0001140361-12-022945.txt : 20120504 0001140361-12-022945.hdr.sgml : 20120504 20120504115406 ACCESSION NUMBER: 0001140361-12-022945 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20120331 FILED AS OF DATE: 20120504 DATE AS OF CHANGE: 20120504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MOTOR PRODUCTS INC CENTRAL INDEX KEY: 0000093389 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 111362020 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04743 FILM NUMBER: 12812781 BUSINESS ADDRESS: STREET 1: 37 18 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 BUSINESS PHONE: 7183920200 MAIL ADDRESS: STREET 1: 3718 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 10-Q 1 form10q.htm STANDARD MOTOR PRODUCTS INC 10-Q 3-31-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2012
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number:  1-4743
 
Standard Motor Products, Inc.
(Exact name of registrant as specified in its charter)
 
New York   11-1362020
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
37-18 Northern Blvd., Long Island City, N.Y.   11101
(Address of principal executive offices)   (Zip Code)
 
(718) 392-0200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o
Accelerated Filer þ
Non-Accelerated Filer    o (Do not check if a smaller reporting company)
Smaller reporting company   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ

As of the close of business on April 30, 2012, there were 23,028,231 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.
 


 
 

 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES


PART I - FINANCIAL INFORMATION
 
   
Page No.
Item 1.
Consolidated Financial Statements:
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
20
     
Item 3. 
31
     
Item 4. 
32
     
 
PART II – OTHER INFORMATION
 
     
Item 1. Legal Proceedings
33
     
Item 6. Exhibits
34
     
34

 
2

 
PART I - FINANCIAL INFORMATION
 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 

(Dollars in thousands, except share and per share data)
 
Three Months Ended
March 31,
 
   
2012
   
2011
 
   
(Unaudited)
 
             
Net sales
  $ 211,711     $ 220,230  
Cost of sales
    157,161       167,078  
Gross profit
    54,550       53,152  
Selling, general and administrative expenses
    44,776       40,640  
Restructuring and integration expenses
    124       343  
Other income, net
    53       269  
Operating income
    9,703       12,438  
Other non-operating income (expense), net
    (42 )     267  
Interest expense
    713       1,357  
Earnings from continuing operations before taxes
    8,948       11,348  
Provision for income taxes
    3,454       4,337  
Earnings from continuing operations
    5,494       7,011  
Loss from discontinued operations, net of income taxes
    (300 )     (304 )
Net earnings
  $ 5,194     $ 6,707  
Net earnings per common share – Basic:
               
Earnings from continuing operations
  $ 0.24     $ 0.31  
Discontinued operations
    (0.01 )     (0.01 )
Net earnings per common share – Basic
  $ 0.23     $ 0.30  
Net earnings per common share – Diluted:
               
Earnings from continuing operations
  $ 0.24     $ 0.31  
Discontinued operations
    (0.02 )     (0.02 )
Net earnings per common share – Diluted
  $ 0.22     $ 0.29  
Dividends declared per share
  $ 0.09     $ 0.07  
                 
Average number of common shares
     22,867,519        22,706,462  
Average number of common shares and dilutive common shares
    23,103,858       22,856,651  

See accompanying notes to consolidated financial statements.
 
 
3

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 

   
Three Months Ended
March 31,
 
(In thousands)
 
2012
   
2011
 
   
(Unaudited)
 
             
Net earnings
  $ 5,194     $ 6,707  
Other comprehensive income (loss), net of tax:
               
Foreign currency translation adjustments
    1,069       935  
Pension and postretirement plans:
               
Amortization of:
               
Prior service benefit
    (1,196 )     (1,612 )
Unrecognized loss
    713       355  
Foreign currency exchange rate changes
    16       13  
Income tax related to pension and postretirement plans
    186       503  
Pension and post retirement plans, net of tax
    (281 )     (741 )
Total other comprehensive income, net of tax
    788       194  
Comprehensive income
  $ 5,982     $ 6,901  

See accompanying notes to consolidated financial statements.
 
 
4

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 

 
(In thousands, except share and per share data)
 
March 31,
2012
   
December 31,
2011
 
   
(Unaudited)
       
ASSETS
 
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 9,282     $ 10,871  
Accounts receivable, less allowance for discounts and doubtful accounts of $6,970 and $6,709 for 2012 and 2011, respectively
    122,178       104,115  
Inventories, net
    259,913       248,097  
Deferred income taxes
    31,857       32,199  
Prepaid expenses and other current assets
    8,900       5,705  
Total current assets
    432,130       400,987  
                 
Property, plant and equipment, net
    63,642       64,039  
Goodwill
    26,124       26,124  
Other intangibles, net
    30,742       31,718  
Deferred income taxes
    15,780       16,937  
Other assets
    11,447       10,917  
Total assets
  $ 579,865     $ 550,722  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
CURRENT LIABILITIES:
               
Notes payable
  $ 79,000     $ 73,000  
Current portion of long-term debt
    113       109  
Accounts payable
    72,454       50,880  
Sundry payables and accrued expenses
    27,234       33,409  
Accrued customer returns
    30,727       25,074  
Accrued rebates
    25,605       22,373  
Payroll and commissions
    14,432       24,036  
Total current liabilities
    249,565       228,881  
                 
Long-term debt
     165        190  
Accrued postretirement benefits
    5,852       6,017  
Other accrued liabilities
    17,739       17,540  
Accrued asbestos liabilities
    26,042       26,141  
Total liabilities
    299,363       278,769  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock – par value $2.00 per share: Authorized – 30,000,000 shares; issued 23,936,036 shares
    47,872       47,872  
Capital in excess of par value
    82,083       79,789  
Retained earnings
    156,694       153,555  
Accumulated other comprehensive income
    4,087       3,299  
Treasury stock – at cost 909,305 shares and 1,116,155 shares in 2012 and 2011, respectively
    (10,234 )     (12,562 )
Total stockholders’ equity
    280,502       271,953  
Total liabilities and stockholders’ equity
  $ 579,865     $ 550,722  
 
See accompanying notes to consolidated financial statements.
 
