10-K 1 form10k.htm 10-K

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

For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transaction period from ____ to ____

Commission file number:   1‑4743

Standard Motor Products, Inc.
(Exact name of registrant as specified in its charter)

New York
11-1362020
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
37-18 Northern Blvd., Long Island City, N.Y.
11101
(Address of principal executive offices)
(Zip Code)
   
Registrant’s telephone number, including area code:
(718) 392-0200
   
Securities registered pursuant to Section 12(b) of the Act:
 
   
Title of each class
Name of each exchange on which registered
Common Stock, par value $2.00 per share
New York Stock Exchange
   
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☑ No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No  ☑

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 ☑          No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☑      No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  No  ☑

The aggregate market value of the voting common stock based on the closing price on the New York Stock Exchange on June 30, 2018 (the last business day of registrant’s most recently completed second fiscal quarter) of $48.34 per share held by non-affiliates of the registrant was $970,447,467.  For purposes of the foregoing calculation only, all directors and officers have been deemed to be affiliates, but the registrant disclaims that any of such are affiliates.

As of February 15, 2019, there were 22,434,727 outstanding shares of the registrant’s common stock, par value $2.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report is incorporated herein by reference from the registrant’s definitive proxy statement relating to its annual meeting of stockholders to be held on May 16, 2019.



STANDARD MOTOR PRODUCTS, INC.

INDEX

PART I.
 
Page No.
     
Item 1.
3
     
Item 1A.
12
     
Item 1B.
19
     
Item 2.
20
     
Item 3.
21
     
Item 4.
21
     
PART II.
   
     
Item 5.
21
 


Item 6.
24
     
Item 7.
26
     
Item 7A.
44
     
Item 8.
45
     
Item 9.
92
 


Item 9A.
92
     
Item 9B.
93
     
PART III.
   
     
Item 10.
93
     
Item 11.
93
     
Item 12.
93
 


Item 13.
93
     
Item 14.
93
     
PART IV.
   
     
Item 15.
94
     
 
98

2

PART I

In this Annual Report on Form 10-K, “Standard Motor Products,” “we,” “us,” “our” and the “Company” refer to Standard Motor Products, Inc. and its subsidiaries, unless the context requires otherwise. This Report, including the documents incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties.  Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, changes in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our receivables factoring arrangements, such as changes in terms, termination of contracts and/or the impact of rising interest rates; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs, including procurement costs resulting from higher tariffs, that cannot be recouped in product pricing; the performance of the aftermarket, heavy duty, industrial equipment and original equipment markets; changes in the product mix and distribution channel mix; economic and market conditions; successful integration of acquired businesses; our ability to achieve benefits from our cost savings initiatives; product liability and environmental matters (including, without limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties); as well as other risks and uncertainties, such as those described under Risk Factors, Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC. Forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, historical information should not be considered as an indicator of future performance.

ITEM 1.
BUSINESS

Overview

We are a leading independent manufacturer and distributor of premium replacement parts for the engine management and temperature control systems of motor vehicles in the automotive aftermarket industry with a complementary focus on heavy duty, industrial equipment and the original equipment market.

We are organized into two operating segments.  Each segment focuses on providing our customers with full-line coverage of premium engine management or temperature control products, and a full suite of complimentary services that are tailored to our customers’ business needs and driving end-user demand for our products.  We sell our products primarily to automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Mexico, Europe, Asia and other Latin American countries.

Our Culture

Our Company was founded on the values of ethics, integrity, common decency and respect for others.  These values are embodied in our Code of Ethics, which has been adopted by the Board of Directors of the Company to serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business.  We believe that our commitment to our Company, our employees and the communities within which we operate has led to high employee satisfaction and low employee turnover, and our commitment to our customers, suppliers and business parties has resulted in high customer satisfaction, as evidenced by the customer awards that we routinely win, and decades-long customer relationships.  We also seek ways to positively contribute to our local communities by operating our facilities with conservation in mind, holding charitable drives, and being a good neighbor.

The Automotive Aftermarket

The automotive aftermarket industry is comprised of a large number of diverse manufacturers varying in product specialization and size.  In addition to manufacturing, aftermarket companies must allocate resources towards an efficient distribution process in order to maintain the flexibility and responsiveness on which their customers depend.  Aftermarket manufacturers must be efficient producers of small lot sizes, and must distribute, with rapid turnaround times, products for nearly all domestic and import vehicles on the road today.

The automotive aftermarket replacement parts business differs substantially from the OEM parts business.  Unlike the OEM parts business that primarily follows trends in new car production, the automotive aftermarket replacement parts business primarily tends to follow different trends, such as:


·
the number of vehicles on the road;

3


·
the average age of vehicles on the road; and


·
the total number of miles driven per year.

Our Business Strategy

Our mission is to be the best-in-class, full-line, full-service supplier of premium engine management and temperature control products.

The key elements of our strategy are as follows:


·
Maintain Our Strong Competitive Position in our Engine Management and Temperature Control Businesses.  We are a leading independent manufacturer and distributor serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control.  We believe that our success is attributable to our emphasis on product quality, the breadth and depth of our product lines for both domestic and import vehicles, and our reputation for outstanding value-added services.

To maintain our strong competitive position, we remain committed to the following:


·
providing our customers with full-line coverage of high quality engine management and temperature control products, supported by the highest level of value-added services;


·
continuing to maximize our production, supply chain and distribution efficiencies;


·
continuing to improve our cost position through increased global sourcing, increased manufacturing at our low-cost plants, and strategic transactions with manufacturers in low-cost regions; and


·
focusing on our engineering development efforts including a focus on bringing more product manufacturing in-house.


·
Provide Superior Value-Added Services and Product Availability.  Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability and offering a product portfolio that provides comprehensive coverage for all vehicle applications.  In addition, our marketing support provides insightful customer category management, technical support and award-winning programs, and our technically skilled sales personnel provide our customers with product selection, assortment and application support, and technical training on diagnosing and repairing vehicles equipped with complex systems related to our products.


·
Expand Our Product Lines.  We intend to increase our sales by continuing to develop internally, or through potential acquisitions, the range of engine management and temperature control products that we offer to our customers.  We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture product lines that incorporate the latest technologies, including product lines relating to safety, advanced driver assistance and collision avoidance systems.


·
Broaden Our Customer Base.  Our goal is to increase our customer base by (a) leveraging our manufacturing capabilities to secure additional business globally with original equipment vehicle and equipment manufacturers and their service part operations, as well as our existing customer base of large retailers, program distribution groups, warehouse distributors, other manufacturers and export customers, and (b) supporting the service part operations of vehicle and equipment manufacturers with value-added services and product support for the life of the part.


·
Improve Operating Efficiency and Cost Position.  Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates.

4

We intend to continue to improve our operating efficiency and cost position by:


·
increasing cost‑effective vertical integration in key product lines through internal development;


·
focusing on integrated supply chain management, customer collaboration and vendor managed inventory initiatives;


·
evaluating additional opportunities to relocate manufacturing to our low-cost plants;


·
maintaining and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain materials and products from low cost regions such as those in Asia without compromising product quality;


·
enhancing company‑wide programs geared toward manufacturing and distribution efficiency; and


·
focusing on company‑wide overhead and operating expense cost reduction programs.


·
Cash Utilization.  We intend to apply any excess cash flow from operations and the management of working capital primarily to reduce our outstanding indebtedness, pay dividends to our shareholders, expand our product lines by investing in new tooling and equipment, grow revenues through potential acquisitions and repurchase shares of our common stock.

Our Products & Services

Engine Management Segment

Our Engine Management Segment manufactures and distributes a full line of critical components for the ignition, electrical, emissions, fuel and safety-related systems of motor vehicles.  Key product categories within our engine management portfolio include: electronic ignition control modules, fuel injectors, including diesel injectors and pumps (new and remanufactured), ignition wires, coils, switches, relays, EGR valves, distributor caps and rotors, various sensors primarily measuring temperature, pressure and position in numerous vehicle systems (such as camshaft and crankshaft position, fuel pressure, vehicle speed and mass airflow sensors), electronic throttle bodies, keyless entry transmitters, safety-related components, such as anti-lock brake (ABS) sensors, tire pressure monitoring (TPMS) sensors and park assist sensors, in addition to many other engine management components.

We continuously look to expand our product offering to provide our customers with full-line coverage.  We have more recently expanded our offering by adding late-model coverage for existing product categories, and new product categories in response to new and evolving vehicle technologies, including VVT solenoids and sprockets, diesel injectors, pumps and components, turbochargers, evaporation emission control system components, exhaust gas temperature sensors, active grill shutters, battery current sensors, third brake lights, and Advanced Driver Assistance Systems (ADAS) components, including blind spot detection sensors, cruise control distance sensors, lane departure sensor cameras and park assist backup cameras.

Ignition, Emission Control, Fuel & Safety Related System Products.  Replacement parts for ignition, emission, fuel and safety related systems accounted for approximately $648.3 million, or 59%, of our consolidated net sales in 2018, approximately $657.3 million, or 59%, of our consolidated net sales in 2017, and approximately $616.5 million, or 58%, of our consolidated net sales in 2016.

5

Wire & Cable Products.  Wire and cable parts accounted for approximately $155.2 million, or 14%, of our consolidated net sales in 2018, approximately $172.1 million, or 15%, of our consolidated net sales in 2017, and approximately $149 million, or 14%, of our consolidated net sales in 2016.  These products include ignition (spark plug) wire sets, battery cables, pigtails, sockets and a wide range of electrical wire, terminals, connectors and tools for servicing an automobile’s electrical system.

In May 2016, we acquired the North American automotive ignition wire business of General Cable Corporation (“General Cable”).  The acquisition included General Cable’s automotive ignition wire business in the United States, Canada and Mexico.  For additional information regarding our integration efforts related to the acquisition, refer to the information set forth under the caption “Integration Costs” appearing in Note 5 of the Notes to Consolidated Financial Statements in Item 8 of this Report.

Computer-Controlled Technology.  Nearly all new vehicles are factory‑equipped with computer‑controlled engine management systems that monitor and control ignition, emissions, fuel economy, transmission and many other automotive systems.  The on‑board computers monitor inputs from many types of sensors located throughout the vehicle, and control a myriad of valves, solenoids, coils, switches and motors to manage engine and vehicle performance.  Computer-controlled engine management systems enable the engine to operate with improved fuel efficiency and reduced levels of emissions.  Our sales of sensors, valves, solenoids and related parts have increased as automobile manufacturers equip their cars with more complex engine management systems.

Government mandated emissions and fuel economy regulations have been implemented throughout the United States.  The Clean Air Act imposes strict emissions control test standards on existing and new vehicles, and remains the preeminent legislation in the area of vehicle emissions.  As many states have implemented required inspection/maintenance tests, the Environmental Protection Agency, through its rulemaking ability, has also encouraged both manufacturers and drivers to reduce vehicle emissions.  Automobiles must now comply with emissions standards from the time they were manufactured and, in most states, until the last day they are in use.  This law and other government emissions laws and fuel economy regulations have had a positive impact on sales of our ignition, emissions control and fuel delivery parts since vehicles failing these laws may require repairs utilizing parts sold by us.

Safety, Driver Assistance and Collision Avoidance Systems. An increasing number of new vehicles are factory-equipped with government-mandated safety devices, such as anti-lock braking systems and air bags. As these systems mature, requiring servicing and repair, we anticipate increased sales opportunities for many of our products such as ABS sensors, TPMS sensors and traction control products.  Newer automotive systems include Advanced Driver Assistance Systems and Collision Avoidance Systems to alert the driver to potential problems, or to avoid collisions by implementing safeguards.  Many of these systems use on-board computers to monitor inputs from sensing devices located throughout the vehicle.  As the use and complexity of these systems continue to develop and proliferate, we expect to identify and benefit from new sales opportunities within this category.

Temperature Control Segment

Our Temperature Control Segment manufactures and distributes a full line of critical components for the temperature control (air conditioning and heating) systems, engine cooling systems, power window accessories and windshield washer systems of motor vehicles.  Key product categories within our temperature control portfolio include: air conditioning compressors (new and remanufactured), air conditioning compressor repair kits, clutch assemblies, blower and radiator fan motors, filter dryers, evaporators, accumulators, hose assemblies, thermal expansion devices, heater valves, heater cores, A/C service tools and chemicals, fan assemblies, fan clutches, oil coolers, window lift motors, window regulators and assemblies, and windshield washer pumps.

We continuously look to improve our cost position through strategic transactions with manufacturers in low cost regions.  In November 2017, we formed another joint venture with Foshan Guangdong Automotive Air Conditioning Co., Ltd., a China-based manufacturer of air conditioning compressors for the automotive aftermarket and the Chinese OE market.  In April 2014, we formed a joint venture with Gwo Yng Enterprise Co., Ltd., a China-based manufacturer of air conditioning accumulators, filter driers, hose assemblies, and switches.  We believe that these transactions will enhance our position as a basic low-cost manufacturer and a leading supplier of temperature control parts to the aftermarket, as well as provide us with an opportunity for growth in the China market.

