STANDARD MOTOR PRODUCTS, INC. - Annual Report: 2015 (Form 10-K)

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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, 2015

 

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

(Exact name of registrant as specified in its charter)

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 o 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑      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, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

The aggregate market value of the voting common stock based on the closing price on the New York Stock Exchange on June 30, 2015 (the last business day of registrant’s most recently completed second fiscal quarter) of $35.12 per share held by non-affiliates of the registrant was $711,572,176.  For purposes of the foregoing calculation only, all directors and officers have been deemed to be affiliates, but the registrant disclaims that any of such are affiliates.

As of February 24, 2016, there were 22,630,585 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 19, 2016.

 

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STANDARD MOTOR PRODUCTS, INC.

INDEX

 

PART I.		Page No.
Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	22
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	88
Item 9A.	Controls and Procedures	88
Item 9B.	Other Information	89
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	89
Item 11.	Executive Compensation	89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89
Item 13.	Certain Relationships and Related Transactions	89
Item 14.	Principal Accounting Fees and Services	89
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	90
	Signatures	91

 

PART I

In this Annual Report on Form 10-K, “Standard Motor Products,” “we,” “us,” “our” and the “Company” refer to Standard Motor Products, Inc. and its subsidiaries, unless the context requires otherwise. This Report, including the documents incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties.  Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, changes in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our receivables factoring arrangements; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs that cannot be recouped in product pricing; the performance of the aftermarket, heavy duty, industrial equipment and original equipment service 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 replacement parts for motor vehicles in the automotive aftermarket industry with a complementary focus on heavy duty, industrial equipment and the original equipment service market.  We are organized into two major operating segments, each of which focuses on specific lines of replacement parts.  Our Engine Management Segment manufactures and remanufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicle systems.  Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories, and windshield washer system parts.

We sell our products primarily to warehouse distributors, large retail chains, original equipment manufacturers and original equipment service part operations in the United States, Canada, Latin America, and Europe.  Our customers consist of many of the leading warehouse distributors and auto parts retail chains, such as NAPA Auto Parts (National Automotive Parts Association, Inc.), Advance Auto Parts, Inc./CARQUEST Auto Parts, AutoZone, Inc., O’Reilly Automotive, Inc., Canadian Tire Corporation Limited and The Pep Boys Manny, Moe & Jack, as well as national program distribution groups, such as 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 newly formed organization, the Automotive Parts Services Group or The Group, and specialty market distributors. We distribute parts under our own brand names, such as Standard®, Blue Streak®, BWD®, Select®, Intermotor®, GP Sorensen®, TechSmart®, Tech Expert®, OEM®, LockSmart®, Four Seasons®, Factory Air®, EVERCO®, ACi®, Imperial®, COMPRESSORWORKS®, TORQFLO® and Hayden® and through co-labels and private labels, such as CARQUEST® BWD®, CARQUEST® Intermotor®, Duralast®, Duralast Gold®, Import Direct®, Master Pro®, Murray®, NAPA®, NAPA® Echlin®, NAPA Proformer™ Mileage Plus®, NAPA Temp Products™, Cold Power®, Driveworks^TM, ToughOne^TM and NAPA® Belden®.

 

Business Strategy

Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality original equipment and replacement products to the engine management and temperature control markets. The key elements of our strategy are as follows:

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

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

·

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

·

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

·

continuing to improve our cost position through increased global sourcing and increased manufacturing in low cost regions; and

·

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

·

Provide Superior Value-Added Services, Product Availability and Technical Support.  Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability, providing insightful customer category management, and providing technical support in a cost‑effective manner. In addition, our category management and technically skilled sales force professionals provide product selection, assortment and application support to our customers.

·

Expand Our Product Lines.  We intend to increase our sales by continuing to develop internally, or through acquisitions, the range of Engine Management and Temperature Control products that we offer to our customers. We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture multiple product lines that incorporate the latest technologies.

·

Broaden Our Customer Base.  Our goal is to increase our customer base by (a) continuing to leverage our manufacturing capabilities to secure additional original equipment business globally with automotive, industrial, marine, military and heavy duty vehicle and equipment manufacturers and their service part operations as well as our existing customer base including traditional warehouse distributors, large retailers, other manufacturers and export customers, and (b) supporting the service part operations of vehicle and equipment manufacturers with value added services and product support for the life of the part.

·

Improve Operating Efficiency and Cost Position.  Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates. We intend to continue to improve our operating efficiency and cost position by:

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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 located outside of the U.S.;

 

·

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, repurchase shares of our common stock, expand our product lines and grow revenues through acquisitions.

The Automotive Aftermarket

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

The automotive aftermarket industry differs substantially from the OEM supply business. Unlike the OEM supply business that primarily follows trends in new car production, the automotive aftermarket industry’s performance primarily tends to follow different trends, such as:

·

growth in number of vehicles on the road;

·

increase in average vehicle age;

·

change in total miles driven per year;

·

new or modified environmental and vehicle safety regulations, including fuel-efficiency and emissions reduction standards;

·

increase in pricing of new cars;

·

economic and financial market conditions;

·

new car quality and related warranties;

·

changes in automotive technologies;

·

change in vehicle scrap rates; and

·

change in average fuel prices.

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

 

Financial Information about our Operating Segments

The table below shows our consolidated net sales by operating segment and by major product group within each segment for the three years ended December 31, 2015.  Our two major reportable operating segments are Engine Management and Temperature Control.

The following table shows our operating profit and identifiable assets by operating segment for the three years ended December 31, 2015.

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

Engine Management Segment

Breadth of Products.

We manufacture a full line of engine management replacement parts including, electronic ignition control modules, fuel injectors, remanufactured diesel injectors and pumps, 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, tire pressure monitoring (TPMS) and mass airflow sensors), electronic throttle bodies and many other engine management components primarily under our brand names Standard®, Blue Streak®, BWD®, Select®, Intermotor®, OEM®, LockSmart®, TechSmart®, Tech Expert® and GP Sorensen®, and through co-labels and private labels such as CARQUEST® BWD®, CARQUEST® Intermotor®, Duralast®, Duralast Gold®, Import Direct®, Master Pro®, NAPA®, NAPA® Echlin®, NAPA Proformer^TM Mileage Plus® and NAPA® Belden®. We are a basic manufacturer of many of the engine management parts we market.  Our strategy includes expanding our product lines through strategic acquisitions in addition to sourcing certain materials and products from low cost regions such as those in Asia.  In our Engine Management Segment, replacement parts for ignition, emission control and fuel systems accounted for approximately 63% of our consolidated net sales in 2015, 62% of our consolidated net sales in 2014 and 61% of our consolidated net sales in 2013.

 

Computer-Controlled Technology. Nearly all new vehicles are factory‑equipped with computer‑controlled engine management systems to monitor and control ignition, emissions, fuel injection, transmission and certain mechanical systems.  The on‑board computers monitor inputs from many types of sensors located throughout the vehicle, and control a myriad of valves, solenoids, coils, switches and motors to manage engine and vehicle performance. Computer-controlled engine management systems enable the engine to operate with improved fuel efficiency and reduced levels of hazardous emissions.

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

Our sales of sensors, valves, solenoids and related parts have increased as automobile manufacturers equip their cars with more complex engine management systems.

Wire and Cable Products. Wire and cable parts accounted for approximately 9% of our consolidated net sales in 2015, 10% of our consolidated net sales in 2014 and 11% of our consolidated net sales in 2013.  These products include ignition (spark plug) wires, wire harnesses, battery cables and a wide range of electrical wire, terminals, connectors and tools for servicing an automobile’s electrical system.

We have historically offered ignition wires and battery cables under premium brands, which capitalize on the market’s awareness of the importance of quality, along with “value” priced brands for older vehicle applications. We extrude high voltage wire for use in our ignition wire sets. The vertical integration of this critical component offers us the ability to achieve lower costs and a controlled source of supply and quality.

Temperature Control Segment

We manufacture, remanufacture and market a full line of replacement parts for automotive temperature control (air conditioning and heating) systems, engine cooling systems, power window accessories and windshield washer systems, primarily under our brand names of Four Seasons®, Factory Air®, EVERCO®, ACi®, Imperial®, COMPRESSORWORKS®, TORQFLO® and Hayden® and through co-labels and private labels such as NAPA Temp Products™, Cold Power®, Driveworks^TM, ToughOne^TM and Murray®.  The major product groups sold by our Temperature Control Segment are new and remanufactured compressors, clutch assemblies, blower and radiator fan motors, filter dryers, evaporators, accumulators, hose assemblies, thermal expansion devices, heater valves, heater cores, AC service tools and chemicals, fan assemblies, fan clutches, oil coolers, window lift motors, window regulators and assemblies, and windshield washer pumps.  Our temperature control products accounted for approximately 27% of our consolidated net sales in 2015, 2014 and 2013.

Our Temperature Control business continues to implement cost savings initiatives in response to offshore competitive price pressures.  We have consolidated excess manufacturing facilities and have implemented a program to improve our manufacturing efficiencies.  We are also continuing to improve our cost position through our global sourcing initiatives in low cost regions and by increasing our production of remanufactured and new compressors in our facility in Reynosa, Mexico.

Today’s vehicles are being produced with more complex AC systems that are designed to improve their efficiency and reduce their size.  Our Temperature Control Segment continues to be a leader in providing superior training to service dealers who require access to up-to-date knowledge in proper maintenance and repair for changing technologies utilized in today’s vehicles.  We believe that our training module (Diagnosing and Repairing the Top Automotive HVAC Problems) remains one of the most sought-after training clinics in the industry and among professional service dealers.

 

Financial Information about Our Foreign and Domestic Operations and Export Sales

We sell our line of products primarily in the United States, with additional sales in Canada, Europe, Asia and Latin America.  Our sales are substantially denominated in U.S. dollars.

The table below shows our consolidated net sales by geographic area for the three years ended December 31, 2015.

The table below shows our long‑lived assets by geographic area for the three years ended December 31, 2015.

Sales and Distribution

In the traditional channel, we sell our products to warehouse distributors, who supply auto parts jobber stores. Jobbers in turn sell to professional technicians and to “do-it-yourselfers” who perform automotive repairs on their personal vehicles. In recent years, warehouse distributors have consolidated with other distributors, and an increasing number of distributors own their jobber stores or sell down channel to professional technicians. In the retail channel, customers buy directly from us and sell directly to professional technicians and “do-it-yourselfers” through their own stores. Retailers are also consolidating with other retailers and have begun to increase their efforts to sell to professional technicians adding additional competition in the “do-it-for-me,” or the professional technician segment of our industry.

As automotive parts grow more complex, “do-it-yourselfers” are less likely to service their own vehicles and may become more reliant on automotive dealerships and independent service dealer technicians.  In addition to new car sales, automotive dealerships sell OE brand parts and service vehicles.  The products available through the dealers are purchased through the original equipment service (“OES”) network.  Traditionally, the parts manufacturers of OEMs have supplied a majority of the OES network.  However, certain parts manufacturers have become independent and are no longer affiliated with OEMs.  In addition, many Tier 1 OEM suppliers are disinterested in providing service parts requirements for up to 15 years after the OE model has gone out of production.  As a result of these factors, there are additional opportunities for independent automotive aftermarket manufacturers like us to supply the OES network.

