of automotive aftermarket products, some of which may have substantially greater financial, marketing and other resources than we do.

The automotive aftermarket industry is highly competitive, and our success depends on our ability to compete with domestic and international suppliers of automotive aftermarket products. In the Engine Management Segment, our competitors include ACDelco, Delphi Automotive PLC, Denso Corporation, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., LTD., General Cable Corporation, United Components, Inc., Dorman Products, Inc. and several privately-owned companies importing products from Asia.   In the Temperature Control Segment, we compete with ACDelco, Delphi Automotive PLC, Denso Corporation, Sanden International, Inc., Continental AG, Vista-Pro Automotive, LLC and several privately-owned companies.  In addition, automobile manufacturers supply many of the replacement parts we sell.
13

Some of our competitors may have larger customer bases and significantly greater financial, technical and marketing resources than we do.  These factors may allow our competitors to:
 
· respond more quickly than we can to new or emerging technologies and changes in customer requirements by devoting greater resources than we can to the development, promotion and sale of automotive aftermarket products and services;
· engage in more extensive research and development;
· sell products at a lower price than we do;
· undertake more extensive marketing campaigns; and
· make more attractive offers to existing and potential customers and strategic partners.
 
We cannot assure you that our competitors will not develop products or services that are equal or superior to our products or that achieve greater market acceptance than our products or that in the future other companies involved in the automotive aftermarket industry will not expand their operations into product lines produced and sold by us.  We also cannot assure you that additional entrants will not enter the automotive aftermarket industry or that companies in the aftermarket industry will not consolidate.  Any such competitive pressures could cause us to lose market share or could result in significant price decreases and could have a material adverse effect upon our business, financial condition and results of operations.

There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure.

There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure.  This is the result of a number of industry trends, including the impact of offshore suppliers in the marketplace (particularly in China) which suppliers do not have the same infrastructure costs as we do, the consolidated purchasing power of large customers, and actions taken by some of our competitors in an effort to ‘‘win over’’ new business.  We have in the past reduced prices to remain competitive and may have to do so again in the future.  Price reductions have impacted our sales and profit margins and are expected to do so in the future.  Our future profitability will depend in part upon our ability to respond to changes in product and distribution channel mix, to continue to improve our manufacturing efficiencies, to generate cost reductions, including reductions in the cost of components purchased from outside suppliers, and to maintain a cost structure that will enable us to offer competitive prices.  Our inability to maintain a competitive cost structure could have a material adverse effect on our business, financial condition and results of operations.

Our business is seasonal and is subject to substantial quarterly fluctuations, which impact our quarterly performance and working capital requirements.

Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and 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, as we experienced in 2013, 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 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.
14

We may incur material losses and significant costs as a result of warranty-related returns by our customers in excess of anticipated amounts.

Our products are required to meet rigorous standards imposed by our customers and our industry. 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, failure to meet industry published specifications and/or the result of installer error. In the event that there are material deficiencies or defects in the design and manufacture of our products and/or installer error, the affected products may be subject to warranty returns and/or product recalls. Although we maintain a comprehensive quality control program, we cannot give any assurance that our products will not suffer from defects or other deficiencies or that we will not experience material warranty returns or product recalls in the future.
 
We accrue for warranty returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for warranty returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. We have in the past incurred, and may in the future incur, material losses and significant costs as a result of our customers returning products to us for warranty-related issues in excess of anticipated amounts. Deficiencies or defects in our products in the future may result in warranty returns and product recalls in excess of anticipated amounts and may have a material adverse effect on our business, financial condition and results of operations.

Our profitability may be materially adversely affected as a result of overstock inventory-related returns by our customers in excess of anticipated amounts.

We permit overstock returns of inventory that may be either new or non-defective or non-obsolete but that we believe we can re-sell. Customers are generally limited to returning overstocked inventory according to a specified percentage of their annual purchases from us. In addition, a customer’s annual allowance cannot be carried forward to the upcoming year.
 
We accrue for overstock returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for overstock returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. To the extent that overstocked returns are materially in excess of our projections, our business, financial condition and results of operations may be materially adversely affected.

We may be materially adversely affected by asbestos claims arising from products sold by our former brake business, as well as by other product liability claims.

In 1986, we acquired a brake business, which we subsequently sold in March 1998. 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 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 of such claims.
 
Actuarial consultants with experience in assessing asbestos-related liabilities conducted a study to estimate our potential claim liability as of August 31, 2013.  The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $24.4 million to $37.4 million for the period through 2058. The change from the prior year study was a $2.7 million decrease for the low end of the range and a $4.1 million decrease for the high end of the range.  The decrease in the estimated undiscounted liability from the prior year study at both the low end and high end of the range reflects our actual experience over the prior twelve months.  Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.  Based upon the results of the August 31, 2013 actuarial study, no adjustment to the asbestos liability was recorded in our consolidated financial statements as the difference between our recorded liability and the liability in the actuarial report at the low end of the range was not material.  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 $27.4 million to $48.1 million during the same period.
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At December 31, 2013, approximately 2,280 cases were outstanding for which we may be responsible for any related liabilities.  Since inception in September 2001 through December 31, 2013, the amounts paid for settled claims are approximately $14.9 million.  A substantial increase in the number of new claims or increased settlement payments or awards of damages could have a material adverse effect on our business, financial condition and results of operations.
 
Given the uncertainties associated with projecting asbestos-related matters into the future and other factors outside our control, we cannot give any assurance that significant increases in the number of claims filed against us will not occur, that asbestos-related damages or settlement awards will not exceed the amount we have in reserve, or that additional provisions will not be required. Management will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional reserves and provisions may be necessary. We plan on performing a similar annual actuarial analysis during the third quarter of each year for the foreseeable future.
 
In addition to asbestos-related claims, our product sales entail the risk of involvement in other product liability actions.  We maintain product liability insurance coverage, but we cannot give any assurance that current or future policy limits will be sufficient to cover all possible liabilities.  Further, we can give no assurance that adequate product liability insurance will continue to be available to us in the future or that such insurance may be maintained at a reasonable cost to us. In the event of a successful product liability claim against us, a lack or insufficiency of insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

Severe weather, natural disasters and other disruptions could adversely impact our operations at our manufacturing and distribution facilities.

Severe weather conditions and natural disasters, such as hurricanes, floods and tornados, could damage our properties and effect our operations, particularly our major manufacturing and distribution operations at foreign facilities in Canada, Mexico and Poland, and at our domestic facilities in Florida, Indiana, Kansas, South Carolina, Texas, and Virginia. In addition, our business and operations could be materially adversely affected in the event of other serious disruptions at these facilities due to fire, electrical blackouts, power losses, telecommunications failures, terrorist attack or similar events.  Any of these occurrences could impair our ability to adequately manufacture or supply our customers due to all or a significant portion of our equipment or inventory being damaged. We may not be able to effectively shift the manufacture or delivery of products to our customers if one or more of our manufacturing or distribution facilities are significantly disrupted.

Our operations would be materially and adversely affected if we are unable to purchase raw materials, manufactured components or equipment from our suppliers.

Because we purchase various types of raw materials, finished goods, equipment, and component parts from suppliers, we may be materially and adversely affected by the failure of those suppliers to perform as expected.  This non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products.  The risk of non-performance may also result from the insolvency or bankruptcy of one or more of our suppliers.  Our suppliers’ ability to supply products to us is also subject to a number of risks, including availability and cost of raw materials, destruction of their facilities, or work stoppages.  In addition, our failure to promptly pay, or order sufficient quantities of inventory from our suppliers may increase the cost of products we purchase or may lead to suppliers refusing to sell products to us at all.  Our efforts to protect against and to minimize these risks may not always be effective.
16

We may not be able to achieve the benefits that we expect from our cost savings initiatives.

We are continuing to implement a number of cost savings programs including moving some US production to our low cost facilities in Mexico and Poland and integrating and transferring acquired assets and businesses to company facilities.  Although we expect to realize cost savings as a result of these initiatives, we may not be able to achieve the level of benefits that we expect to realize or we may not be able to realize these benefits within the time frames we currently expect.  Our ability to achieve any anticipated cost savings could be affected by a number of factors such as changes in the amount, timing and character of charges related to such initiatives and failure to complete or a substantial delay in completing such initiatives. Failure to achieve the benefits of our cost saving initiatives could have a material adverse effect on us.  Our cost savings is also predicated upon maintaining our sales levels.

Risks Related to Liquidity

We are exposed to risks related to our receivables factoring arrangements.

We have entered into factoring arrangements with financial institutions to sell certain of our customers’ trade accounts receivable without recourse.  If we do not enter into these factoring arrangements, our financial condition, results of operations and cash flows could be materially and adversely affected by delays or failures in collecting trade accounts receivables.  In addition, if any of the financial institutions with which we have factoring arrangements experience financial difficulties or otherwise terminate our factoring arrangements, we may experience material and adverse economic losses due to the loss of such factoring arrangements and the impact of such loss on our liquidity, which could have a material and adverse effect upon our financial condition, results of operations and cash flows. The utility of our factoring arrangements also depends upon the LIBOR rate, as it is a component of the discount rate applicable to each arrangement. If the LIBOR rate increases such that the cost of factoring becomes more than the cost of servicing our receivables with existing debt, we may not be able to rely on such factoring arrangements, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

Increasing our indebtedness could negatively affect our financial health.

We have an existing revolving bank credit facility of $250 million with General Electric Capital Corporation, as agent, and a syndicate of lenders, which we refer to throughout this Report as our revolving credit facility.  As of December 31, 2013, our total outstanding indebtedness was $21.5 million, of which amount $21.4 million of outstanding indebtedness and approximately $148.9 million of availability was attributable to this revolving credit facility.  Any significant increase in our indebtedness could increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
 
In addition, we have granted the lenders under our revolving credit facility a first priority security interest in substantially all of our currently owned and future acquired personal property, real property and other assets. We have also pledged shares of stock in our subsidiaries to those lenders.  If we default on any of our indebtedness, or if we are unable to obtain necessary liquidity, our business could be adversely affected.

We may not be able to generate the significant amount of cash needed to service our indebtedness and fund our future operations.