6

Compressors.  Compressors accounted for approximately $148.4 million, or 14%, of our consolidated net sales in 2018, approximately $148.4 million, or 13%, of our consolidated net sales in 2017, and approximately $148.6 million, or 14%, of our consolidated net sales in 2016.

Other Climate Control Parts.  Other climate control parts accounted for approximately $130 million, or 12%, of our consolidated net sales in 2018, approximately $130.8 million, or 12%, of our consolidated net sales in 2017, and approximately $135.1 million, or 13%, of our consolidated net sales in 2016.

Financial Information about our Operating Segments

For additional information related to our operating segments, and the disaggregation of operating segment net sales by geographic area, major product group and major sales channel, see Note 22 “Industry Segment and Geographic Data” and Note 2 “Net Sales”, respectively, of the Notes to Consolidated Financial Statements in Item 8 of this Report.

Our Brands

We believe that our brands are an important component of our value proposition, and serve to distinguish our premium engine management and temperature control products from those of our competitors.  We market and distribute our products under our own brands, such as:

Engine
Management
Products
   
   
Temperature
Control
Products

We also distribute our products to customers for resale under private labels and the following co-labels:

Engine
Management

7

We have also developed our product offering and brand strategies to support our customers’ initiatives to market a tiered product assortment designed to satisfy end-user preferences for quality and value.  We believe that this alignment makes us an invaluable business partner to our customers.

Our Customers

We sell our products primarily to:

  ·
Automotive aftermarket retailers, such as O’Reilly Automotive, Inc. (“O’Reilly”), Advance Auto Parts, Inc. (operating under the trade names Advance Auto Parts, Autopart International, Carquest and Worldpac) (“Advance”), AutoZone, Inc. (“AutoZone”), and Canadian Tire Corporation, Limited.

  ·
Automotive aftermarket distributors, including warehouse distributors and program distribution groups, such as Genuine Parts Co. and National Automotive Parts Association (“NAPA”), Auto Value and All Pro/Bumper to Bumper (Aftermarket Auto Parts Alliance, Inc.), Automotive Distribution Network LLC, The National Pronto Association (“Pronto”), Federated Auto Parts Distributors, Inc. (“Federated”), Pronto and Federated’s affiliate, the Automotive Parts Services Group or The Group, and Icahn Automotive Group LLC (doing business as Pep Boys, Auto Plus, AAMCO and Precision Tune Auto Care).

  ·
Original equipment manufacturers and original equipment service part operations, such as General Motors Co., FCA US LLC (formerly known as Chrysler Group LLC), Ford Motor Co., Woodward, Inc. and Red Dot Corporation.

Our five largest individual customers accounted for approximately 70% of our consolidated net sales in 2018, 2017 and 2016.  During 2018, O’Reilly, NAPA, Advance, and AutoZone accounted for 22%, 17%, 16% and 11% of our consolidated net sales, respectively.  Net sales from each of these customers were reported in both our Engine Management and Temperature Control Segments.

Competition

We compete primarily on the basis of product quality, product availability, value-added services, product coverage, order turn‑around time, order fill rate, technical support and price.  We believe we differentiate ourselves from our competitors primarily through:


·
a value‑added, knowledgeable sales force;


·
extensive product coverage in conjunction with market leading brands;


·
rigorous product qualification standards to ensure that our parts meet or exceed exacting performance specifications;


·
sophisticated parts cataloguing systems, including catalogues available online through our website and our mobile application;


·
inventory levels and logistical systems sufficient to meet the rapid delivery requirements of customers;


·
breadth of manufacturing capabilities; and


·
award-winning marketing programs, sales support and technical training.

We are one of the leading independent manufacturers and distributors serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control.  In the Engine Management Segment, we compete with: ACDelco, Delphi Technologies PLC, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., Ltd., Dorman Products, Inc. and several privately-owned companies primarily importing products from Asia.  In the Temperature Control Segment, we compete with: ACDelco, MAHLE GmbH, Behr Hella Service GmbH, Denso Corporation, Motorcraft, Sanden International, Inc., Continental AG, and several privately-owned companies.

8

The automotive aftermarket is highly competitive, and we face substantial competition in all markets that we serve.  Our success in the marketplace depends on our ability execute the key elements of our business strategy discussed above.  Some of our competitors may have greater financial, marketing and other resources than we do.  In addition, we face competition from automobile manufacturers who supply many of the replacement parts sold by us, although these manufacturers generally supply parts only for cars they produce through OE dealerships.

Sales and Distribution

In the aftermarket channel, we sell our products to warehouse distributors and retailers.  Our customers buy directly from us and sell directly to jobber stores, professional technicians and to “do-it-yourselfers” who perform automotive repairs on their personal vehicles.  In recent years, warehouse distributors have consolidated with other distributors, and an increasing number of distributors own their jobber stores or sell down channel to professional technicians.  Retailers are also consolidating with other retailers and have begun to increase their efforts to sell to professional technicians adding additional competition in the “do-it-for-me,” or the professional technician segment of our industry.  As automotive parts and systems become more complex, “do-it-yourselfers” are less likely to service their own vehicles and may become more reliant on professional technicians.

In the original equipment and original equipment service channel, we sell our products to original equipment manufacturers (“OEMs”) for use in the production of vehicles or for distribution within their distribution network to independent dealerships and service dealer technicians.  In addition to new car sales, automotive dealerships sell parts and service vehicles.  We also sell our products to Tier 1 suppliers of OEMs.

We sell our products primarily in the United States, with additional sales in Canada, Mexico, Europe, Asia and other Latin American countries.  Our sales are substantially denominated in U.S. dollars.  For information on revenues and long-lived assets by geographic area, see Note 22 “Industry Segment and Geographic Data” of the Notes to Consolidated Financial Statements in Item 8 of this report.

Our sales force is structured to meet the needs of our customers across the distribution channel, allowing us to provide value-added services that we believe are unmatched by our competitors.  We also believe that our sales force is the premier direct sales force for our product lines due to our concentration of highly‑qualified, well‑trained sales personnel.  We focus our recruitment efforts on candidates who have technical backgrounds as well as strong sales experience, and we provide our sales personnel extensive instruction and continuing education at our training facility in Irving, Texas, which allows our sales force to stay current on troubleshooting and repair techniques.  The continuing education courses along with monthly supplemental web-based training are an integral part of our sales force development strategy.

Our customers have come to depend on our sales personnel as a reliable source for technical information and to assist with sales to their customers (e.g., jobber stores and professional technicians).  In this manner, we direct a significant portion of our sales efforts to our customers’ customers to generate demand for our products, and we believe that the structure of our sales force facilitates these efforts by enabling us to implement our sales and marketing programs uniformly throughout the distribution channel.  One of the ways we generate this demand is by offering in-person training seminars on 30 different topics, which teach approximately 60,000 technicians annually how to diagnose and repair vehicles equipped with complex systems related to our products.  We also offer on-demand training webinars online on 144 different topics.  Approximately 14,000 technicians were registered to participate in such sessions in 2018.

We offer a variety of strategic customer discounts, allowances and incentives to increase customer purchases of our products.  For example, we offer cash discounts for paying invoices in accordance with the specified discounted terms of the invoice.  We also offer rebates and discounts to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided.  We believe these discounts, allowances and incentives are a common practice throughout the automotive aftermarket industry, and we intend to continue to offer them in response to competitive pressures and to strategically support the growth of all our products.

9

Seasonality

Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment.  It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business.  In addition to this seasonality, the demand for our temperature control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories.  For example, a warm summer, as we experienced in 2018, may increase the demand for our temperature control products, while a mild summer, as we experienced in 2017, may lessen such demand.  As a result of this seasonality and variability in demand of our temperature control products, our working capital requirements typically peak near the end of the second quarter, as the inventory build‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.  During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

Working Capital and Inventory Management

Automotive aftermarket companies have been under increasing pressure to provide broad SKU (stock keeping unit) coverage due to parts and brand proliferation.  In response to this, we have made, and continue to make, changes to our inventory management system designed to reduce inventory requirements.  We have a pack‑to‑order distribution system, which permits us to retain slow moving items in a bulk storage state until an order for a specific branded part is received.  This system reduces the volume of a given part in inventory.  We also expanded our inventory management system to improve inventory deployment, enhance our collaboration with customers on forecasts and inventory assortments, and further integrate our supply chain both to customers and suppliers.

We face inventory management issues as a result of overstock returns.  We permit our customers to return new, undamaged products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories.  In addition, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns.

Our profitability and working capital requirements are seasonal due to our sales mix of temperature control products.  Our working capital requirements peak near the end of the second quarter, as the inventory build‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.  These increased working capital requirements are funded by borrowings from our revolving credit facility.

Production and Engineering

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

10

Suppliers

We source materials through a global network of suppliers to ensure a consistent, high quality and low cost supply of materials and key components for our product lines.  We are not dependent on any single commodity.

The principal raw materials purchased by us consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), steel magnets, laminations, tubes and shafts, stamped steel parts, copper wire, stainless steel coils and rods, aluminum coils, fittings, rods, cast aluminum parts, lead, steel roller bearings, rubber molding compound, thermo‑set and thermo plastic molding powders, and chemicals.  Additionally, we use components and cores (used parts) in our remanufacturing processes for air conditioning compressors, diesel injectors, diesel pumps, and turbo chargers.

In the case of cores for air conditioning compressors, diesel injectors, diesel pumps, and turbo chargers, we obtain them either from exchanges with customers who return cores subsequent to purchasing remanufactured parts or through direct purchases from a network of core brokers.  In addition, we acquire certain materials by purchasing products that are resold into the market, particularly by OEM sources and other domestic and foreign suppliers.

We believe there is an adequate supply of primary raw materials and cores; however, there can be no assurance over the long term that the availability of materials and components or increases in commodity prices will not materially affect our business or results of operations.

Employees

As of December 31, 2018, we employed approximately 4,400 people, with 1,800 people in the United States and 2,600 people in Mexico, Canada, Poland, the U.K., Hong Kong and Taiwan.  Of the 4,400 people employed, approximately 2,600 people are production employees.  We operate primarily in non‑union facilities and have binding labor agreements with employees at other unionized facilities.  We have approximately 77 production employees in Edwardsville, Kansas who are covered by a contract with The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) that expires in April 2019.  We expect to renew this agreement with the UAW upon mutually agreeable terms.  We also have approximately 1,500 employees in Mexico who are covered under union agreements negotiated at various intervals.

We believe that our facilities are in favorable labor markets with ready access to adequate numbers of skilled and unskilled workers, and we believe our relations with our union and non‑union employees are good.  Our employees share our corporate values of ethics, integrity, common decency and respect of others, values which have been established since our company was founded in 1919.

Available Information

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

11

ITEM 1A.
RISK FACTORS

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

Risks Related to Our Operations

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

Our five largest individual customers accounted for approximately 70% of our consolidated net sales in 2018, 2017 and 2016.  During 2018, O’Reilly, NAPA, Advance, and AutoZone accounted for 22%, 17%, 16% and 11% of our consolidated net sales, respectively.  The loss of one or more of these customers or, a significant reduction in purchases of our products from any one of them, could have a materially adverse impact on our business, financial condition and results of operations. In addition, any consolidation among our key customers may further increase our customer concentration risk.

Also, we do not typically enter into long-term agreements with any of our customers.  Instead, we enter into a number of purchase order commitments with our customers, based on their current or projected needs.  We have in the past, and may in the future, lose customers or lose a particular product line of a customer due to the highly competitive conditions in the automotive aftermarket industry, including pricing pressures, consolidation of customers, customer initiatives to buy direct from foreign suppliers or other business considerations.  A decision by any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to materially decrease the amount of products purchased from us, to change their manner of doing business with us, or to stop doing business with us, including a decision to source products directly from a low cost region such as Asia, could have a material adverse effect on our business, financial condition and results of operations.

Because our sales are concentrated, and the market in which we operate is very competitive, we are under ongoing pressure from our customers to offer lower prices, extend payment terms, increase marketing allowances and other terms more favorable to these customers.  These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers, and significantly increased our working capital needs.

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

The automotive aftermarket industry is highly competitive, and our success depends on our ability to compete with domestic and international suppliers of automotive aftermarket products. In the Engine Management Segment, we compete with: ACDelco, Delphi Technologies PLC, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., LTD., Dorman Products, Inc. and several privately-owned companies primarily importing products from Asia.   In the Temperature Control Segment, we compete with: ACDelco, MAHLE GmbH, Behr Hella Service GmbH, Denso Corporation, Motorcraft, Sanden International, Inc., Continental AG, and several privately-owned companies.  In addition, automobile manufacturers supply many of the replacement parts we sell.