Our sales force is structured to meet the needs of our traditional and retail customers across the distribution channel, allowing us to provide 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 provide our sales personnel extensive instruction at our training facility in Irving, Texas and provide an extensive continuing education program that allows our sales force to stay current on troubleshooting and repair techniques.  The continuing education courses along with monthly supplemental web-based training are an integral part of our sales force development strategy.

 

In addition to training our sales personnel in the function and application of our products, we thoroughly train our sales personnel in proven sales techniques.  Our traditional and retail customers, therefore, have come to depend on these sales personnel as a reliable source for technical information and to assist with sales to their customers (i.e., jobber stores, “do-it-yourselfers,” and professional technicians).  In this 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 technician seminars, which teach over 60,000 technicians annually how to diagnose and repair vehicles equipped with complex systems related to our products.  To help our sales personnel to be teachers and trainers, we focus our recruitment efforts on candidates who have technical backgrounds as well as strong sales experience.

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

Customers

Our customer base is comprised largely of warehouse distributors, large retailers, OE/OES customers, other manufacturers and export customers.  Our five largest individual customers, including members of a marketing group, accounted for approximately 68% of our consolidated net sales in 2015, 69% of our consolidated net sales in 2014 and 66% of our consolidated net sales in 2013.  During 2015, O’Reilly Automotive, Inc., NAPA Auto Parts, Advance Auto Parts, Inc., and AutoZone, Inc. accounted for 19%, 19%, 17% and 11% of our consolidated net sales, respectively.  Net sales from each of the customers were reported in both our Engine Management and Temperature Control Segments.

 

In January 2016, one of our customers filed a petition for bankruptcy.  In connection with the bankruptcy filing, we evaluated our potential risk and exposure as related to our outstanding accounts receivable balance from the customer as of December 31, 2015, and estimated our anticipated recovery.  As a result of our evaluation, we recorded a net $3.5 million pre-tax charge during the year ended December 31, 2015 to reduce our accounts receivable balance to our estimated recovery.  The net $3.5 million pre-tax charge is included in selling, general and administrative expenses in our consolidated statement of operations.  We will continue to monitor the circumstances surrounding the bankruptcy in determining whether additional provisions may be necessary.

Competition

We are a leading independent manufacturer and distributor of replacement parts for product lines in Engine Management and Temperature Control. We compete primarily on the basis of product quality, product availability, 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;

·

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

·

breadth of manufacturing capabilities; and

·

award-winning marketing and sales support and technical training.

 

In the Engine Management business, we are one of the leading independent manufacturers and distributors in the United States. Our competitors include ACDelco, Delphi Automotive PLC, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., Ltd., General Cable Corporation, Dorman Products, Inc. and several privately-owned companies importing products from Asia.

Our Temperature Control business is one of the leading independent manufacturers and distributors of a full line of temperature control products in North America and other geographic areas. ACDelco, Delphi Automotive PLC, Denso Corporation, Motorcraft, Sanden International, Inc., Continental AG, and several privately-owned companies are some of our key competitors in this market.

The automotive aftermarket is highly competitive, and we face substantial competition in all markets that we serve.  Our success in the marketplace continues to depend on our ability to offer competitive prices, improved products, superior value-added services and expanded offerings in competition with many other suppliers to the aftermarket.  Some of our competitors may have greater financial, marketing and other resources than we do.  In addition, we face competition from automobile manufacturers who supply many of the replacement parts sold by us, although these manufacturers generally supply parts only for cars they produce through OE dealerships.

Seasonality

Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business.  In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories. For example, a cool summer, as we experienced in both 2014 and 2013, may lessen the demand for our Temperature Control products, while a warm summer, as we experienced in 2015, may increase such demand.  As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically peak near the end of the second quarter, as the inventory build‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

Working Capital Management

Automotive aftermarket companies have been under increasing pressure to provide broad SKU (stock keeping unit) coverage due to parts and brand proliferation. In response to this, we have made, and continue to make, changes to our inventory management system designed to reduce inventory requirements. We have a pack‑to‑order distribution system, which permits us to retain slow moving items in a bulk storage state until an order for a specific branded part is received. This system reduces the volume of a given part in inventory and reduces the labor requirements to package and repackage inventory. We also expanded our 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 warranty and overstock returns. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications and/or the result of 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.  In addition, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns.

 

In order to better control warranty and overstock return levels, we have in place procedures for authorized warranty returns, including for warranty returns which result from installation error, placed restrictions on the amounts customers can return and instituted a program to better estimate potential future product returns.  In addition, with respect to our air conditioning compressors, which are our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not provide acceptable proof that complete air conditioning system repair was performed in accordance with approved procedures.

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

Suppliers

The principal raw materials purchased by us consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), steel magnets, laminations, tubes and shafts, stamped steel parts, copper wire, stainless steel coils and rods, aluminum coils, fittings, rods, cast aluminum parts, lead, steel roller bearings, rubber molding compound, thermo‑set and thermo plastic molding powders, 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.

We purchase materials in the U.S. and foreign open markets and have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores for air conditioning compressors, 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. In order to ensure a consistent, high quality and low cost supply of key components for each product line, we continue to develop our own sources.  We are not dependent on any single commodity, however, there can be no assurance over the long term that increases in commodity prices will not materially affect our business or results of operations.  In addition, in August 2012, the U.S. Securities and Exchange Commission adopted 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. Implementation of the disclosure requirements could affect the sourcing and availability of some of the minerals used in the manufacture of our products, and may impose additional costs on us associated with complying with the disclosure requirements.

Production and Engineering

We engineer, tool and manufacture many of the components used in the assembly of our products. We also perform our own plastic molding operations, stamping and machining operations, wire extrusion, automated electronics assembly and a wide variety of other processes. In the case of remanufactured components, we conduct our own teardown, diagnostics and rebuilding for air conditioning compressors, 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.

 

Employees

As of December 31, 2015, we employed approximately 3,400 people, with 1,900 people in the United States and 1,500 people in Mexico, Canada, Poland, the U.K., Hong Kong and Taiwan.  Of the 3,400 people employed, approximately 1,500 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 60 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 700 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.

Insurance

We maintain basic liability coverage up to $2 million for automobile liability, $10 million for general and product liability and $100 million for umbrella liability coverage.  We also maintain environmental insurance of $10 million and property insurance of $210 million, including business interruption insurance, covering our existing U.S. and Canadian facilities.  We are currently monitoring our environmental remediation efforts at one of our facilities.  The environmental testing and any remediation costs at such facility may be covered by several insurance policies, although we can give no assurance that our insurance will cover any environmental remediation claims.  Historically, we have not experienced casualty losses in any year in excess of our coverage.  However, there can be no assurances that liability losses in the future will not exceed our coverage.

Available Information

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

 

ITEM 1A.

RISK FACTORS

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

Risks Related to Our Operations

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

Our five largest individual customers, including members of a marketing group, accounted for approximately 68% of our consolidated net sales in 2015, 69% of our consolidated net sales in 2014 and 66% of our consolidated net sales in 2013.  During 2015, O’Reilly Automotive, Inc., NAPA Auto Parts, Advance Auto Parts, Inc., and AutoZone, Inc. accounted for 19%, 19%, 17% 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, such as Advance Auto’s acquisition of CarQuest in 2014, may further exacerbate our customer concentration risk.

Also, we do not typically enter into long-term agreements with any of our customers.  Instead, we enter into a number of purchase order commitments with our customers, based on their current or projected needs.  We have in the past, and may in the future, lose customers or lose a particular product line of a customer due to the highly competitive conditions in the automotive aftermarket industry, including pricing pressures, consolidation of customers, 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, our competitors include ACDelco, Delphi Automotive PLC, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., LTD., General Cable Corporation, Dorman Products, Inc. and several privately-owned companies importing products from Asia.   In the Temperature Control Segment, we compete with ACDelco, Delphi Automotive PLC, Denso Corporation, Motorcraft, Sanden International, Inc., Continental AG, and several privately-owned companies.  In addition, automobile manufacturers supply many of the replacement parts we sell.

 

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

·

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

·

engage in more extensive research and development;

·

sell products at a lower price than we do;

·

undertake more extensive marketing campaigns; and

·

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

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

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

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

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

Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and with revenues generally being recognized at the time of shipment.  It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business. In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories. For example, a cool summer, as we experienced in both 2014 and 2013, may lessen the demand for our Temperature Control products, while a warm summer, as we experienced in 2015, may increase such demand.  As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.  During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

 

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 indemnity and defense of such claims.

Actuarial consultants with experience in assessing asbestos-related liabilities conducted a study to estimate our potential claim liability as of August 31, 2015.  The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $33.3 million to $51.1 million for the period through 2058. The change from the prior year study was a $2.8 million decrease for the low end of the range and a $4.3 million decrease for the high end of the range.  The decrease in the estimated undiscounted liability from the prior year study at both the low end and high end of the range reflects our actual experience over the prior twelve months, our historical data and certain assumptions with respect to events that may occur in the future.  Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.  Based upon the results of the August 31, 2015 actuarial study, a favorable adjustment to the asbestos liability was not recorded in our consolidated financial statements as the difference between our recorded liability and the liability in the actuarial report at the low end of the range was not material.  Future legal costs, which are expensed as incurred and reported in loss from discontinued operations in the accompanying statement of operations, are estimated, according to the updated study, to range from $40 million to $75.5 million for the period through 2058.

 

At December 31, 2015, approximately 2,110 cases were outstanding for which we may be responsible for any related liabilities.  Since inception in September 2001 through December 31, 2015, the amounts paid for settled claims are approximately $18.9 million.  A substantial increase in the number of new claims or increased settlement payments or awards of damages could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

 

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.

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

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

Risks Related to Liquidity

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

We have entered into factoring arrangements with financial institutions to sell certain of our customers’ trade accounts receivable without recourse.  If we do not enter into these factoring arrangements, our financial condition, results of operations and cash flows could be materially and adversely affected by delays or failures in collecting trade accounts receivables.  In addition, if any of the financial institutions with which we have factoring arrangements experience financial difficulties or otherwise terminate our factoring arrangements, we may experience material and adverse economic losses due to the loss of such factoring arrangements and the impact of such loss on our liquidity, which could have a material and adverse effect upon our financial condition, results of operations and cash flows. The utility of our factoring arrangements also depends upon 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, 2015, our total outstanding indebtedness was $47.5 million, of which amount $47.4 million of outstanding indebtedness and approximately $128.5 million of availability was attributable to this revolving credit facility.  Any significant increase in our indebtedness could increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

In addition, we have granted the lenders under our revolving credit facility a first priority security interest in substantially all of our currently owned and future acquired personal property 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

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

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

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

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

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

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

 

In August 2012, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted 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 used in the manufacture of our products as the number of suppliers who provide conflict-free minerals may be limited.  In addition, we expect to incur additional costs and expenses in order to comply with these rules, including for (i) due diligence to determine whether conflict minerals are necessary to the functionality or production of any of our products and, if so, to verify the sources of such conflict minerals; and (ii) any changes that we may desire to make to our products, processes, or sources of supply as a result of such diligence and verification activities.  It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free and/or we are unable to alter our products, processes or sources of supply to avoid such materials.  We may also face difficulties in satisfying customers who may require that our products be certified as having conflict-free minerals, which could place us at a competitive disadvantage if we are unable to do so and lead to a loss of revenue.