 
5

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
 
 
(In thousands)
 
Three Months Ended
March 31,
 
   
2012
   
2011
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net earnings
  $ 5,194     $ 6,707  
Adjustments to reconcile net earnings to net cash used in operating activities:
               
Depreciation and amortization
    3,828       3,419  
Increase to allowance for doubtful accounts
    38       226  
Increase to inventory reserves
    1,197       704  
Amortization of deferred gain on sale of building
    (262 )     (262 )
Gain on disposal of property, plant and equipment
    (6 )     (7 )
Equity income from joint ventures
          (44 )
Employee stock ownership plan allocation
    966       629  
Stock-based compensation
    443       325  
Decrease in deferred income taxes
    1,501       2,049  
Loss on discontinued operations, net of tax
    300       304  
Change in assets and liabilities:
               
Increase in accounts receivable
    (18,101 )     (34,902 )
Increase in inventories
    (13,013 )     (261 )
Increase in prepaid expenses and other current assets
    (297 )     (599 )
Increase in accounts payable
    16,706       13,614  
Decrease in sundry payables and accrued expenses
    (6,893 )     (4,324 )
Net changes in other assets and liabilities
    (637 )     542  
Net cash used in operating activities
    (9,036 )     (11,880 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from the sale of property, plant and equipment
    6       28  
Divestiture of joint ventures
          1,000  
Capital expenditures
    (2,442 )     (2,351 )
Net cash used in investing activities
    (2,436 )     (1,323 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net borrowings under line-of-credit agreements
    6,000       7,098  
Principal payments of long-term debt and capital lease obligations
    (21 )     (21 )
Increase in overdraft balances
    4,868       8,432  
Proceeds from exercise of employee stock options
    307       43  
Excess tax benefits related to the exercise of employee stock grants
    7       1  
Dividends paid
    (2,055 )     (1,586 )
Net cash provided by financing activities
    9,106       13,967  
Effect of exchange rate changes on cash
    777       733  
Net increase (decrease) in cash and cash equivalents
    (1,589 )     1,497  
CASH AND CASH EQUIVALENTS at beginning of year
    10,871       12,135  
CASH AND CASH EQUIVALENTS at end of year
  $ 9,282     $ 13,632  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the year for:
               
Interest
  $ 411     $ 430  
Income taxes
  $ 1,158     $ 2,279  
 
See accompanying notes to consolidated financial statements.
 
 
6

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Three Months Ended March 31, 2012
(Unaudited)
 
   
Common
Stock
   
Capital in 
Excess of
Par Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Treasury
Stock
   
Total
 
(In thousands)
                                   
                                                 
Balance at December 31, 2011
  $ 47,872     $ 79,789     $ 153,555     $ 3,299     $ (12,562 )   $ 271,953  
Comprehensive income
                5,194       788             5,982  
Cash dividends paid
                (2,055 )                 (2,055 )
Stock-based compensation and related tax benefits
           426                   24        450  
Stock options and related tax benefits
          29                   278       307  
Employee Stock Ownership Plan
          1,839                   2,026       3,865  
                                                 
Balance at March 31, 2012
  $ 47,872     $ 82,083     $ 156,694     $ 4,087     $ (10,234 )   $ 280,502  

See accompanying notes to consolidated financial statements.
 
 
7


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
Note 1.
Basis of Presentation
 
Standard Motor Products, Inc. (referred to hereinafter in these notes to consolidated financial statements as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of replacement parts for motor vehicles in the automotive aftermarket industry with an increasing focus on the original equipment service market.
 
The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.  The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership.  Our investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest.  All significant inter-company items have been eliminated.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.

Note 2.
Summary of Significant Accounting Policies
 
The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.  We have made a number of estimates and assumptions in the preparation of these consolidated financial statements.  We can give no assurance that actual results will not differ from those estimates.  Some of the more significant estimates include allowances for doubtful accounts, realizability of inventory, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability, pensions and other postretirement benefits, asbestos, environmental and litigation matters, the valuation of deferred tax assets and sales return allowances.
 
The impact and any associated risks related to significant accounting policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results.  There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011.

Recently Issued Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which amended the provisions of FASB Accounting Standards Codification (“ASC”) 220, Comprehensive Income.  The amendment eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity.  In accordance with the amendment an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in one continuous statement or in two separate, but consecutive, statements.  Additionally, reclassification adjustments from other comprehensive income to net income will be presented on the face of the financial statements.  The amendment is effective for annual reporting periods beginning after December 15, 2011, which for us was January 1, 2012 with full retrospective application required.  As a result of the adoption of this standard, effective with this Form 10-Q, we have eliminated the presentation of other comprehensive income in our consolidated statement of changes in stockholders’ equity and have instead presented other comprehensive income in a new statement, consolidated statement of comprehensive income, which immediately follows our consolidated statement of operations.
 
 
8

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

In December 2011, the FASB issued 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 2011-05, which indefinitely defers the requirement in FASB ASU 2011-05 to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  During the deferral period, entities will still need to comply with the existing requirements for the presentation of reclassification adjustments. The amendment is effective for annual reporting periods beginning after December 15, 2011, which for us was January 1, 2012 with full retrospective application required.  The adoption of this standard did not impact the manner in which we present reclassification adjustments from other comprehensive income.

Goodwill Impairment Testing

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), that amended the provisions of FASB ASC 350, Intangibles – Goodwill and Other (“ASC 350”).  FASB ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test.  If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit.  The new standard is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, which for us was January 1, 2012.  We will consider this new standard when conducting our annual impairment test of goodwill.

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 will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  We do not anticipate that the adoption of FASB ASU 2011-11 will have a material effect on our consolidated financial statements and disclosures.
 
 
9


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Note 3.
Restructuring and Integration Costs

The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of December 31, 2011 and March 31, 2012 and activity for the three months ended March 31, 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
    61       63       124  
Non-cash usage, including asset write-downs
          (63 )     (63 )
Cash payments
    (364 )           (364 )
Exit activity liability at March 31, 2012
  $ 1,604     $ 1,654     $ 3,258  

Liabilities associated with the remaining restructuring and integration costs as of March 31, 2012 relate primarily to employee severance and other retiree benefit enhancements to be paid through 2016 in connection with the 2008 Voluntary Separation Program 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 pursuant to the 2008 Reynosa Integration Program.

Note 4.
Sale of Receivables

From time to time, we sell undivided interests in certain of our receivables to financial institutions.  We enter these agreements at our discretion when we determine that the cost of factoring is less than the cost of servicing our receivables with existing debt.  Pursuant to these agreements, we sold $132.1 million and $126.4 million of receivables during the three months ended March 31, 2012 and 2011, respectively.  Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale.  As such, these transactions are being accounted for as a sale.  A charge in the amount of $2.4 million and $1.8 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months ended March 31, 2012 and 2011, respectively.

Note 5.
Inventories, Net

Inventories, which are stated at the lower of cost (determined by means of the first-in, first-out method) or market, consist of the following:

   
March 31,
2012
   
December 31,
2011
 
   
(In thousands)
 
             
Finished goods, net
  $ 170,323     $ 165,503  
Work in process, net
    5,409       5,144  
Raw materials, net
    84,181       77,450  
Total inventories, net
  $ 259,913     $ 248,097  

 
10

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Note 6.
Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

   
March 31,
2012
   
December 31,
2011
 
   
(In thousands)
 
             
Revolving credit facilities
  $ 79,000     $ 73,000  
Other
    278       299  
Total debt
  $ 79,278     $ 73,299  
                 
                 
Current maturities of debt
  $ 79,113     $ 73,109  
Long-term debt
    165       190  
Total debt
  $ 79,278     $ 73,299  

Deferred Financing Costs

We had deferred financing cost of $3.5 million and $3.8 million as of March 31, 2012 and December 31, 2011, respectively.  Deferred financing costs are related to our revolving credit facility.  Deferred financing costs as of March 31, 2012 are being amortized, assuming no further prepayments of principal, in the amount of $0.9 million in 2012, $1.2 million in 2013, $1.2 million in 2014 and $0.2 million in 2015.