12

Some of our competitors may have larger customer bases and significantly greater financial, technical and marketing resources than we do.  These factors may allow our competitors to:


·
respond more quickly than we can to new or emerging technologies and changes in customer requirements by devoting greater resources than we can to the development, promotion and sale of automotive aftermarket products and services;

·
engage in more extensive research and development;

·
sell products at a lower price than we do;

·
undertake more extensive marketing campaigns; and

·
make more attractive offers to existing and potential customers and strategic partners.

We cannot assure you that our competitors will not develop products or services that are equal or superior to our products or that achieve greater market acceptance than our products or that in the future other companies involved in the automotive aftermarket industry will not expand their operations into product lines produced and sold by us.  We also cannot assure you that additional entrants will not enter the automotive aftermarket industry or that companies in the aftermarket industry will not consolidate.  Any such competitive pressures could cause us to lose market share or could result in significant price decreases and could have a material adverse effect upon our business, financial condition and results of operations.

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

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

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

Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and with revenues generally being recognized at the time of shipment.  It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business. In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories.  For example, a warm summer, as we experienced in 2018, may increase the demand for our temperature control products, while a mild summer, as we experienced in 2017, may lessen such demand.  As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.  During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

13

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

Our products are required to meet rigorous standards imposed by our customers and our industry. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship, failure to meet industry published specifications and/or the result of installation error. In the event that there are material deficiencies or defects in the design and manufacture of our products and/or installation error, the affected products may be subject to warranty returns and/or product recalls. Although we maintain a comprehensive quality control program, we cannot give any assurance that our products will not suffer from defects or other deficiencies or that we will not experience material warranty returns or product recalls in the future.

We accrue for warranty returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for warranty returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. We have in the past incurred, and may in the future incur, material losses and significant costs as a result of our customers returning products to us for warranty-related issues in excess of anticipated amounts. Deficiencies or defects in our products in the future may result in warranty returns and product recalls in excess of anticipated amounts and may have a material adverse effect on our business, financial condition and results of operations.

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

We permit overstock returns of inventory that may be either new or non-defective or non-obsolete but that we believe we can re-sell. Customers are generally limited to returning overstocked inventory according to a specified percentage of their annual purchases from us. In addition, a customer’s annual allowance cannot be carried forward to the upcoming year.

We accrue for overstock returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for overstock returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. To the extent that overstocked returns are materially in excess of our projections, our business, financial condition and results of operations may be materially adversely affected.

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

In 1986, we acquired a brake business, which we subsequently sold in March 1998. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed after September 2001.  Our ultimate exposure will depend upon the number of claims filed against us on or after September 2001, and the amounts paid for settlements, awards of asbestos-related damages, and defense of such claims.  We do not have insurance coverage for the indemnity and defense costs associated with the claims we face.

At December 31, 2018, approximately 1,430 cases were outstanding for which we may be responsible for any related liabilities.  Since inception in September 2001 through December 31, 2018, the amounts paid for settled claims are approximately $25.6 million.  A substantial increase in the number of new claims or increased settlement payments or awards of asbestos-related damages could have a material adverse effect on our business, financial condition and results of operations.

In accordance with our policy of performing an annual actuarial evaluation in the third quarter of each year, and whenever events or changes in circumstances indicate that additional provisions may be necessary, an actuarial study were performed as of August 31, 2018, which was revised to reflect events occurring through November 20, 2018.  Based upon the actuarial studies performed, in 2018, we increased our asbestos liability to $46.7 million, the low end of the range and recorded an incremental pre-tax provision of $13.6 million in earnings (loss) from discontinued operations in the accompanying statement of operations. The results of the revised study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs, ranging from $46.7 million to $83.9 million for the period through 2061.  Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the revised study, to range from $45 million to $83.1 million.

14

Given the uncertainties associated with projecting asbestos-related matters into the future and other factors outside our control, we cannot give any assurance that significant increases in the number of claims filed against us will not occur, that awards of asbestos-related damages or settlement awards will not exceed the amount we have in reserve, or that additional provisions will not be required. Management will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional reserves and provisions may be necessary. We plan on performing an annual actuarial analysis during the third quarter of each year for the foreseeable future, and whenever events or changes in circumstances indicate that additional provisions may be necessary.

In addition to asbestos-related claims, our product sales entail the risk of involvement in other product liability actions.  We maintain product liability insurance coverage, but we cannot give any assurance that current or future policy limits will be sufficient to cover all possible liabilities.  Further, we can give no assurance that adequate product liability insurance will continue to be available to us in the future or that such insurance may be maintained at a reasonable cost to us. In the event of a successful product liability claim against us, a lack or insufficiency of insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

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

We expect to realize cost savings as a result of various recently completed initiatives, including the closing of our Grapevine, Texas facility; the closing of our recently acquired wire set assembly operation in Nogales, Mexico; the closing of our Orlando, Florida facility; and moving some U.S. production to other facilities, both domestically and to our facilities in Mexico and Poland.  Due to factors outside our control, we may not be able to achieve the level of benefits that we expect to realize in these initiatives, or we may not be able to realize these benefits within the time frames we currently expect.  Our ability to achieve any anticipated cost savings could be affected by a number of factors such as changes in the amount, timing and character of charges related to such initiatives, or a substantial delay in the completion of such initiatives.  Failure to achieve the benefits of our cost saving initiatives could have a material adverse effect on us.  Our cost savings is also predicated upon maintaining our sales levels.

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

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

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

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

15

Our operations could be adversely affected by interruptions or breaches in the security of our computer and information technology systems.

We rely on information technology systems throughout our organization to conduct day-to-day business operations, including the management of our supply chain and our purchasing, receiving and distribution functions.  We also routinely use our information technology systems to send, receive, store, access and use sensitive data relating to our Company and its employees, customers, suppliers, and business partners, including intellectual property, proprietary business information, and other sensitive materials.  Our information technology systems have been subject to cyber threats, including attempts to hack into our network and computer viruses.  Such hacking attempts and computer viruses have not significantly impacted or interrupted our business operations.  While we implement security measures designed to prevent and mitigate the risk of cyber attacks, our information technology systems, and those functions that we may outsource, may continue to be vulnerable to computer viruses, attacks by hackers, or unauthorized access caused by employee error or malfeasance.  The exploitation of any such vulnerability in our information technology systems, or those functions that we may outsource, could unexpectedly compromise the information security of our customers, suppliers and other business partners.  Furthermore, because the techniques used to carry out cyber attacks change frequently and in many instances are not recognized until after they are used against a target, we may be unable to anticipate these changes or implement adequate preventative measures.  If our information technology systems are subject to cyber attacks, such as those involving significant or extensive system interruptions, sabotage, computer viruses or unauthorized access, we could experience disruptions to our business operations and incur substantial remediation costs, which could have a material adverse effect on our business, financial condition or results of operations.

Risks Related to Liquidity

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

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

Increasing our indebtedness could negatively affect our financial health.

We have an existing revolving bank credit facility of $250 million with JPMorgan Chase Bank, N.A., as agent, and a syndicate of lenders, which we refer to throughout this Report as our revolving credit facility.  As of December 31, 2018, our total outstanding indebtedness was $49.2 million, of which amount $43.7 million of outstanding indebtedness and approximately $203.1 million of availability was attributable to this revolving credit facility.  Any significant increase in our indebtedness could increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

16

In addition, we have granted the lenders under our revolving credit facility a first priority security interest in substantially all of our currently owned and future acquired personal property and other assets. We have also pledged shares of stock in our subsidiaries to those lenders.  If we default on any of our indebtedness, or if we are unable to obtain necessary liquidity, our business could be adversely affected.

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

Our ability either to make payments on or to refinance our indebtedness, or to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future. Our ability to generate cash is in part subject to:


·
general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control;

·
the ability of our customers to pay timely the amounts we have billed; and

·
our ability to factor receivables under customer draft programs.

The occurrence of any of the foregoing factors could result in reduced cash flow, which could have a material adverse effect on us.

Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months.  Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as:


·
deferring, reducing or eliminating future cash dividends;

·
reducing or delaying capital expenditures or restructuring activities;

·
reducing or delaying research and development efforts;

·
selling assets;

·
deferring or refraining from pursuing certain strategic initiatives and acquisitions;

·
refinancing our indebtedness; and

·
seeking additional funding.

We cannot assure you that, if material adverse developments in our business, liquidity or capital requirements should occur, our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs. In addition, if we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected.

Risks Related to External Factors

We conduct our manufacturing and distribution operations on a worldwide basis and are subject to risks associated with doing business outside the United States.

We have manufacturing and distribution facilities in many countries, including Canada, Poland, Mexico and China, and increasing our manufacturing footprint in low cost regions is an important element of our strategy.  There are a number of risks associated with doing business internationally, including: (a) exposure to local economic and political conditions; (b) social unrest such as risks of terrorism or other hostilities; (c) currency exchange rate fluctuations and currency controls; (d) the effect of potential changes in U.S. trade policy and international trade agreements; and (e) the potential for shortages of trained labor.

17

In particular, there has been social unrest in Mexico and any increased violence in or around our manufacturing facilities in Mexico could impact our business by disrupting our supply chain, the delivery of products to customers, and the reluctance of our customers to visit our Mexico facilities.  In addition, the increased violence in or around our manufacturing facilities in Mexico could present several risks to our employees who may be directly affected by the violence and may result in a decision by them to relocate from the area, or make it difficult for us to recruit or retain talented employees at our Mexico facilities.

Furthermore, changes in U.S. trade policy, particularly as it relates to China, have resulted in the assessment of increased tariffs on goods that we import into the United States, and have caused uncertainty about the future of free trade generally.  We benefit from current free trade agreements, such as the North American Free Trade Agreement (NAFTA) and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (USMCA).  The repeal or modification of NAFTA or the USMCA or further increases to tariffs on goods imported into the United States could increase our costs to source materials, component parts and finished goods from other countries.  The likelihood of such occurrences and their potential effect on us is unpredictable and may vary from country to country. Any such occurrences could be harmful to our business and our financial results.

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

Domestic and foreign political developments and government regulations and policies directly affect automotive consumer products in the United States and abroad.  Regulations and policies relating to over-the-highway vehicles include standards established by the United States Department of Transportation for motor vehicle safety and emissions.  The modification of existing laws, regulations or policies, or the adoption of new laws, regulations or policies could have a material adverse effect on our business, financial condition and results of operations.

In August 2012, the SEC adopted rules requiring us to provide disclosure regarding the use of specified minerals, known as conflict minerals, which are mined from the Democratic Republic of the Congo and adjoining countries.  The rules require us to engage in ongoing due diligence efforts, and to disclose the results of our efforts in May of each year.  The rules could affect the sourcing and availability of such minerals, or cause us to suffer reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free and/or we are unable to alter our products or sources of supply to avoid such materials.  We may also face difficulties in satisfying customers who may require that our products be certified as having conflict-free minerals, which could place us at a competitive disadvantage if we are unable to do so and lead to a loss of revenue.

Our operations and properties are subject to a wide variety of increasingly complex and stringent federal, state, local and international laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of materials, substances and wastes, the remediation of contaminated soil and groundwater and the health and safety of employees. Such environmental laws, including but not limited to those under the Comprehensive Environmental Response Compensation & Liability Act, may impose joint and several liability and may apply to conditions at properties presently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors have been sent or otherwise come to be located.

The nature of our operations exposes us to the risk of claims with respect to such matters, and we can give no assurance that violations of such laws have not occurred or will not occur or that material costs or liabilities will not be incurred in connection with such claims.  We are currently monitoring our environmental remediation efforts at one of our facilities and our reserve balance related to the environmental clean-up at this facility is $1.6 million at December 31, 2018.  The environmental testing and any remediation costs at such facility may be covered by several insurance policies, although we can give no assurance that our insurance will cover any environmental remediation claims.  We also maintain insurance to cover our existing U.S. and Canadian facilities. We can give no assurance that the future cost of compliance with existing environmental laws and the liability for known environmental claims pursuant to such environmental laws will not give rise to additional significant expenditures or liabilities that would be material to us. In addition, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, state or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations.

18

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

Changes in automotive technologies, such as vehicles powered by fuel cells or electricity, could negatively affect sales to our aftermarket customers. These factors could result in less demand for our products thereby causing a decline in our results of operations or deterioration in our business and financial condition and may have a material adverse effect on our long-term performance.

In addition, the size of the automobile replacement parts market depends, in part, upon the growth in number of vehicles on the road, increase in average vehicle age, change in total miles driven per year, new or modified environmental and vehicle safety regulations, including fuel-efficiency and emissions reduction standards, increase in pricing of new cars and new car quality and related warranties. The automobile replacement parts market has been negatively impacted by the fact that the quality of more recent automotive vehicles and their component parts (and related warranties) has improved, thereby lengthening the repair cycle. Generally, if parts last longer, there will be less demand for our products and the average useful life of automobile parts has been steadily increasing in recent years due to innovations in products and technology. In addition, the introduction by original equipment manufacturers of increased warranty and maintenance initiatives has the potential to decrease the demand for our products. When proper maintenance and repair procedures are followed, newer AC systems in particular are less prone to leak resulting in fewer AC system repairs. These factors could have a material adverse effect on our business, financial condition and results of operations.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.
19

ITEM 2.
PROPERTIES

We maintain our executive offices in Long Island City, New York. The table below describes our principal facilities as of December 31, 2018.