Our ability either to make payments on or to refinance our indebtedness, or to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future. Our ability to generate cash is in part subject to:
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· general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control;
· the ability of our customers to pay timely the amounts we have billed; and
· the ability of vendors to factor receivables from customers.
 
The occurrence of any of the foregoing factors could result in reduced cash flow, which could have a material adverse effect on us.
 
Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months.  Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as:
 
· deferring, reducing or eliminating future cash dividends;
· reducing or delaying capital expenditures or restructuring activities;
· reducing or delaying research and development efforts;
· selling assets;
· deferring or refraining from pursuing certain strategic initiatives and acquisitions;
· refinancing our indebtedness; and
· seeking additional funding.
 
We cannot assure you that, if material adverse developments in our business, liquidity or capital requirements should occur, our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs. In addition, if we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected.

Risks Related to External Factors

Our results of operations and financial condition may be adversely affected by global economic conditions.

Continued weakness in the global economy, including the potential for a prolonged global economic recession, high unemployment, and a global increase in commodity prices, may materially and adversely affect our results of operations and financial condition. These conditions may also materially impact our customers, suppliers and other parties with whom we do business.  For example, end users may put off discretionary repairs or, as a result of increases in average fuel prices, drive less miles thereby resulting in less need for our products.  Economic conditions that adversely affect our customers may cause them to terminate existing purchase orders or to reduce the volume of products they purchase from us in the future. In connection with the sale of products, we normally do not require collateral as security for customer receivables and do not purchase credit insurance. We may have significant balances owing from customers that operate in cyclical industries and under leveraged conditions that may impair the collectability of those receivables. Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations and financial condition. Adverse economic conditions may also cause our suppliers to be unable to meet their commitments to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the required payment period for outstanding accounts receivable or reducing the maximum amount of trade credit available to us.  Changes of this type or worsening economic conditions could significantly affect our liquidity and could have a material adverse effect on our results of operations and financial condition.
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We conduct our manufacturing and distribution operations on a worldwide basis and are subject to risks associated with doing business outside the United States.

We have manufacturing and distribution facilities in many countries, including Canada, Poland and Mexico, and increasing our manufacturing footprint in low cost regions is an important element of our strategy.  There are a number of risks associated with doing business internationally, including: (a) exposure to local economic and political conditions; (b) social unrest such as risks of terrorism or other hostilities; (c) currency exchange rate fluctuations and currency controls; (d) export and import restrictions; and (e) the potential for shortages of trained labor.  In particular, there has been social unrest in Mexico and any increased violence in or around our manufacturing facilities in Mexico could impact our business by disrupting our supply chain, the delivery of products to customers, and the reluctance of our customers to visit our Mexican facilities.  In addition, the increased violence in or around our manufacturing facilities in Mexico could present several risks to our employees who may be directly affected by the violence and may result in a decision by them to relocate from the area, or make it difficult for us to recruit or retain talented employees at our Mexican facilities.  The likelihood of such occurrences and their potential effect on us is unpredictable and vary from country to country. Any such occurrences could be harmful to our business and our financial results.

We may incur liabilities under government regulations and environmental laws, which may have a material adverse effect on our business, financial condition and results of operations.

Domestic and foreign political developments and government regulations and policies directly affect automotive consumer products in the United States and abroad.  Regulations and policies relating to over-the-highway vehicles include standards established by the United States Department of Transportation for motor vehicle safety and emissions.  The modification of existing laws, regulations or policies, or the adoption of new laws, regulations or policies, such as legislation offering incentives to remove older vehicles from the road, could have a material adverse effect on our business, financial condition and results of operations.
 
In August 2012, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted a new rule requiring us to provide disclosure regarding the use of specified minerals, known as conflict minerals, which are mined from the Democratic Republic of the Congo and adjoining countries. The new rules require us to engage in due diligence efforts for the 2013 calendar year, with initial disclosures required in May 2014, and subsequent annual disclosures. The new rule could affect the sourcing and availability of such minerals used in the manufacture of our products as the number of suppliers who provide conflict-free minerals may be limited. In addition, we expect to incur additional costs and expenses in order to comply with these rules, including for (i) due diligence to determine whether conflict minerals are necessary to the functionality or production of any of our products and, if so, verify the sources of such conflict minerals; and (ii) any changes that we may desire to make to our products, processes, or sources of supply as a result of such diligence and verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict free and/or we are unable to alter our products, processes or sources of supply to avoid such materials. We may also face difficulties in satisfying customers who may require that our products be certified as having conflict-free minerals, which could place us at a competitive disadvantage if we are unable to do so and lead to a loss of revenue.
 
Our operations and properties are subject to a wide variety of increasingly complex and stringent federal, state, local and international laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of materials, substances and wastes, the remediation of contaminated soil and groundwater and the health and safety of employees. Such environmental laws, including but not limited to those under the Comprehensive Environmental Response Compensation & Liability Act, may impose joint and several liability and may apply to conditions at properties presently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors have been sent or otherwise come to be located.
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The nature of our operations exposes us to the risk of claims with respect to such matters, and we can give no assurance that violations of such laws have not occurred or will not occur or that material costs or liabilities will not be incurred in connection with such claims.  We are currently monitoring our environmental remediation efforts at one of our facilities and our reserve balance related to the environmental clean-up at this facility is $0.9 million at December 31, 2013.  The environmental testing and any remediation costs at such facility may be covered by several insurance policies, although we can give no assurance that our insurance will cover any environmental remediation claims.  We also maintain insurance to cover our existing U.S. and Canadian facilities. We can give no assurance that the future cost of compliance with existing environmental laws and the liability for known environmental claims pursuant to such environmental laws will not give rise to additional significant expenditures or liabilities that would be material to us. In addition, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, state or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations.

Our future performance may be materially adversely affected by changes in technologies and improvements in the quality of new vehicle parts.

Changes in automotive technologies, such as vehicles powered by fuel cells or electricity, could negatively affect sales to our aftermarket customers. These factors could result in less demand for our products thereby causing a decline in our results of operations or deterioration in our business and financial condition and may have a material adverse effect on our long-term performance.
 
In addition, the size of the automobile replacement parts market depends, in part, upon the growth in number of vehicles on the road, increase in average vehicle age, change in total miles driven per year, new and modified environmental regulations, including fuel-efficiency standards, increase in pricing of new cars and new car quality and related warranties. The automobile replacement parts market has been negatively impacted by the fact that the quality of more recent automotive vehicles and their component parts (and related warranties) has improved, thereby lengthening the repair cycle. Generally, if parts last longer, there will be less demand for our products and the average useful life of automobile parts has been steadily increasing in recent years due to innovations in products and technology. In addition, the introduction by original equipment manufacturers of increased warranty and maintenance initiatives has the potential to decrease the demand for our products. These factors could have a material adverse effect on our business, financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

We maintain our executive offices in Long Island City, New York. The table below describes our principal facilities as of December 31, 2013.
 
 
 
 
Location
 
 
State or
Country
 
 
 
Principal Business Activity
 
Approx.
Square
Feet
Owned or
Expiration
Date
of Lease
 
 
 
 
 
 
 
Engine Management
 
 
 
 
 
 
 
Ocala
FL
Manufacturing (Ignition)
20,000
Owned
Orlando
FL
Manufacturing (Ignition)
50,600
2017
Ft. Lauderdale
FL
Distribution
23,300
Owned
Ft. Lauderdale
FL
Distribution
30,000
Owned
Mishawaka
IN
Manufacturing
153,100
Owned
Edwardsville
KS
Distribution (Wire)
363,500
Owned
Independence
KS
Manufacturing
337,400
Owned
Long Island City
NY
Administration
74,800
2018
Greenville
SC
Manufacturing (Ignition)
184,500
Owned
Disputanta
VA
Distribution (Ignition)
411,000
Owned
Reynosa
Mexico
Manufacturing (Wire)
100,000
2018
Reynosa
Mexico
Manufacturing (Ignition)
153,000
2018
 
 
 
 
 
 
 
Temperature Control
 
 
 
 
 
 
 
Lewisville
TX
Administration and Distribution
415,000
2016
Grapevine
TX
Manufacturing
180,000
Owned
Dallas
TX
Manufacturing and Distribution
90,000
2014
St. Thomas
Canada
Manufacturing
40,000
Owned
Reynosa
Mexico
Remanufacturing (Compressors)
82,000
2019
Reynosa
Mexico
Manufacturing
40,000
2014
 
 
 
 
 
 
 
Europe
 
 
 
 
 
 
 
Bialystok
Poland
Manufacturing (Ignition)
60,300
2022
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
Mississauga
Canada
Administration and Distribution (Ignition, Wire, Temperature Control)
128,400
2016
Irving
TX
Training Center
13,400
2016

The real property that we own in Indiana, Kansas, South Carolina, Virginia and Texas and in St. Thomas, Canada is encumbered by a mortgage or deed of trust, as applicable, in favor of General Electric Capital Corporation or its affiliated company, as agent for our revolving credit facility.
21

ITEM 3. LEGAL PROCEEDINGS

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 December 31, 2013, approximately 2,280 cases were outstanding for which we may be responsible for any related liabilities.  Since inception in September 2001 through December 31, 2013, the amounts paid for settled claims are approximately $14.9 million.  We acquired limited insurance coverage up to a fixed amount for defense and indemnity costs associated with certain asbestos-related claims and have exhausted all insurance coverage.
 
We are involved in various litigation and product liability matters arising in the ordinary course of business. Although the final outcome of 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.

22

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades publicly on the New York Stock Exchange (“NYSE”) under the trading symbol “SMP.” The following table shows the high and low sales prices per share of our common stock as reported by the NYSE and the dividends declared per share for the periods indicated:

 
 
High
   
Low
   
Dividend
 
 
 
   
   
 
Fiscal Year ended December 31, 2013:
 
   
   
 
First Quarter
 
$
28.50
   
$
21.35
   
$
0.11
 
Second Quarter
   
35.92
     
27.35
     
0.11
 
Third Quarter
   
38.05
     
28.07
     
0.11
 
Fourth Quarter
   
39.99
     
32.10
     
0.11
 
 
Fiscal Year ended December 31, 2012:
                       
First Quarter
 
$
25.91
   
$
17.29
   
$
0.09
 
Second Quarter
   
17.70
     
11.94
     
0.09
 
Third Quarter
   
19.70
     
13.30
     
0.09
 
Fourth Quarter
   
22.45
     
16.57
     
0.09
 

The last reported sale price of our common stock on the NYSE on February 24, 2014 was $36.51 per share.  As of February 24, 2014, there were 493 holders of record of our common stock.
 
