0001140361-19-019479.txt : 20191031 0001140361-19-019479.hdr.sgml : 20191031 20191031121204 ACCESSION NUMBER: 0001140361-19-019479 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191031 DATE AS OF CHANGE: 20191031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MOTOR PRODUCTS, INC. CENTRAL INDEX KEY: 0000093389 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 111362020 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04743 FILM NUMBER: 191182714 BUSINESS ADDRESS: STREET 1: 37-18 NORTHERN BLVD. CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 BUSINESS PHONE: 718-392-0200 MAIL ADDRESS: STREET 1: 37-18 NORTHERN BLVD. CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD MOTOR PRODUCTS INC DATE OF NAME CHANGE: 19920703 10-Q 1 form10q.htm 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number:  001-04743

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

(718) 392-0200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $2.00 per share
SMP
New York Stock Exchange LLC

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 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 definitions 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 Exchange Act).
Yes     No

As of the close of business on October 28, 2019, there were 22,456,467 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.



STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION

 
 
Page No.
 
 
 
 
 
3
     
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
9
 
 
 
28
 
   
40
 
 
 
41
 
 
 
PART II – OTHER INFORMATION
 
 
 
42
 
 
 
 
 
 
42
 
 
 
43

2



PART I - FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands, except share and per share data)
 
2019
   
2018
   
2019
   
2018
 
   
(Unaudited)
   
(Unaudited)
 
 
                       
Net sales
 
$
307,723
   
$
296,619
   
$
896,661
   
$
845,081
 
Cost of sales
   
215,635
     
209,313
     
637,705
     
603,897
 
Gross profit
   
92,088
     
87,306
     
258,956
     
241,184
 
Selling, general and administrative expenses
   
59,947
     
60,137
     
180,483
     
175,604
 
Restructuring and integration expenses
   
825
     
6
     
1,469
     
3,073
 
Other income (expense), net
   
(12
)
   
15
     
(15
)
   
328
 
Operating income
   
31,304
     
27,178
     
76,989
     
62,835
 
Other non-operating income, net
   
225
     
351
     
2,282
     
800
 
Interest expense
   
1,508
     
1,254
     
4,319
     
3,137
 
Earnings from continuing operations before taxes
   
30,021
     
26,275
     
74,952
     
60,498
 
Provision for income taxes
   
7,367
     
7,002
     
18,639
     
15,801
 
Earnings from continuing operations
   
22,654
     
19,273
     
56,313
     
44,697
 
Loss from discontinued operations, net of income taxes
   
(7,903
)
   
(3,524
)
   
(9,914
)
   
(5,014
)
Net earnings
 
$
14,751
   
$
15,749
   
$
46,399
   
$
39,683
 
                                 
Per Share Data:
                               
Net earnings per common share – Basic:
                               
Earnings from continuing operations
 
$
1.01
   
$
0.86
   
$
2.52
   
$
1.99
 
Discontinued operations
   
(0.35
)
   
(0.16
)
   
(0.44
)
   
(0.22
)
Net earnings per common share – Basic
 
$
0.66
   
$
0.70
   
$
2.08
   
$
1.77
 
                                 
Net earnings per common share – Diluted:
                               
Earnings from continuing operations
 
$
1.00
   
$
0.84
   
$
2.47
   
$
1.95
 
Discontinued operations
   
(0.35
)
   
(0.15
)
   
(0.44
)
   
(0.22
)
Net earnings per common share – Diluted
 
$
0.65
   
$
0.69
   
$
2.03
   
$
1.73
 
                                 
Dividend declared per share
 
$
0.23
   
$
0.21
   
$
0.69
   
$
0.63
 
                                 
Average number of common shares
   
22,329,835
     
22,424,962
     
22,359,637
     
22,464,697
 
Average number of common shares and dilutive common shares
   
22,754,440
     
22,938,925
     
22,814,228
     
22,954,649
 

See accompanying notes to consolidated financial statements (unaudited).

3

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands)
 
2019
   
2018
   
2019
   
2018
 
   
(Unaudited)
   
(Unaudited)
 
 
                       
Net earnings
 
$
14,751
   
$
15,749
   
$
46,399
   
$
39,683
 
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation adjustments
   
(2,720
)
   
719
     
(1,627
)
   
(2,997
)
Pension and postretirement plans
   
(5
)
   
(6
)
   
(15
)
   
(11
)
Total other comprehensive income (loss), net of tax
   
(2,725
)
   
713
     
(1,642
)
   
(3,008
)
Comprehensive income
 
$
12,026
   
$
16,462
   
$
44,757
   
$
36,675
 

See accompanying notes to consolidated financial statements (unaudited).