Location
 
State or
Country
 
Principal Business Activity
 
Approx.
Square
Feet
 
Owned or
Expiration
Date
of Lease
                 
       
Engine Management
       
                 
Ft. Lauderdale
 
FL
 
Distribution
 
23,300
 
Owned
Ft. Lauderdale
 
FL
 
Distribution
 
30,000
 
Owned
Mishawaka
 
IN
 
Manufacturing
 
153,100
 
Owned
Edwardsville
 
KS
 
Distribution
 
363,500
 
Owned
Independence
 
KS
 
Manufacturing
 
337,400
 
Owned
Long Island City
 
NY
 
Administration
 
75,800
 
2023
Greenville
 
SC
 
Manufacturing
 
184,500
 
Owned
Disputanta
 
VA
 
Distribution
 
411,000
 
Owned
Reynosa
 
Mexico
 
Manufacturing
 
175,000
 
2025
Reynosa
 
Mexico
 
Manufacturing
 
153,000
 
2023
Bialystok
 
Poland
 
Manufacturing
 
108,400
 
2022
                 
       
Temperature Control
       
                 
Lewisville
 
TX
 
Administration and Distribution
 
415,000
 
2024
St. Thomas
 
Canada
 
Manufacturing
 
40,000
 
Owned
Reynosa
 
Mexico
 
Manufacturing
 
82,000
 
2019
Reynosa
 
Mexico
 
Manufacturing
 
118,000
 
2021
                 
       
Other
       
                 
Mississauga
 
Canada
 
Administration and Distribution
 
82,400
 
2023
Irving
 
TX
 
Training Center
 
13,400
 
2021

20

ITEM 3.
LEGAL PROCEEDINGS

The information required by this Item is incorporated herein by reference to the information set forth in Item 8, “Financial Statements and Supplementary Data” of this Report under the captions “Asbestos” and “Other Litigation” appearing in Note 23, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

Our common stock trades publicly on the New York Stock Exchange (“NYSE”) under the trading symbol “SMP.”  The last reported sale price of our common stock on the NYSE on February 15, 2019 was $49.21 per share.  As of February 15, 2019, there were 464 holders of record of our common stock.

Dividends are declared and paid on the common stock at the discretion of our Board of Directors (the “Board”) and depend on our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our Board.  Our revolving credit facility permits dividends and distributions by us provided specific conditions are met.  For information related to our revolving credit facility, see Note 12, “Credit Facilities and Long-Term Debt,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.

There have been no unregistered offerings of our common stock during the fourth quarter of 2018.

21

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

For information related to our stock repurchases, see Note 13, “Stockholders’ Equity,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.

The following table provides information relating to the Company’s purchases of its common stock for the fourth quarter of 2018:

Period
 
Total Number of
Shares Purchased
(1)
   
Average
Price Paid
Per Share
   
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
   
Maximum Number (or
Approximate Dollar
Value) of Shares that
may yet be Purchased
Under the Plans or
Programs (2)
 
                         
October 1-31, 2018
   
118,509
   
$
45.30
     
118,509
   
$
10,738,270
 
November 1-30, 2018
   
     
     
     
10,738,270
 
December 1-31, 2018
   
     
     
     
10,738,270
 
Total
   
118,509
   
$
45.30
     
118,509
   
$
10,738,270
 


(1)
All shares were purchased through the publicly announced stock repurchase programs in open market transactions.


(2)
During 2017, our Board of Directors authorized the purchase of up to $30 million of our common stock under stock repurchase programs.  Under these programs, during the years ended December 31, 2017 and December 31, 2018, we repurchased 539,760 and 112,307 shares of our common stock, respectively, at a total cost of $24.8 million and $5.2 million, respectively, thereby completing the 2017 Board of Directors’ authorizations.

In May 2018, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a new stock repurchase program.  Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant.  Under this program, during the three months and twelve months ended December 31, 2018, we repurchased 118,509 and 201,484 shares of our common stock, respectively, at a total cost of $5.4 million and $9.3 million, respectively.  As of December 31, 2018, there was approximately $10.7 million available for future stock purchases under the program.  During the period from January 1, 2019 through February 15, 2019, we have not repurchased any additional shares of our common stock under the program.

22

Stock Performance Graph

The following graph compares the five year cumulative total return on the Company’s Common Stock to the total returns on the Standard & Poor’s 500 Stock Index and the S&P 1500 Auto Parts & Equipment Index, which is a combination of automotive parts and equipment companies within the S&P 400, the S&P 500 and the S&P 600.  The graph shows the change in value of a $100 investment in the Company’s Common Stock and each of the above indices on December 31, 2013 and the reinvestment of all dividends. The comparisons in this table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company’s Common Stock or the referenced indices.


   
SMP
     
S&P 500
   
S&P 1500 Auto
Parts &
Equipment
Index
 
2013
   
100
     
100
     
100
 
2014
   
105
     
114
     
104
 
2015
   
106
     
115
     
97
 
2016
   
152
     
129
     
102
 
2017
   
130
     
157
     
134
 
2018
   
143
     
150
     
92
 

* Source: S&P Capital IQ

23

ITEM 6.
SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the five years ended December 31, 2018.  This selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto included elsewhere in this Form 10-K.  Certain prior period amounts have been reclassified to conform to the 2018 presentation.

   
Year Ended
December 31,
 
   
2018
   
2017
   
2016
   
2015
   
2014
 
         
(Dollars in thousands)
       
Statement of Operations Data:
                             
                               
Net sales
 
$
1,092,051
   
$
1,116,143
   
$
1,058,482
   
$
971,975
   
$
980,392
 
Gross profit
   
312,787
     
326,656
     
322,487
     
280,988
     
289,630
 
Litigation charge (1)
   
     
     
     
     
10,650
 
Operating income (2)
   
81,268
     
97,521
     
98,789
     
79,764
     
85,062
 
Earnings from continuing operations (3)
   
56,854
     
43,630
     
62,412
     
48,120
     
52,899
 
Loss from discontinued operations, net of income tax benefit
   
(13,851
)
   
(5,654
)
   
(1,982
)
   
(2,102
)
   
(9,870
)
Net earnings (3) (4)
   
43,003
     
37,976
     
60,430
     
46,018
     
43,029
 
                                         
Per Share Data:
                                       
                                         
Earnings from continuing operations (3):
                                       
Basic
 
$
2.53
   
$
1.92
   
$
2.75
   
$
2.11
   
$
2.31
 
Diluted
   
2.48
     
1.88
     
2.70
     
2.08
     
2.28
 
Earnings per common share (3) (4):
                                       
Basic
   
1.91
     
1.67
     
2.66
     
2.02
     
1.88
 
Diluted
   
1.88
     
1.64
     
2.62
     
1.99
     
1.85
 
Cash dividends per common share
   
0.84
     
0.76
     
0.68
     
0.60
     
0.52
 
                                         
Other Data:
                                       
                                         
Depreciation and amortization
 
$
24,104
   
$
23,916
   
$
20,457
   
$
17,637
   
$
17,295
 
Capital expenditures
   
20,141
     
24,442
     
20,921
     
18,047
     
13,904
 
Dividends
   
18,854
     
17,287
     
15,447
     
13,697
     
11,905
 
                                         
Cash Flows Provided By (Used In):
                                       
                                         
Operating activities
 
$
70,258
   
$
64,617
   
$
97,805
   
$
65,171
   
$
46,987
 
Investing activities
   
(29,886
)
   
(31,228
)
   
(88,018
)
   
(18,011
)
   
(51,200
)
Financing activities
   
(46,121
)
   
(35,944
)
   
(7,756
)
   
(41,155
)
   
15,316
 
                                         
Balance Sheet Data (at period end):
                                       
                                         
Cash and cash equivalents
 
$
11,138
   
$
17,323
   
$
19,796
   
$
18,800
   
$
13,728
 
Working capital
   
233,638
     
210,194
     
190,380
     
195,198
     
178,670
 
Total assets
   
843,132
     
787,567
     
768,697
     
681,064
     
673,551
 
Total debt
   
49,219
     
61,778
     
54,975
     
47,505
     
56,816
 
Long‑term debt (excluding current portion)
   
153
     
79
     
120
     
62
     
83
 
Stockholders’ equity
   
467,201
     
453,654
     
441,028
     
391,979
     
374,153
 

24

Notes to Selected Financial Data


(1)
During 2014, we recorded a $10.6 million litigation charge in connection with a settlement agreement in a legal proceeding with a third party.  The settlement amount was funded from cash on hand and available credit under our revolving credit facility.


(2)
On January 1, 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  Pursuant to the adoption, net periodic benefit cost (credit) for the years ended December 31, 2017, 2016, 2015 and 2014 has been reclassified from selling, general and administrative expenses to other non-operating income (expense), net. See Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.


(3)
During 2017, we recorded an increase of $17.5 million to the provision for income taxes resulting from the remeasurement of our deferred tax assets, and the tax on deemed repatriated earnings of our foreign subsidiaries as a result of the enactment of the Tax Cuts and Jobs Act.


(4)
We recorded an after tax charge of $13.9 million, $5.7 million, $2 million, $2.1 million, and $9.9 million as loss from discontinued operations to account for legal expenses and potential costs associated with our asbestos‑related liability for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively.  Such costs were also separately disclosed in the operating activity section of the consolidated statements of cash flows for those same years.

25

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

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended December 31, 2018.

Overview

We are a leading independent manufacturer and distributor of premium replacement parts for the engine management and temperature control systems of motor vehicles in the automotive aftermarket industry with a complementary focus on heavy duty, industrial equipment and the original equipment market.

We are organized into two operating segments.  Each segment focuses on providing our customers with full-line coverage of premium engine management or temperature control products, and a full suite of complimentary services that are tailored to our customers’ business needs and driving end-user demand for our products.  We sell our products primarily to automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Mexico, Europe, Asia and other Latin American countries.

Our Business Strategy

Our mission is to be the best-in-class, full-line, full-service supplier of premium engine management and temperature control products.

The key elements of our strategy are as follows:


·
Maintain Our Strong Competitive Position in our Engine Management and Temperature Control Businesses.  We are a leading independent manufacturer and distributor serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control.  We believe that our success is attributable to our emphasis on product quality, the breadth and depth of our product lines for both domestic and import vehicles, and our reputation for outstanding value-added services.

To maintain our strong competitive position, we remain committed to the following:


·
providing our customers with full-line coverage of high quality engine management and temperature control products, supported by the highest level of value-added services;


·
continuing to maximize our production, supply chain and distribution efficiencies;


·
continuing to improve our cost position through increased global sourcing, increased manufacturing at our low-cost plants, and strategic transactions with manufacturers in low-cost regions; and


·
focusing on our engineering development efforts including a focus on bringing more product manufacturing in-house.


·
Provide Superior Value-Added Services and Product Availability.  Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability and offering a product portfolio that provides comprehensive coverage for all vehicle applications.  In addition, our marketing support provides insightful customer category management, technical support and award-winning programs, and our technically skilled sales personnel provide our customers with product selection, assortment and application support, and technical training on diagnosing and repairing vehicles equipped with complex systems related to our products.

26


·
Expand Our Product Lines.  We intend to increase our sales by continuing to develop internally, or through potential acquisitions, the range of engine management and temperature control products that we offer to our customers.  We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture product lines that incorporate the latest technologies, including product lines relating to safety, advanced driver assistance and collision avoidance systems.


·
Broaden Our Customer Base.  Our goal is to increase our customer base by (a) leveraging our manufacturing capabilities to secure additional business globally with original equipment vehicle and equipment manufacturers and their service part operations, as well as our existing customer base of large retailers, program distribution groups, warehouse distributors, other manufacturers and export customers, and (b) supporting the service part operations of vehicle and equipment manufacturers with value-added services and product support for the life of the part.


·
Improve Operating Efficiency and Cost Position.  Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates.

We intend to continue to improve our operating efficiency and cost position by:


·
increasing cost‑effective vertical integration in key product lines through internal development;


·
focusing on integrated supply chain management, customer collaboration and vendor managed inventory initiatives;


·
evaluating additional opportunities to relocate manufacturing to our low-cost plants;


·
maintaining and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain materials and products from low cost regions such as those in Asia without compromising product quality;


·
enhancing company‑wide programs geared toward manufacturing and distribution efficiency; and


·
focusing on company‑wide overhead and operating expense cost reduction programs.


·
Cash Utilization.  We intend to apply any excess cash flow from operations and the management of working capital primarily to reduce our outstanding indebtedness, pay dividends to our shareholders, expand our product lines by investing in new tooling and equipment, grow revenues through potential acquisitions and repurchase shares of our common stock.