Dividends are declared and paid on the common stock at the discretion of our Board of Directors (the “Board”) and depend on our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our Board. Our current practice is to pay dividends on a quarterly basis.  In February 2014, our Board voted to increase our quarterly dividend to a rate of $0.13 per share per quarter.  Our revolving credit facility permits dividends and distributions by us provided specific conditions are met.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for a further discussion of our revolving credit facility.
There have been no unregistered offerings of our common stock during the fourth quarter of 2013.
23

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

For a discussion of our stock repurchases, see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table provides information relating to the Company’s purchases of its common stock for the fourth quarter of 2013:

Period
 
Total Number of Shares Purchased (1)
   
Average Price Paid Per Share
   
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
   
Maximum Number (or
Approximate Dollar
Value) of Shares that
may yet be Purchased
Under the Plans or
Programs (2)
 
 
 
   
   
   
 
October 1-31, 2013
   
     
     
     
 
November 1-30, 2013
   
28,243
   
$
33.57
     
28,243
   
$
4,244,662
 
December 1-31, 2013
   
123,076
     
34.49
     
123,076
     
 
Total
   
151,319
   
$
34.32
     
151,319
   
$
 

(1) In February 2013, our Board of Directors authorized the purchase of up to $6 million of our common stock under a stock repurchase program.  All shares were purchased through the publicly announced stock repurchase program in open market transactions.

(2) In February 2014, our Board of Directors authorized the purchase of up to an additional $10 million of our common stock under a stock repurchase program.  Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant.

24

The following graph compares the five year cumulative total return on the Company’s Common Stock to the total returns on the Standard & Poor’s 500 Stock Index and the S&P 1500 Auto Parts & Equipment Index, which is a combination of automotive parts and equipment companies within the S&P 400, the S&P 500 and the S&P 600. The graph shows the change in value of a $100 investment in the Company’s Common Stock and each of the above indices on December 31, 2008 and the reinvestment of all dividends. The comparisons in this table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company’s Common Stock or the referenced indices.



 
 
 
 
 
SMP
     
 
 
 
S&P 500
   
S&P 1500 Auto
Parts &
Equipment
Index
 
2008
   
100
     
100
     
100
 
2009
   
246
     
126
     
156
 
2010
   
405
     
146
     
243
 
2011
   
604
     
149
     
212
 
2012
   
683
     
172
     
213
 
2013
   
1,148
     
228
     
351
 
 
* Source: Standard & Poor’s
25

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the five years ended December 31, 2013.  This selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto included elsewhere in this Form 10-K.

 
 
Year Ended
December 31,
 
 
 
2013
   
2012
   
2011
   
2010
   
2009
 
 
 
   
(Dollars in thousands)
   
 
Statement of Operations Data:
 
   
   
   
   
 
Net sales
 
$
983,704
   
$
948,916
   
$
874,625
   
$
810,910
   
$
735,424
 
Gross profit
   
290,454
     
259,669
     
229,147
     
207,606
     
177,224
 
Operating income
   
86,863
     
71,431
     
64,899
     
46,793
     
17,631
 
Earnings from continuing operations
   
53,043
     
42,969
     
64,327
     
24,700
     
5,906
 
Loss from discontinued operations, net of tax
   
(1,593
)
   
(1,616
)
   
(1,926
)
   
(2,740
)
   
(2,423
)
Net earnings (1) (2)
   
51,450
     
41,353
     
62,401
     
21,960
     
3,483
 
Per Share Data:
                                       
Earnings from continuing operations:
                                       
Basic
 
$
2.31
   
$
1.88
   
$
2.82
   
$
1.10
   
$
0.31
 
Diluted
   
2.28
     
1.86
     
2.78
     
1.09
     
0.31
 
Earnings per common share:
                                       
Basic
   
2.24
     
1.81
     
2.74
     
0.97
     
0.18
 
Diluted
   
2.21
     
1.79
     
2.70
     
0.97
     
0.18
 
Cash dividends per common share
   
0.44
     
0.36
     
0.28
     
0.20
     
 
Other Data:
                                       
Depreciation and amortization
 
$
17,595
   
$
16,466
   
$
14,145
   
$
13,574
   
$
14,354
 
Capital expenditures
   
11,410
     
11,811
     
11,037
     
10,806
     
7,174
 
Dividends
   
10,107
     
8,215
     
6,381
     
4,508
     
 
Cash Flows Provided By (Used In):
                                       
Operating activities
 
$
57,616
   
$
93,560
   
$
75,307
   
$
28,078
   
$
102,296
 
Investing activities
   
(24,762
)
   
(49,912
)
   
(75,890
)
   
(7,888
)
   
(11,151
)
Financing activities
   
(39,295
)
   
(42,787
)
   
566
     
(19,413
)
   
(91,477
)
Balance Sheet Data (at period end):
                                       
Cash and cash equivalents
 
$
5,559
   
$
13,074
   
$
10,871
   
$
12,135
   
$
10,618
 
Working capital
   
225,761
     
196,381
     
172,106
     
169,875
     
159,591
 
Total assets
   
615,523
     
576,594
     
550,722
     
492,801
     
484,459
 
Total debt
   
21,481
     
40,648
     
73,299
     
65,596
     
76,405
 
Long‑term debt (excluding current portion)
   
16
     
75
     
190
     
307
     
17,908
 
Stockholders’ equity
   
349,432
     
307,587
     
271,953
     
209,883
     
193,878
 

26

Notes to Selected Financial Data

(1) We recorded an after tax gain (charge) of $(1.6) million, $(1.6) million, $(1.9) million, $(2.7) million, and $(2.4) million as loss from discontinued operations to account for legal expenses and potential costs associated with our asbestos‑related liability for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, respectively.  Such costs were also separately disclosed in the operating activity section of the consolidated statements of cash flows for those same years.
 
(2) In December 2011, we realized a non-recurring non-cash benefit of $21.5 million in our provision for income taxes related to a reduction of a significant portion of our deferred tax valuation allowance on net U.S. deferred tax assets.
27

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended December 31, 2013.

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 specific lines of replacement parts.  Our Engine Management Segment manufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicle systems.  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 Corporation and NAPA Auto Parts, as well as many of the leading auto parts retail chains, such as Advance Auto Parts, Inc., AutoZone, Inc., O’Reilly Automotive, Inc., Canadian Tire Corporation Limited and The Pep Boys Manny, Moe & Jack. Our customers also include national program distribution groups, such as Federated Auto Parts Distributors, Inc., Auto Value and All Pro/Bumper to Bumper (Aftermarket Auto Parts Alliance, Inc.), Automotive Distribution Network LLC and The National Pronto Association, and specialty market distributors. We distribute parts under our own brand names, such as Standard®, BWD®, Intermotor®, GP Sorensen®, TechSmart®, OEM®, LockSmart®, Four Seasons®, Factory Air®, EVERCO®, ACi®, Imperial®, COMPRESSORWORKS®, TORQFLO® and Hayden® and through private labels, such as CARQUEST®, Duralast®, Duralast Gold®, Import Direct®, Master Pro®, Murray®, NAPA®, Cold Power® NAPA® Echlin®, Mileage Plus®, NAPA® Temp Products™ and NAPA® Belden®.

Business Strategy

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. The key elements of our strategy are as follows:
 
· Maintain Our Strong Competitive Position in the Engine Management and Temperature Control Businesses.  We are one of the leading independent manufacturers and distributors serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control. We believe that our success is attributable to our emphasis on product quality, the breadth and depth of our product lines for both domestic and import vehicles, and our reputation for outstanding customer service.
 
To maintain our strong competitive position in our markets, we remain committed to the following:
 
· providing our customers with broad lines of high quality engine management and temperature control products, supported by the highest level of customer service and reliability;
· continuing to maximize our production, supply chain and distribution efficiencies;
· continuing to improve our cost position through increased global sourcing and increased manufacturing in low cost regions; and
28

 
· focusing on our engineering development efforts including a focus on bringing more product manufacturing in house.
 
· Provide Superior Customer Service, Product Availability and Technical Support.  Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability, providing insightful customer category management, and providing technical support in a cost‑effective manner. In addition, our category management and technically skilled sales force professionals provide product selection, assortment and application support to our customers.
 
· Expand Our Product Lines.  We intend to increase our sales by continuing to develop internally, or through potential acquisitions, the range of Engine Management and Temperature Control products that we offer to our customers. We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture multiple product lines that incorporate the latest technologies.
 
· Broaden Our Customer Base.  Our goal is to increase our customer base by (a) continuing to leverage our manufacturing capabilities to secure additional original equipment business globally with automotive, industrial, marine, military and heavy duty vehicle and equipment manufacturers and their service part operations as well as our existing customer base including traditional warehouse distributors, large retailers, other manufacturers and export customers, and (b) supporting the service part operations of vehicle and equipment manufacturers with value added services and product support for the life of the part.
 
· Improve Operating Efficiency and Cost Position.  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 and cost position by:
 
· increasing cost‑effective vertical integration in key product lines through internal development;
· focusing on integrated supply chain management and customer collaboration initiatives;
· relocating manufacturing to our low-cost off-shore plants;
· maintaining and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain materials and products from low cost regions such as those in Asia;
· enhancing company‑wide programs geared toward manufacturing and distribution efficiency; and
· focusing on company‑wide overhead and operating expense cost reduction programs, such as closing excess facilities and consolidating redundant functions.
 
· Cash Utilization.  We intend to apply any excess cash flow from operations and the management of working capital primarily to reduce our outstanding indebtedness, pay dividends to our shareholders, repurchase shares of our common stock, expand our product lines and grow revenues through potential acquisitions.