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

The nature of our operations exposes us to the risk of claims with respect to such matters, and we can give no assurance that violations of such laws have not occurred or will not occur or that material costs or liabilities will not be incurred in connection with such claims.  We are currently monitoring our environmental remediation efforts at one of our facilities and our reserve balance related to the environmental clean-up at this facility is $0.6 million at December 31, 2015.  The environmental testing and any remediation costs at such facility may be covered by several insurance policies, although we can give no assurance that our insurance will cover any environmental remediation claims.  We also maintain insurance to cover our existing U.S. and Canadian facilities. We can give no assurance that the future cost of compliance with existing environmental laws and the liability for known environmental claims pursuant to such environmental laws will not give rise to additional significant expenditures or liabilities that would be material to us. In addition, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, state or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations.

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

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

In addition, the size of the automobile replacement parts market depends, in part, upon the growth in number of vehicles on the road, increase in average vehicle age, change in total miles driven per year, new 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.

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, 2015.

 

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,” “Litigation Charge” and “Other Litigation” appearing in Note 19, “Commitments and Contingencies” of the notes to our 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 following table shows the high and low sales prices per share of our common stock as reported by the NYSE and the dividends declared per share for the periods indicated:

The last reported sale price of our common stock on the NYSE on February 24, 2016 was $36.09 per share.  As of February 24, 2016, there were 486 holders of record of our common stock.

 

Dividends are declared and paid on the common stock at the discretion of our Board of Directors (the “Board”) and depend on our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our Board. Our current practice is to pay dividends on a quarterly basis.  In January 2016, our Board voted to increase our quarterly dividend to a rate of $0.17 per share.  Our revolving credit facility permits dividends and distributions by us provided specific conditions are met.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for a further discussion of our revolving credit facility.

 

There have been no unregistered offerings of our common stock during the fourth quarter of 2015.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

For a discussion of our stock repurchases, see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following table provides information relating to the Company’s purchases of its common stock for the fourth quarter of 2015:

(1)

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

(2)

In February 2015, our Board of Directors authorized the purchase of up to $10 million of our common stock under a stock repurchase program.  In July 2015, our Board of Directors authorized the purchase of up to an additional $10 million of our common stock under another stock repurchase program.  Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant. Under these programs, during the three months and twelve months ended December 31, 2015, we repurchased 111,989 shares and 551,791 shares of our common stock, respectively, at a total cost of $4.1 million and $19.6 million, respectively.  As of December 31, 2015, there was approximately $0.4 million available for future stock repurchases under the programs.  In January 2016, we repurchased an additional 10,135 shares of our common stock under the programs at a total cost of $0.4 million, thereby completing the 2015 Board of Directors authorizations.

 

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, 2010 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.

 

* Source: S&P Capital IQ

 

ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the five years ended December 31, 2015.  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.

 

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)

We recorded an after tax charge of $2.1 million, $9.9 million, $1.6 million, $1.6 million, and $1.9 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, 2015, 2014, 2013, 2012 and 2011, respectively.  Such costs were also separately disclosed in the operating activity section of the consolidated statements of cash flows for those same years.

 

(3)

In December 2011, we realized a non-recurring non-cash benefit of $21.5 million in our provision for income taxes related to a reduction of a significant portion of our deferred tax valuation allowance on net U.S. deferred tax assets.

 

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, 2015.

Overview

We are a leading independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry, with a complementary focus on heavy duty, industrial equipment and the original equipment service market.  We are organized into two major operating segments, each of which focuses on specific lines of replacement parts.  Our Engine Management Segment manufactures and remanufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicle systems.  Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories, and windshield washer system parts.

We sell our products primarily to warehouse distributors, large retail chains, original equipment manufacturers and original equipment service part operations in the United States, Canada, Latin America, and Europe.  Our customers consist of many of the leading warehouse distributors and auto parts retail chains, such as NAPA Auto Parts (National Automotive Parts Association, Inc.), Advance Auto Parts, Inc./CARQUEST Auto Parts, AutoZone, Inc., O’Reilly Automotive, Inc., Canadian Tire Corporation Limited and The Pep Boys Manny, Moe & Jack, as well as national program distribution groups, such as 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 newly formed organization, the Automotive Parts Services Group or The Group, and specialty market distributors. We distribute parts under our own brand names, such as Standard®, Blue Streak®, BWD®, Select®, Intermotor®, GP Sorensen®, TechSmart®, Tech Expert®, OEM®, LockSmart®, Four Seasons®, Factory Air®, EVERCO®, ACi®, Imperial®, COMPRESSORWORKS®, TORQFLO® and Hayden® and through co-labels and private labels, such as CARQUEST® BWD®, CARQUEST® Intermotor®, Duralast®, Duralast Gold®, Import Direct®, Master Pro®, Murray®, NAPA®, NAPA® Echlin®, NAPA Proformer™ Mileage Plus®, NAPA Temp Products™, Cold Power®, Driveworks^TM, ToughOne^TM and NAPA® Belden®.

Business Strategy

Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality original equipment and replacement products to the engine management and temperature control markets. The key elements of our strategy are as follows:

·

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

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

·

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

·

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

 

·

continuing to improve our cost position through increased global sourcing and increased manufacturing in low cost regions; and

·

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

·

Provide Superior Value-Added Services, Product Availability and Technical Support.  Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability, providing insightful customer category management, and providing technical support in a cost‑effective manner. In addition, our category management and technically skilled sales force professionals provide product selection, assortment and application support to our customers.

·

Expand Our Product Lines.  We intend to increase our sales by continuing to develop internally, or through potential acquisitions, the range of Engine Management and Temperature Control products that we offer to our customers. We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture multiple product lines that incorporate the latest technologies.

·

Broaden Our Customer Base.  Our goal is to increase our customer base by (a) continuing to leverage our manufacturing capabilities to secure additional original equipment business globally with automotive, industrial, marine, military and heavy duty vehicle and equipment manufacturers and their service part operations as well as our existing customer base including traditional warehouse distributors, large retailers, other manufacturers and export customers, and (b) supporting the service part operations of vehicle and equipment manufacturers with value added services and product support for the life of the part.

·

Improve Operating Efficiency and Cost Position.  Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates. We intend to continue to improve our operating efficiency and cost position by:

·

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

·

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

·

evaluating additional opportunities to relocate manufacturing to our low-cost plants located outside of the U.S.;

·

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, repurchase shares of our common stock, expand our product lines and grow revenues through potential acquisitions.

The Automotive Aftermarket

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

 

The automotive aftermarket industry differs substantially from the OEM supply business. Unlike the OEM supply business that primarily follows trends in new car production, the automotive aftermarket industry’s performance primarily tends to follow different trends, such as:

·

growth in number of vehicles on the road;

·

increase in average vehicle age;

·

change in total miles driven per year;

·

new or modified environmental and vehicle safety regulations, including fuel-efficiency and emissions reduction standards;

·

increase in pricing of new cars;

·

economic and financial market conditions;

·

new car quality and related warranties;

·

changes in automotive technologies;

·

change in vehicle scrap rates; and

·

change in average fuel prices.

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

Seasonality.  Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business.  In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories.  For example, a cool summer, as we experienced in both 2014 and 2013, may lessen the demand for our Temperature Control products, while a warm summer, as we experienced in 2015, may increase such demand.  As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements typically peak near the end of the second quarter, as the inventory build‑up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

Inventory Management. We face inventory management issues as a result of warranty and overstock returns. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications and/or the result of 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. We accrue for overstock returns as a percentage of sales, after giving consideration to recent returns history.

 

In order to better control warranty and overstock return levels, we have in place procedures for authorized warranty returns, including for warranty returns which result from installation error, placed restrictions on the amounts customers can return and instituted a program to better estimate potential future product returns.  In addition, with respect to our air conditioning compressors, which are our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not provide acceptable proof that complete air conditioning system repair was performed.

 

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.

Sales.  Consolidated net sales for 2015 were $972 million, a decrease of $8.4 million compared to $980.4 million in the same period of 2014.  Consolidated net sales at our Engine Management Segment decreased year-over-year, which more than offset the increase in sales at our Temperature Control Segment.  Had the same Canadian Dollar and Polish Zloty exchange rates applied in 2014 been used in 2015, net sales for 2015 would have been $8.2 million higher, or $980.2 million.

 

The following table summarizes net sales and gross margins by segment for the years ended December 31, 2015 and 2014, respectively (in thousands):

 

Engine Management’s net sales decreased $11.2 million, or 1.6%, to $698 million for 2015.  Net sales in 2015 were negatively impacted by customer ordering patterns and diesel injector returns for quality inspection.  Also contributing to the reduction in net sales was the negative impact of foreign currency exchange rates.  Had the same Polish Zloty exchange rate applied in 2014 been used in 2015, net sales for 2015 would have been $1.5 million higher, or $699.5 million.

 

Temperature Control’s net sales increased $5.4 million, or 2.1%, to $264.5 million for 2015.  Included in the 2015 net sales are incremental sales of $4.7 million from our asset acquisition of Annex Manufacturing, acquired in April 2014.  Excluding the incremental sales from the acquisition, Temperature Control’s net sales increased $0.7 million compared to 2014.  The year-over-year increase in net sales at Temperature Control resulted from the impact of warmer summer conditions in 2015 as compared to the same period in 2014.  Offsetting the increase in net sales at Temperature Control was the negative impact of foreign currency exchange rates.  Had the same Canadian exchange rate applied in 2014 been used in 2015, net sales for 2015 would have been $1.1 million higher, or $265.6 million.  Demand for our Temperature Control products may vary significantly with summer weather conditions and customer inventories.

 

Gross Margins.  Gross margins, as a percentage of consolidated net sales, decreased to 28.9% in 2015 compared to 29.5% in 2014.  Gross margins at Engine Management decreased 0.6 percentage points from 31% to 30.4% while gross margins at Temperature Control increased 0.3 percentage points from 21.6% to 21.9%.  The gross margin percentage decline in Engine Management compared to the prior year was primarily the result of costs incurred to improve our diesel manufacturing production processes and quality controls.  The gross margin percentage increase in Temperature Control compared to the prior year reflects the impact of higher production volumes to meet the increase in customer demand due to warmer year-over-year summer weather conditions.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses (“SG&A”) increased to $206.3 million, or 21.2% of consolidated net sales in 2015, as compared to $193.5 million or 19.7% of consolidated net sales in 2014.  The $12.8 million increase in SG&A expenses as compared to 2014 reflects the impact of the net $3.5 million charge recorded in 2015 to reduce our outstanding accounts receivable balance from one of our customers that filed for bankruptcy in January 2016 to our estimated recovery amount, in addition to higher selling, marketing and distribution expenses, higher expenses related to the sale of receivables, and higher employee compensation and benefit costs including the reduction of postretirement prior service cost benefit amortization.