Revolving Credit Facility

In November 2010, we entered into a Third Amended and Restated Credit Agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility.  This restated credit agreement replaces our prior credit facility with General Electric Capital Corporation.  The restated credit agreement (as amended in September 2011) provides for a line of credit of up to $200 million (inclusive of the Canadian revolving credit facility described below) and expires in March 2015.  Direct borrowings under the restated credit agreement bear interest at the LIBOR rate plus the applicable margin (as defined), or floating at the index rate plus the applicable margin, at our option. The interest rate may vary depending upon our borrowing availability. The restated credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.
 
In September 2011, we amended our restated credit agreement (1) to extend the maturity date of our credit facility to March 2015; (2) to reduce the margin added to the LIBOR rate to 1.75% - 2.25%; (3) to reduce the margin added to the index rate to 0.75% - 1.25%; and (4) to provide us with greater flexibility regarding permitted acquisitions and stock repurchases.
 
Borrowings under the restated credit agreement are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of certain of our subsidiaries. After taking into account outstanding borrowings under the restated credit agreement, there was an additional $98.5 million available for us to borrow pursuant to the formula at March 31, 2012.  Outstanding borrowings under the restated credit agreement (inclusive of the Canadian revolving credit facility described below), which are classified as current liabilities, were $79 million and $73 million at March 31, 2012 and December 31, 2011, respectively.  At March 31, 2012, the weighted average interest rate on our restated credit agreement was 1.99%, which consisted of $79 million in direct borrowings.  There were no index loans outstanding at March 31, 2012.  At December 31, 2011, the weighted average interest rate on our restated credit agreement was 2%, which consisted of $73 million in direct borrowings.  There were no index loans outstanding at December 31, 2011.  During the three months ended March 31, 2012 our average daily index loan balance was $4.5 million compared to $5.6 million for the three months ended March 31, 2011 and $5.7 million for the year ended December 31, 2011.
 
 
11

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
At any time that our average borrowing availability over the previous thirty days is less than $30 million or if our borrowing availability is $20 million or less, and until such time that we have maintained an average borrowing availability of $30 million or greater for a continuous period of ninety days, the terms of our restated credit agreement provide for, among other provisions, financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months), and (2) to limit capital expenditure levels.  As of March 31, 2012, we were not subject to these covenants.  Availability under our restated credit agreement is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets.  Our restated credit agreement also permits dividends and distributions by us provided specific conditions are met.

Canadian Revolving Credit Facility

In May 2010, we amended our Canadian Credit Agreement with GE Canada Finance Holding Company, for itself and as agent for the lenders.  The amended Canadian Credit Agreement provided for the conversion of the then existing $10 million line of credit into a revolving credit facility.  The Canadian $10 million line of credit is part of the $200 million available for borrowing under our restated credit agreement with General Electric Capital Corporation.
 
In November 2010 and September 2011, we further amended our Canadian Credit Agreement to extend the maturity date of the agreement to March 2015 and modify certain provisions, including interest rates, to parallel the revolving credit provisions of the restated credit agreement (described above).  The amended credit agreement is guaranteed and secured by us and certain of our wholly-owned subsidiaries.  Direct borrowings under the amended credit agreement bear interest at the same rate as our restated credit agreement with General Electric Capital Corporation.  As of March 31, 2012, we have no outstanding borrowings under the Canadian Credit Agreement.

Capital Leases

As of March 31, 2012, our capital lease obligations related to certain equipment for use in our operations totaled $0.3 million.  Assets held under capitalized leases are included in property, plant and equipment and depreciated over the lives of the respective leases or over their economic useful lives, whichever is less.

Note 7.
Stock-Based Compensation Plans

We account for our stock-based compensation plans in accordance with the provisions of FASB ASC 718, Stock Compensation, which requires that a company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  The recognition of that cost is recorded in the consolidated statement of operations over the period during which an employee is required to provide service in exchange for the award.
 
 
12


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Stock Option Grants

The following is a summary of the changes in outstanding stock options for the three months ended March 31, 2012:
 
         
Weighted
    Weighted Average    
         
 Average
    Remaining  
          Exercise      Contractual  
    Shares    
 Price
    Term (Years)  
                   
Outstanding at December 31, 2011
    59,400     $ 12.35       2.9  
Expired
                 
Exercised
    (24,750 )     12.41        
Forfeited, other
                 
Outstanding at March 31, 2012
    34,650     $ 12.32       2.6  
                         
Options exercisable at March 31, 2012
    34,650     $ 12.32       2.6  
 
The aggregate intrinsic value of all outstanding stock options as of March 31, 2012 was $0.2 million.  All outstanding stock options as of March 31, 2012 are fully vested and exercisable.  The total intrinsic value of options exercised was $0.3 million for the three months ended March 31, 2012.  There were no options granted in the three months ended March 31, 2012.
 
Restricted and Performance Stock Grants

As part of the 2006 Omnibus Incentive Plan, we currently grant shares of restricted and performance-based stock to eligible employees and directors.  Selected executives and other key personnel are granted performance awards whose vesting is contingent upon meeting various performance measures with a retention feature.  Performance-based shares are subject to a three year measuring period and the achievement of performance targets and, depending upon the achievement of such performance targets, they may become vested on the third anniversary of the date of grant.  Each period we evaluate the probability of achieving the applicable targets, and we adjust our accrual accordingly.  Restricted shares granted to employees become fully vested upon the third anniversary of the date of grant; and for selected key executives certain restricted share grants vest 25% upon the attainment of age 60, 25% upon the attainment of age 63 and become fully vested upon the attainment of age 65.  Restricted shares granted to directors become fully vested upon the first anniversary of the date of grant.  Forfeitures on restricted stock grants are estimated at 5% for employees and 0% for executives and directors, respectively, based on our evaluation of historical and expected future turnover.
 
Our restricted and performance-based share activity was as follows for the three months ended March 31, 2012:
 
 
 
Shares
   
Weighted Average
Grant Date Fair
Value Per Share
 
Balance at December 31, 2011
    458,050     $ 11.92  
Granted
           
Vested
    (2,100 )     12.29  
Forfeited
    (2,750 )     12.05  
Balance at March 31, 2012
    453,200     $ 11.91  

We recorded compensation expense related to restricted shares and performance-based shares of $430,153 ($264,114 net of tax) and $312,000 ($192,800 net of tax) for the three months ended March 31, 2012 and 2011, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $3.3 million at March 31, 2012, and is expected to be recognized as they vest over a weighted average period of 4.7 and 0.1 years for employees and directors, respectively.
 