The Automotive Aftermarket

The automotive aftermarket industry is comprised of a large number of diverse manufacturers varying in product specialization and size. In addition to manufacturing, aftermarket companies allocate resources towards an efficient distribution process and product engineering in order to maintain the flexibility and responsiveness on which their customers depend. Aftermarket manufacturers must be efficient producers of small lot sizes and do not have to provide systems engineering support. Aftermarket manufacturers also must distribute, with rapid turnaround times, products for a full range of vehicles on the road. The primary customers of the automotive aftermarket manufacturers are national and regional warehouse distributors, large retail chains, automotive repair chains and the dealer service networks of original equipment manufacturers (“OEMs”).
29

The automotive aftermarket industry differs substantially from the OEM supply business. Unlike the OEM supply business that primarily follows trends in new car production, the automotive aftermarket industry’s performance primarily tends to follow different trends, such as:
 
  · growth in number of vehicles on the road;
  · increase in average vehicle age;
  · change in total miles driven per year;
  · new and modified environmental regulations, including fuel-efficiency standards;
  · increase in pricing of new cars;
  · economic and financial market conditions;
  · new car quality and related warranties;
  · changes in automotive technologies;
  · change in vehicle scrap rates; and
 
·
change in average fuel prices.

Traditionally, the parts manufacturers of OEMs and the independent manufacturers who supply the original equipment (“OE”) part applications have supplied a majority of the business to new car dealer networks.  However, certain parts manufacturers have become more independent and are no longer affiliated with OEMs, which has provided, and may continue to provide, opportunities for us to supply replacement parts to the dealer service networks of the OEMs, both for warranty and out‑of‑warranty repairs.

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, as we experienced in 2013,  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 and/or the result of installer error. 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, including for warranty returns which result from installer error, 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.
30

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 purchased from us and participation in our cost reduction initiatives.  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.

Comparison of Fiscal Years 2013 and 2012

Sales.  Consolidated net sales for 2013 were $983.7 million, an increase of $34.8 million, or 3.7%, compared to $948.9 million in the same period of 2012.  Consolidated net sales increased primarily due to higher sales in the retail, traditional and OE/OES markets of our Engine Management Segment as compared to 2012, which more than offset the lower sales achieved by our Temperature Control Segment.
 
The following table summarizes net sales and gross margins by segment for the years ended December 31, 2013 and 2012, respectively:

Year Ended
December 31,
 
Engine Management
   
Temperature Control
   
Other
   
Total
 
2013
 
   
   
   
 
Net sales
 
$
711,245
   
$
262,537
   
$
9,922
   
$
983,704
 
Gross margins
   
218,294
     
58,150
     
14,010
     
290,454
 
Gross margin percentage
   
30.7
%
   
22.1
%
   
%
   
29.5
%
 
                               
2012
                               
Net sales
 
$
665,105
   
$
268,804
   
$
15,007
   
$
948,916
 
Gross margins
   
187,776
     
58,583
     
13,310
     
259,669
 
Gross margin percentage
   
28.2
%
   
21.8
%
   
%
   
27.4
%
 
Engine Management’s net sales increased $46.1 million, or 6.9%, to $711.2 million for 2013.  Year-over-year increases in net sales were achieved in the traditional, retail and OE/OES markets as compared to 2012.
 
Temperature Control’s net sales decreased $6.3 million, or 2.3%, to $262.5 million for 2013.  Included in the year end 2013 net sales are incremental sales of $16.6 million from our asset acquisition of CompressorWorks, Inc., acquired in April 2012.  Excluding the incremental sales from the acquisition, Temperature Control’s net sales decreased $22.9 million compared to 2012.  The year-over-year decline in net sales, excluding the acquisition, resulted primarily from the impact of a cool, wet spring and milder summer weather conditions in 2013 as compared to the same period in the prior year.

Gross Margins.  Gross margins, as a percentage of consolidated net sales, increased by 2.1 percentage points to 29.5% in 2013 from 27.4% in 2012.  Gross margins at Engine Management increased 2.5 percentage points from 28.2% to 30.7 % while gross margins at Temperature Control increased 0.3 percentage points from 21.8% to 22.1 %.  The gross margin percentage improvement in Engine Management compared to the prior year was primarily the result of increased volume, improved global sourcing and manufacturing efficiencies including the increase in manufacturing at our lower cost facilities.  The gross margin percentage improvement in Temperature Control compared to the prior year was primarily the result of the increase in manufacturing at our lower cost facilities and the benefits achieved as a result of the integration of CompressorWorks product lines.
31

Selling, General and Administrative Expenses.  Selling, general and administrative expenses (“SG&A”) increased by $13.8 million to $201.3 million or 20.5% of consolidated net sales in 2013, as compared to $187.5 million or 19.8% of consolidated net sales in 2012.  The increase in SG&A expenses is principally due to the incremental expenses from our asset acquisition of CompressorWorks, Inc., including amortization of intangible assets acquired, and the higher sales, marketing and distribution expenses associated with the increased sales volumes.

Restructuring and Integration Expenses.  Restructuring and integration expenses increased to $3.4 million in 2013 compared to $1.4 million in 2012.  Components of our restructuring and integration accruals, by segment, were as follows (in thousands):

 
 
Engine Management
   
Temperature Control
   
 
Other
   
Total
 
Exit activity liability at December 31, 2012
 
$
3,203
   
$
203
   
$
373
   
$
3,779
 
Restructuring and integration costs:
                               
Amounts provided for during 2013
   
385
     
1,128
     
1,844
     
3,357
 
Non-cash usage, including asset write-downs
   
     
(398
)
   
     
(398
)
Cash payments
   
(2,032
)
   
(366
)
   
(598
)
   
(2,996
)
Exit activity liability at December 31, 2013
 
$
1,556
   
$
567
   
$
1,619
   
$
3,742
 

During 2013, we offered a voluntary separation incentive program to certain eligible employees to reduce costs and improve our operating efficiency.  Eligible employees, who accepted the program, received enhanced severance and other retiree benefit enhancements.  In connection with the program, we recorded a charge of $1.8 million during the year ended December 31, 2013.

Other Income, Net.  Other income, net was $1 million in 2013 compared to $0.7 million for the year ended December 31, 2012.  During 2013 and 2012, we recognized $1 million of deferred gain related to the sale-leaseback of our Long Island City, New York facility.  In addition, other income, net in 2012 included a $0.2 million gain on the sale of land located in the U.K. and a $0.6 million loss on the disposal of certain machinery and equipment.

Operating Income.  Operating income was $86.9 million in 2013, compared to $71.4 million in 2012.  The increase of $15.5 million is the result of higher year-over-year consolidated net sales and higher gross margins as a percentage of consolidated net sales offset, in part, by higher SG&A and restructuring and integration expenses.

Other Non-Operating Income (Expense), Net.  Other non-operating expense, net was $0.7 million for the year ended December 31, 2012 and includes a fair market value adjustment for the option provided to the buyers of our European business in November 2009 to purchase 20% of our SMP Poland subsidiary.

Interest Expense. Interest expense decreased by $0.9 million to $1.9 million in 2013 compared to interest expense of $2.8 million in 2012 as average outstanding borrowings and average interest rates declined year-over-year.  The year-over-year decline in interest rates reflects the impact of the lower interest rates in our May 2013 amendment to our revolving credit facility.

Income Tax Provision.  The income tax provision for 2013 was $31.9 million at an effective tax rate of 37.6%, compared to $25 million at an effective tax rate of 36.8% in 2012. The effective tax rate in 2013 and 2012 was favorably impacted by $0.4 million and $0.8 million, respectively, related to certain foreign tax and research and development credits, and production deductions which were finalized during the year.  For further information, see Note 16 of the notes to our financial statements.

Loss from Discontinued Operations, Net of Income Tax Benefit.  Loss from discontinued operations, net of income tax, reflects information contained in the most recent actuarial study performed as of August 31, 2013 and other information available and considered by us, and legal expenses incurred associated with our asbestos-related liability.  During each of 2013 and 2012, we recorded a loss of $1.6 million, net of tax, from discontinued operations.  As discussed more fully in Note 19 in the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
32

Comparison of Fiscal Years 2012 and 2011

Sales.  Consolidated net sales for 2012 were $ 948.9 million, an increase of $74.3 million, or 8.5%, compared to $874.6 million in the same period of 2011.  Consolidated net sales for the year ended December 31, 2012 included incremental sales of $33.5 million in Engine Management from our acquisitions of the Engine Control business of BLD Products, Ltd. and Forecast Trading Corporation, which began shipping in May 2011 and November 2011, respectively, and $44.3 million in Temperature Control from our asset acquisition of CompressorWorks, Inc., acquired in April 2012.
 
The following table summarizes net sales and gross margins by segment for the years ended December 31, 2012 and 2011, respectively:

Year Ended
December 31,
 
Engine Management
   
Temperature Control
   
 
Other
   
Total
 
2012
 
   
   
   
 
Net sales
 
$
665,105
   
$
268,804
   
$
15,007
   
$
948,916
 
Gross margins
   
187,776
     
58,583
     
13,310
     
259,669
 
Gross margin percentage
   
28.2
%
   
21.8
%
   
%
   
27.4
%
 
                               
2011
                               
Net sales
 
$
628,673
   
$
233,723
   
$
12,229
   
$
874,625
 
Gross margins
   
160,930
     
54,848
     
13,369
     
229,147
 
Gross margin percentage
   
25.6
%
   
23.5
%
   
%
   
26.2
%
 
Engine Management’s net sales increased $36.4 million, or 5.8%, to $665.1 million for 2012.  Included in the year end December 31, 2012 net sales are incremental sales of $33.5 million from our acquisitions of the Engine Controls business of BLD Products, Ltd. and Forecast Trading Corporation, which began shipping in May 2011 and November 2011, respectively.  Excluding the incremental sales from acquisitions, Engine Management’s net sales increased $2.9 million compared to 2011.
 
Temperature Control’s net sales increased $35.1 million, or 15%, to $268.8 million for 2012.  Included in the year end 2012 net sales are incremental sales of $44.3 million from our asset acquisition of CompressorWorks, Inc., acquired in April 2012.  Excluding the incremental sales from the acquisition, Temperature Control’s net sales decreased $9.2 million compared to 2011.  The year-over-year decline in net sales, excluding acquisitions, results primarily from the loss of sales from a major customer that began purchasing certain air conditioning parts direct from China.