4



STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
(In thousands, except share and per share data)
 
September 30,
2019
   
December 31,
2018
 
 
 
(Unaudited)
       
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
13,259
   
$
11,138
 
Accounts receivable, less allowances for discounts and doubtful accounts of $6,001 and $5,687 for 2019 and 2018, respectively
   
168,968
     
157,535
 
Inventories
   
340,231
     
349,811
 
Unreturned customer inventories
   
20,325
     
20,484
 
Prepaid expenses and other current assets
   
14,273
     
7,256
 
Total current assets
   
557,056
     
546,224
 
 
               
Property, plant and equipment, net of accumulated depreciation of $194,410 and $186,135 for 2019 and 2018, respectively
   
88,835
     
90,754
 
Operating lease right-of-use assets
   
34,055
     
 
Goodwill
   
77,664
     
67,321
 
Other intangibles, net
   
66,857
     
48,411
 
Deferred income taxes
   
39,105
     
42,334
 
Investments in unconsolidated affiliates
   
39,030
     
32,469
 
Other assets
   
18,081
     
15,619
 
Total assets
 
$
920,683
   
$
843,132
 
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
CURRENT LIABILITIES:
               
Notes payable
 
$
78,211
   
$
43,689
 
Current portion of other debt
   
5,225
     
5,377
 
Accounts payable
   
71,139
     
94,357
 
Sundry payables and accrued expenses
   
36,326
     
31,033
 
Accrued customer returns
   
53,984
     
57,433
 
Accrued core liability
   
26,045
     
31,263
 
Accrued rebates
   
31,140
     
28,870
 
Payroll and commissions
   
27,590
     
20,564
 
Total current liabilities
   
329,660
     
312,586
 
 
               
Long-term debt
   
132
     
153
 
Noncurrent operating lease liabilities
   
27,214
     
 
Other accrued liabilities
   
19,731
     
18,075
 
Accrued asbestos liabilities
   
49,894
     
45,117
 
Total liabilities
   
426,631
     
375,931
 
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Common stock – par value $2.00 per share:
               
Authorized – 30,000,000 shares; issued 23,936,036 shares
   
47,872
     
47,872
 
Capital in excess of par value
   
106,043
     
102,470
 
Retained earnings
   
411,083
     
380,113
 
Accumulated other comprehensive income
   
(11,236
)
   
(9,594
)
Treasury stock – at cost (1,597,342 shares and 1,503,284 shares in 2019 and 2018, respectively)
   
(59,710
)
   
(53,660
)
Total stockholders’ equity
   
494,052
     
467,201
 
Total liabilities and stockholders’ equity
 
$
920,683
   
$
843,132
 

See accompanying notes to consolidated financial statements (unaudited).

5



STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
(In thousands)
 
Nine Months Ended
September 30,
 
 
 
2019
   
2018
 
 
 
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings
 
$
46,399
   
$
39,683
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
   
19,261
     
17,745
 
Amortization of deferred financing cost
   
169
     
258
 
Increase to allowance for doubtful accounts
   
301
     
40
 
Increase to inventory reserves
   
3,006
     
2,753
 
Amortization of deferred gain on sale of building
   
     
(218
)
Equity income from joint ventures
   
(2,630
)
   
(603
)
Employee stock ownership plan allocation
   
1,889
     
1,918
 
Stock-based compensation
   
5,742
     
5,614
 
Decrease (increase) in deferred income taxes
   
3,232
     
(2,556
)
Loss on discontinued operations, net of tax
   
9,914
     
5,014
 
Change in assets and liabilities:
               
Increase in accounts receivable
   
(16,583
)
   
(23,428
)
Decrease in inventories
   
11,824
     
2,761
 
(Increase) decrease in prepaid expenses and other current assets
   
(6,502
)
   
1,202
 
(Decrease) increase in accounts payable
   
(24,107
)
   
5,193
 
(Decrease) increase in sundry payables and accrued expenses
   
(2,551
)
   
12,828
 
Net change in other assets and liabilities
   
(6,260
)
   
(619
)
Net cash provided by operating activities
   
43,104
     
67,585
 
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisitions of and investments in businesses
   
(43,490
)
   
(9,852
)
Net proceeds from sale of Grapevine, Texas facility
   
4,801
     
 
Capital expenditures
   
(12,329
)
   
(15,633
)
Other investing activities
   
47
     
37
 
Net cash used in investing activities
   
(50,971
)
   
(25,448
)
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net borrowings (payments) under line-of-credit agreements
   
34,523
     
(12,000
)
Net borrowings of other debt and capital lease obligations
   
133
     
1,463
 
Purchase of treasury stock
   
(10,738
)
   
(9,271
)
Increase in overdraft balances
   
1,109
     
1,382
 
Dividends paid
   
(15,429
)
   
(14,144
)
Net cash provided by (used in) financing activities
   
9,598
     
(32,570
)
Effect of exchange rate changes on cash
   
390
     
431
 
Net increase in cash and cash equivalents
   
2,121
     
9,998
 
CASH AND CASH EQUIVALENTS at beginning of period
   
11,138
     
17,323
 
CASH AND CASH EQUIVALENTS at end of period
 
$
13,259
   
$
27,321
 
 
               
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
4,083
   
$
2,896
 
Income taxes
 
$
18,114
   
$
11,829
 

See accompanying notes to consolidated financial statements (unaudited).