 
13


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Note 8.
Employee Benefits

The components of net periodic benefit cost for our defined benefit plans and postretirement benefit plans for the three months ended March 31, 2012 and 2011 were as follows (in thousands):

   
Three Months Ended
 
   
March 31,
 
Pension benefits
 
2012
   
2011
 
Service cost
  $ 33     $ 28  
Interest cost
    47       45  
Amortization of prior service cost
    28       26  
Actuarial net loss
    65       43  
Net periodic benefit cost
  $ 173     $ 142  
       
Postretirement benefits
               
Service cost
  $ 1     $ 54  
Interest cost
    25       298  
Amortization of prior service cost
    (1,224 )     (1,616 )
Amortization of transition obligation
          1  
Actuarial net loss
    648       346  
Net periodic benefit credit
  $ (550 )   $ (917 )

For the three months ended March 31, 2012, we made employee benefit contributions of $0.2 million related to our postretirement plans.  Based on current actuarial estimates, we believe we will be required to make approximately $1.1 million in contributions for 2012.
 
We maintain a Supplemental Executive Retirement Plan (“SERP”) for key employees. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, we may at our discretion make contributions to the plan on behalf of the employees.  In March 2012, contributions of $0.5 million were made related to calendar year 2011.
 
We also have an Employee Stock Ownership Plan and Trust (“ESOP”) for employees who are not covered by a collective bargaining agreement.  In connection therewith, we maintain an employee benefits trust to which we contribute shares of treasury stock.  We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under the ESOP. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released.  The trustees will vote the shares in accordance with their fiduciary duties.  During the three months ended March 31, 2012, we contributed to the trust an additional 177,000 shares from our treasury and released 180,000 shares from the trust leaving 930 shares remaining in the trust as of March 31, 2012.
 
 
14


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Note 9.
Fair Value Measurements

We follow a three-level fair value hierarchy that prioritizes the inputs to measure fair value.  This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.”  The three levels of inputs used to measure fair value are as follows:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date.
 
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3: Significant unobservable inputs that reflect assumptions that market participants would use in pricing an asset or liability.
 
The following is a summary of the carrying amounts and estimated fair values of our financial instruments at March 31, 2012 and December 31, 2011 (in thousands):
 
   
March 31, 2012
   
December 31, 2011
 
   
Carrying
Amount
   
Fair Value
   
Carrying
Amount
   
Fair Value
 
                         
Cash and cash equivalents
  $ 9,282     $ 9,282     $ 10,871     $ 10,871  
Deferred compensation
    6,435       6,435       5,882       5,882  
Short term borrowings
    79,113       79,113       73,109       73,109  
Long-term debt
    165       165       190       190  

For fair value purposes the carrying value of cash and cash equivalents approximates fair value due to the short maturity of those investments.  The fair value of the underlying assets held by the deferred compensation plan are based on the quoted market prices of the funds in registered investment companies, which are considered Level 1 inputs.  The carrying value of our revolving credit facilities, classified as short term borrowings, equals fair market value because the interest rate reflects current market rates.
 
 
15


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Note 10.
Earnings Per Share

The following are reconciliations of the earnings available to common stockholders and the shares used in calculating basic and dilutive net earnings per common share (in thousands, except per share data):

   
Three Months Ended
 
   
March 31,
 
Basic Net Earnings Per Common Shares:
 
2012
   
2011
 
Earnings from continuing operations
  $ 5,494     $ 7,011  
Loss from discontinued operation
    (300 )     (304 )
Net earnings available to common stockholders
  $ 5,194     $ 6,707  
                 
Weighted average common shares outstanding
    22,868       22,706  
                 
Earnings from continuing operations per common share
  $ 0.24     $ 0.31  
Loss from discontinued operation per common share
    (0.01 )     (0.01 )
Basic net earnings per common share
  $ 0.23     $ 0.30  
                 
Diluted Net Earnings Per Common Share:
               
Earnings from continuing operations
  $ 5,494     $ 7,011  
Loss from discontinued operation
    (300 )     (304 )
Net earnings available to common stockholders
  $ 5,194     $ 6,707  
                 
Weighted average common shares outstanding
    22,868       22,706  
Plus incremental shares from assumed conversions:
               
Dilutive effect of restricted and performance stock
    224       142  
Dilutive effect of stock options
    12       9  
Weighted average common shares outstanding – Diluted
    23,104       22,857  
                 
Earnings from continuing operations per common share
  $ 0.24     $ 0.31  
Loss from discontinued operation per common share
    (0.02 )     (0.02 )
Diluted net earnings per common share
  $ 0.22     $ 0.29  

The shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or because they were excluded under the treasury method (in thousands):
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Stock options
    22       249  
Restricted and performance shares
    210       170  
15% convertible subordinated debentures
          820  
 
 
16


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Note 11.
Industry Segments

We have two major reportable operating segments, each of which focuses on a specific line of replacement parts.  Our Engine Management Segment manufactures and distributes ignition and emission parts, ignition wires, battery cables and fuel system parts.  Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories and windshield washer system parts.
 
The following tables show our net sales and operating income by our operating segments (in thousands):
 
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Net Sales
           
Engine Management
  $ 163,015     $ 164,204  
Temperature Control
    45,291       54,079  
All Other
    3,405       1,947  
Consolidated
  $ 211,711     $ 220,230  
                 
Intersegment Revenue
               
Engine Management
  $ 4,488     $ 5,561  
Temperature Control
    1,109       1,281  
All Other
    (5,597 )     (6,842 )
Consolidated
  $     $  
                 
Operating Profit
               
Engine Management
  $ 13,688     $ 14,820  
Temperature Control
    48       1,253  
All Other
    (4,033 )     (3,635 )
Consolidated
  $ 9,703     $ 12,438  
 
Note 12.
Commitments and Contingencies

Asbestos

In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business.  In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed on or after September 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 2001 and the amounts paid for indemnity and defense thereof.  At March 31, 2012, approximately 2,110 cases were outstanding for which we may be responsible for any related liabilities.  Since inception in September 2001 through March 31, 2012, the amounts paid for settled claims are approximately $12.3 million.  We acquired limited insurance coverage up to a fixed amount for defense and indemnity costs associated with certain asbestos-related claims.  Under the policy currently in effect, we have submitted claims to our insurance carrier and have received $0.9 million in reimbursement for settlement claims and defense costs.
 
In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study performed by an independent actuarial firm with expertise in assessing asbestos-related liabilities, our settlement amounts and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of settlement discussions.  As is our accounting policy, we engage actuarial consultants with experience in assessing asbestos-related liabilities to estimate our potential claim liability. The methodology used to project asbestos-related liabilities and costs in the study considered: (1) historical data available from publicly available studies; (2) an analysis of our recent claims history to estimate likely filing rates into the future; (3) an analysis of our currently pending claims; and (4) an analysis of our settlements to date in order to develop average settlement values.
 
 
17

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
The most recent actuarial study was performed as of August 31, 2011.  The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $27.5 million to $66.5 million for the period through 2059. The change from the prior year study was a $1.8 million increase for the low end of the range and a $0.4 million decrease for the high end of the range.  Based on the information contained in the actuarial study and all other available information considered by us, we concluded that no amount within the range of settlement payments was more likely than any other and, therefore, recorded the low end of the range as the liability associated with future settlement payments through 2059 in our consolidated financial statements.  Accordingly, an incremental $1.3 million provision in our discontinued operation was added to the asbestos accrual in September 2011 increasing the reserve to approximately $27.5 million. According to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation in the accompanying statement of operations, are estimated to range from $26.2 million to $63 million during the same period.
 