Gross Margins.  Gross margins, as a percentage of consolidated net sales, increased by 1.2 percentage points to 27.4% in 2012 from 26.2% in 2011.  Gross margins at Engine Management increased 2.6 percentage points from 25.6% to 28.2% while gross margins at Temperature Control decreased 1.7 percentage points from 23.5% to 21.8%.  The gross margin percentage improvement in Engine Management compared to the prior year was primarily the result of improved global sourcing, manufacturing efficiencies including the increase in manufacturing at our lower cost facilities, and the change in process related to certain incremental customer costs resulting in the recording of these costs as selling expenses rather than as sales deductions.  The gross margin percentage decline in Temperature Control compared to the prior year was primarily the result of lower manufacturing cost absorption, product mix and the impact of the mark-up of inventory to fair value from the CompressorWorks, Inc. acquisition.

Selling, General, and Administrative Expenses.  Selling, general, and administrative expenses (“SG&A”) increased by $23.7 million to $187.5 million or 19.8% of consolidated net sales in 2012, as compared to $163.8 million or 18.7% of consolidated net sales in 2011.  The increase in SG&A expenses is principally due to $13.9 million of incremental expenses from our acquisitions of the Engine Controls business of BLD Products, Ltd., Forecast Trading Corporation and assets of CompressorWorks, Inc., including amortization of intangible assets acquired, $5.3 million of higher expenses related to the sale of receivables, and $5.4 million of incremental year-over-year postretirement plan costs, including the impact of a $3.6 million curtailment gain related to changes made to our domestic and Canadian postretirement plans and the amortization of gains of $1.8 million from plan amendments included in SG&A expenses in 2011.
33

Restructuring and Integration Expenses.  Restructuring and integration expenses increased slightly to $1.4 million in 2012 compared to $1.3 million in 2011.  Components of our restructuring and integration accruals, by segment, were as follows (in thousands):

 
 
Engine Management
   
Temperature Control
   
 
Other
   
Total
 
Exit activity liability at December 31, 2011
 
$
2,629
   
$
419
   
$
513
   
$
3,561
 
Restructuring and integration costs:
                               
Amounts provided for during 2012
   
1,413
     
24
     
     
1,437
 
Non-cash usage, including asset write-downs
   
(63
)
   
     
     
(63
)
Cash payments
   
(776
)
   
(240
)
   
(140
)
   
(1,156
)
Exit activity liability at December 31, 2012
 
$
3,203
   
$
203
   
$
373
   
$
3,779
 

Other Income, Net.  Other income, net was $0.7 million in 2012 compared to $0.9 million for the year ended December 31, 2011.  During 2012 and 2011, we recognized $1 million of deferred gain related to the sale-leaseback of our Long Island City, New York facility.  In addition, in 2012 we recorded a $0.2 million gain on the sale of land located in the U.K. and incurred an additional $0.5 million loss on the disposal of certain machinery and equipment compared to 2011.

Operating Income.  Operating income was $71.4 million in 2012, compared to $64.9 million in 2011.  The higher year-over-year consolidated net sales and higher gross margins as a percentage of consolidated net sales were offset by higher SG&A expenses which were principally the result of the incremental expenses from our acquisitions of the Engine Controls business of BLD Products, Ltd., Forecast Trading Corporation and assets of CompressorWorks, Inc., including amortization of intangible assets acquired, higher expenses related to the sale of receivables, and the impact of incremental year-over-year postretirement plan costs, including the impact of a $3.6 million curtailment gain related to changes made to our domestic and Canadian postretirement plans and the amortization of gains from plan amendments included in SG&A expenses in 2011.

Other Non-Operating Income (Expense), Net.  Other non-operating expense, net was $0.7 million in 2012 compared to other non-operating income, net of $3.4 million for the year ended December 31, 2011.  Other non-operating expense, net in 2012 includes a fair market value adjustment for the option provided to the buyers of our European business in November 2009 to purchase 20% of our SMP Poland subsidiary.  Other operating income, net in 2011 includes a pre-tax gain of $2.5 million related to the sale of our 50% equity ownership investment in a joint venture located in Europe.

Interest Expense. Interest expense decreased by $1 million to $2.8 million in 2012 compared to interest expense of $3.8 million in 2011 as average interest rates declined year-over-year.  The year-over-year decline in interest rates reflects the impact of the lower interest rates in our September 2011 amendment to our revolving credit facility and the April 2011 maturity of the $12.3 million principal amount of the 15% convertible subordinated debentures.

Income Tax Provision.  The income tax provision for 2012 was $25 million at an effective tax rate of 36.8%, compared to $0.1 million in 2011.  The effective tax rate in 2012 was favorably impacted by $0.8 million related to certain foreign tax and research and development credits, and production deductions which were finalized during the year.
34

In December 2011, we realized a one-time non-cash benefit of $21.5 million in our tax provision related to a reduction of a significant portion of our deferred tax valuation allowance on net U.S. deferred tax assets.  In assessing the ability to recognize our deferred tax assets, we reviewed all positive and negative evidence and considered historical book and taxable income, the scheduled reversal of deferred tax assets and liabilities, and projected future book and taxable income.  Based upon this detailed assessment, we determined that it was more likely than not that a significant portion of our net U.S. deferred tax assets, for which a valuation allowance had been previously recorded, would be realized and as such, reversed $21.5 million of the valuation allowance on net U.S. deferred tax assets.  In addition, the income tax provision in 2011 was favorably impacted by the reversal of previously established reserves of $0.5 million 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 Note 16 of the notes to our consolidated financial statements.

Loss from Discontinued Operations, Net of Income Tax Benefit.  Loss from discontinued operations, net of tax, reflects adjustments made to our indemnity liability in line with information contained in actuarial studies obtained in August 2012 and 2011 and other information available and considered by us, and legal expenses incurred associated with our asbestos-related liability.  We recorded a loss of $1.6 million and $1.9 million, both net of tax, from discontinued operation for 2012 and 2011, respectively.  The loss for 2012 and 2011 reflects a $0.4 million and $1.3 million pre-tax adjustment, respectively, to increase our indemnity liability in line with the August 2012 and 2011 actuarial studies, as well as legal fees incurred.  As discussed more fully in Note 19 of 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 and for the years ended December 31, 2013 and 2012, consisted of the following (in thousands):

 
 
Workforce Reduction
   
Other Exit Costs
   
Total
 
Exit activity liability at December 31, 2011
 
$
1,907
   
$
1,654
   
$
3,561
 
Restructuring and integration costs:
                       
Amounts provided for during 2012
   
1,210
     
227
     
1,437
 
Non-cash usage, including asset write-downs
   
     
(63
)
   
(63
)
Cash payments
   
(891
)
   
(265
)
   
(1,156
)
Exit activity liability at December 31, 2012
 
$
2,226
   
$
1,553
   
$
3,779
 
Restructuring and integration costs:
                       
Amounts provided for during 2013
   
2,446
     
911
     
3,357
 
Non-cash usage, including asset write-downs
   
     
(398
)
   
(398
)
Cash payments
   
(1,872
)
   
(1,124
)
   
(2,996
)
Exit activity liability at December 31, 2013
 
$
2,800
   
$
942
   
$
3,742
 

During 2013, we offered a voluntary separation incentive program to certain eligible employees to reduce costs and improve our operating efficiency.  Eligible employees, who accepted the program, received enhanced severance and other retiree benefit enhancements.  In connection with the program, we have recorded a charge of $1.8 million during the year ended December 31, 2013.
 
Liabilities associated with the remaining restructuring and integration costs as of December 31, 2013 relate primarily to employee severance and other retiree benefit enhancements to be paid through 2017 and environmental clean-up costs at our Long Island City, New York location in connection with the closure of our manufacturing operations at the site.
35

Liquidity and Capital Resources

Operating Activities.  During 2013, cash provided by operations was $57.6 million, compared to cash provided by operations of $93.6 million in 2012.  The year-over-year decrease in cash provided by operations is primarily the result of year-over-year increases in accounts receivable, inventory, and prepaid expenses and other current assets partially offset by an increase in accounts payable balances.  Accounts receivable balances increased during 2013 resulting in a $27.3 million cash usage as compared to a decrease in accounts receivable balances during 2012, providing $15.4 million of operating cash flow.  The increase in inventory balances during 2013 resulted in a cash usage of $6.1 million as compared to a $1.6 million cash usage in 2012.  Prepaid expenses and other current assets increased during 2013 resulting in a $4 million cash usage as compared to a $0.7 million cash usage in 2012.  Accounts payable balances increased during 2013 providing $12.5 million of operating cash flow compared to an increase in 2012, providing $3.3 million of operating cash flow.  The increase in accounts receivable balances reflects the impact of strong fourth quarter 2013 net sales compared net sales in the fourth quarter 2012.
 
During 2012, cash provided by operations was $93.6 million, compared to cash provided by operations of $75.3 million in 2011.  The year-over-year increase of $18.3 million in cash provided by operations is primarily the result of enhanced working capital management which resulted in a decrease in accounts receivable balances, and higher year-over-year accounts payable, sundry payables and accrued expense balances.

Investing Activities.  Cash used in investing activities was $24.8 million in 2013, compared to $49.9 million in 2012 and $75.9 million in 2011.  Investing activities in 2013 consisted primarily of (1) our acquisition of an approximate 25% minority interest in Orange Electronic Co. Ltd., our supplier of tire pressure monitoring systems located in Taiwan, for $6.3 million, (2) our acquisition of the original equipment business of Standard Motor Products Holdings Ltd., our former affiliate in the U.K., for $6.5 million, and (3) $11.4 million in capital expenditures.
 
Cash used in investing activities in 2012 included (1) a cash payment of $38.6 million related to the asset acquisition of CompressorWorks, Inc. and (2) capital expenditures of $11.8 million.
 