6



STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2019
(Unaudited)

 
 
Common
Stock
   
Capital in
Excess of
Par Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
 
(In thousands)
                                   
Balance at June 30, 2019
 
$
47,872
   
$
105,347
   
$
401,465
   
$
(8,511
)
 
$
(60,908
)
 
$
485,265
 
Net earnings
   
     
     
14,751
     
     
     
14,751
 
Other comprehensive income, net of tax
   
     
     
     
(2,725
)
   
     
(2,725
)
Cash dividends paid
   
     
     
(5,133
)
   
     
     
(5,133
)
Stock-based compensation
   
     
696
     
     
     
1,198
     
1,894
 
 
                                               
Balance at September 30, 2019
 
$
47,872
   
$
106,043
   
$
411,083
   
$
(11,236
)
 
$
(59,710
)
 
$
494,052
 


Three Months Ended September 30, 2018
(Unaudited)

 
 
Common
Stock
   
Capital in
Excess of
Par Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
 
(In thousands)
                                   
Balance at June 30, 2018
 
$
47,872
   
$
103,403
   
$
370,461
   
$
(7,830
)
 
$
(51,536
)
 
$
462,370
 
Net earnings
   
     
     
15,749
     
     
     
15,749
 
Other comprehensive income, net of tax
   
     
     
     
713
     
     
713
 
Cash dividends paid
   
     
     
(4,707
)
   
     
     
(4,707
)
Purchase of treasury stock
   
     
     
     
     
(1,791
)
   
(1,791
)
Stock-based compensation
   
     
1,473
     
     
     
245
     
1,718
 
 
                                               
Balance at September 30, 2018
 
$
47,872
   
$
104,876
   
$
381,503
   
$
(7,117
)
 
$
(53,082
)
 
$
474,052
 

See accompanying notes to consolidated financial statements (unaudited).
7


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2019
(Unaudited)

 
 
Common
Stock
   
Capital in
Excess of
Par Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
 
(In thousands)
                                   
Balance at December 31, 2018
 
$
47,872
   
$
102,470
   
$
380,113
   
$
(9,594
)
 
$
(53,660
)
 
$
467,201
 
Net earnings
   
     
     
46,399
     
     
     
46,399
 
Other comprehensive income, net of tax
   
     
     
     
(1,642
)
   
     
(1,642
)
Cash dividends paid
   
     
     
(15,429
)
   
     
     
(15,429
)
Purchase of treasury stock
   
     
     
     
     
(10,738
)
   
(10,738
)
Stock-based compensation
   
     
2,828
     
     
     
2,914
     
5,742
 
Employee Stock Ownership Plan
   
     
745
     
     
     
1,774
     
2,519
 
 
                                               
Balance at September 30, 2019
 
$
47,872
   
$
106,043
   
$
411,083
   
$
(11,236
)
 
$
(59,710
)
 
$
494,052
 

Nine Months Ended September 30, 2018
(Unaudited)

 
 
Common
Stock
   
Capital in
Excess of
Par Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
 
(In thousands)
                                   
Balance at December 31, 2017
 
$
47,872
   
$
100,057
   
$
357,153
   
$
(4,109
)
 
$
(47,319
)
 
$
453,654
 
Cumulative effect adjustment
   
     
     
(1,189
)
   
     
     
(1,189
)
Net earnings
   
     
     
39,683
     
     
     
39,683
 
Other comprehensive income (loss), net of tax
   
     
     
     
(3,008
)
   
     
(3,008
)
Cash dividends paid
   
     
     
(14,144
)
   
     
     
(14,144
)
Purchase of treasury stock
   
     
     
     
     
(9,115
)
   
(9,115
)
Stock-based compensation
   
     
4,054
     
     
     
1,560
     
5,614
 
Employee Stock Ownership Plan
   
     
765
     
     
     
1,792
     
2,557
 
 
                                               
Balance at September 30, 2018
 
$
47,872
   
$
104,876
   
$
381,503
   
$
(7,117
)
 
$
(53,082
)
 
$
474,052
 

See accompanying notes to consolidated financial statements (unaudited).

8


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1.  Basis of Presentation

Standard Motor Products, Inc. and subsidiaries (referred to as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of premium replacement parts for motor vehicles in the automotive aftermarket industry with a complementary focus on the heavy duty, industrial equipment and original equipment markets.