We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future. Given the uncertainties associated with projecting such matters into the future and other factors outside our control, we can give no assurance that additional provisions will not be required. We will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional provisions may be necessary. At the present time, however, we do not believe that any additional provisions would be reasonably likely to have a material adverse effect on our liquidity or consolidated financial position.

Antitrust Litigation

In November 2004, we were served with a summons and complaint in the U.S. District Court for the Southern District of New York by The Coalition for a Level Playing Field, which is an organization comprised of a large number of auto parts retailers. The complaint alleged antitrust violations by us and a number of other auto parts manufacturers and retailers and sought injunctive relief and unspecified monetary damages.  In September 2011, the court dismissed the complaint with prejudice and in October 2011, the plaintiff filed an appeal.  In April 2012, we settled the lawsuit for a nominal dollar amount.

Other Litigation

We are involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of any asbestos-related matters or any other litigation or product liability matter cannot be determined, based on our understanding and evaluation of the relevant facts and circumstances, it is our opinion that the final outcome of these matters will not have a material adverse effect on our business, financial condition or results of operations.

Warranties

We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time of the product depending on the nature of the product.  As of March 31, 2012 and 2011, we have accrued $13.9 million and $12.6 million, respectively, for estimated product warranty claims included in accrued customer returns. The accrued product warranty costs are based primarily on historical experience of actual warranty claims.
 
 
18

 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
The following table provides the changes in our product warranties (in thousands):
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Balance, beginning of period
  $ 13,500     $ 12,153  
Liabilities accrued for current year sales
    15,423       13,856  
Settlements of warranty claims
    (14,975 )     (13,368 )
Balance, end of period
  $ 13,948     $ 12,641  

Note 13.
Subsequent Event

On April 30, 2012, we acquired substantially all of the assets of CompressorWorks, Inc. for approximately $37.4 million in cash funded by our revolving credit facility.  CompressorWorks, Inc. has manufacturing and distribution facilities in Dallas, Texas, and distributes a range of temperature control products including new compressors, fan clutches, and other A/C system and engine cooling products.  Revenues from the acquired business were approximately $60 million for the year ended December 31, 2011.  The final purchase price is subject to customary post-closing adjustments based upon the working capital of the purchased business through the closing date.
 
 
19

 

This Report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties.  Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, our significant indebtedness; economic and market conditions (including access to credit and financial markets); the performance of the aftermarket and original equipment service markets; changes in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in the product mix and distribution channel mix; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs that cannot be recouped in product pricing; successful integration of acquired businesses; our ability to achieve cost savings from our restructuring initiatives;  product liability and environmental matters (including, without limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties); as well as other risks and uncertainties, such as those described under Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC. Forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, historical information should not be considered as an indicator of future performance.  The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report.

Business Overview

We are a leading independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry, with an increasing focus on the original equipment service market.  We are organized into two major operating segments, each of which focuses on a specific line of replacement parts.  Our Engine Management Segment manufactures ignition and emission parts, ignition wires, battery cables and fuel system parts.  Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories, and windshield washer system parts.
 
We sell our products primarily to warehouse distributors, large retail chains, original equipment manufacturers and original equipment service part operations in the United States, Canada and Latin America. Our customers consist of many of the leading warehouse distributors, such as CARQUEST 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 and Pep Boys. Our customers also include national program distribution groups, such as Federated Auto Parts, Inc., All Pro/Bumper to Bumper (Aftermarket Auto Parts Alliance, Inc.), Automotive Distribution Network 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®, Four Seasons®, Factory Air®, EVERCO®, ACi®, Imperial® and Hayden® and through private labels, such as CARQUEST®, O’Reilly Import Direct® and Master Pro®, NAPA® Echlin®, NAPA® Temp Products and NAPA® Belden®.
 
Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality original equipment and replacement products to the engine management and temperature control markets.  Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates.  We intend to continue to improve our operating efficiency, customer satisfaction and cost position by increasing cost-effective vertical integration in key product lines through internal development and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain products from low cost countries such as those in Asia.
 
 
20


Seasonality.  Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year, with revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business.  In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories. For example, a cool summer may lessen the demand for our Temperature Control products, while a hot summer may increase such demand.  As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.  During this period, our working capital requirements are typically funded by borrowings from our revolving credit facility.

Inventory Management.  We face inventory management issues as a result of warranty and overstock returns.  Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications. In addition to warranty returns, we also permit our customers to return products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories. We accrue for overstock returns as a percentage of sales, after giving consideration to recent returns history.
 
In order to better control warranty and overstock return levels, we have in place procedures for authorized warranty returns, placed restrictions on the amounts customers can return and instituted a program to better estimate potential future product returns.  In addition, with respect to our air conditioning compressors, which are our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not provide acceptable proof that complete air conditioning system repair was performed.

Discounts, Allowances and Incentives.  In connection with our sales activities, we offer a variety of usual customer discounts, allowances and incentives.  First, we offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice.  Second, we offer pricing discounts based on volume and different product lines purchased from us.  These discounts are principally in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale.  For those customers that choose to receive a payment on a quarterly basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly.  Finally, rebates and discounts are provided to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided.  Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. We account for these discounts and allowances as a reduction to revenues, and record them when sales are recorded.
 
 
21

 
Interim Results of Operations:

Comparison of the Three Months Ended March 31, 2012 to the Three Months Ended March 31, 2011

Sales.  Consolidated net sales for the three months ended March 31, 2012 were $211.7 million, a decrease of $8.5 million, or 3.9%, compared to $220.2 million in the same period of 2011.  Consolidated net sales decreased primarily due to lower retail market sales in our Temperature Control Segment and lower traditional market sales in our Engine Management Segment.  Retail market sales in our Engine Management Segment increased year over year as a result of incremental sales during the first three months of 2012 from our acquisition of Forecast Trading Corporation, which began shipping in November 2011.
 
The following table summarizes consolidated net sales by segment for the quarters ended March 31, 2012 and 2011, respectively (in thousands):

Three Months Ended
March 31,
 
Engine
Management
   
Temperature
Control
   
Other
   
Total
 
2012
                       
Net sales
  $ 163,015     $ 45,291     $ 3,405     $ 211,711  
Gross margins
    42,993       8,577       2,980       54,550  
Gross margin percentage
    26.4 %     18.9 %           25.8 %
                                 
2011
                               
Net sales
  $ 164,204     $ 54,079     $ 1,947     $ 220,230  
Gross margins
    40,005       10,281       2,866       53,152  
Gross margin percentage
    24.4 %     19 %           24.1 %

Engine Management’s net sales decreased $1.2 million to $163 million for the first quarter of 2012.  Included in the first quarter 2012 are incremental sales of $11.3 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.  Offsetting the incremental sales provided by our 2011 acquisitions is the impact of the year over year decline in pipeline orders from the significant levels achieved in the first quarter of 2011 as we are seeing a return to a more historical pattern of customer purchases.
 