Cash used in investing activities in 2011 included cash payments of $27 million and $44 million related to the acquisitions of the Engine Controls business of BLD Products, Ltd. and Forecast Trading Corporation, respectively, cash receipts of $1.3 million related to the note issued in connection with the sale of our European distribution business in 2009, and cash receipts of $3 million and $1.3 million related to the sale of our 50% equity ownership investment in a joint venture in Europe and the note issued in connection with the divestiture in 2008 of certain of our joint venture equity ownerships, respectively.  Capital expenditures in 2011 were $11 million.

Financing Activities.  Cash used in financing activities was $39.3 million in 2013, compared to $42.8 million in 2012 and cash provided by financing activities of $0.6 million in 2011.  The excess cash provided by operations over cash used in investing activities in 2013 was used to pay down borrowings under our revolving credit facility, to fund the purchase of 209,973 shares of our common stock for $6.9 million and to pay $1.3 million of debt issuance costs in connection with our May 2013 amendment to our restated credit agreement.
 
Cash used in financing activities was $42.8 million in 2012.  The excess cash provided by operations over cash used in investing activities in 2012 was used to pay down borrowings under our revolving credit facility and to fund the purchase of 380,777 shares of our common stock for $5 million.
 
Cash provided by financing activities was $0.6 million in 2011.  During 2011, cash provided by additional borrowings along with cash provided by operating activities was used to finance our acquisitions of the Engine Controls business of BLD Products, Ltd. and Forecast Trading Corporation, finance our capital expenditures, repurchase $12.3 million principal amount of our 15% convertible subordinated debentures and to fund the purchase of 322,250 shares of our common stock for $4.1 million.  In addition, during 2011 we received $2.6 million of proceeds from the exercise of stock options.
Dividends of $10.1 million, $8.2 million and $6.4 million were paid in 2013, 2012 and 2011, respectively.
36

Liquidity

Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends and principal and interest payments on indebtedness.  Our primary sources of funds are ongoing net cash flows from operating activities and availability under our secured revolving credit facility (as detailed below).
 
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.  The restated credit agreement (as amended) provides for a line of credit of up to $250 million (inclusive of the Canadian revolving credit facility described below) and expires in March 2018.  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 February 2013, we amended the restated credit agreement to provide us with greater flexibility regarding the payment of cash dividends and stock repurchases.  In May 2013, we further amended our restated credit agreement (1) to extend the maturity date of our credit facility to March 2018; (2) to increase the line of credit from $200 million to $250 million (inclusive of the Canadian revolving credit facility described below); (3) to reduce the margin added to the LIBOR rate to 1.50% - 2%; (4) to reduce the margin added to the index rate to 0.50% - 1%; (5) to reduce the unused fee to 0.25%; and (6) to provide us with greater flexibility regarding acquisitions, other permissible debt financing, cash held and capital expenditures, among other matters.
 
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 $148.9 million available for us to borrow pursuant to the formula at December 31, 2013.  Outstanding borrowings under the restated credit agreement (inclusive of the Canadian revolving credit facility described below), which are classified as current liabilities, were $21.4 million and $40.4 million at December 31, 2013 and 2012, respectively.  Borrowings under the restated credit agreement have been classified as current liabilities based upon the accounting rules and certain provisions in the agreement.
 
At December 31, 2013, the weighted average interest rate on our restated credit agreement was 2%, which consisted of $18 million in direct borrowings at 1.7% and an index loan of $3.4 million at 3.8%.  At December 31, 2012, the weighted average interest rate on our restated credit agreement was 2.7%, which consisted of $25 million in direct borrowings at 2% and an index loan of $15.4 million at 4%.  During 2013 and 2012, our average daily index loan balance was $4.1 million and $6.1 million, respectively.
 
At any time that our average borrowing availability is less than $25 million, the terms of our restated credit agreement provide for, among other provisions, a financial covenant requiring us, on a consolidated basis, to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months). As of December 31, 2013, 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 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 $250 million available for borrowing under our restated credit agreement with General Electric Capital Corporation.
 
In May 2013, we further amended our Canadian Credit Agreement to extend the maturity date of the agreement to March 2018 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 December 31, 2013, we have no outstanding borrowings under the Canadian Credit Agreement.
37

As of December 31, 2013, our capital lease obligations related to certain equipment for use in our operations totaled $0.1 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.
 
In order to reduce our accounts receivable balances and improve our cash flow, 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.  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.
 
Pursuant to these agreements, we sold $672.8 million and $663.7 million of receivables for the years ended December 31, 2013 and 2012, respectively.  A charge in the amount of $13.9 million, $13.7 million and $8.4 million related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011, respectively.  If we do not enter into these arrangements or if any of the financial institutions with which we enter into these arrangements were to experience financial difficulties or otherwise terminate these arrangements, our financial condition, results of operations and cash flows could be materially and adversely affected by delays or failures to collect future trade accounts receivable.
 
In May 2012, our Board of Directors authorized the purchase of up to $5 million of our common stock under a stock repurchase program.  Under this program, during the years ended December 31, 2013 and 2012, we repurchased 30,601 shares and 312,527 shares, respectively, of our common stock at a total cost of $0.9 million and $4.1 million, respectively.  No stock repurchases remain available under the 2012 program as the entire $5 million was utilized.
 
In February 2013, our Board of Directors authorized the purchase of up to an additional $6 million of our common stock under a stock repurchase program.  During the year ended December 31, 2013, we repurchased 179,372 shares of our common stock under this program at a total cost of $6 million.  No stock repurchases remain available under the 2013 program as the entire $6 million was utilized.
 
In February 2014, our Board of Directors authorized the purchase of up to an additional $10 million of our common stock under a stock repurchase program.  Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant.
 
We anticipate that our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months.  Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements.  If material adverse developments were to occur in any of these areas, there can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs.  In addition, if we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected.
38

The following table summarizes our contractual commitments as of December 31, 2013 and expiration dates of commitments through 2023:

 
(In thousands)
 
2014
   
2015
   
2016
   
2017
   
2018
     
2019-2023
   
Total
 
Lease obligations
 
$
7,531
   
$
6,717
   
$
5,686
   
$
3,592
   
$
2,259
   
$
2,221
   
$
28,006
 
Postretirement and pension benefits
   
2,064
     
6,896
     
1,453
     
67
     
60
     
213
     
10,753
 
Severance payments related to restructuring and integration
   
2,356
     
278
     
95
     
71
     
     
     
2,800
 
Total commitments
 
$
11,951
   
$
13,891
   
$
7,234
   
$
3,730
   
$
2,319
   
$
2,434
   
$
41,559
 

Indebtedness under our revolving credit facilities of $21.4 million as of December 31, 2013 is not included in the table above as it is reported as a current liability in our consolidated balance sheets.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these 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. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the notes to our consolidated financial statements. You should be aware that preparation of our consolidated annual and quarterly financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, 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 can give no assurance that actual results will not differ from those estimates.  Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimate or in the assumptions that we use in calculating the estimate, unforeseen changes in the industry, or business could materially impact the estimate and may have a material adverse effect on our business, financial condition and results of operations.

Revenue Recognition. We derive our revenue primarily from sales of replacement parts for motor vehicles from both our Engine Management and Temperature Control Segments.  We recognize revenues when products are shipped and title has been transferred to a customer, the sales price is fixed and determinable, and collection is reasonably assured.  For some of our sales of remanufactured products, we also charge our customers a deposit for the return of a used core component which we can use in our future remanufacturing activities.  Such deposit is not recognized as revenue but rather carried as a core liability.  The liability is extinguished when a core is actually returned to us.  We estimate and record provisions for cash discounts, quantity rebates, sales returns and warranties in the period the sale is recorded, based upon our prior experience and current trends.  As described below, significant management judgments and estimates must be made and used in estimating sales returns and allowances relating to revenue recognized in any accounting period.

Inventory Valuation.  Inventories are valued at the lower of cost or market.  Cost is determined on the first-in, first-out basis.  Where appropriate, standard cost systems are utilized for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs.  Estimates of lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.
 
We also evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand.  For inventory deemed to be obsolete, we provide a reserve on the full value of the inventory. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates our estimate of future demand.  Future projected demand requires management judgment and is based upon (a) our review of historical trends and (b) our estimate of projected customer specific buying patterns and trends in the industry and markets in which we do business.  Using rolling twelve month historical information, we estimate future demand on a continuous basis.  As such, the historical volatility of such estimates has been minimal.
39

We utilize cores (used parts) in our remanufacturing processes for air conditioning compressors.  The production of air conditioning compressors involves the rebuilding of used cores, which we acquire either in outright purchases from used parts brokers or from returns pursuant to an exchange program with customers.  Under such exchange programs, we reduce our inventory, through a charge to cost of sales, when we sell a finished good compressor, and put back to inventory the used core exchanged at standard cost through a credit to cost of sales when it is actually received from the customer.

Sales Returns and Other Allowances and Allowance for Doubtful Accounts. We must make estimates of potential future product returns related to current period product revenue.  We analyze historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances.  Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.  At December 31, 2013, the allowance for sales returns was $31.5 million.  Similarly, we must make estimates of the uncollectability of our accounts receivables. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit‑worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  At December 31, 2013, the allowance for doubtful accounts and for discounts was $7 million.

New Customer Acquisition Costs.  New customer acquisition costs refer to arrangements pursuant to which we incur change-over costs to induce a new customer to switch from a competitor’s brand.  In addition, change-over costs include the costs related to removing the new customer’s inventory and replacing it with Standard Motor Products inventory commonly referred to as a stocklift.  New customer acquisition costs are recorded as a reduction to revenue when incurred.

Accounting for Income Taxes.  As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.  We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that it is more likely than not that the deferred tax assets will not be recovered, we must establish a valuation allowance.  To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include an expense or recovery, respectively, within the tax provision in the statement of operations.
 
We maintain valuation allowances when it is more likely than not that all or a portion of a deferred asset will not be realized.  In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies. We consider all positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the deferred tax asset.  We consider cumulative losses in recent years as well as the impact of one-time events in assessing our pre-tax earnings.  Assumptions regarding future taxable income require significant judgment. Our assumptions are consistent with estimates and plans used to manage our business, which includes restructuring and integration initiatives that are expected to generate significant savings in future periods.
 