Litigation Charge.  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 paid in September 2014 and was funded from cash on hand and available credit under our revolving credit facility.  For additional information, see Note 19 of the notes to our financial statements.

Restructuring and Integration (Income) Expenses.  Restructuring and integration income was $0.1 million in 2015 compared to restructuring and integration expenses of $1.2 million in 2014.  Components of our restructuring and integration accruals, by segment, were as follows (in thousands):

Other Income, Net.  Other income, net was $1 million in 2015 compared to $1.1 million for the year ended December 31, 2014.  During 2015 and 2014, 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 $75.9 million in 2015, compared to $85.3 million in 2014.  Included in operating income in 2014 was a $10.6 million charge in connection with a settlement agreement in a legal proceeding with a third party.  Excluding the $10.6 million charge in 2014, operating income in 2014 was $95.9 million.  The year-over year decline in operating income is the result of lower net sales, lower gross margins as a percentage of consolidated net sales and higher SG&A expenses.

Other Non-Operating Income (Expense), Net.  Other non-operating expense, net was $0.2 million in 2015, compared to other non-operating expense, net of $2 million in 2014.  During 2015, we recognized foreign currency losses of $0.7 million, and upon entering into a new revolving credit agreement wrote-off $0.8 million of unamortized deferred financing costs associated with the prior revolving credit agreement.  Offsetting these other non-operating expenses in 2015 were $1 million of equity income from our joint ventures, and interest, dividend income and other income of $0.2 million.  Other non-operating expense, net during 2014 consisted of foreign currency losses of $1.6 million and equity losses from our joint ventures of $0.8 million, which were offset by interest and dividend income of $0.3 million.

 

Interest Expense. Interest expense was essentially flat year-over year.  Interest expense was $1.5 million in 2015 compared to $1.6 million in 2014.  The lower average outstanding borrowings in 2015, when compared to 2014, were offset by slightly higher interest rates.

Income Tax Provision.  The income tax provision for 2015 was $26 million at an effective tax rate of 35.1%, compared to $28.9 million at an effective tax rate of 35.3% in 2014.  The effective tax rate was essentially flat year-over-year.

Loss from Discontinued Operations, Net of Income Tax Benefit.  Loss from discontinued operations, net of income tax, reflects information contained in the most recent actuarial studies performed as of August 31, 2015 and 2014, and other information available and considered by us, and legal expenses incurred associated with our asbestos-related liability.  During 2015 and 2014, we recorded a loss of $2.1 million and $9.9 million, net of tax, from discontinued operations, respectively.  The loss from discontinued operations in 2014 includes a $12.8 million pre-tax provision reflecting the impact of the results of the August 2014 actuarial study.  In 2015, the difference between the low end of the range in the August 2015 actuarial study and our recorded liability indicated a favorable pre-tax adjustment that was not material and, as such, was not recorded.  As discussed more fully in Note 19 of the notes to our financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

Sales.  Consolidated net sales for 2014 were $980.4 million, a decrease of $3.3 million compared to $983.7 million in the same period of 2013.  Consolidated net sales decreased in both our Engine Management and Temperature Control Segments as compared to 2013.

 

The following table summarizes net sales and gross margins by segment for the years ended December 31, 2014 and 2013, respectively (in thousands):

 

Engine Management’s net sales decreased $2 million to $709.3 million for 2014.  The year-over-year decrease in net sales resulted primarily from lower net sales in the OE/OES and export markets as compared to 2013, which more than offset the higher net sales in the retail, traditional and specialty markets.

 

Temperature Control’s net sales decreased $3.5 million, or 1.3%, to $259.1 million for 2014.  The year-over-year decrease in net sales at Temperature Control resulted from the lower results in the traditional and retail markets offset, in part, by the higher net sales in the OE/OES and specialty markets.  Included in the 2014 net sales are incremental sales of $8.5 million from the business acquired in connection with our asset acquisition of Annex Manufacturing in April 2014.  Excluding the incremental sales from the acquisition, Temperature Control’s net sales decreased $12 million compared to 2013.  Demand for our Temperature Control products may vary significantly with summer weather conditions and customer inventories.

 

Gross Margins.  Gross margins, as a percentage of consolidated net sales, were flat at 29.5% when compared to 2013.  Gross margins at Engine Management increased 0.3 percentage points from 30.7% to 31% while gross margins at Temperature Control decreased 0.5 percentage points from 22.1% to 21.6%.  The gross margin percentage improvement in Engine Management compared to the prior year was primarily the result of improved global sourcing and manufacturing efficiencies, including the increase in manufacturing at our lower cost facilities.  The gross margin percentage decline in Temperature Control compared to the prior year resulted primarily from lower production volumes to bring inventories in line with anticipated market demand.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses (“SG&A”) decreased by $7.8 million to $193.5 million or 19.7% of consolidated net sales in 2014, as compared to $201.3 million or 20.5% of consolidated net sales in 2013.  The decrease in SG&A expenses as compared to 2013 is principally due to lower employee benefit costs and savings from the integration of the CompressorWorks acquisition in April 2012.

Litigation Charge.  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.  For additional information, see Note 19 of the notes to our financial statements.

Restructuring and Integration Expenses.  Restructuring and integration expenses decreased to $1.2 million in 2014 compared to $3.4 million in 2013.  Components of our restructuring and integration accruals, by segment, were as follows (in thousands):

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

Other Income, Net.  Other income, net was $1.1 million in 2014 compared to $1 million for the year ended December 31, 2013.  During 2014 and 2013, we recognized $1 million of deferred gain related to the sale-leaseback of our Long Island City, New York facility.

Operating Income.  Operating income decreased $1.6 million to $85.3 million in 2014, compared to $86.9 million in 2013.  The year-over year decline in operating income reflects the impact of lower net sales and the $10.6 million litigation charge incurred in 2014 in connection with a settlement agreement in a legal proceeding with a third party, offset in part by lower SG&A and restructuring and integration expenses.

Other Non-Operating Income (Expense), Net.  Other non-operating expense, net was $2 million in 2014.  During 2014, we recognized foreign currency exchange losses of $1.6 million and equity losses from our joint ventures of $0.8 million, which were offset by interest and dividend income of $0.3 million.  Other non-operating income (expense), net during 2013 consisted of foreign currency losses of $0.1 million and equity losses from our joint ventures of $0.3 million, offset by interest and dividend income of $0.3 million.

Interest Expense. Interest expense decreased by $0.3 million to $1.6 million in 2014 compared to interest expense of $1.9 million in 2013 as average interest rates declined year-over-year.  The year-over-year decline in interest rates reflects the impact of the lower interest rates in our May 2013 amendment to our revolving credit facility.

 

Income Tax Provision.  The income tax provision for 2014 was $28.9 million at an effective tax rate of 35.3%, compared to $31.9 million at an effective tax rate of 37.6% in 2013.  The lower year-over-year effective tax rate is the result of the change in the mix of pre-tax income from the U.S. to the lower foreign tax rate jurisdictions, the reversal of previously established reserves for uncertain tax positions as a result of the expiration of the statue of limitations and tax return adjustments relating to production deductions and research and development credits.

Loss from Discontinued Operations, Net of Income Tax Benefit.  Loss from discontinued operations, net of income tax, reflects information contained in the most recent actuarial studies performed as of August 31, 2014 and 2013, and other information available and considered by us, and legal expenses incurred associated with our asbestos-related liability.  During 2014 and 2013, we recorded a loss of $9.9 million and $1.6 million, net of tax, from discontinued operations, respectively.  The loss from discontinued operations for 2014 includes a $12.8 million pre-tax provision reflecting the impact of the results of the August 2014 actuarial study.  No similar adjustment to our asbestos liability was made in 2013 as the difference between the low end of the range in the August 2013 actuarial study and our recorded liability was not material.  As discussed more fully in Note 19 in the notes to our financial statements, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

Restructuring and Integration (Income) Expenses

The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of and for the years ended December 31, 2015 and 2014, consisted of the following (in thousands):

Liabilities associated with the remaining restructuring and integration costs as of December 31, 2015 relate primarily to employee severance and other retiree benefit enhancements to be paid through 2019 and environmental clean-up costs at our Long Island City, New York location in connection with the closure of our manufacturing operations at the site.

Liquidity and Capital Resources

Operating Activities.  During 2015, cash provided by operations was $65.2 million, compared to $47 million in 2014.  Included in cash provided by operations during 2014 was a nonrecurring $10.6 million cash payment in connection with a settlement agreement in a legal proceeding with a third party.  During 2015, cash provided by operations was favorably impacted by (1) net earnings of $46 million compared to net earnings of $43 million in 2014; (2) the increase in accounts payable of $1.9 million compared to the year-over-year decrease in accounts payable of $4.3 million in 2014; and (3) the increase in sundry payables and accrued expenses of $1.9 million compared to the year-over-year decrease in sundry payables and accrued expenses of $7.7 million in 2014.  Partially offsetting the favorable result in operating cash flow was (1) the increase in accounts receivable of $2 million compared to the year-over-year decrease in accounts receivable of $1.8 million in 2014; and (2) the increase in inventory of $12.5 million compared to the year-over-year increase in inventory of $6.7 million in 2014.  We continue to actively manage our working capital to maximize our operating cash flow.

 

During 2014, cash provided by operations was $47 million, compared to $57.6 million in 2013.  Included in cash provided by operations during 2014 was a nonrecurring $10.6 million cash payment in connection with a settlement agreement in a legal proceeding with a third party.  During 2014, cash provided by operations was unfavorably impacted by (1) net earnings of $43 million compared to net earnings of $51.5 million in 2013; (2) the increase in inventory of $6.7 million compared to the year-over-year increase in inventory of $6.1 million in 2013; (3) the decrease in accounts payable of $4.3 million compared to the year-over-year increase in accounts payable of $12.5 million in 2013; and (4) the decrease in sundry payables and accrued expenses of $7.7 million compared to the year-over-year increase in sundry payables and accrued expenses of $8.7 million in 2013.  Partially offsetting the unfavorable result in operating cash flow was the decrease in accounts receivable of $1.8 million in 2014 compared to the year-over-year increase in accounts receivable of $27.3 million in 2013.

Investing Activities.  Cash used in investing activities was $18 million in 2015, compared to $51.2 million in 2014 and $24.8 million in 2013.  Investing activities in 2015 consisted of capital expenditures of $18 million.

Cash used in investing activities was $51.2 million in 2014.  Investing activities in 2014 consisted of (1) our acquisition of certain assets of Pensacola Fuel Injection Inc., our primary vendor for rebuilt diesel fuel injectors and other related diesel products, for $12.2 million; (2) our acquisition of a 50% interest in the joint venture with Gwo Yng Enterprise Co., Ltd., a China based manufacturer of air conditioning accumulators, filter driers, hose assemblies, and switches for the automotive aftermarket and OEM/OES markets for $14 million; (3) our acquisition of certain assets of Annex Manufacturing of Fort Worth, Texas, a distributor of a variety of temperature control products for the automotive aftermarket, for $11.5 million; and (4) capital expenditures of $13.9 million.