Temperature Control’s net sales decreased $8.8 million, or 16.3%, to $45.3 million for the first quarter of 2012.  The year over year decrease in sales reflects the lower pipeline orders in the first quarter of 2012 compared to the significant orders received in the prior year, and the impact of 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 to 25.8% in the first quarter of 2012, compared to 24.1% in the first quarter of 2011.  The increase resulted from a 2 percentage point improvement in Engine Management margins offset, in part, by a 0.1 percentage point decline at Temperature Control.  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, 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, and product mix including the impact of incremental retail market sales from our Forecast Trading Corporation acquisition.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses (“SG&A”) increased by $4.1 million to $44.8 million or 21.1% of consolidated net sales, in the first quarter of 2012, as compared to $40.6 million, or 18.5% of consolidated net sales in the first quarter of 2011.  The increase in SG&A expenses is principally due to the incremental expenses from our acquisitions of the Engine Controls business of BLD Products, Ltd. and Forecast Trading Corporation including amortization of intangible assets acquired, the change in process related to certain incremental customer costs resulting in the recording of these costs in selling expenses rather than as sales deductions, and higher expenses related to the sale of receivables.
 
 
22


Restructuring and Integration Expenses.  Restructuring and integration expenses for the first quarter of 2012 decreased to $0.1 million compared to $0.3 million in the comparable quarter of 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
    105       19             124  
Non-cash usage, including asset write-downs
    (63 )      —        —       (63 )
Cash payments
    (159 )     (172 )     (33 )     (364 )
Exit activity liability at March 31, 2012
  $ 2,512     $ 266     $ 480     $ 3,258  

Other Income, Net. Other income, net decreased to $0.1 million in the first quarter of 2012 compared to $0.3 million in the same period in 2011.  During 2012 and 2011, we recognized $0.3 million of deferred gain related to the sale-leaseback of our Long Island City, New York facility and in 2012, we recorded a $0.2 million loss on the disposal of certain machinery and equipment.

Operating Income.  Operating income was $9.7 million in the first quarter of 2012, compared to $12.4 million in the first quarter of 2011.  The decrease of $2.7 million is the result of lower consolidated net sales and higher SG&A expenses offset, in part, by the higher gross margins as a percentage of consolidated net sales.

Interest Expense.  Interest expense decreased to $0.7 million in the first quarter of 2012 compared to $1.4 million the same period in 2011 as average interest rates declined year over year.  The decrease includes the impact of the April 2011 maturity of the $12.3 million principal amount of the 15% convertible subordinated debentures.

Income Tax Provision.  The income tax provision in the first quarter of 2012 was $3.5 million at an effective tax rate of 38.6% compared to $4.3 million and an effective tax rate of 38.2% for the same period in 2011.

Loss from Discontinued Operations.  Loss from discontinued operations, net of tax, reflects legal expenses associated with our asbestos related liability.  We recorded a $0.3 million loss from discontinued operations in both the first quarter of 2012 and 2011.  As discussed more fully in Note 12 in the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

Restructuring and Integration Costs

The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of December 31, 2011 and March 31, 2012 and activity for the three months ended March 31, 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
    61       63       124  
Non-cash usage, including asset write-downs
          (63 )     (63 )
Cash payments
    (364 )           (364 )
Exit activity liability at March 31, 2012
  $ 1,604     $ 1,654     $ 3,258  
 
 
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Liabilities associated with the remaining restructuring and integration costs as of March 31, 2012 relate primarily to employee severance and other retiree benefit enhancements to be paid through 2016 in connection with the 2008 Voluntary Separation Program 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 pursuant to the 2008 Reynosa Integration Program.

Liquidity and Capital Resources

Operating Activities.  During the first three months of 2012, cash used in operations amounted to $9 million compared to $11.9 million in the same period of 2011.  The year-over-year decrease in cash used in operations is primarily the result of a smaller year over year increase in accounts receivable, higher accounts payable, partially offset by a greater increase in inventories.

Investing Activities.  Cash used in investing activities was $2.4 million in the first three months of 2012, compared to $1.3 million in the same period of 2011.  Investing activities in 2012 consisted of $2.4 million in capital expenditures.  Investing activities during the first quarter of 2011 consisted of $2.3 million of capital expenditures offset, in part, by a $1 million cash payment received in connection with the December 2008 divestiture of certain of our joint venture equity ownerships.

Financing Activities.  Cash provided by financing activities was $9.1 million in the first three months of 2012 compared to $14 million in the same period of 2011.  The decrease is primarily due to lower borrowings.  Dividends of $2.1 million were paid in the first three months of 2012 compared to $1.6 million in the comparable period last year.  In January 2012, we increased our quarterly dividend $0.02 per share per quarter from $0.07 per share in 2011 to $0.09 per share in 2012.
 
In November 2010, we entered into a Third Amended and Restated Credit Agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility.  This restated credit agreement replaces our prior credit facility with General Electric Capital Corporation.  The restated credit agreement (as amended in September 2011) provides for a line of credit of up to $200 million (inclusive of the Canadian revolving credit facility described below) and expires in March 2015.  Direct borrowings under the restated credit agreement bear interest at the LIBOR rate plus the applicable margin (as defined), or floating at the index rate plus the applicable margin, at our option. The interest rate may vary depending upon our borrowing availability. The restated credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.
 
In September 2011, we amended our restated credit agreement (1) to extend the maturity date of our credit facility to March 2015; (2) to reduce the margin added to the LIBOR rate to 1.75% - 2.25%; (3) to reduce the margin added to the index rate to 0.75% - 1.25%; and (4) to provide us with greater flexibility regarding permitted acquisitions and stock repurchases
 
Borrowings under the restated credit agreement are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of certain of our subsidiaries. After taking into account outstanding borrowings under the restated credit agreement, there was an additional $98.5 million available for us to borrow pursuant to the formula at March 31, 2012.  Outstanding borrowings under the restated credit agreement (inclusive of the Canadian revolving credit facility described below), which are classified as current liabilities, were $79 million and $73 million at March 31, 2012 and December 31, 2011, respectively.  At March 31, 2012, the weighted average interest rate on our restated credit agreement was 1.99%, which consisted of $79 million in direct borrowings.  There were no index loans outstanding at March 31, 2012.  At December 31, 2011, the weighted average interest rate on our restated credit agreement was 2%, which consisted of $73 million in direct borrowings.  There were no index loans outstanding at December 31, 2011.  During the three months ended March 31, 2012 our average daily index loan balance was $5 million compared to $5.5 million for the three months ended March 31, 2011 and $5.7 million for the year ended December 31, 2011.
 
 
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At any time that our average borrowing availability over the previous thirty days is less than $30 million or if our borrowing availability is $20 million or less, and until such time that we have maintained an average borrowing availability of $30 million or greater for a continuous period of ninety days, the terms of our restated credit agreement provide for, among other provisions, financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months), and (2) to limit capital expenditure levels. As of March 31, 2012, 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 $200 million available for borrowing under our restated credit agreement with General Electric Capital Corporation.
 