The valuation allowance of $6.7 million as of December 31, 2013 is intended to provide for uncertainty regarding the ultimate realization of our state tax credit carryovers, U.S. capital loss carryforwards, and U.S. foreign tax credit carryovers. The assessment of the adequacy of our valuation allowance is based on our estimates of taxable income in these jurisdictions and the period over which our deferred tax assets will be recoverable.  Based on these considerations, we believe it is more likely than not that we will realize the benefit of the net deferred tax asset of $45.9 million as of December 31, 2013, which is net of the remaining valuation allowance.
40

In the event that actual results differ from these estimates, or we adjust these estimates in future periods for current trends or expected changes in our estimating assumptions, we may need to modify the level of the valuation allowance which could materially impact our business, financial condition and results of operations.
 
In accordance with generally accepted accounting practices, we recognize in our financial statements only those tax positions that meet the more-likely-than-not-recognition threshold. We establish tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in our consolidated statement of operations.

Valuation of Long‑Lived and Intangible Assets and Goodwill.  At acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consists of customer relationships, trademarks and trade names, patents and non-compete agreements.  The fair values of these intangible assets are estimated based on our assessment.  Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations.  Goodwill and certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment.  Intangible assets determined to have definite lives are amortized over their remaining useful lives.
 
We assess the impairment of long‑lived assets, identifiable intangibles assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  With respect to goodwill and identifiable intangible assets having indefinite lives, we test for impairment on an annual basis or in interim periods if an event occurs or circumstances change that may indicate the fair value is below its carrying amount.  Factors we consider important, which could trigger an impairment review, include the following: (a) significant underperformance relative to expected historical or projected future operating results; (b) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (c) significant negative industry or economic trends.  We review the fair values using the discounted cash flows method and market multiples.
 
When performing our evaluation of goodwill for impairment, if we conclude qualitatively that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, than the two-step impairment test is not required.  If we are unable to reach this conclusion, then we would perform the two-step impairment test.  Initially, the fair value of the 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; we are required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired.  In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill and recognize a charge for impairment to the extent the carrying value exceeds the implied fair value. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.  In addition, identifiable intangible assets having indefinite lives are reviewed for impairment on an annual basis using a methodology consistent with that used to evaluate goodwill.
 
Intangible assets having definite lives and other long-lived assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable.  In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition.  When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets fair value and their carrying value.
 
There are inherent assumptions and estimates used in developing future cash flows requiring our judgment in applying these assumptions and estimates to the analysis of identifiable intangibles and long‑lived asset impairment including projecting revenues, interest rates, tax rates and the cost of capital.  Many of the factors used in assessing fair value are outside our control and it is reasonably likely that assumptions and estimates will change in future periods.  These changes can result in future impairments.  In the event our planning assumptions were modified resulting in impairment to our assets, we would be required to include an expense in our statement of operations, which could materially impact our business, financial condition and results of operations.
41

Retirement and Postretirement Medical Benefits.  Each year, we calculate the costs of providing retiree benefits under the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 712, Nonretirement Postemployment Benefits, and FASB ASC 715, Retirement Benefits.  The determination of defined benefit pension and postretirement plan obligations and their associated costs requires the use of actuarial computations to estimate participant plan benefits the employees will be entitled to.  The key assumptions used in making these calculations are the eligibility criteria of participants and the discount rate used to value the future obligation.  The discount rate reflects the yields available on high-quality, fixed-rate debt securities.

Share-Based Compensation.  The provisions of FASB ASC 718, Stock Compensation, require the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the grant date using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our condensed consolidated statement of operations.  Forfeitures are estimated at the time of grant based on historical trends in order to estimate the amount of share-based awards that will ultimately vest.  We monitor actual forfeitures for any subsequent adjustment to forfeiture rates.

Environmental Reserves.  We are subject to various U.S. Federal, state and local environmental laws and regulations and are involved in certain environmental remediation efforts. We estimate and accrue our liabilities resulting from such matters based upon a variety of factors including the assessments of environmental engineers and consultants who provide estimates of potential liabilities and remediation costs. Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.  Potential recoveries from insurers or other third parties of environmental remediation liabilities are recognized independently from the recorded liability, and any asset related to the recovery will be recognized only when the realization of the claim for recovery is deemed probable.

Asbestos Litigation. We are responsible for certain future liabilities relating to alleged exposure to asbestos-containing products.  In accordance with our accounting policy, our most recent actuarial study as of August 31, 2013 estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $24.4 million to $37.4 million for the period through 2058.  Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.  Based upon the results of the August 31, 2013 actuarial study, no adjustment to the asbestos liability was recorded in our consolidated financial statements as the difference between our recorded liability and the liability in the actuarial report at the low end of the range was not material.  In addition, according to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations, are estimated to range from $27.4 million to $48.1 million during the same period.  We will continue to perform an annual actuarial analysis during the third quarter of each year for the foreseeable future.  Based on this analysis and all other available information, we will continue to reassess the recorded liability and, if deemed necessary, record an adjustment to the reserve, which will be reflected as a loss or gain from discontinued operations.  The aforementioned estimated settlement payments and legal costs do not reflect any coverage with insurance carriers for certain asbestos-related claims that we may obtain in the future.
42

Other Loss Reserves. We have other loss exposures, for such matters as product liability and litigation. Establishing loss reserves for these matters requires the use of estimates and judgment of risk exposure and ultimate liability. We estimate losses using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded liabilities.

Recently Issued Accounting Pronouncements

Presentation of Accumulated Other Comprehensive Income

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which amended the provisions of FASB ASC 220, Comprehensive Income.  The amendments in this update supercede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in FASB ASU 2011-05, Presentation of Comprehensive Income and FASB ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05The amendment requires an entity to present information about significant items reclassified out of accumulated other comprehensive income by component either (1) on the face of the statement where net income is presented or (2) as a separate disclosure in the notes to the consolidated financial statements.  The amendment is effective for annual reporting periods beginning after December 15, 2012, which for us was January 1, 2013, and interim periods within those annual periods.  As a result of the adoption of this standard, we have elected to present amounts reclassified out of accumulated other comprehensive income as a separate disclosure in the notes to the consolidated financial statements.

Indefinite-Lived Intangible Assets Impairment Testing

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), which amended the provisions of FASB ASC 350.  FASB ASU 2012-02 permits an entity to make a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is less than its carrying amount before applying the two-step impairment test.  If an entity concludes that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it would not be required to perform the two-step impairment test for that indefinite-lived intangible asset.  The new standard is effective for annual and interim indefinite-lived intangible assets impairment tests performed in fiscal years beginning after September 15, 2012, which for us was January 1, 2013.  We considered this new standard when conducting our annual impairment test of indefinite-lived intangible assets as of December 31, 2013.

Balance Sheet Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”).  The update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  The amendment was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  The adoption of FASB ASU 2011-11 did not have a material effect on our consolidated financial statements and disclosures.
43

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than one of our subsidiary’s functional currency.  Similarly, we are exposed to market risk as the result of changes in interest rates, which may affect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures.  We do not hold or issue derivative financial instruments for trading or speculative purposes.  As of December 31, 2013, we did not have any derivative financial instruments.

Exchange Rate Risk

We have exchange rate exposure, primarily, with respect to the Canadian Dollar, the Euro, the British Pound, the Polish Zloty, the Mexican Peso, the Taiwan Dollar and the Hong Kong Dollar.  As of December 31, 2013, our monetary assets and liabilities which are subject to this exposure are immaterial, therefore, the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows.  This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the offsetting effect of such a change on our foreign‑currency denominated revenues.

Interest Rate Risk

We manage our exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in our debt portfolio. To manage a portion of our exposure to interest rate changes, we have in the past entered into interest rate swap agreements.
 
At December 31, 2013, we had approximately $21.5 million in loans and financing outstanding, of which approximately $0.1 million bear interest at fixed interest rates and approximately $21.4 million bear interest at variable rates of interest.  We invest our excess cash in highly liquid short‑term investments. Our percentage of variable rate debt to total debt was 99.6% and 99.5% at December 31, 2013 and 2012, respectively.  Depending upon the level of borrowings under our revolving credit facility and our excess cash, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have an approximate $0.3 million negative impact on our earnings or cash flows.

44

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page No.
 
 
Management’s Report on Internal Control Over Financial Reporting
46
 
 
Report of Independent Registered Public Accounting Firm—Internal Control Over Financial Reporting
47
 
 
Report of Independent Registered Public Accounting Firm Consolidated Financial Statements
48
 
 
Consolidated Statements of Operations for the years ended December 31, 2013,2012 and 2011
49
 
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011
50
 
 
Consolidated Balance Sheets as of December 31, 2013 and 2012
51
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2013,2012 and 2011
52
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011
53
 
 
Notes to Consolidated Financial Statements
54

45

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

To the Stockholders of
Standard Motor Products, Inc. and Subsidiaries:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
We assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 1992 Internal Control-Integrated Framework. Based on our assessment using those criteria, we concluded that, as of December 31, 2013, our internal control over financial reporting is effective.
 