The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.  The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership, except in instances where the minority shareholder maintains substantive participating rights, in which case we follow the equity method of accounting.  Investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence.  All significant inter-company items have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.

Note 2.  Summary of Significant Accounting Policies

The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.  We have made a number of estimates and assumptions in the preparation of these consolidated financial statements.  We can give no assurance that actual results will not differ from those estimates.  Some of the more significant estimates include allowances for doubtful accounts, cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability exposures, asbestos, environmental and litigation matters, valuation of deferred tax assets, share based compensation and sales returns and other allowances.

There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018, except for changes made as a result of the adoption of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”), described under the heading, “Recently Issued Accounting Pronouncements” below and in Note 3, “Leases.”
9


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)

Recently Issued Accounting Pronouncements

Standards that were adopted

Leases

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

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

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

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

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

See Note 3 for further information regarding our adoption of ASU 2016-02.
10


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)

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

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

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


Note 3.  Leases

Significant Accounting Policy

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

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

Quantitative Lease Disclosures

We have operating and finance leases for our manufacturing facilities, warehouses, office space, automobiles, and certain equipment.  Our leases have remaining lease terms of up to ten years, some of which may include one or more five-year renewal options.  We have included the five-year renewal option for one of our leases in our operating lease payments as we concluded that it is reasonably certain that we will exercise the option.  Leases with an initial term of twelve months or less are not recorded on the balance sheet.  Operating lease expense is recognized on a straight-line basis over the lease term.  Finance leases are not material.
11


STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)

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

Balance Sheet Information
 
September 30,
2019
 
Assets
     
Operating lease right-of-use assets
 
$
34,055
 
 
       
Liabilities
       
Sundry payables and accrued expenses
 
$
7,899
 
Noncurrent operating lease liabilities
   
27,214
 
Total operating lease liabilities
 
$
35,113
 
 
       
Weighted Average Remaining Lease Term
       
Operating leases
 
6 Years
 
 
       
Weighted Average Discount Rate
       
Operating leases
   
3.8
%



Lease Expense
 
Three Months Ended
September 30, 2019
   
Nine Months Ended
September 30, 2019
 
             
Operating Lease Expense (a)
 
$
2,199
   
$
6,633
 

(a)
Excludes expenses of approximately $1.9 million related to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less, which is not material.




 
 
Nine Months Ended
September 30, 2019
 
Supplemental Cash Flow Information
     
Cash paid for the amounts included in the measurement of lease liabilities:
     
Operating cash flows from operating leases
 
$
6,490
 
Right-of-use assets obtained in exchange for new lease obligations:
       
Operating leases
 
$
856
 


Minimum Lease Payments

At September 30, 2019, we are obligated to make minimum lease payments through 2028, under operating leases, which are as follows (in thousands):

2019
 
$
2,158
 
2020
   
7,787
 
2021
   
7,088
 
2022
   
5,861
 
2023
   
5,279
 
Thereafter
   
11,316
 
Total lease payments
 
$
39,489
 
Less: Interest
   
(4,376
)
Present value of lease liabilities
 
$
35,113
 


12

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)

Note 4.  Business Acquisitions and Investments

2019 Business Acquisition and Investment

Jiangsu Che Yijia New Energy Technology Co., Ltd. Equity Investment

In August 2019, we acquired an approximate 29% minority interest in Jiangsu Che Yijia New Energy Technology Co., Ltd. (“CYJ”) for approximately $5.1 million. Our investment in CYJ was funded through borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A.  CYJ is a manufacturer of electric air conditioning compressors for electric vehicles and is located in China.  Our minority interest in CYJ is accounted for using the equity method of accounting.

Pollak Business of Stoneridge, Inc. Acquisition

In April 2019, we acquired certain assets and liabilities of the Pollak business of Stoneridge, Inc. for approximately $40 million, subject to post-closing adjustments.  In May 2019, the post-closing adjustments were finalized at $1.6 million, reducing the purchase price to $38.4 million.  The acquisition was funded through borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A.  Stoneridge’s Pollak business had manufacturing and distribution facilities in Canton, Massachusetts, El Paso, Texas, and Juarez, Mexico, and distributed a range of engine management products including sensors, switches, and connectors.  The acquisition, reported as part of our Engine Management Segment, enhanced our growth opportunities in the OE/OES, heavy duty and commercial vehicle markets and added to our existing expertise in aftermarket distribution, product management and service.  We will be relocating all production to our existing facilities, and have not acquired any of the Pollak facilities or employees.  We anticipate that the business will be fully integrated within 12 months.  Revenues generated from the acquired business were approximately $45 million for the year ended December 31, 2018.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values (in thousands):

Purchase Price