In November 2010 and September 2011, we further amended our Canadian Credit Agreement to extend the maturity date of the agreement to March 2015 and modify certain provisions, including interest rates, to parallel the revolving credit provisions of the restated credit agreement (described above).  The amended credit agreement is guaranteed and secured by us and certain of our wholly-owned subsidiaries.  Direct borrowings under the amended credit agreement bear interest at the same rate as our restated credit agreement with General Electric Capital Corporation.  As of March 31, 2012, we have no outstanding borrowings under the Canadian Credit Agreement.
 
As of March 31, 2012, our capital lease obligations related to certain equipment for use in our operations totaled $0.3 million.  Assets held under capitalized leases are included in property, plant and equipment and depreciated over the lives of the respective leases or over their economic useful lives, whichever is less.
 
In order to reduce our accounts receivable balances and improve our cash flow, we sold undivided interests in certain of our receivables to financial institutions.  We entered these agreements at our discretion when we determined that the cost of factoring was less than the cost of servicing our receivables with existing debt.  Pursuant to these agreements, we sold $132.1 million and $126.4 million of receivables during the three months ended March 31, 2012 and 2011, respectively.  Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale.  As such, these transactions are being accounted for as a sale.  A charge in the amount of $2.4 million and $1.8 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months ended March 31, 2012 and 2011, respectively.
 
In August 2011, our Board of Directors authorized the purchase of up to $5 million of our common stock under a stock repurchase program.  During 2011, we repurchased 322,250 shares of our common stock under the program at a total cost of $4.1 million, leaving approximately $0.9 million available for future stock repurchases under the program.
 
We anticipate that our present sources of funds, including funds from operations and additional borrowings, will continue to be adequate to meet our financing needs over the next twelve months.  We continue to evaluate alternative sources to further improve the liquidity of our business.  The timing, terms, size and pricing of any alternative sources of financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing.  In addition, we have a substantial amount of indebtedness which could, among other things, increase our vulnerability to general adverse economic and industry conditions, make it more difficult to satisfy our obligations, limit our ability to pay future dividends, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, and require that a portion of our cash flow from operations be used for the payment of interest on our indebtedness instead of for funding working capital, capital expenditures, acquisitions or for other corporate purposes.  If we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected. For further information regarding the risks of our business, please refer to the Risk Factors section of our Annual Report on Form 10-K for the year ending December 31, 2011.
 
 
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The following table summarizes our contractual commitments as of December 31, 2011 and expiration dates of commitments through 2021:

 
(In thousands)
 
2012
   
2013
   
2014
   
2015
   
2016
      2017-2021    
Total
 
Lease obligations
  $ 7,643     $ 7,614     $ 5,467     $ 4,958     $ 4,313     $ 2,128     $ 32,123  
Postretirement and pension benefits
    1,158       1,190       1,220       6,936       1,303       348       12,155  
Severance payments related to restructuring and integration
    1,177       439       234       55       2             1,907  
Total commitments
  $ 9,978     $ 9,243     $ 6,921     $ 11,949     $ 5,618     $ 2,476     $ 46,185  

Indebtedness under our revolving credit facilities is not included in the table above as it is reported as a current liability in our consolidated balance sheets.  As of March 31, 2012, amounts outstanding under our revolving credit facilities were $79 million.

Summary of Significant 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. There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011.  You should be aware that preparation of our consolidated quarterly financial statements in this Report requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.  We can give no assurances that actual results will not differ from those estimates.

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 at the reporting unit level and are based upon the inventory at that location taken as a whole.  These estimates are 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.
 
 
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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 generally either in outright purchases 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 at standard cost through a credit to cost of sales the used core exchanged at the time it is eventually 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 March 31, 2012, the allowance for sales returns was $30.7 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 March 31, 2012, 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. Management considers 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 core pretax 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 which are expected to generate significant savings in future periods.
 
The valuation allowance of $7.7 million as of March 31, 2012 is intended to provide for the uncertainty regarding the ultimate realization of our state tax credit carryovers, U.S. capital loss carryforwards, U.S. foreign tax credit carryovers, and foreign net operating loss carryforwards. 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.
 
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 valuation allowance which could materially impact our business, financial condition and results of operations.
 
 
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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 and identifiable intangibles assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  With respect to goodwill, we test for impairment of goodwill of a reporting unit on an annual basis or in interim periods if an event occurs or circumstances change that would reduce the fair value of a reporting unit 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 of each of our reporting units using the discounted cash flows method and market multiples.
 
Goodwill is tested for impairment using a two-step approach.  When performing our evaluation, 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. 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.
 
Intangible 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 addition, identifiable intangible assets having indefinite lives are reviewed for impairment on an annual basis.  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.
 
 
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Retirement and Postretirement Medical Benefits.  Each year, we calculate the costs of providing retiree benefits under the provisions of FASB 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 Reserve.  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, 2011 estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $27.5 million to $66.5 million for the period through 2059.  As a result, in September 2011 an incremental $1.3 million provision in our discontinued operation was added to the asbestos accrual increasing the reserve to approximately $27.5 million as of that date. Based on the information contained in the actuarial study and all other available information considered by us, we concluded that no amount within the range of settlement payments was more likely than any other and, therefore, recorded the low end of the range as the liability associated with future settlement payments through 2059 in our consolidated financial statements.  In addition, according to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation, are estimated to range from $26.2 million to $63 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 operation.  The aforementioned estimated settlement payments and legal costs do not reflect any limited coverage that we may obtain pursuant to agreements with insurance carriers for certain asbestos-related claims.

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 for loss.
 
 
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Recently Issued Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which amended the provisions of FASB Accounting Standards Codification (“ASC”) 220, Comprehensive Income.  The amendment eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity.  In accordance with the amendment an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in one continuous statement or in two separate, but consecutive, statements.  Additionally, reclassification adjustments from other comprehensive income to net income will be presented on the face of the financial statements.  The amendment is effective for annual reporting periods beginning after December 15, 2011, which for us was January 1, 2012 with full retrospective application required.  As a result of the adoption of this standard, effective with this Form 10-Q, we have eliminated the presentation of other comprehensive income in our consolidated statement of changes in stockholders’ equity and have instead presented other comprehensive income in a new statement, consolidated statement of comprehensive income, which immediately follows our consolidated statement of operations.
 
In December 2011, the FASB issued 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 2011-05, which indefinitely defers the requirement in FASB ASU 2011-05 to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  During the deferral period, entities will still need to comply with the existing requirements for the presentation of reclassification adjustments. The amendment is effective for annual reporting periods beginning after December 15, 2011, which for us was January 1, 2012 with full retrospective application required.  The adoption of this standard did not impact the manner in which we present reclassification adjustments from other comprehensive income.

Goodwill Impairment Testing

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), that amended the provisions of FASB ASC 350, Intangibles – Goodwill and Other (“ASC 350”).  FASB ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test.  If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit.  The new standard is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, which for us was January 1, 2012.  We will consider this new standard when conducting our annual impairment test of goodwill.