Cash used in investing activities was $24.8 million in 2013.  Cash used in investing activities in 2013 consisted primarily of (1) our acquisition of an approximate 25% minority interest in Orange Electronic Co. Ltd., our supplier of tire pressure monitoring systems located in Taiwan, for $6.3 million, (2) our acquisition of the original equipment business of Standard Motor Products Holdings Ltd., our former affiliate in the U.K., for $6.5 million, and (3) $11.4 million in capital expenditures.

Financing Activities.  Cash used in financing activities was $41.2 million in 2015, compared to cash provided by financing activities of $15.3 million in 2014, and cash used in financing activities of $39.3 million in 2013.  Cash provided by operating cash flow in 2015 was used to fund capital expenditures, pay dividends, repurchase company stock and reduce borrowings under our revolving credit facility.  During 2015, we reduced borrowings under our revolving credit facilities by $9.1 million and repurchased 551,791 shares of our common stock for $19.6 million.

Cash provided by financing activities was $15.3 million in 2014.  Borrowings under our revolving credit facility in 2014, along with the cash provided by operations, were used to pay dividends and to fund acquisitions, business investments, capital expenditures, and the repurchase of 284,284 shares of our common stock for $10 million.

Cash used in financing activities was $39.3 million in 2013.  The excess cash provided by operations over cash used in investing activities in 2013 was used to (1) pay down borrowings under our revolving credit facility; (2) to fund the purchase of 209,973 shares of our common stock for $6.9 million; (3) to pay $1.3 million of debt issuance costs in connection with our May 2013 amendment to our restated credit agreement; and (4) pay dividends.

Dividends of $13.7 million, $11.9 million and $10.1 million were paid in 2015, 2014 and 2013, respectively.  Quarterly dividends were paid at a rate of $0.15 per share in 2015, $0.13 per share in 2014 and $0.11 per share in 2013.  In January 2016, our Board of Directors voted to increase our quarterly dividend from $0.15 per share in 2015 to $0.17 per share in 2016.

 

Liquidity

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

In October 2015, we entered into a Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and a syndicate of lenders 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 a maturity date in October 2020.  The new credit agreement replaces our prior credit facility with General Electric Capital Corporation, as agent, and the lenders therein.  Direct borrowings under the new 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 credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.

Borrowings under the new 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 credit agreement is based on a formula of eligible accounts receivable, eligible inventory, eligible equipment and eligible fixed assets.  After taking into account outstanding borrowings under the credit agreement, there was an additional $128.5 million available for us to borrow pursuant to the formula at December 31, 2015.  Outstanding borrowings under the credit agreements, which are classified as current liabilities, were $47.4 million and $56.6 million at December 31, 2015 and 2014, respectively.  Borrowings under the restated credit agreement have been classified as current liabilities based upon the accounting rules and certain provisions in the agreement.

At December 31, 2015, the weighted average interest rate on our credit agreement was 1.7%, which consisted of $44 million in direct borrowings at 1.6% and an alternative base rate loan of $3.4 million at 3.8%.  At December 31, 2014, the weighted average interest rate under our prior credit facility with General Electric Capital Corporation was 1.8%, which consisted of $53 million in direct borrowings at 1.7% and an index loan of $3.6 million at 3.8%.  During 2015, our average daily alternative base rate/index loan balance was $4.9 million and during 2014 our average daily index loan balance under our prior credit facility with General Electric Capital Corporation was $4.4 million.

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 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, 2015, we were not subject to these covenants.  The 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 credit agreement also permits acquisitions, permissible debt financing, capital expenditures, and cash dividend payments and stock repurchases of greater than $20 million.

The new credit agreement also replaces our Canadian Credit Agreement with GE Canada Finance Holding Company.  The new agreement with JPMorgan Chase Bank, N.A. allows for a $10 million line of credit to Canada as part of the $250 million available for borrowing.

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 $693.6 million and $690.3 million of receivables for the years ended December 31, 2015 and 2014, respectively.  A charge in the amount of $14.3 million, $13.1 million and $13.9 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, 2015, 2014 and 2013, respectively.  If we do not enter into these arrangements or if any of the financial institutions with which we enter into these arrangements were to experience financial difficulties or otherwise terminate these arrangements, our financial condition, results of operations and cash flows could be materially and adversely affected by delays or failures to collect future trade accounts receivable.

In January 2016, one of our customers filed a petition for bankruptcy.  In connection with the bankruptcy filing, we evaluated our potential risk and exposure as related to our outstanding accounts receivable balance from the customer as of December 31, 2015, and estimated our anticipated recovery.  As a result of our evaluation, we recorded a net $3.5 million pre-tax charge during the year ended December 31, 2015 to reduce our accounts receivable balance to our estimated recovery.  The net $3.5 million pre-tax charge is included in selling, general and administrative expenses in our consolidated statement of operations.  We will continue to monitor the circumstances surrounding the bankruptcy in determining whether additional provisions may be necessary.

In May 2012, our Board of Directors authorized the purchase of up to $5 million of our common stock under a stock repurchase program.  Under this program, during the years ended December 31, 2013 and 2012, we repurchased 30,601 shares and 312,527 shares, respectively, of our common stock at a total cost of $0.9 million and $4.1 million, respectively.  No stock repurchases remain available under the 2012 program as the entire $5 million was utilized.

In February 2013, our Board of Directors authorized the purchase of up to $6 million of our common stock under a stock repurchase program.  During the year ended December 31, 2013, we repurchased 179,372 shares of our common stock under this program at a total cost of $6 million.  No stock repurchases remain available under the 2013 program as the entire $6 million was utilized.

In February 2014, our Board of Directors authorized the purchase of up to $10 million of our common stock under a stock repurchase program.  During the year ended December 31, 2014, we repurchased 284,284 shares of our common stock under this program at a total cost of $10 million.  No stock repurchases remain available under the 2014 program as the entire $10 million was utilized.

In February 2015, our Board of Directors authorized the purchase of up to $10 million of our common stock under a stock repurchase program.  In July 2015, our Board of Directors authorized the purchase of up to an additional $10 million of our common stock under another stock repurchase program.  Under these programs, during the year ended December 31, 2015, we repurchased 551,791 shares of our common stock at a total cost of $19.6 million.  As of December 31, 2015, there was approximately $0.4 million available for future stock repurchases under the programs.  In January 2016, we repurchased an additional 10,135 shares of our common stock under the programs at a total cost of $0.4 million, thereby completing the 2015 Board of Directors authorizations.

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.

 

The following table summarizes our contractual commitments as of December 31, 2015 and expiration dates of commitments through 2025(a):

(a)

Indebtedness under our revolving credit facilities of $47.4 million as of December 31, 2015 is not included in the table above as it is reported as a current liability in our consolidated balance sheets.

Critical Accounting Policies

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

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

Inventory Valuation.  Inventories are valued at the lower of cost or market.  Cost is determined on the first-in, first-out basis.  Where appropriate, standard cost systems are utilized for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs.  Estimates of lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.

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

 

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

Sales Returns and Other Allowances and Allowance for Doubtful Accounts. We must make estimates of potential future product returns related to current period product revenue.  We analyze historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances.  Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.  At December 31, 2015, the allowance for sales returns was $38.8 million.

Similarly, we must make estimates of the uncollectability of our accounts receivables. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit‑worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  In January 2016, one of our customers filed a petition for bankruptcy.  In connection with the bankruptcy filing, we evaluated our potential risk and exposure as related to our outstanding accounts receivable balance from the customer as of December 31, 2015, and estimated our anticipated recovery.  As a result of our evaluation, we recorded a net $3.5 million pre-tax charge during the year ended December 31, 2015 to reduce our accounts receivable balance to our estimated recovery.  We will continue to monitor the circumstances surrounding the bankruptcy in determining whether additional provisions may be necessary.  At December 31, 2015, the allowance for doubtful accounts and for discounts was $4.2 million.

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

Accounting for Income Taxes.  As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that it is more likely than not that the deferred tax assets will not be recovered, we must establish a valuation allowance.  To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include an expense or recovery, respectively, within the tax provision in the statement of operations.

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

 

The valuation allowance of $0.4 million as of December 31, 2015 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 $51.4 million as of December 31, 2015, 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.  As of December 31, 2015, we do not believe there is a need to establish a liability for uncertain tax positions.  Penalties associated with income tax matters are included in the provision for income taxes in our consolidated statement of operations.

Valuation of Long‑Lived and Intangible Assets and Goodwill.  At acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consists of customer relationships, trademarks and trade names, patents and non-compete agreements.  The fair values of these intangible assets are estimated based on our assessment.  Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations.  Goodwill and certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment.  Intangible assets determined to have definite lives are amortized over their remaining useful lives.

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

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

 

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

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

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

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

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

Asbestos Litigation. We are responsible for certain future liabilities relating to alleged exposure to asbestos-containing products.  In accordance with our accounting policy, our most recent actuarial study as of August 31, 2015 estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $33.3 million to $51.1 million for the period through 2058.  Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.  Based upon the results of the August 31, 2015 actuarial study, a favorable adjustment to the asbestos liability was not recorded in our consolidated financial statements as the difference between our recorded liability and the liability in the actuarial report at the low end of the range was not material.  In addition, according to the updated study, future legal costs, which are expensed as incurred and reported in loss from discontinued operations in the accompanying statement of operations, are estimated to range from $40 million to $75.5 million for the period through 2058. We will continue to perform an annual actuarial analysis during the third quarter of each year for the foreseeable future.  Based on this analysis and all other available information, we will continue to reassess the recorded liability and, if deemed necessary, record an adjustment to the reserve, which will be reflected as a loss or gain from discontinued operations.

 

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

 

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, 2015, 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, 2015, 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.

 

At December 31, 2015, we had approximately $47.5 million in loans and financing outstanding, of which approximately $0.1 million bear interest at fixed interest rates and approximately $47.4 million bear interest at variable rates of interest.  We invest our excess cash in highly liquid short‑term investments. Our percentage of variable rate debt to total debt was 99.8% and 99.5% at December 31, 2015 and 2014, respectively.  Depending upon the level of borrowings under our revolving credit facility and our excess cash, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have an approximate $0.7 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, 2015, we sold $693.6 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 $6.9 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.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2015. 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, 2015, 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, 2015 and has also audited the effectiveness of our internal control over financial reporting as of December 31, 2015.  KPMG’s report appears on the following pages of this “Item 8. Financial Statements and Supplementary Data.”

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders of

Standard Motor Products, Inc. and Subsidiaries

We have audited Standard Motor Products, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Standard Motor Products, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 26, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

New York, New York

February 26, 2016

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—

CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Stockholders of

Standard Motor Products, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015.  In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement Schedule II, Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements and the accompanying consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Standard Motor Products, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 2015, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

New York, New York

February 26, 2016

 

 

See accompanying notes to consolidated financial statements.