The Automotive Aftermarket

The automotive aftermarket industry is comprised of a large number of diverse manufacturers varying in product specialization and size.  In addition to manufacturing, aftermarket companies must allocate resources towards an efficient distribution process in order to maintain the flexibility and responsiveness on which their customers depend.  Aftermarket manufacturers must be efficient producers of small lot sizes, and must distribute, with rapid turnaround times, products for nearly all domestic and import vehicles on the road today.

27

The automotive aftermarket replacement parts business differs substantially from the OEM parts business.  Unlike the OEM parts business that primarily follows trends in new car production, the automotive aftermarket replacement parts business primarily tends to follow different trends, such as:


·
the number of vehicles on the road;


·
the average age of vehicles on the road; and


·
the total number of miles driven per year.

Seasonality.  Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business.  In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories.  For example, a warm summer, as we experienced in 2018, may increase the demand for our temperature control products, while a mild summer, as we experienced in 2017, may lessen such demand.  As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically peak near the end of the second quarter, as the inventory build‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

Inventory Management. We face inventory management issues as a result of overstock returns.  We permit our customers to return new, undamaged products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories.  In addition, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns.  We accrue for overstock returns as a percentage of sales after giving consideration to recent returns history.

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

Tax Cuts and Jobs Act

In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which included a broad range of tax reform affecting businesses, including the reduction of the federal corporate tax rate from 35% to 21%, changes in the deductibility of certain business expenses, and the manner in which international operations are taxed in the U.S.  Although the majority of the changes resulting from the Act are effective beginning in 2018, U.S. GAAP requires that certain impacts of the Act be recognized in the income tax provision in the period of enactment.  In connection with the enactment of the Act, our income tax provision for 2017 included an increase of $17.5 million, reflecting an increase of $16.1 million for the remeasurement of our net deferred tax assets and an increase in tax of $1.4 million due to the deemed repatriation of earnings of our foreign subsidiaries.

28

As related to the deemed repatriation of earnings of foreign subsidiaries, the Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries.  As a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued are now subject to U.S. tax.  In accordance with the guidelines provided in the Act, as of December 31, 2017 we have aggregated our estimated foreign earnings and profits, and utilized participating deductions and available foreign tax credits.  The gross repatriation tax was $2.3 million, which was offset by $0.9 million of foreign tax credits for a net repatriation tax charge of $1.4 million.  The net repatriation tax of $1.4 million was recorded in the fourth quarter of 2017.  During 2018, we refined and updated our calculation of the gross repatriation tax to $2.7 million, which was paid to the U.S. Treasury.  The difference in the refined and updated repatriation tax and what was previously recorded in 2017 was reflected in the 2018 tax provision.  Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest most or all of these earnings indefinitely outside of the U.S., and do not expect to incur any significant additional taxes related to such amounts.  In addition, although we believe that the impact of the Act has been properly reflected in our financial statements, the Internal Revenue Service is continuing to issue new regulations for the various provisions of the Act and, therefore, amounts recorded are subject to change.

See Note 19, “Income Taxes,” of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.

Impact of Changes in U.S. Trade Policy

During 2018, changes in U.S. trade policy, particularly as it relates to China, as with much of our industry, have resulted in the assessment of increased tariffs on goods that we import into the United States.  Although our operating results in 2018 have been slightly impacted by the timing of Chinese sourced products, we have taken, and continue to take, several actions to mitigate the impact of the increased tariffs, including but not limited to, price increases to our customers.  We do not anticipate that the increased tariffs will have a significant impact on our future operating results.  Although we are confident that we will be able to pass along the impact of the increased tariffs to our customers, there can be no assurances that we will be able to pass on the entire increased costs imposed by the tariffs.

29

Comparison of Fiscal Years 2018 and 2017

Sales.  Consolidated net sales for 2018 were $1,092 million, a decrease of $24.1 million, or 2.2%, compared to $1,116.1 million in the same period of 2017, with the majority of our net sales to customers located in the United States.  Consolidated net sales decreased due to the lower results achieved by our Engine Management Segment.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the years ended December 31, 2018 and 2017 (in thousands):

   
Year Ended December 31,
 
   
2018
   
2017
 
Engine Management:
           
Ignition, Emission Control, Fuel & Safety Related System Products
 
$
648,270
   
$
657,287
 
Wire and Cable
   
155,217
     
172,126
 
Total Engine Management
   
803,487
     
829,413
 
                 
Temperature Control:
               
Compressors
   
148,416
     
148,377
 
Other Climate Control Parts
   
130,040
     
130,750
 
Total Temperature Control
   
278,456
     
279,127
 
                 
All Other
   
10,108
     
7,603
 
                 
Total
 
$
1,092,051
   
$
1,116,143
 

Engine Management’s net sales decreased $25.9 million, or 3.1%, to $803.5 million for the year ended December 31, 2018.  Net sales in ignition, emission control, fuel and safety related system products for the year ended December 31, 2018 were $648.3 million, a decrease of $9 million, or 1.4%, compared to $657.3 million in the same period of 2017.  Net sales in the wire and cable product group for the year ended December 31, 2018 were $155.2 million, a decrease of $16.9 million, or 9.8%, compared to $172.1 million in the same period of 2017.  Engine Management’s decrease in net sales for the year ended December 31, 2018 compared to the same period in 2017 reflects the impact of large pipeline orders placed in the first half of 2017 by certain customers, who were in the process of increasing the breadth and depth of their inventories.  In addition, Engine Management’s year-over-year decrease in net sales reflects the impact of the gradual decline in our wire and cable business, which is an older technology used on fewer cars, and due to the product lifecycle will continue to reduce overall Engine Management net sales.  During the third and fourth quarters of 2018, as our customers experienced increases in Engine Management product sell-through, demand for our products in ignition, emission control, fuel and safety related system parts increased, resulting in an increase in Engine Management sales in the third and fourth quarters of 2018 compared to the same period of 2017.  More significantly, our customers reported Engine Management POS up approximately 4% in both the 2018 fourth quarter and full year, in line with our long-term forecast.

Temperature Control’s net sales were essentially flat for the year ended December 31, 2018 when compared to the same period in 2017.  Net sales in the compressors product group were flat at $148.4 million for each of the years ended December 31, 2018 and 2017.  Net sales in other climate control parts for the year ended December 31, 2018 were $130 million, a decrease of $0.8 million, or 0.6%, compared to $130.8 million for the year ended December 31, 2017.  Temperature Control’s net sales in 2018 as compared to 2017 reflects the impact of a slow start to the 2018 season, resulting from a mild 2017 summer, higher than normal customer inventory levels going into 2018, and a cool early spring.  As weather conditions began to turn warm in mid-May, customer orders strengthened in June and continued throughout the third and fourth quarters of 2018, resulting in strong third and fourth quarter 2018 Temperature Control net sales, as our customers reported Temperature Control POS sales increases in the 6% - 7% range.  Demand for our Temperature Control products may vary significantly with summer weather conditions and customer inventory levels.

30

Margins.  Gross margins, as a percentage of consolidated net sales, decreased to 28.6% for 2018, compared to 29.3% for 2017.  The following table summarizes gross margins by segment for the years ended December 31, 2018 and 2017, respectively (in thousands):

Year Ended
December 31,
 
Engine
Management
   
Temperature
Control
   
Other
   
Total
 
2018
                       
Net sales (a)
 
$
803,487
   
$
278,456
   
$
10,108
   
$
1,092,051
 
Gross margins
   
229,949
     
70,561
     
12,277
     
312,787
 
Gross margin percentage
   
28.6
%
   
25.3
%
   
%
   
28.6
%
                                 
2017
                               
Net sales (a)
 
$
829,413
   
$
279,127
   
$
7,603
   
$
1,116,143
 
Gross margins
   
243,791
     
73,254
     
9,611
     
326,656
 
Gross margin percentage
   
29.4
%
   
26.2
%
   
%
   
29.3
%


(a)
Segment net sales include intersegment sales in our Engine Management and Temperature Control segments.

Compared to 2017, gross margins at Engine Management decreased 0.8 percentage points from 29.4% to 28.6%, and gross margins at Temperature Control decreased 0.9 percentage points from 26.2% to 25.3%. The gross margin percentage decrease in Engine Management compared to the prior year reflects the impact of product mix, inefficiencies and redundant costs incurred as a result of our various planned production moves, and the slight negative impact caused by the timing of tariffs incurred with Chinese sourced products in 2018.  The gross margin percentage decrease in Temperature Control compared to the prior year reflects the impact of product mix, and the impact of unfavorable production variances carriedforward from the weak 2017 season.

Selling, General and Administrative Expenses.  SG&A expenses increased to $231.3 million, or 21.2% of consolidated net sales in 2018, as compared to $224.2 million, or 20.1% of consolidated net sales in 2017.  The $7.1 million increase in SG&A expenses as compared to 2017 is principally due to higher distribution expenses at Temperature Control and higher expenses related to the sale of receivables, offset in part, by lower selling and marketing expenses.  The higher than usual distribution expenses at Temperature Control were due to a combination of significant additional labor costs to keep up with the surge in sales in the third and fourth quarters of 2018, as well as start-up costs related to the installation of a new automation project in our distribution center.  In 2019, we anticipate lower distribution costs in our Temperature Control segment as the new automation project is optimized.

Restructuring and Integration Expenses.  Restructuring and integration expenses were $4.5 million in 2018 compared to restructuring and integration expenses of $6.2 million in 2017.  The $1.7 million year-over-year decrease in restructuring and integration expenses reflects the impact of lower expenses incurred in connection with the plant rationalization program that commenced in February 2017, the wire and cable relocation program announced in October 2017, and the Orlando plant rationalization program that commenced in January 2017, all of which were substantially completed as of December 31, 2018, and which more than offset the $1.3 million increase in environmental cleanup costs related to the remediation in connection with the prior closure of our manufacturing operations at our Long Island City, New York location.

Other Income, Net. Other income, net was $4.3 million in 2018 compared to $1.3 million in 2017.  The $3 million increase in other income, net as compared to 2017 is principally due to the $3.9 million gain on the December 2018 sale of our property located in Grapevine, Texas offset, in part, by the lower year-over-year deferred gain related to the sale-leaseback of our Long Island City, New York facility.  During 2018 and 2017, we recognized $0.2 million and $1 million, respectively, of deferred gain related to the sale-leaseback of our Long Island City, New York facility.  The recognition of the deferred gain related to the sale-leaseback of our Long Island City, New York facility ended in the first quarter of 2018 upon the termination of the initial 10-year lease term for the facility.

31

Operating Income.  Operating income was $81.3 million in 2018, compared to $97.5 million in 2017.  The year-over-year decrease in operating income of $16.2 million is the result of the impact of lower consolidated net sales, lower gross margins as a percentage of consolidated net sales and higher SG&A expenses, which more than offset the impact of lower restructuring and integration expenses and higher other income, net.

Other Non-Operating Income (Expense), Net.  Other non-operating expense, net was $0.4 million in 2018, compared to other non-operating income, net of $1.3 million in 2017.  Included in other non-operating income (expense), net in 2018 and 2017 are noncash impairment charges of approximately $1.7 million and $1.8 million, respectively, related to our minority interest investment in Orange Electronics Co., Ltd.  Recognizing that the year-over-year impact of the noncash impairment charges is essentially flat, the year-over-year decline in other non-operating income (expense), net results principally from the unfavorable impact of changes in foreign currency exchange rates, and the year-over-year decline in the actuarial net gain related to our postretirement medical benefit plans.  Our postretirement medical benefit plans to substantially all eligible U.S. and Canadian employees terminated on December 31, 2016.

Interest Expense.  Interest expense was $4 million in 2018 compared to $2.3 million in 2017.  The year-over-year increase in interest expense reflects the impact of higher year-over-year average interest rates on our revolving credit facility, and higher average outstanding borrowings during 2018 when compared to 2017.

Income Tax Provision.  The income tax provision for 2018 was $20 million at an effective tax rate of 26%, compared to $52.8 million at an effective tax rate of 54.8% in 2017.  The lower effective tax rate in 2018 compared to 2017 reflects the impact of the Tax Cuts and Jobs Act enacted in the U.S. in December 2017.  The enactment of the Tax Cuts and Jobs Act impacted the year-over-year income tax provision and effective tax rate through (1) a reduction in the effective tax rate due to lowering of federal corporate tax rate from 35% to 21%, and (2) an increase in the 2017 income tax provision of $17.5 million resulting from the remeasurement of our deferred tax assets, and the tax on deemed repatriated earnings of our foreign subsidiaries. Excluding the impact of the Tax Cuts and Jobs Act, the income tax provision for 2017 was $35.3 million at an effective tax rate of 36.6%.