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 will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  We do not anticipate that the adoption of FASB ASU 2011-11 will have a material effect on our consolidated financial statements and disclosures.
 
 
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Quantitative and Qualitative Disclosure 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 March 31, 2012, we do not have any derivative financial instruments.

Exchange Rate Risk

We have exchange rate exposure, primarily, with respect to the Canadian dollar, the Euro, the Polish zloty, the Mexican Peso and the Hong Kong dollar.  As of March 31, 2012 and December 31, 2011, 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.  We invest our excess cash in highly liquid short-term investments.  Our percentage of variable rate debt to total debt was 99.6% at March 31, 2012 and December 31, 2011.
 
Other than the aforementioned, there have been no significant changes to the information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K for the year ended December 31, 2011.
 
 
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(a) 
Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

(b) 
Changes in Internal Control Over Financial Reporting.

During the quarter ended March 31, 2012, we have not made any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
We continue to review, document and test our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts may lead to various changes in our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION


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 March 31, 2012, approximately 2,110 cases were outstanding for which we may be responsible for any related liabilities.  Since inception in September 2001 through March 31, 2012, the amounts paid for settled claims are approximately $12.3 million.  We acquired limited insurance coverage up to a fixed amount for the defense and indemnity costs associated with certain asbestos-related claims.  Under the policy currently in effect, we have submitted claims to our insurance carrier and have received $0.9 million in reimbursement for settlement claims and defense costs.
 
In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study performed by an independent actuarial firm with expertise in assessing asbestos-related liabilities, our settlement amounts and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of settlement discussions. As is our accounting policy, we engage actuarial consultants with experience in assessing asbestos-related liabilities to estimate our potential claim liability. The methodology used to project asbestos-related liabilities and costs in the study considered: (1) historical data available from publicly available studies; (2) an analysis of our recent claims history to estimate likely filing rates into the future; (3) an analysis of our currently pending claims; and (4) an analysis of our settlements to date in order to develop average settlement values.
 
The most recent actuarial study was performed as of August 31, 2011.  The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $27.5 million to $66.5 million for the period through 2059. The change from the prior year study was a $1.8 million increase for the low end of the range and a $0.4 million decrease for the high end of the range.  Based on the information contained in the actuarial study and all other available information considered by us, we concluded that no amount within the range of settlement payments was more likely than any other and, therefore, recorded the low end of the range as the liability associated with future settlement payments through 2059 in our consolidated financial statements.  Accordingly, an incremental $1.3 million provision in our discontinued operation was added to the asbestos accrual in September 2011 increasing the reserve to approximately $27.5 million. According to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation in the accompanying statement of operations, are estimated to range from $26.2 million to $63 million during the same period.
 
We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future. Given the uncertainties associated with projecting such matters into the future and other factors outside our control, we can give no assurance that additional provisions will not be required. We will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional provisions may be necessary. At the present time, however, we do not believe that any additional provisions would be reasonably likely to have a material adverse effect on our liquidity or consolidated financial position.
 
In November 2004, we were served with a summons and complaint in the U.S. District Court for the Southern District of New York by The Coalition for a Level Playing Field, which is an organization comprised of a large number of auto parts retailers. The complaint alleged antitrust violations by us and a number of other auto parts manufacturers and retailers and sought injunctive relief and unspecified monetary damages.  In September 2011, the court dismissed the complaint with prejudice and in October 2011, the plaintiff filed an appeal.  In April 2012, we settled the lawsuit for a nominal dollar amount.
 
We are involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of any asbestos-related matters or any other litigation or product liability matter cannot be determined, based on our understanding and evaluation of the relevant facts and circumstances, it is our opinion that the final outcome of these matters will not have a material adverse effect on our business, financial condition or results of operations.
 
 
33


ITEM 6.
 
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  STANDARD MOTOR PRODUCTS, INC.
                             (Registrant)
   
Date: May 4, 2012
/s/ James J. Burke
  James J. Burke
  Vice President Finance,
  Chief Financial Officer
  (Principal Financial and
  Accounting Officer)
 
 
34

                                                      
STANDARD MOTOR PRODUCTS, INC.
 
EXHIBIT INDEX
 
Exhibit
Number
 
   
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
35

EX-31.1 2 ex31_1.htm EXHIBIT 31.1 ex31_1.htm

EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lawrence I. Sills, certify that:
 
1.
I have reviewed this report on Form 10-Q of Standard Motor Products, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: May 4, 2012
 
   
  /s/ Lawrence I. Sills
 
Lawrence I. Sills
 
Chief Executive Officer
 
 

EX-31.2 3 ex31_2.htm EXHIBIT 31.2 ex31_2.htm

EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James J. Burke, certify that:
 
1.
I have reviewed this report on Form 10-Q of Standard Motor Products, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
c)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
d)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: May 4, 2012
 
   
 
/s/ James J. Burke
 
James J. Burke
 
Chief Financial Officer
 
 

EX-32.1 4 ex32_1.htm EXHIBIT 32.1 ex32_1.htm

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
In connection with the Quarterly Report of Standard Motor Products, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence I. Sills, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
 
/s/ Lawrence I. Sills  
Lawrence I. Sills
 
Chief Executive Officer
 
May 4, 2012
 
 
*             A signed original of this written statement required by Section 906 has been provided to Standard Motor Products, Inc. and will be retained by Standard Motor Products, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
 

EX-32.2 5 ex32_2.htm EXHIBIT 32.2 ex32_2.htm

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Standard Motor Products, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James J. Burke, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
 
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
 
/s/ James J. Burke  
James J. Burke
 
Chief Financial Officer
 
May 4, 2012
 

*             A signed original of this written statement required by Section 906 has been provided to Standard Motor Products, Inc. and will be retained by Standard Motor Products, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
 

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font-size: 10pt;">&#160;</td><td valign="bottom" style="text-align: left; width: 1%; font-family: times new roman; font-size: 10pt;">&#160;</td><td valign="bottom" style="text-align: right; width: 9%; font-family: times new roman; font-size: 10pt;">&#160;</td><td nowrap="nowrap" valign="bottom" style="text-align: left; width: 1%; font-family: times new roman; font-size: 10pt;">&#160;</td></tr><tr bgcolor="#cceeff"><td valign="bottom" style="width: 76%; display: inline; font-family: times new roman; font-size: 10pt;">&#160; </td><td valign="bottom" style="width: 1%; display: inline; font-family: times new roman; font-size: 10pt;">&#160;</td><td valign="bottom" style="text-align: left; width: 1%; font-family: times new roman; font-size: 10pt;">&#160;</td><td valign="bottom" style="text-align: right; width: 9%; font-family: times new roman; font-size: 10pt;">&#160;</td><td nowrap="nowrap" valign="bottom" style="text-align: left; width: 1%; font-family: times new roman; font-size: 10pt;">&#160;</td><td valign="bottom" style="width: 1%; 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