 

		Year Ended December 31,
		2015				2014				2013
		(In thousands)
Net earnings		$	46,018			$	43,029			$	51,450
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			(5,739	)			(3,781	)			(1,101	)
Pension and postretirement plans:
Amortization of:
Prior service benefit			(112	)			(3,017	)			(4,317	)
Unrecognized loss			2,261				2,435				3,123
Actuarial gains (losses)			462				(413	)			(343	)
Plan settlement			654				—				—
Foreign currency exchange rate changes			(23	)			(34	)			(32	)
Income tax (expense) benefit related to pension and postretirement plans			(1,325	)			372				577
Pension and postretirement plans, net of tax			1,917				(657	)			(992	)
Total other comprehensive income (loss), net of tax			(3,822	)			(4,438	)			(2,093	)
Comprehensive income		$	42,196			$	38,591			$	49,357

		December 31,
		2015				2014
		(Dollars in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	18,800			$	13,728
Accounts receivable, less allowances for discounts and doubtful accounts of $4,246 and $6,369 in 2015 and 2014, respectively			123,853				126,524
Inventories			285,793				278,051
Deferred income taxes			40,626				36,534
Prepaid expenses and other current assets			10,668				11,196
Total current assets			479,740				466,033
Property, plant and equipment, net			68,882				64,611
Goodwill			54,881				54,975
Other intangibles, net			29,386				34,402
Deferred incomes taxes			10,737				14,941
Other assets			37,438				38,589
Total assets		$	681,064			$	673,551
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable		$	47,427			$	56,558
Current portion of long-term debt			16				175
Accounts payable			72,711				70,674
Sundry payables and accrued expenses			40,706				49,412
Accrued customer returns			38,812				30,621
Accrued rebates			27,196				26,076
Payroll and commissions			17,048				17,313
Total current liabilities			243,916				250,829
Long-term debt			62				83
Other accrued liabilities			12,922				15,024
Accrued asbestos liabilities			32,185				33,462
Total liabilities			289,085				299,398
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			93,247				91,411
Retained earnings			291,481				259,160
Accumulated other comprehensive income			(6,474	)			(2,652	)
Treasury stock - at cost (1,295,316 shares and 1,043,064 shares in 2015 and 2014, respectively)			(34,147	)			(21,638	)
Total stockholders’ equity			391,979				374,153
Total liabilities and stockholders’ equity		$	681,064			$	673,551

		Year Ended December 31,
		2015				2014				2013
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	46,018			$	43,029			$	51,450
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			17,637				17,295				17,595
Amortization of deferred financing cost			635				699				893
Increase (decrease) to allowance for doubtful accounts			3,371				(497	)			641
Increase to inventory reserves			1,864				3,553				4,636
Amortization of deferred gain on sale of buildings			(1,048	)			(1,048	)			(1,048	)
Equity (income) loss from joint ventures			(976	)			822				285
Employee Stock Ownership Plan allocation			2,208				1,826				4,376
Stock-based compensation			5,379				4,843				3,668
Excess tax benefits related to exercise of employee stock grants			(1,254	)			(1,269	)			(1,264	)
(Increase) decrease in deferred income taxes			(1,494	)			(4,959	)			(527	)
Decrease in unrecognized tax benefit			—				(350	)			—
Increase (decrease) in tax valuation allowance			87				(342	)			(480	)
Loss on discontinued operations, net of tax			2,102				9,870				1,593
Change in assets and liabilities:
(Increase) decrease in accounts receivable			(1,996	)			1,755				(27,278	)
Increase in inventories			(12,503	)			(6,712	)			(6,094	)
(Increase) decrease in prepaid expenses and other current assets			367				(959	)			(4,048	)
Increase (decrease) in accounts payable			1,882				(4,329	)			12,497
Increase (decrease) in sundry payables and accrued expenses			1,874				(7,697	)			8,673
Net changes in other assets and liabilities			1,018				(8,543	)			(7,952	)
Net cash provided by operating activities			65,171				46,987				57,616
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and investments in businesses			—				(37,726	)			(12,760	)
Capital expenditures			(18,047	)			(13,904	)			(11,410	)
Other investing activities			36				430				(592	)
Net cash used in investing activities			(18,011	)			(51,200	)			(24,762	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line-of-credit agreements			(9,131	)			35,152				(19,046	)
Net borrowings (payments) of long-term debt and capital lease obligations			(170	)			182				(120	)
Purchase of treasury stock			(19,623	)			(10,000	)			(6,864	)
Increase (decrease) in overdraft balances			851				522				(3,312	)
Payments of debt issuance costs			(748	)			—				(1,261	)
Proceeds from exercise of employee stock options			109				96				151
Excess tax benefits related to the exercise of employee stock grants			1,254				1,269				1,264
Dividends paid			(13,697	)			(11,905	)			(10,107	)
Net cash provided by (used in) financing activities			(41,155	)			15,316				(39,295	)
Effect of exchange rate changes on cash			(933	)			(2,934	)			(1,074	)
Net increase (decrease) in cash and cash equivalents			5,072				8,169				(7,515	)
CASH AND CASH EQUIVALENTS at beginning of year			13,728				5,559				13,074
CASH AND CASH EQUIVALENTS at end of year		$	18,800			$	13,728			$	5,559
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest		$	901			$	882			$	1,050
Income taxes		$	27,513			$	27,562			$	33,489

		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income				Treasury Stock				Total
(In thousands)
BALANCE AT DECEMBER 31, 2012		$	47,872			$	82,348			$	186,693			$	3,879			$	(13,205	)		$	307,587
Net earnings			—				—				51,450				—				—				51,450
Other comprehensive loss, net of tax			—				—				—				(2,093	)			—				(2,093	)
Cash dividends paid ($0.44 per share)			—				—				(10,107	)			—				—				(10,107	)
Purchase of treasury stock			—				—				—				—				(6,864	)			(6,864	)
Stock-based compensation and related tax benefits			—				2,917				—				—				1,933				4,850
Stock options exercised and related tax benefits			—				84				—				—				149				233
Employee Stock Ownership Plan			—				2,214				—				—				2,162				4,376
BALANCE AT DECEMBER 31, 2013			47,872				87,563				228,036				1,786				(15,825	)			349,432
Net earnings			—				—				43,029				—				—				43,029
Other comprehensive income (loss), net of tax			—				—				—				(4,438	)			—				(4,438	)
Cash dividends paid ($0.52 per share)			—				—				(11,905	)			—				—				(11,905	)
Purchase of treasury stock			—				—				—				—				(10,000	)			(10,000	)
Stock-based compensation and related tax benefits			—				3,005				—				—				3,065				6,070
Stock options exercised and related tax benefits			—				17				—				—				122				139
Employee Stock Ownership Plan			—				826				—				—				1,000				1,826
BALANCE AT DECEMBER 31, 2014			47,872				91,411				259,160				(2,652	)			(21,638	)			374,153
Net earnings			—				—				46,018				—				—				46,018
Other comprehensive income (loss), net of tax			—				—				—				(3,822	)			—				(3,822	)
Cash dividends paid ($0.60 per share)			—				—				(13,697	)			—				—				(13,697	)
Purchase of treasury stock			—				—				—				—				(19,623	)			(19,623	)
Stock-based compensation and related tax benefits			—				833				—				—				5,700				6,533
Stock options exercised and related tax benefits			—				2				—				—				207				209
Employee Stock Ownership Plan			—				1,001				—				—				1,207				2,208
BALANCE AT DECEMBER 31, 2015		$	47,872			$	93,247			$	291,481			$	(6,474	)		$	(34,147	)		$	391,979

	Estimated Life
Buildings	25 to 33-1/2 years
Building improvements	10 to 25 years
Machinery and equipment	7 to 12 years
Tools, dies and auxiliary equipment	3 to 8 years
Furniture and fixtures	3 to 12 years

		2015				2014				2013
		(In thousands)
Weighted average common shares outstanding – Basic			22,812				22,900				22,975
Plus incremental shares from assumed conversions:
Dilutive effect of restricted shares and performance shares			330				335				287
Dilutive effect of stock options			—				5				8
Weighted average common shares outstanding – Diluted			23,142				23,240				23,270

		2015				2014				2013
		(In thousands)
Stock options			—				4				8
Restricted and performance shares			307				276				203

		Pensacola Fuel Injection, Inc.								Annex Manufacturing
Purchase price:						$	12,225							$	11,500
Assets acquired and liabilities assumed:
Receivables		$	—							$	2,581
Inventory			2,815								2,630
Property, plant and equipment, net			466								128
Intangible assets			—								4,760
Goodwill			12,528								4,567
Current liabilities			(3,584	)							(3,166	)
Net assets acquired						$	12,225							$	11,500

		Workforce Reduction				Other Exit Costs				Total
Exit activity liability at December 31, 2013		$	2,800			$	942			$	3,742
Restructuring and integration costs:
Amounts provided for during 2014			639				558				1,197
Non-cash usage, including asset write-downs			—				(17	)			(17	)
Cash payments			(2,492	)			(754	)			(3,246	)
Exit activity liability at December 31, 2014		$	947			$	729			$	1,676
Restructuring and integration costs:
Amounts provided for during 2015			(212	)			78				(134	)
Cash payments			(465	)			(216	)			(681	)
Exit activity liability at December 31, 2015		$	270			$	591			$	861

		December 31,
		2015				2014
		(In thousands)
Finished goods		$	186,782			$	185,655
Work-in-process			5,456				4,722
Raw materials			93,555				87,674
Total inventories		$	285,793			$	278,051

		December 31,
		2015				2014
		(In thousands)
Land, buildings and improvements		$	45,655			$	45,050
Machinery and equipment			131,959				128,998
Tools, dies and auxiliary equipment			43,044				40,352
Furniture and fixtures			25,287				23,830
Leasehold improvements			7,761				7,436
Construction-in-progress			9,253				7,409
Total property, plant and equipment			262,959				253,075
Less accumulated depreciation			194,077				188,464
Total property, plant and equipment, net		$	68,882			$	64,611

		Engine Management				Temperature Control				Total
Balance as of December 31, 2013
Goodwill		$	66,790			$	9,703			$	76,493
Accumulated impairment losses			(38,488	)			—				(38,488	)
		$	28,302			$	9,703			$	38,005
Activity in 2014
Acquisition of assets of Pensacola Fuel Injection, Inc.		$	12,528			$	—			$	12,528
Acquisition of assets of Annex Manufacturing			—				4,567				4,567
Foreign currency exchange rate change			(125	)			—				(125	)
Balance as of December 31, 2014
Goodwill			79,193				14,270				93,463
Accumulated impairment losses			(38,488	)			—				(38,488	)
		$	40,705			$	14,270			$	54,975
Activity in 2015
Foreign currency exchange rate change		$	(94	)		$	—			$	(94	)
Balance as of December 31, 2015
Goodwill			79,099				14,270				93,369
Accumulated impairment losses			(38,488	)			—				(38,488	)
		$	40,611			$	14,270			$	54,881

		December 31,
		2015				2014
		(In thousands)
Customer relationships		$	48,475			$	48,646
Trademarks and trade names			6,800				6,800
Non-compete agreements			970				970
Patents and supply contracts			723				723
Leaseholds			160				160
Total acquired intangible assets			57,128				57,299
Less accumulated amortization (1)			(29,040	)			(24,120	)
Net acquired intangible assets		$	28,088			$	33,179

		December 31,
		2015				2014
		(In thousands)
Equity in joint ventures		$	20,622			$	20,004
Deferred compensation			10,675				9,811
Long term receivables			4,215				6,513
Deferred financing costs, net			1,267				1,570
Other			659				691
Total other assets, net		$	37,438			$	38,589