Loss from Discontinued Operations.  Loss from discontinued operations, net of income tax, reflects information contained in the most recent actuarial studies performed as of August 31, 2018 and revised to reflect events occurring through November 20, 2018, and as of August 31, 2017, other information available and considered by us, and legal expenses associated with our asbestos-related liability.  During the years ended December 31, 2018 and 2017, we recorded a loss of $13.9 million and $5.7 million from discontinued operations, respectively.  The loss from discontinued operations for 2018 and 2017 includes a $13.6 million and $6 million pre-tax provision, respectively, to increase our indemnity liability in line with the 2018 and 2017 actuarial studies.  As discussed more fully in Note 23 in the notes to our consolidated financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

32

Comparison of Fiscal Years 2017 and 2016

Sales.  Consolidated net sales for 2017 were $1,116.1 million, an increase of $57.6 million, or 5.4%, compared to $1,058.5 million in the same period of 2016, with the majority of our net sales to customers located in the United States.  Consolidated net sales increased due to the higher results achieved by our Engine Management Segment.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the years ended December 31, 2017 and 2016 (in thousands):

   
Year Ended December 31,
 
   
2017
   
2016
 
Engine Management:
           
Ignition, Emission Control, Fuel & Safety Related System Products
 
$
657,287
   
$
616,523
 
Wire and Cable
   
172,126
     
149,016
 
Total Engine Management
   
829,413
     
765,539
 
                 
Temperature Control:
               
Compressors
   
148,377
     
148,623
 
Other Climate Control Parts
   
130,750
     
135,117
 
Total Temperature Control
   
279,127
     
283,740
 
                 
All Other
   
7,603
     
9,203
 
                 
Total
 
$
1,116,143
   
$
1,058,482
 

Engine Management’s net sales increased $63.9 million, or 8.3%, to $829.4 million for the year ended December 31, 2017.  Net sales in ignition, emission control, fuel and safety related system products for the year ended December 31, 2017 were $657.3 million, an increase of $40.8 million, or 6.6%, compared to $616.5 million in the same period of 2016.  Net sales in the wire and cable product group for the year ended December 31, 2017 were $172.1 million, an increase of $23.1 million, or 15.5%, compared to $149 million in the same period of 2016.  In May 2016, we acquired the North American automotive ignition wire business of General Cable Corporation.  Incremental net sales from the acquisition of $38.4 million were included in net sales of the wire and cable product group for the year ended December 31, 2017.  Excluding the incremental sales from the acquisition, net sales in the wire and cable product group declined $15.3 million, or 10.3%, and Engine Management net sales increased $25.5 million, or 3.3%, compared to the year ended December 31, 2016, in line with our expectations of low single digit organic growth.

Temperature Control’s net sales decreased $4.6 million, or 1.6%, to $279.1 million for the year ended December 31, 2017.  Net sales in the compressors product group for the year ended December 31, 2017 were $148.4 million, a decrease of $0.2 million, or 0.2%, compared to $148.6 million in the same period of 2016.  Net sales in other climate control parts for the year ended December 31, 2017 were $130.8 million, a decrease of $4.4 million, or 3.2%, compared to $135.1 million for the year ended December 31, 2016.  Temperature Control’s decrease in net sales for the year ended December 31, 2017 of 1.6% reflects the impact of a cool 2017 summer following a very warm 2016, and is slightly better than our customers’ reported year-to-date net sales decrease of 4%.  Demand for our Temperature Control products may vary significantly with summer weather conditions and customer inventories.

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Gross Margins.  Gross margins, as a percentage of consolidated net sales, decreased to 29.3% for 2017, compared to 30.5% for 2016.  The following table summarizes gross margins by segment for the years ended December 31, 2017 and 2016, respectively (in thousands):

Year Ended
December 31,
 
Engine
Management
   
Temperature
Control
   
Other
   
Total
 
2017
                       
Net sales (a)
 
$
829,413
   
$
279,127
   
$
7,603
   
$
1,116,143
 
Gross margins
   
243,791
     
73,254
     
9,611
     
326,656
 
Gross margin percentage
   
29.4
%
   
26.2
%
   
%
   
29.3
%
                                 
2016
                               
Net sales (a)
 
$
765,539
   
$
283,740
   
$
9,203
   
$
1,058,482
 
Gross margins
   
239,710
     
72,547
     
10,230
     
322,487
 
Gross margin percentage
   
31.3
%
   
25.6
%
   
%
   
30.5
%


(a)
Segment net sales include intersegment sales in our Engine Management and Temperature Control segments.

Compared to 2016, gross margins at Engine Management decreased 1.9 percentage points from 31.3% to 29.4%, and gross margins at Temperature Control increased 0.6 percentage points from 25.6% to 26.2%. The gross margin percentage decrease in Engine Management compared to the prior year reflects inefficiencies and redundant costs incurred during our various planned production moves.  The gross margin percentage increase in Temperature Control compared to the prior year resulted primarily from transferring production manufacturing to our lower cost Reynosa, Mexico facility.

Selling, General and Administrative Expenses.  SG&A expenses increased to $224.2 million, or 20.1% of consolidated net sales in 2017, as compared to $220.9 million, or 20.9% of consolidated net sales in 2016.  The $3.3 million increase in SG&A expenses as compared to 2016 is principally due to higher distribution expenses and higher costs incurred in our accounts receivable factoring program, both of which are associated with increased sales volumes offset, in part, by the benefits from our General Cable integration and lower incentive compensation expenses.

Restructuring and Integration Expenses.  Restructuring and integration expenses were $6.2 million in 2017 compared to restructuring and integration expenses of $4 million in 2016.  The $2.2 million year-over-year increase in restructuring and integration expenses reflects the impact of the plant rationalization program that commenced in February 2016, the wire and cable relocation program announced in October 2016, and the Orlando plant rationalization program that commenced in January 2017.

Other Income, Net. Other income, net was $1.3 million in 2017 compared to $1.2 million in 2016.  During 2017 and 2016, we recognized $1 million of deferred gain related to the sale-leaseback of our Long Island City, New York facility.

Operating Income.  Operating income was $97.5 million in 2017, compared to $98.8 million in 2016.  The year-over-year decrease in operating income of $1.3 million reflects the impact of lower gross margins as a percentage of consolidated net sales, higher SG&A expenses and higher restructuring and integration expenses, which more than offset the impact of higher consolidated net sales.

Other Non-Operating Income, Net.  Other non-operating income, net was $1.3 million in both 2017 and 2016.  Included in other non-operating income, net in 2017 is a noncash impairment charge of approximately $1.8 million related to our minority interest investment in Orange Electronics Co., Ltd.

Interest Expense.  Interest expense was $2.3 million in 2017 compared to $1.6 million in 2016.  The year-over-year increase reflects the impact of higher year-over-year average interest rates on our revolving credit facility, and higher average outstanding borrowings during 2017 when compared to 2016.

34

Income Tax Provision.  The income tax provision for 2017 was $52.8 million at an effective tax rate of 54.8%, compared to $36.2 million at an effective tax rate of 36.7% in 2016.  During 2017, we recorded an increase of $17.5 million to the income tax provision resulting from the remeasurement of our net deferred tax assets, and the tax on deemed repatriated earnings of our foreign subsidiaries as a result of the enactment of the Tax Cuts and Jobs Act.  Excluding the impact of the Tax Cuts and Jobs Act, the income tax provision for 2017 was $35.3 million at an effective tax rate of 36.6%.

Loss from Discontinued Operations.  Loss from discontinued operations, net of income tax, reflects information contained in the most recent actuarial studies performed as of August 31, 2017 and 2016, other information available and considered by us, and legal expenses associated with our asbestos-related liability.  During 2017 and 2016, we recorded a loss of $5.7 million and $2 million from discontinued operations, respectively.  The loss from discontinued operations for 2017 includes a $6 million pre-tax provision reflecting the impact of the results of the August 2017 actuarial study.  No adjustment was made in 2016 to our asbestos liability as the difference between the low end of the range in the August 2016 actuarial study and our recorded liability was not material.  As discussed more fully in Note 23 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 Programs

As of December 31, 2018, the plant rationalization program that commenced in February 2016, the wire and cable relocation program announced in October 2016, and the Orlando plant rationalization program that commenced in January 2017 are all substantially completed.

For a detailed discussion on the restructuring and integration costs, see Note 5, “Restructuring and Integration Expense,” of the notes to our consolidated financial statements.

Liquidity and Capital Resources

Operating Activities.  During 2018, cash provided by operating activities was $70.3 million compared to $64.6 million in 2017.  The year-over-year increase in operating cash flow is primarily the result of higher net earnings, the year-over-year increase in accounts payable compared to the year-over-year decrease in accounts payable in 2017, the year-over-year increase in sundry payables and accrued expenses compared to the year-over-year decrease in sundry payables and accrued expenses in 2017, and the year-over-year decrease in prepaid expenses and other current assets compared to the year-over-year increase in prepaid expenses and other current assets in 2017 offset, in part, by the larger year-over-year increase in accounts receivable, and the larger year-over-year increase in inventories.

Net earnings during 2018, were $43 million compared to $38 million in 2017.  During 2018 (1) the increase in receivables was $13.7 million compared to the year-over-year increase in receivables of $5.1 million in 2017; (2) the increase in inventories was $30.2 million compared to the year-over-year increase in inventories of $13.9 million in 2017; (3) the decrease in prepaid expenses and other current assets was $4.9 million compared to the year-over-year increase in prepaid expenses and other current assets of $4.9 million in 2017; (4) the increase in accounts payable was $16.9 million compared to the year-over-year decrease in accounts payable of $7.2 million in 2017; and (5) the increase in sundry payables and accrued expenses was $8.4 million compared to the year-over-year decrease in sundry payables and accrued expenses of $6 million in 2017.  We continue to actively manage our working capital to maximize our operating cash flow.

During 2017, cash provided by operations was $64.6 million, compared to $97.8 million in 2016.  During 2017, the year-over-year decrease in operating cash flow is primarily the result of (1) lower net earnings of $38 million compared to net earnings of $60.4 million in 2016, (2) the year-over-year decrease in accounts payable of $7.2 million compared to the year-over-year increase in accounts payable of $7.3 million in 2016; (3) the year-over-year decrease in sundry payables and accrued expenses of $6 million compared to the year-over-year increase in sundry payables and accrued expenses of $21 million in 2016; and (4) the year-over-year increase in prepaid expenses and other current assets of $4.9 million compared to the year-over-year decrease in prepaid expenses and other current assets of $3.5 million in 2016.  Partially offsetting the unfavorable result in operating cash flow was (1) the year-over-year increase in receivables of $5.1 million compared to the year-over-year increase in receivables of $8.8 million in 2016; and (2) the year-over-year increase in inventories of $13.9 million compared to the year-over-year increase in inventories of $20.2 million in 2016.  The year-over-year decline in net earnings included a noncash increase in the provision for income taxes of $17.5 million, resulting from the remeasurement of our deferred tax assets of $16.1 million, and an increase in tax of $1.4 million due to the deemed repatriation of earnings of our foreign subsidiaries as a result of the enactment of the Tax Cuts and Jobs Act; while the decrease in sundry payables and accrued expenses reflects the impact of lower year-over-year incentive compensation expenses.  We continue to actively manage our working capital to maximize our operating cash flow.

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Investing Activities.  Cash used in investing activities was $29.9 million in 2018, compared to $31.2  million in 2017 and $88 million in 2016.   Investing activities in 2018 consisted of (1) the payment of the third and final contribution of $5.7 million for our November 2017 acquisition of a 50% interest in Foshan FGD SMP Automotive Compressor Co., Ltd., a China-based joint venture that manufactures air conditioning compressors for the automotive aftermarket and the Chinese OE market; (2) the payment of $4.2 million for our 15% increase in equity ownership in Foshan GWO YNG SMP Vehicle Climate Control & Cooling Products Co. Ltd., a China-based joint venture that manufactures air conditioner accumulators, filter driers, hose assemblies and switches for the automotive aftermarket and OEM/OES markets; and (3) capital expenditures of $20.1 million.

Cash used in investing activities was $31.2 million in 2017.  Investing activities in 2017 consisted of (1) the payment $6.8 million representing the first two contributions of the approximate $12.5 million for our acquisition of a 50% interest in Foshan FGD SMP Automotive Compressor Co., Ltd., a China-based joint venture that manufactures air conditioning compressors for the automotive aftermarket and the Chinese OE market and (2) capital expenditures of $24.4 million.

Cash used in investing activities was $88 million in 2016.  Investing activities in 2016 consisted of (1) our acquisition of certain assets and the assumption of certain liabilities of General Cable Corporation’s automotive ignition wire business in North America as well as 100% of the equity interests of a General Cable subsidiary in Nogales, Mexico for $67.3 million, net of cash acquired and (2) capital expenditures of $20.9 million.

Financing Activities.  Cash used in financing activities was $46.1 million in 2018, compared to $35.9 million in 2017, and $7.8 million in 2016.  During 2018, cash provided by operating activities, along with borrowings under our Polish overdraft facility, net of payments under our capital lease obligations, were used to fund the third and final contribution of our acquisition of a 50% interest in Foshan FGD SMP Automotive Compressor Co., Ltd., fund the 15% increase in equity ownership in Foshan GWO YNG SMP Vehicle Climate Control & Cooling Products Co. Ltd., pay down borrowings under our revolving credit facility, purchase shares of our common stock, pay dividends and fund our capital expenditures.  During 2018, we increased borrowings under the Polish overdraft facility, net of payments under our capital lease obligations of $1.1 million, paid down borrowings under our revolving credit facility of $13.3 million and made cash payments of $14.9 million for the repurchase of our common stock.