Our independent registered public accounting firm, KPMG LLP, has audited our consolidated financial statements as of and for the year ended December 31, 2013 and has also audited the effectiveness of our internal control over financial reporting as of December 31, 2013.  KPMG’s report appears on the following pages of this “Item 8. Financial Statements and Supplementary Data.”
46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—
INTERNAL CONTROL OVER REPORTING

The Board of Directors and Stockholders of
Standard Motor Products, Inc. and Subsidiaries

We have audited Standard Motor Products, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Standard Motor Products, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated February 27, 2014 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
New York, New York
February 27, 2014
47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—
CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Stockholders of
Standard Motor Products, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013.  In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement Schedule II, Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements and the accompanying consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Standard Motor Products, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 2013, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on the criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
New York, New York
February 27, 2014

48

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

 
 
Year Ended December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
(Dollars in thousands,
except share and per share data)
 
Net sales
 
$
983,704
   
$
948,916
   
$
874,625
 
Cost of sales
   
693,250
     
689,247
     
645,478
 
Gross profit
   
290,454
     
259,669
     
229,147
 
Selling, general and administrative expenses
   
201,256
     
187,495
     
163,845
 
Restructuring and integration expenses
   
3,357
     
1,437
     
1,344
 
Other income, net
   
1,022
     
694
     
941
 
Operating income
   
86,863
     
71,431
     
64,899
 
Other non-operating income (expense), net
   
1
     
(696
)
   
3,370
 
Interest expense
   
1,902
     
2,788
     
3,821
 
Earnings from continuing operations before taxes
   
84,962
     
67,947
     
64,448
 
Provision for income taxes
   
31,919
     
24,978
     
121
 
Earnings from continuing operations
   
53,043
     
42,969
     
64,327
 
Loss from discontinued operations, net of income tax benefit of $1,062, $1,077 and $1,284
   
(1,593
)
   
(1,616
)
   
(1,926
)
Net earnings
 
$
51,450
   
$
41,353
   
$
62,401
 
Net earnings per common share – Basic:
                       
Earnings from continuing operations
 
$
2.31
   
$
1.88
   
$
2.82
 
Discontinued operations
   
(0.07
)
   
(0.07
)
   
(0.08
)
Net earnings per common share – Basic
 
$
2.24
   
$
1.81
   
$
2.74
 
Net earnings per common share – Diluted:
                       
Earnings from continuing operations
 
$
2.28
   
$
1.86
   
$
2.78
 
Discontinued operations
   
(0.07
)
   
(0.07
)
   
(0.08
)
Net earnings per common share – Diluted
 
$
2.21
   
$
1.79
   
$
2.70
 
Dividends declared per share
 
$
0.44
   
$
0.36
   
$
0.28
 
Average number of common shares
   
22,974,690
     
22,812,077
     
22,794,606
 
Average number of common shares and dilutive common shares
   
23,270,067
     
23,050,340
     
23,228,345
 

See accompanying notes to consolidated financial statements.
49

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
Year Ended December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
(In thousands)
 
Net earnings
 
$
51,450
   
$
41,353
   
$
62,401
 
Other comprehensive income (loss), net of tax:
                       
Foreign currency translation adjustments
   
(1,101
)
   
1,585
     
(1,512
)
Pension and postretirement plans:
                       
Amortization of:
                       
Prior service benefit
   
(4,317
)
   
(4,784
)
   
(6,402
)
Unrecognized loss
   
3,123
     
3,096
     
2,376
 
Plan amendment adjustment
   
     
     
14,415
 
Curtailment
   
     
     
(3,647
)
Unrecognized amounts
   
(343
)
   
33
     
20
 
Foreign currency exchange rate changes
   
(32
)
   
14
     
(7
)
Income tax benefit (expense) related to pension and postretirement plans
   
577
     
636
     
(2,660
)
Pension and postretirement plans, net of tax
   
(992
)
   
(1,005
)
   
4,095
 
Total other comprehensive income, net of tax
   
(2,093
)
   
580
     
2,583
 
Comprehensive income
 
$
49,357
   
$
41,933
   
$
64,984
 

See accompanying notes to consolidated financial statements.
50

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 
 
December 31,
 
 
 
2013
   
2012
 
 
 
(Dollars in thousands,
except share data)
 
ASSETS
 
   
 
CURRENT ASSETS:
 
   
 
Cash and cash equivalents
 
$
5,559
   
$
13,074
 
Accounts receivable, less allowances for discounts and doubtful accounts of $6,969 and $6,124 in 2013 and 2012, respectively
   
125,201
     
98,565
 
Inventories, net
   
269,447
     
267,468
 
Deferred income taxes
   
35,633
     
33,258
 
Prepaid expenses and other current assets
   
10,237
     
6,188
 
Total current assets
   
446,077
     
418,553
 
 
               
Property, plant and equipment, net
   
63,646
     
64,422
 
Goodwill
   
38,005
     
35,827
 
Other intangibles, net
   
34,861
     
36,546
 
Deferred incomes taxes
   
10,278
     
11,085
 
Other assets
   
22,656
     
10,161
 
Total assets
 
$
615,523
   
$
576,594
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
CURRENT LIABILITIES:
               
Notes payable
 
$
21,406
   
$
40,453
 
Current portion of long-term debt
   
59
     
120
 
Accounts payable
   
71,469
     
62,283
 
Sundry payables and accrued expenses
   
41,939
     
41,723
 
Accrued customer returns
   
31,464
     
29,033
 
Accrued rebates
   
28,758
     
27,349
 
Payroll and commissions
   
25,221
     
21,211
 
Total current liabilities
   
220,316
     
222,172
 
 
               
Long-term debt
   
16
     
75
 
Other accrued liabilities
   
21,840
     
21,650
 
Accrued asbestos liabilities
   
23,919
     
25,110
 
Total liabilities
   
266,091
     
269,007
 
 
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
    Common Stock - par value $2.00 per share:
Authorized 30,000,000 shares, issued 23,936,036 shares in 2013 and 2012
   
47,872
     
47,872
 
Capital in excess of par value
   
87,563
     
82,348
 
Retained earnings
   
228,036
     
186,693
 
Accumulated other comprehensive income
   
1,786
     
3,879
 
Treasury stock - at cost (981,004 shares and 1,117,104 shares in 2013 and 2012, respectively)
   
(15,825
)
   
(13,205
)
Total stockholders’ equity
   
349,432
     
307,587
 
Total liabilities and stockholders’ equity
 
$
615,523
   
$
576,594
 

See accompanying notes to consolidated financial statements.
51

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Year Ended December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
   
 
Net earnings
 
$
51,450
   
$
41,353
   
$
62,401
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation and amortization
   
17,595
     
16,466
     
14,145
 
Amortization of deferred financing cost
   
893
     
1,161
     
1,477
 
Increase (decrease) to allowance for doubtful accounts
   
641
     
(728
)
   
(484
)
Increase to inventory reserves
   
4,636
     
4,921
     
4,504
 
Amortization of deferred gain on sale of buildings
   
(1,048
)
   
(1,048
)
   
(1,048
)
Equity (income) loss from and gain on the sale of joint ventures
   
285
     
     
(2,826
)
Employee Stock Ownership Plan allocation
   
4,376
     
3,865
     
2,514
 
Stock-based compensation
   
3,668
     
2,358
     
2,025
 
Excess tax benefits related to exercise of employee stock grants
   
(1,264
)
   
(343
)
   
(501
)
(Increase) decrease in deferred income taxes
   
(527
)
   
6,098
     
9,311
 
Decrease in unrecognized tax benefit
   
     
     
(454
)
Decrease in tax valuation allowance
   
(480
)
   
(669
)
   
(21,625
)
Loss on discontinued operations, net of tax
   
1,593
     
1,616
     
1,926
 
Change in assets and liabilities:
                       
(Increase) decrease in accounts receivable
   
(27,278
)
   
15,393
     
9,595
 
(Increase) decrease in inventories
   
(6,094
)
   
(1,556
)
   
2,500
 
(Increase) decrease in prepaid expenses and other current assets
   
(4,048
)
   
(659
)
   
748
 
Increase (decrease) in accounts payable
   
12,497
     
3,287
     
(3,105
)
Increase in sundry payables and accrued expenses
   
8,673
     
6,837
     
4,026
 
Net changes in other assets and liabilities
   
(7,952
)
   
(4,792
)
   
(9,822
)
Net cash provided by operating activities
   
57,616
     
93,560
     
75,307
 
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Acquisitions of and investments in businesses
   
(12,760
)
   
(38,594
)
   
(70,532
)
Divestiture of European distribution business
   
     
     
1,317
 
Divestiture of joint ventures
   
     
     
4,317
 
Capital expenditures
   
(11,410
)
   
(11,811
)
   
(11,037
)
Other investing activities
   
(592
)
   
493
     
45
 
Net cash used in investing activities
   
(24,762
)
   
(49,912
)
   
(75,890
)
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net borrowings under (repayments of) line-of-credit agreements
   
(19,046
)
   
(32,547
)
   
20,113
 
Principal payments of long-term debt and capital lease obligations
   
(120
)
   
(105
)
   
(12,410
)
Purchase of treasury stock
   
(6,864
)
   
(4,999
)
   
(4,136
)
Increase (decrease) in overdraft balances
   
(3,312
)
   
2,387
     
645
 
Payments of debt issuance costs
   
(1,261
)
   
     
(329
)
Proceeds from exercise of employee stock options
   
151
     
349
     
2,563
 
Excess tax benefits related to the exercise of employee stock grants
   
1,264
     
343
     
501
 
Dividends paid
   
(10,107
)
   
(8,215
)
   
(6,381
)
Net cash provided by (used in) financing activities
   
(39,295
)
   
(42,787
)
   
566
 
Effect of exchange rate changes on cash
   
(1,074
)
   
1,342
     
(1,247
)
Net increase (decrease) in cash and cash equivalents
   
(7,515
)
   
2,203
     
(1,264
)
CASH AND CASH EQUIVALENTS at beginning of year
   
13,074
     
10,871
     
12,135
 
CASH AND CASH EQUIVALENTS at end of year
 
$
5,559
   
$
13,074
   
$
10,871
 
 
                       
Supplemental disclosure of cash flow information:
                       
Cash paid during the year for:
Interest
 
$
1,050
   
$
1,636
   
$
2,775
 
Income taxes
 
$
33,489
   
$
16,087
   
$
12,354
 

See accompanying notes to consolidated financial statements.
52

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
Years Ended December 31, 2013, 2012 and 2011

 
 
Common Stock
   
Capital in Excess of Par Value
   
Retained Earnings
   
Accumulated
Other Comprehensive Income
   
Treasury Stock
   
Total
 
(In thousands)
 
 
BALANCE AT DECEMBER 31, 2010
 
$
47,872
   
$
77,471
   
$
97,535
   
$
716
   
$
(13,711
)
 
$
209,883
 
Net earnings
   
     
     
62,401
     
     
     
62,401
 
Other comprehensive income, net of tax
   
     
     
     
2,583
     
     
2,583
 
Cash dividends paid ($0.28 per share)
   
     
     
(6,381
)
   
     
     
(6,381
)
Purchase of treasury stock