		December 31,
		2015				2014
		(In thousands)
Revolving credit facilities		$	47,427			$	56,558
Other			78				258
Total debt		$	47,505			$	56,816
Current maturities of long-term debt		$	47,443			$	56,733
Long-term debt			62				83
Total debt		$	47,505			$	56,816

(In thousands)
2016		$	330
2017			330
2018			330
2019			330
2020			277
Total amortization		$	1,597

		Foreign Currency Translation Adjustments				Unrecognized Pension and Postretirement Benefit Costs (Credit)				Total
		(In thousands)
Balance at December 31, 2013		$	3,562			$	(1,776	)		$	1,786
Other comprehensive income before reclassifications			(3,781	)			(447	)			(4,228	)
Amounts reclassified from accumulated other comprehensive income			—				(210	)			(210	)
Other comprehensive income, net			(3,781	)			(657	)			(4,438	)
Balance at December 31, 2014		$	(219	)		$	(2,433	)		$	(2,652	)
Other comprehensive income before reclassifications			(5,739	)			1,093				(4,646	)
Amounts reclassified from accumulated other comprehensive income			—				824				824
Other comprehensive income, net			(5,739	)			1,917				(3,822	)
Balance at December 31, 2015		$	(5,958	)		$	(516	)		$	(6,474	)

		Year Ended December 31,
Details About Accumulated Other Comprehensive Income Components		2015				2014
Amortization of pension and postretirement benefit plans:		(In thousands)
Prior service benefit (1)		$	(112	)		$	(3,017	)
Unrecognized loss (1)			2,261				2,435
Total before income tax			2,149				(582	)
Income tax (expense) benefit			(1,325	)			372
Total reclassifications for the period		$	824			$	(210	)

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)
Outstanding at December 31, 2013			16,875			$	12.14				1.0
Expired			—				—				—
Exercised			(7,000	)			13.76				—
Forfeited, other			—				—				—
Outstanding at December 31, 2014			9,875				10.99				0.4
Expired			—				—				—
Exercised			(9,875	)			10.99				—
Forfeited, other			—				—				—
Outstanding at December 31, 2015			—			$	—				—
Options exercisable at December 31, 2015			—			$	—				—

		Shares				Weighted Average Grant Date Fair Value per Share
Balance at December 31, 2013			630,600			$	19.47
Granted			256,443				32.22
Vested			(132,325	)			15.50
Forfeited			(5,700	)			18.77
Balance at December 31, 2014			749,018				24.62
Granted			211,950				31.79
Vested			(192,768	)			22.13
Forfeited			(9,650	)			29.30
Balance at December 31, 2015			758,550			$	27.19

		U.S. Defined Contribution
Year ended December 31,
2015		$	8,445
2014			8,267
2013			8,115

		Defined Benefit Retirement Plan
		2015				2014
Change in benefit obligation:
Benefit obligation at beginning of year		$	6,538			$	5,661
Service cost			—				164
Interest cost			218				277
Actuarial loss			854				436
Benefits paid			(7,610	)			—
Benefit obligation at end of year		$	—			$	6,538
Unfunded status of the plan		$	—			$	(6,538	)
Amounts recognized in the balance sheet:
Accrued postretirement benefit liabilities		$	—			$	6,538
Accumulated other comprehensive loss (pre-tax) related to:
Unrecognized net actuarial losses			—				1,389
Unrecognized prior service cost			—				—

		December 31,
Defined benefit retirement plan:		2015				2014				2013
Service cost		$	—			$	164			$	180
Interest cost			218				277				235
Amortization of prior service cost			—				—				28
Actuarial net loss			735				388				690
Settlement loss			1,509				—				—
Net periodic benefit cost		$	2,462			$	829			$	1,133

		Settlement Date				December 31,
		2015				2014				2013
Discount rates			2.88	%			4.00	%			4.90	%
Salary increase			N/A				N/A				4.00	%

		December 31,
		2015				2014
Projected benefit obligation		$	—			$	6,538
Accumulated benefit obligation			—				6,538
Fair value of plan assets			—				—

		Postretirement Benefit Plans
		U.S. Plan								Canadian Plan
		2015				2014				2015				2014
Change in benefit obligation:
Benefit obligation at beginning of year		$	4,192			$	4,960			$	110			$	126
Service cost			—				1				—				—
Interest cost			24				26				3				4
Benefits paid			(833	)			(772	)			(16	)			(26	)
Actuarial loss (gain)			(455	)			(23	)			(7	)			17
Translation adjustment			—				—				(16	)			(11	)
Benefit obligation at end of year		$	2,928			$	4,192			$	74			$	110
(Unfunded) status of the plans		$	(2,928	)		$	(4,192	)		$	(74	)		$	(110	)

		Postretirement Benefit Plans
		U.S. Plan								Canadian Plan
		2015				2014				2015				2014
Amounts recognized in the balance sheet:
Accrued postretirement benefit liabilities		$	2,928			$	4,192			$	74			$	110
Accumulated other comprehensive (income) loss (pre-tax) related to:
Unrecognized net actuarial losses (gains)			970				2,973				(36	)			(65	)
Unrecognized prior service cost (credit)			—				—				(52	)			(201	)

		December 31,
U.S. postretirement plan:		2015				2014				2013
Service cost		$	—			$	1			$	1
Interest cost			24				26				33
Amortization of prior service cost			—				(2,888	)			(4,206	)
Actuarial net loss			1,548				2,092				2,548
Net periodic benefit cost (credit)		$	1,572			$	(769	)		$	(1,624	)
Canadian postretirement plan:
Service cost		$	—			$	—			$	—
Interest cost			3				4				5
Amortization of prior service cost			(112	)			(129	)			(140	)
Actuarial net loss			(22	)			(45	)			(115	)
Net periodic benefit cost (credit)		$	(131	)		$	(170	)		$	(250	)
Total net periodic benefit cost (credit)		$	1,441			$	(939	)		$	(1,874	)

		December 31,
		2015				2014				2013
Discount rate			0.0	%			0.55	%			0.45	%

		December 31,
		2015				2014				2013
Discount rates			3.00	%			3.00	%			3.50	%
Current medical cost trend rate			5.71	%			6.43	%			7.14	%
Ultimate medical cost trend rate			5	%			5	%			5	%
Year trend rate declines to ultimate			2017				2017				2017

2016		$	2,568
2017			63
2018			59
2019			54
2020			50
Years 2021 – 2025			181

		1-Percentage- Point Increase				1-Percentage- Point Decrease
Effect on total of service and interest cost components		$	1			$	(1	)
Effect on postretirement benefit obligation			26				(24	)

		Year Ended December 31,
		2015				2014				2013
		(In thousands)
Interest and dividend income		$	151			$	296			$	302
Equity income (loss) from joint ventures			976				(822	)			(285	)
Loss on foreign exchange			(719	)			(1,562	)			(143	)
Write-off of deferred financing costs			(773	)			—				—
Other non-operating income, net			145				119				127
Total other non-operating income (expense), net		$	(220	)		$	(1,969	)		$	1

		Year Ended December 31,
		2015				2014				2013
Current:
Domestic		$	22,943			$	30,415			$	31,220
Foreign			4,324				3,740				1,706
Total current			27,267				34,155				32,926
Deferred:
Domestic			(1,210	)			(4,732	)			(1,178	)
Foreign			(74	)			(569	)			171
Total deferred			(1,284	)			(5,301	)			( 1,007	)
Total income tax provision		$	25,983			$	28,854			$	31,919

		Year Ended December 31,
		2015				2014				2013
U.S. Federal income tax rate of 35%		$	25,936			$	28,614			$	29,737
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal income tax benefit			1,857				2,309				2,936
Income tax (tax benefits) attributable to foreign income			(1,705	)			(1,511	)			(428	)
Change in unrecognized tax benefits			—				(350	)			—
Other non-deductible items, net			(192	)			134				(806	)
Change in valuation allowance			87				(342	)			480
Provision for income taxes		$	25,983			$	28,854			$	31,919

		December 31,
		2015				2014
Deferred tax assets:
Inventories		$	17,651			$	17,529
Allowance for customer returns			14,551				11,409
Postretirement benefits			1,127				2,155
Allowance for doubtful accounts			1,512				2,347
Accrued salaries and benefits			9,683				10,802
Capital loss			234				234
Tax credit carryforwards			381				313
Deferred gain on building sale			891				1,299
Accrued asbestos liabilities			13,098				13,625
			59,128				59,713
Valuation allowance (1)			(440	)			(353	)
Total deferred tax assets			58,688				59,360
Deferred tax liabilities:
Depreciation			7,054				7,023
Promotional costs			230				124
Other			41				738
Total deferred tax liabilities			7,325				7,885
Net deferred tax assets		$	51,363			$	51,475

Balance at January 1, 2014		$	350
Increase based on tax positions taken in the current year			—
Decrease based on tax positions taken in the current year			(350	)
Balance at December 31, 2014			—
Increase based on tax positions taken in the current year			—
Decrease based on tax positions taken in the current year			—
Balance at December 31, 2015		$	—

		Year Ended December 31,
		2015				2014				2013
Operating income		$	75,860			$	85,338			$	86,863
Other non-operating income (expense)			(220	)			(1,969	)			1
Interest expense			1,537				1,616				1,902
Earnings from continuing operations before taxes			74,103				81,753				84,962
Income tax expense			25,983				28,854				31,919
Earnings from continuing operations			48,120				52,899				53,043
Discontinued operations, net of tax			(2,102	)			(9,870	)			(1,593	)
Net earnings		$	46,018			$	43,029			$	51,450

		Year Ended December 31,
		2015				2014				2013
Revenues:		(In thousands)
United States		$	881,206			$	884,701			$	895,648
Canada			48,072				51,526				46,133
Europe			16,305				18,061				15,413
Other foreign			26,392				26,104				26,510
Total revenues		$	971,975			$	980,392			$	983,704

		December 31,
		2015				2014				2013
Long-lived assets:		(In thousands)
United States		$	155,438			$	158,350			$	135,834
Canada			1,190				1,546				1,526
Europe			12,324				11,725				11,310
Other foreign			21,634				20,957				10,497
Total long-lived assets		$	190,586			$	192,578			$	159,167

			December 31, 2015								December 31, 2014
	Fair Value Hierarchy		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Cash and cash equivalents	LEVEL 1		$	18,800			$	18,800			$	13,728			$	13,728
Deferred compensation	LEVEL 1			10,675				10,675				9,811				9,811
Short term borrowings	LEVEL 1			47,443				47,443				56,733				56,733
Long-term debt	LEVEL 1			62				62				83				83

		Total				Real Estate				Other
2015		$	9,756			$	7,218			$	2,538
2014			9,702				7,355				2,347
2013			9,814				7,331				2,483

2016		$	7,393
2017			6,278
2018			4,421
2019			2,645
2020			2,303
Thereafter			6,269
Total		$	29,309

		December 31,
		2015				2014
		(In thousands)
Balance, beginning of period		$	19,328			$	18,041
Liabilities accrued for current year sales			94,593				84,480
Settlements of warranty claims			(90,526	)			(83,193	)
Balance, end of period		$	23,395			$	19,328