Cash used by finance activities was $35.9 million in 2017.  Borrowings under our revolving credit facility and our Polish overdraft facility, along with cash provided by operating activities were used to fund the first two contributions of our acquisition of a 50% interest in Foshan FGD SMP Automotive Compressor Co., Ltd., purchase shares of our common stock, pay dividends and fund our capital expenditures.  During 2017, we increased borrowings under our revolving credit facility by $2.2 million; borrowed $4.1 million under the Polish overdraft facility, net of payments under our capital lease obligations; and made cash payments of $24.4 million for the repurchase of our common stock.

Cash used by finance activities was $7.8 million in 2016.  Borrowings under our revolving credit facility, along with cash provided by operating activities, were used to fund the acquisition of the North American automotive ignition business of General Cable Corporation, purchase shares of our common stock, pay dividends and fund capital expenditures.  During 2016, we increased borrowings under our revolving credit facility by $7.4 million and made cash payments of $0.4 million for the repurchase of our common stock.

36

Dividends of $18.9 million, $17.3 million and $15.4 million were paid in 2018, 2017 and 2016, respectively.  Quarterly dividends were paid at a rate of $0.21 per share in 2018, $0.19 per share in 2017 and $0.17 per share in 2016.  In February 2019, our Board of Directors voted to increase our quarterly dividend from $0.21 per share in 2018 to $0.23 per share in 2019.

Liquidity

Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions.  Our primary sources of funds are ongoing net cash flows from operating activities and availability under our secured revolving credit facility (as detailed below).

In December 2018, we amended our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and a syndicate of lenders.  The amended credit agreement provides for a senior secured revolving credit facility with a line of credit of up to $250 million (with an additional $50 million accordion feature) and extends the  maturity date to December 2023.  The line of credit under the amended agreement also allows for a $10 million line of credit to Canada as part of the $250 million available for borrowing.  Direct borrowings under the amended credit agreement bear interest at LIBOR plus a margin ranging from 1.25% to 1.75% based on our borrowing availability, or floating at the alternate base rate plus a margin ranging from 0.25% to 0.75% based on our borrowing availability, at our option.  The amended credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.

Borrowings under the amended credit agreement are secured by substantially all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries.  Availability under the amended credit agreement is based on a formula of eligible accounts receivable, eligible drafts presented to the banks under our factoring agreements, eligible inventory, eligible equipment and eligible fixed assets.  After taking into account outstanding borrowings under the amended credit agreement, there was an additional $203.1 million available for us to borrow pursuant to the formula at December 31, 2018.  Outstanding borrowings under the credit agreement, which are classified as current liabilities, were $43.7 million and $57 million at December 31, 2018 and 2017, respectively.  Borrowings under the credit agreement have been classified as current liabilities based upon the accounting rules and certain provisions in the agreement.

At December 31, 2018, the weighted average interest rate on our amended credit agreement was 3.9%, which consisted of $40 million in direct borrowings at 3.4% and an alternative base rate loan of $3.7 million at 5.8%.  At December 31, 2017, the weighted average interest rate on our credit agreement was 2.7%, which consisted of $57 million in direct borrowings. Our average daily alternative base rate loan balance was $1.8 million and $3.8 million during 2018 and 2017, respectively.

At any time that our borrowing availability is less than the greater of either (a) $25 million, or 10% of the commitments if fixed assets are not included in the borrowing base, or (b) $31.25 million, or 12.5% of the commitments if fixed assets are included in the borrowing base, the terms of the amended credit agreement provide for, among other provisions, a financial covenant requiring us, on a consolidated basis, to maintain a fixed charge coverage ratio of 1:1 at the end of each fiscal quarter (rolling four quarters).  As of December 31, 2018, we were not subject to these covenants.  The amended credit agreement permits us to pay cash dividends of $20 million and make stock repurchases of $20 million in any fiscal year subject to a minimum availability of $25 million.  Provided specific conditions are met, the amended credit agreement also permits acquisitions, permissible debt financing, capital expenditures, and cash dividend payments and stock repurchases of greater than $20 million.

Our Polish subsidiary, SMP Poland sp. z.o.o., has entered into an overdraft facility with HSBC Bank Polska S.A. (“HSBC Poland”) for Zloty 30 million (approximately $8 million).  The facility, as amended, expires on December 2019.  Borrowings under the overdraft facility will bear interest at a rate equal to WIBOR + 0.75% and are guaranteed by Standard Motor Products, Inc., the ultimate parent company.  At December 31, 2018 and 2017, borrowings under the overdraft facility were Zloty 19.9 million (approximately $5.3 million) and Zloty 16.2 million (approximately $4.7 million), respectively.

37

In order to reduce our accounts receivable balances and improve our cash flow, we sell undivided interests in certain of our receivables to financial institutions.  We enter these agreements at our discretion when we determine that the cost of factoring is less than the cost of servicing our receivables with existing debt.  Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale.  As such, these transactions are being accounted for as a sale.

Pursuant to these agreements, we sold $720 million and $780.5 million of receivables for the years ended December 31, 2018 and 2017, respectively, which was reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale.  A charge in the amount of $24.4 million, $22.6 million and $19.3 million related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016, respectively.  If we do not enter into these arrangements or if any of the financial institutions with which we enter into these arrangements were to experience financial difficulties or otherwise terminate these arrangements, our financial condition, results of operations and cash flows could be materially and adversely affected by delays or failures to collect future trade accounts receivable.

During 2015, our Board of Directors authorized the purchase of up to $20 million of our common stock under stock repurchase programs.  Under these programs, during the years ended December 31, 2015 and 2016, we repurchased 551,791 and 10,135 shares of our common stock, respectively, in the open market at a total cost of $19.6 million and $0.4 million, respectively, thereby completing the 2015 Board of Directors’ authorizations.  Our Board of Directors did not authorize a stock repurchase program in 2016.

During 2017, our Board of Directors authorized the purchase of up to $30 million of our common stock under stock repurchase programs.  Under these programs, during the years ended December 31, 2017 and 2018, we repurchased 539,760 and 112,307 shares of our common stock, respectively, in the open market at a total cost of $24.8 million and $5.2 million, respectively, thereby completing the 2017 Board of Directors’ authorizations.

In May 2018, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a new stock repurchase program.  Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant.  Under this program, during the year ended December 31, 2018, we repurchased 201,484 shares of our common stock at a total cost of $9.3 million.  As of December 31, 2018, there was approximately $10.7 million available for future stock purchases under the program.  During the period from January 1, 2019 through February 15, 2019, we have not repurchased any additional shares of our common stock under the program.

We anticipate that our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months.  Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements.  If material adverse developments were to occur in any of these areas, there can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs.  In addition, if we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected.

38

The following table summarizes our contractual commitments as of December 31, 2018 and expiration dates of commitments through 2028 (a) (b) (c):

 
(In thousands)
 
2019
   
2020
   
2021
   
2022
   
2023
     
2024-
2028
   
Total
 
Lease obligations
 
$
8,483
   
$
7,382
   
$
6,753
   
$
5,763
   
$
5,278
   
$
10,590
   
$
44,249
 
Postretirement
   
39
     
36
     
32
     
29
     
25
     
76
     
237
 
Severance payments related to restructuring and integration
   
420
     
233
     
82
     
7
     
     
     
742
 
Total commitments
 
$
8,942
   
$
7,651
   
$
6,867
   
$
5,799
   
$
5,303
   
$
10,666
   
$
45,228
 


(a)
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 December 31, 2018, amounts outstanding under our revolving credit facilities were $43.7 million.


(b)
We anticipate total aggregate future severance payments of approximately $0.7 million related to the plant rationalization program and the Orlando plant rationalization program.  All programs are substantially completed as of December 31, 2018.


(c)
Effective January 1, 2019, upon the adoption of ASU 2016-02, Leases, lease obligations will be recorded as a liability on our consolidated balance sheet.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the notes to our consolidated financial statements. You should be aware that preparation of our consolidated annual and quarterly financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. We can give no assurance that actual results will not differ from those estimates.  Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimate or in the assumptions that we use in calculating the estimate, unforeseen changes in the industry, or business could materially impact the estimate and may have a material adverse effect on our business, financial condition and results of operations.

Revenue Recognition.  We derive our revenue primarily from sales of replacement parts for motor vehicles from both our Engine Management and Temperature Control Segments. We recognize revenues when our performance obligation has been satisfied and the control of products has been transferred to a customer which typically occurs upon shipment.  Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of goods or providing services. The amount of consideration we receive and revenue we recognize depends on the marketing incentives, product warranty and overstock returns we offer to our customers.  For certain 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 at the time of the sale but rather carried as a core liability.  At the same time, we estimate the core expected to be returned from the customer and record the estimated return as unreturned customer inventory.  The liability is extinguished when a core is actually returned to us, or at period end when we estimate and recognize revenue for the core deposits not expected to be returned.  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.  Significant management judgments and estimates must be made and used in estimating sales returns and allowances relating to revenue recognized in any accounting period.

39

Sales Returns and Other Allowances and Allowance for Doubtful Accounts. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications and/or the result of installation error.  In addition to warranty returns, we also permit our customers to return new, undamaged 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. At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return. At the same time, we record an estimate of anticipated customer returns as unreturned customer inventory. Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.  Revision to these estimates is made when necessary, based upon changes in these factors.  We regularly study trends of such claims.  At December 31, 2018, the allowance for sales returns was $57.4 million.

Similarly, we must make estimates of the uncollectability of our accounts receivable. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit‑worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  At December 31, 2018, the allowance for doubtful accounts and for discounts was $5.7 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 our inventory commonly referred to as a stocklift.  New customer acquisition costs are recorded as a reduction to revenue when incurred.

Inventory Valuation.  Inventories are valued at the lower of cost and net realizable value.  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 and net realizable value of inventory are determined by comparing the actual cost of the product to the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation of the inventory.

We also evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand.  For inventory deemed to be obsolete, we provide a reserve on the full value of the inventory. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates our estimate of future demand.  Future projected demand requires management judgment and is based upon (a) our review of historical trends and (b) our estimate of projected customer specific buying patterns and trends in the industry and markets in which we do business.  Using rolling twelve month historical information, we estimate future demand on a continuous basis.  As such, the historical volatility of such estimates has been minimal.

We utilize cores (used parts) in our remanufacturing processes for air conditioning compressors, diesel injectors, and diesel pumps.  The production of air conditioning compressors, diesel injectors, and diesel pumps involves the rebuilding of used cores, which we acquire either in outright purchases from used parts brokers or from returns pursuant to an exchange program with customers.  Under such exchange programs, at the time of sale of air conditioning compressors, diesel injectors, and diesel pumps, we estimate the core expected to be returned from the customer and record the estimated return as unreturned customer inventory.

In addition, many of our customers can return inventory to us based upon customer warranty and overstock arrangements within customer specific limits.  At the time products are sold, we accrue a liability for product warranties and overstock returns and record as unreturned customer inventory our estimate of anticipated customer returns.  Estimates are based upon historical information on the nature, frequency and probability of the customer return.  Unreturned core, warranty and overstock customer inventory is recorded at standard cost.  Revision to these estimates is made when necessary, based upon changes in these factors.  We regularly study trends of such claims.

40

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 tax asset will not be realized.  In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies. We consider all positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the deferred tax asset.  We consider cumulative losses in recent years as well as the impact of one-time events in assessing our pre-tax earnings.  Assumptions regarding future taxable income require significant judgment.  Our assumptions are consistent with estimates and plans used to manage our business, which includes restructuring and integration initiatives that are expected to generate significant savings in future periods.

The valuation allowance of $0.4 million as of December 31, 2018 is intended to provide for the uncertainty regarding the ultimate realization of our U.S. foreign tax credit carryovers and foreign net operating loss carryovers. The assessment of the adequacy of our valuation allowance is based on our estimates of taxable income in these jurisdictions and the period over which our deferred tax assets will be recoverable.  Based on these considerations, we believe it is more likely than not that we will realize the benefit of the net deferred tax asset of $42.3 million as of December 31, 2018, which is net of the remaining valuation allowance.

In the event that actual results differ from these estimates, or we adjust these estimates in future periods for current trends or expected changes in our estimating assumptions, we may need to modify the level of the valuation allowance which could materially impact our business, financial condition and results of operations.

In accordance with generally accepted accounting practices, we recognize in our financial statements only those tax positions that meet the more-likely-than-not recognition threshold. We establish tax reserves for uncertain tax positions that do not meet this threshold.  During the years ended December 31, 2018, 2017 and 2016, we did not establish a liability for uncertain tax positions.  Penalties and interest associated with income tax matters are included in the provision for income taxes in our consolidated statement of operations.

In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Act”), which included a broad range of tax reform affecting businesses, including the reduction of the federal corporate tax rate from 35% to 21%, changes in the deductibility of certain business expenses, and the manner in which international operations are taxed in the U.S.  For a discussion of the impact of the Act on our consolidated financial statements, see Note 19, “Income Taxes,” of the notes to our consolidated financial statements.

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.

41

We assess the impairment of long‑lived assets, identifiable intangibles assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  With respect to goodwill and identifiable intangible assets having indefinite lives, we test for impairment on an annual basis or in interim periods if an event occurs or circumstances change that may indicate the fair value is below its carrying amount.  Factors we consider important, which could trigger an impairment review, include the following: (a) significant underperformance relative to expected historical or projected future operating results; (b) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (c) significant negative industry or economic trends.  We review the fair values using the discounted cash flows method and market multiples.

When performing our evaluation of goodwill for impairment, if we conclude qualitatively that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, than the two-step impairment test is not required.  If we are unable to reach this conclusion, then we would perform the two-step impairment test.  Initially, the fair value of the reporting unit is compared to its carrying amount.  To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit; we are required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired.  In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill and recognize a charge for impairment to the extent the carrying value exceeds the implied fair value. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.  In addition, identifiable intangible assets having indefinite lives are reviewed for impairment on an annual basis using a methodology similar with that used to evaluate goodwill.

Intangible assets having definite lives and other long-lived assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable.  In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition.  When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets fair value and their carrying value.

There are inherent assumptions and estimates used in developing future cash flows requiring our judgment in applying these assumptions and estimates to the analysis of identifiable intangibles and long‑lived asset impairment including projecting revenues, interest rates, tax rates and the cost of capital.  Many of the factors used in assessing fair value are outside our control and it is reasonably likely that assumptions and estimates will change in future periods.  These changes can result in future impairments.  In the event our planning assumptions were modified resulting in impairment to our assets, we would be required to include an expense in our statement of operations, which could materially impact our business, financial condition and results of operations.

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.  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.

42

Asbestos Litigation.  In evaluating our potential asbestos-related liability, we use an actuarial study that is prepared by a leading actuarial firm with expertise in assessing asbestos-related liabilities.  We evaluate the estimate of the range of undiscounted liability to determine which amount to accrue.  Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.  Legal costs are expensed as incurred.  We will continue to perform an annual actuarial analysis during the third quarter of each year for the foreseeable future, and whenever events or changes in circumstances indicate that additional provisions may be necessary.  Based on the actuarial studies and all other available information, we will continue to reassess the recorded liability and, if deemed necessary, record an adjustment to the reserve, which will be reflected as a loss or gain from discontinued operations.  See Note 23, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.

Other Loss Reserves. We have other loss exposures, for such matters as legal claims and legal proceedings.  Establishing loss reserves for these matters requires estimates, judgment of risk exposure, and ultimate liability.  We record provisions when the liability is considered probable and reasonably estimable.  Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated.  As additional information becomes available, we reassess our potential liability related to these matters.  Such revisions of the potential liabilities could have a material adverse effect on our business, financial condition or results of operations.

Recently Issued Accounting Pronouncements

For a detailed discussion on recently issued accounting pronouncements and their impact on our consolidated financial statements, see Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 of this Report.

43

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than one of our subsidiary’s functional currency.  Similarly, we are exposed to market risk as the result of changes in interest rates, which may affect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures.  We do not hold or issue derivative financial instruments for trading or speculative purposes.  As of December 31, 2018, we did not have any derivative financial instruments.

Exchange Rate Risk

We have exchange rate exposure, primarily, with respect to the Canadian Dollar, the Euro, the British Pound, the Polish Zloty, the Mexican Peso, the Taiwan Dollar, the Chinese Yuan Renminbi and the Hong Kong Dollar.  As of December 31, 2018, 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 incremental 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.  Substantially all of our debt is variable rate debt as of December 31, 2018 and 2017.  Depending upon the level of borrowings under our revolving credit facility and our Polish overdraft facility, and our excess cash, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have an approximate $0.6 million negative impact on our earnings or cash flows.

In addition, 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.  During the year ended December 31, 2018, we sold $720 million of receivables.  Depending upon the level of sales of receivables pursuant these agreements, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the margin rate may have an approximate $7.2 million negative impact on our earnings or cash flows.  The charge related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations.

44

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page No.
   
Management’s Report on Internal Control over Financial Reporting
46
   
Report of Independent Registered Public Accounting Firm—Internal Control Over Financial Reporting
47
   
Report of Independent Registered Public Accounting Firm—Consolidated Financial Statements
49
   
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
50
   
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
51
   
Consolidated Balance Sheets as of December 31, 2018 and 2017
52
   
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
53
   
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
54
   
Notes to Consolidated Financial Statements
55

45

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

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

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control - Integrated Framework.  Based on our assessment using those criteria, we concluded that, as of December 31, 2018, our internal control over financial reporting is effective.

Our independent registered public accounting firm, KPMG LLP, has audited our consolidated financial statements as of and for the year ended December 31, 2018 and has also audited the effectiveness of our internal control over financial reporting as of December 31, 2018.  KPMG’s report appears on the following pages of this “Item 8. Financial Statements and Supplementary Data.”

46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM –
INTERNAL CONTROL OVER FINANCIAL REPORTING

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

Opinion on Internal Control Over Financial Reporting

We have audited Standard Motor Products, Inc.’s and subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement Schedule II, Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated February 20, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

47

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP
New York, New York
February 20, 2019

48

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM –
CONSOLIDATED FINANCIAL STATEMENTS

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

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes and financial statement Schedule II, Valuation and Qualifying Accounts (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2010.

New York, New York
February 20, 2019

49

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

   
Year Ended December 31,
 
   
2018
   
2017
   
2016
 
   
(Dollars in thousands,
except share and per share data)
 
Net sales
 
$
1,092,051
   
$
1,116,143
   
$
1,058,482
 
Cost of sales
   
779,264
     
789,487
     
735,995
 
Gross profit
   
312,787
     
326,656
     
322,487
 
Selling, general and administrative expenses
   
231,336
     
224,237
     
220,936
 
Restructuring and integration expenses
   
4,510
     
6,173
     
3,957
 
Other income, net
   
4,327
     
1,275
     
1,195
 
Operating income
   
81,268
     
97,521
     
98,789
 
Other non-operating income (expense), net
   
(411
)
   
1,250
     
1,337
 
Interest expense
   
4,026
     
2,329
     
1,556
 
Earnings from continuing operations before taxes
   
76,831
     
96,442
     
98,570
 
Provision for income taxes
   
19,977
     
52,812
     
36,158
 
Earnings from continuing operations
   
56,854
     
43,630
     
62,412
 
Loss from discontinued operations, net of income tax benefit of $4,866, $3,769 and $1,322
   
(13,851
)
   
(5,654
)
   
(1,982
)
Net earnings
 
$
43,003
   
$
37,976
   
$
60,430
 
Net earnings per common share – Basic:
                       
Earnings from continuing operations
 
$
2.53
   
$
1.92
   
$
2.75
 
Discontinued operations
   
(0.62
)
   
(0.25
)
   
(0.09
)
Net earnings per common share – Basic
 
$
1.91
   
$
1.67
   
$
2.66
 
Net earnings per common share – Diluted:
                       
Earnings from continuing operations
 
$
2.48
   
$
1.88
   
$
2.70
 
Discontinued operations
   
(0.60
)
   
(0.24
)
   
(0.08
)
Net earnings per common share – Diluted
 
$
1.88
   
$
1.64
   
$
2.62
 
Dividends declared per share
 
$
0.84
   
$
0.76
   
$
0.68
 
Average number of common shares
   
22,456,480
     
22,726,491
     
22,722,517
 
Average number of common shares and dilutive common shares
   
22,931,723
     
23,198,392
     
23,082,578
 

See accompanying notes to consolidated financial statements.

50

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   
Year Ended December 31,
 
   
2018
   
2017
   
2016
 
   
(In thousands)
 
Net earnings
 
$
43,003
   
$
37,976
   
$
60,430
 
Other comprehensive income (loss), net of tax:
                       
Foreign currency translation adjustments
   
(5,473
)
   
7,027
     
(5,294
)
Pension and postretirement plans:
                       
Amortization of:
                       
Prior service benefit
   
     
     
(54
)
Unrecognized (gain) loss
   
(268
)
   
(661
)
   
763
 
Unrecognized actuarial gains
   
247
     
481
     
542
 
Foreign currency exchange rate changes
   
     
     
3
 
Income tax related to pension and postretirement plans
   
9
     
72
     
(514
)
Pension and postretirement plans, net of tax
   
(12
)
   
(108
)
   
740
 
Total other comprehensive income (loss), net of tax
   
(5,485
)
   
6,919
     
(4,554
)
Comprehensive income
 
$
37,518
   
$
44,895
   
$
55,876
 

See accompanying notes to consolidated financial statements.

51

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

   
December 31,
 
   
2018
   
2017
 
   
(Dollars in thousands,
except share data)
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
11,138
   
$
17,323
 
Accounts receivable, less allowances for discounts and doubtful accounts of $5,687 and $4,967 in 2018 and 2017, respectively
   
157,535
     
140,057
 
Inventories
   
349,811
     
326,411
 
Unreturned customer inventories
   
20,484
     
 
Prepaid expenses and other current assets
   
7,256
     
12,300
 
Total current assets
   
546,224
     
496,091
 
                 
Property, plant and equipment, net
   
90,754
     
89,103
 
Goodwill
   
67,321
     
67,413
 
Other intangibles, net
   
48,411
     
56,261
 
Deferred incomes taxes
   
42,334
     
32,420
 
Investments in unconsolidated affiliates
   
32,469
     
31,184
 
Other assets
   
15,619
     
15,095
 
Total assets
 
$
843,132
   
$
787,567
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Notes payable
 
$
43,689
   
$
57,000
 
Current portion of other debt
   
5,377
     
4,699
 
Accounts payable
   
94,357
     
77,990
 
Sundry payables and accrued expenses
   
31,033
     
40,012
 
Accrued customer returns
   
57,433
     
35,916
 
Accrued core liability
   
31,263
     
11,899
 
Accrued rebates
   
28,870
     
35,346
 
Payroll and commissions
   
20,564
     
23,035
 
Total current liabilities
   
312,586
     
285,897
 
                 
Long-term debt
   
153
     
79
 
Other accrued liabilities
   
18,075
     
14,561
 
Accrued asbestos liabilities
   
45,117
     
33,376
 
Total liabilities
   
375,931
     
333,913
 
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
   
102,470
     
100,057
 
Retained earnings
   
380,113
     
357,153
 
Accumulated other comprehensive income
   
(9,594
)
   
(4,109
)
Treasury stock - at cost (1,503,284 shares and 1,424,025 shares in 2018 and 2017, respectively)
   
(53,660
)
   
(47,319
)
Total stockholders’ equity
   
467,201
     
453,654
 
Total liabilities and stockholders’ equity
 
$
843,132
   
$
787,567
 

See accompanying notes to consolidated financial statements.

52

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Year Ended December 31,
 
   
2018
   
2017
   
2016
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net earnings
 
$
43,003
   
$
37,976
   
$
60,430
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation and amortization
   
24,104
     
23,916
     
20,457
 
Amortization of deferred financing cost
   
333
     
343
     
346
 
Increase to allowance for doubtful accounts
   
330
     
972
     
210
 
Increase to inventory reserves
   
3,978
     
3,300
     
5,371
 
Amortization of deferred gain on sale of buildings
   
(218
)
   
(1,048
)
   
(1,048
)
Gain on sale of property, plant and equipment
   
(3,997
)
   
(15
)
   
(7
)
Equity (income) loss from joint ventures
   
768
     
602
     
(2,029
)
Employee Stock Ownership Plan allocation
   
2,557
     
2,159
     
2,021
 
Stock-based compensation
   
7,998
     
7,638
     
6,127
 
Excess tax benefits related to exercise of employee stock grants
   
     
     
(849
)
(Increase) decrease in deferred income taxes
   
(10,046
)
   
19,059
     
(691
)
Increase (decrease) in tax valuation allowance
   
22
     
(128
)
   
65
 
Loss on discontinued operations, net of tax
   
13,851
     
5,654
     
1,982
 
Change in assets and liabilities:
                       
Increase in accounts receivable
   
(13,699
)
   
(5,100
)
   
(8,826
)
Increase in inventories
   
(30,199
)
   
(13,901
)
   
(20,155
)
(Increase) decrease in prepaid expenses and other current assets
   
4,926
     
(4,869
)
   
3,475
 
Increase (decrease) in accounts payable
   
16,894
     
(7,186
)
   
7,345
 
Increase (decrease) in sundry payables and accrued expenses
   
8,407
     
(6,015
)
   
20,990
 
Net changes in other assets and liabilities
   
1,246
     
1,260
     
2,591
 
Net cash provided by operating activities
   
70,258
     
64,617
     
97,805