		2015 Quarter Ended
		Dec. 31				Sept. 30				June 30				Mar. 31
		(In thousands, except per share amounts)
Net sales		$	204,967			$	270,037			$	269,382			$	227,589
Gross profit			62,786				81,553				72,760				63,889
Earnings from continuing operations			5,779				19,194				13,808				9,339
Loss from discontinued operations, net of taxes			(553	)			(728	)			(430	)			(391	)
Net earnings		$	5,226			$	18,466			$	13,378			$	8,948
Net earnings from continuing operations per common share:
Basic		$	0.26			$	0.84			$	0.60			$	0.41
Diluted		$	0.25			$	0.83			$	0.59			$	0.40
Net earnings per common share:
Basic		$	0.23			$	0.81			$	0.58			$	0.39
Diluted		$	0.23			$	0.80			$	0.58			$	0.39

		2014 Quarter Ended
		Dec. 31				Sept. 30				June 30				Mar. 31
		(In thousands, except per share amounts)
Net sales		$	218,054			$	257,046			$	272,540			$	232,752
Gross profit			67,094				77,227				77,399				67,910
Earnings from continuing operations			11,517				17,806				11,169				12,407
Loss from discontinued operations, net of taxes			(419	)			(8,240	)			(529	)			(682	)
Net earnings		$	11,098			$	9,566			$	10,640			$	11,725
Net earnings from continuing operations per common share:
Basic		$	0.50			$	0.78			$	0.49			$	0.54
Diluted		$	0.50			$	0.77			$	0.48			$	0.53
Net earnings per common share:
Basic		$	0.48			$	0.42			$	0.47			$	0.51
Diluted		$	0.48			$	0.41			$	0.46			$	0.50

	STANDARD MOTOR PRODUCTS, INC.
	(Registrant)
	/s/ Lawrence I. Sills
	Lawrence I. Sills
	Chairman, Chief Executive Officer and Director
	/s/ James J. Burke
	James J. Burke
	Vice President, Finance and Chief Financial Officer

February 26, 2016	/s/   Lawrence I. Sills
	Lawrence I. Sills
	Chairman, Chief Executive Officer and Director
	(Principal Executive Officer)

February 26, 2016	/s/   James J. Burke
	James J. Burke
	Vice President, Finance and Chief Financial Officer
	(Principal Financial and Accounting Officer)

February 26, 2016	/s/   Pamela Forbes Lieberman
	Pamela Forbes Lieberman, Director
February 26, 2016	/s/   Joseph W. McDonnell
	Joseph W. McDonnell, Director
February 26, 2016	/s/   Alisa C. Norris
	Alisa C. Norris, Director
February 26, 2016	/s/   Arthur S. Sills
	Arthur S. Sills, Director
February 26, 2016	/s/   Peter J. Sills
	Peter J. Sills, Director
February 26, 2016	/s/   Frederick D. Sturdivant
	Frederick D. Sturdivant, Director
February 26, 2016	/s/   William H. Turner
	William H. Turner, Director
February 26, 2016	/s/   Richard S. Ward
	Richard S. Ward, Director
February 26, 2016	/s/   Roger M. Widmann
	Roger M. Widmann, Director

Exhibit Number
3.1	Restated By-Laws, dated May 23, 1996, filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996.
3.2	Restated Certificate of Incorporation, dated July 31, 1990, filed as an Exhibit to the Company’s Annual Report on Form 10‑K for the year ended December 31, 1990.
3.3	Certificate of Amendment of the Certificate of Incorporation, dated February 15, 1996, filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
10.1	Amended and Restated Employee Stock Ownership Plan and Trust of Standard Motor Products, Inc., dated January 1, 2015.
10.2	2006 Omnibus Incentive Plan of Standard Motor Products, Inc., as amended (incorporated by reference to the Company’s Registration Statement on Form S-8 (Registration No. 333-174330), filed on May 19, 2011).
10.3	2004 Omnibus Stock Option Plan of Standard Motor Products, Inc. and 2004 Independent Directors’ Stock Option Plan of Standard Motor Products, Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (Registration No. 333-134239), filed on June 7, 2005).
10.4	Supplemental Compensation Plan effective October 1, 2001 (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
10.5	Severance Compensation Agreement, dated December 12, 2001, between Standard Motor Products, Inc. and John Gethin (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
10.6	Severance Compensation Agreement, dated December 12, 2001, between Standard Motor Products, Inc. and James Burke (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
10.7	Credit Agreement, dated as of December 29, 2005, among SMP Motor Products, Ltd., as Borrower, (incorporated by reference to the Company’s Current Report on Form 8-K filed on January 3, 2006).
10.8	Amendment to the Standard Motor Products, Inc. Supplemental Compensation Plan, effective December 1, 2006 (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
10.9	Retention Bonus and Insurance Agreement dated December 26, 2006, between Standard Motor Products, Inc. and James Burke (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).

Exhibit Number
10.10	Purchase and Sale Agreement, dated December 21, 2007, between Standard Motors Products, Inc. and EXII Northern Boulevard Acquisition LLC (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007).
10.11	Lease Agreement, dated March 12, 2008, between Standard Motors Products, Inc. and 37-18 Northern Boulevard LLC (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007).
10.12	First Amendment Agreement dated as of March 20, 2007, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed March 21, 2007).
10.13	Second Amendment Agreement dated as of May 1, 2007, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).
10.14	Amendment No. 3 to Credit Agreement dated as of December 18, 2008, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed December 22, 2008).
10.15	Amendment to Severance Compensation Agreement, dated as of December 15, 2008, between Standard Motor Products, Inc. and John Gethin (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).
10.16	Amendment to Severance Compensation Agreement, dated as of December 15, 2008, between Standard Motor Products, Inc. and James Burke (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).
10.17	Amended and Restated Supplemental Executive Retirement Plan, dated as of December 31, 2010 (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).
10.18	Amendment No. 4 to Credit Agreement, dated as of June 26, 2009, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed June 29, 2009).
10.19	Amendment No. 5 to Credit Agreement, dated as of May 20, 2010, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed May 20, 2010).

Exhibit Number
10.20	Third Amended and Restated Credit Agreement, dated as of November 2, 2010, among Standard Motor Products, Inc., as borrower and the other credit parties thereto, and General Electric Capital Corp., as agent and lender, Bank of America, N.A. and Wells Fargo Capital Finance, LLC, as lenders and co-syndication agents, JPMorgan Chase Bank, N.A., as lender and as documentation agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed November 12, 2010).
10.21	Amendment No. 6 to Credit Agreement, dated as of November 10, 2010, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed November 12, 2010).
10.22	Amendment to Severance Compensation Agreement, dated as of March 8, 2011, between Standard Motor Products, Inc. and John Gethin (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).
10.23	Amendment to Severance Compensation Agreement, dated as of March 8, 2011, between Standard Motor Products, Inc. and James Burke (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).
10.24	Amendment No. 1 to Third Amended and Restated Credit Agreement, dated as of September 22, 2011, among Standard Motor Products, Inc., as borrower and the other credit parties thereto, and General Electric Capital Corp., as agent and lender, Bank of America, N.A. and Wells Fargo Capital Finance, LLC, as lenders and co-syndication agents, JPMorgan Chase Bank, N.A., as lender and as documentation agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed September 22, 2011).
10.25	Amendment No. 7 to Credit Agreement, dated as of September 22, 2011, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed September 22, 2011).
10.26	Amendment No. 2 to Third Amended and Restated Credit Agreement, dated as of February 22, 2013, among Standard Motor Products, Inc., as borrower and the other credit parties thereto, and General Electric Capital Corp., as agent and lender, Bank of America, N.A. and Wells Fargo Capital Finance, LLC, as lenders and co-syndication agents, JPMorgan Chase Bank, N.A., as lender and as documentation agent, and the other lenders thereto (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 8, 2013).
10.27	Amendment No. 8 to Credit Agreement, dated as of May 16, 2013, among SMP Motor Products, Ltd., as borrower and the other credit parties thereto, and GE Canada Finance Holding Company, as lender and agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed May 20, 2013).
10.28	Amendment No. 3 to Third Amended and Restated Credit Agreement, dated as of May 16, 2013, among Standard Motor Products, Inc., as borrower and the other credit parties thereto, and General Electric Capital Corp., as agent and lender, Bank of America, N.A. and Wells Fargo Capital Finance, LLC, as lenders and co-syndication agents, JPMorgan Chase Bank, N.A., as lender and as documentation agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed May 20, 2013).

Exhibit Number
10.29	Amendment No. 4 to Third Amended and Restated Credit Agreement, dated as of June 12, 2015, among Standard Motor Products, Inc., as borrower and the other credit parties thereto, and General Electric Capital Corp., as agent and lender, Bank of America, N.A. and Wells Fargo Capital Finance, LLC, as lenders and co-syndication agents, JPMorgan Chase Bank, N.A., as lender and as documentation agent, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed June 18, 2015).
10.30	Credit Agreement, dated as of October 28, 2015, among Standard Motor Products, Inc., as borrower and the other loan parties thereto, and JPMorgan Chase Bank, N.A., as agent and lender, J.P. Morgan Securities LLC, as sole bookrunner and joint lead arranger, Bank of America, N.A. and Wells Fargo Bank, National Association, as co-syndication agents and joint lead arrangers, and the other lenders thereto (incorporated by reference to the Company’s Form 8-K filed October 30, 2015).
21	List of Subsidiaries of Standard Motor Products, Inc.
23	Consent of KPMG LLP, Independent Registered Public Accounting Firm.
24	Power of Attorney (see signature page to Annual Report on Form 10-K).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document

						Additions
Description		Balance at beginning of year				Charged to costs and expenses				Other				Deductions				Balance at end of year
Year ended December 31, 2015:
Allowance for doubtful accounts		$	4,894,000			$	3,371,000 (1	)		$	—			$	5,064,000			$	3,201,000
Allowance for discounts			1,475,000				9,872,000				—				10,302,000				1,045,000
		$	6,369,000			$	13,243,000			$	—			$	15,366,000			$	4,246,000
Allowance for sales returns		$	30,621,000			$	133,355,000			$	—			$	125,164,000			$	38,812,000
Year ended December 31, 2014:
Allowance for doubtful accounts		$	5,528,000			$	(497,000	)		$	—			$	137,000			$	4,894,000
Allowance for discounts			1,441,000				13,568,000				—				13,534,000				1,475,000
		$	6,969,000			$	13,071,000			$	—			$	13,671,000			$	6,369,000
Allowance for sales returns		$	31,464,000			$	126,608,000			$	—			$	127,451,000			$	30,621,000
Year ended December 31, 2013:
Allowance for doubtful accounts		$	4,944,000			$	641,000			$	—			$	57,000			$	5,528,000
Allowance for discounts			1,180,000				14,802,000				—				14,541,000				1,441,000
		$	6,124,000			$	15,443,000			$	—			$	14,598,000			$	6,969,000
Allowance for sales returns		$	29,033,000			$	114,958,000			$	—			$	112,527,000			$	31,464,000