STANDARD MOTOR PRODUCTS, INC. - Quarter Report: 2017 June (Form 10-Q)

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New York		11-1362020
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

37-18 Northern Blvd., Long Island City,N.Y.		11101
(Address of principal executive offices)		(Zip Code)

(718) 392-0200

(Registrant’s telephone number, including area code)

	Large Accelerated Filer  ☑		Accelerated Filer ☐
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	Emerging growth company	☐

		Page No.
Item 1.	Consolidated Financial Statements:
	Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2017 and 2016	3
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 2017 and 2016	4
	Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016	5
	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2017 and 2016	6
	Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2017	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40

PART I – FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands, except share and per share data)		2017				2016				2017				2016
		(Unaudited)								(Unaudited)
Net sales		$	312,729			$	288,977			$	595,107			$	527,888
Cost of sales			222,063				201,901				420,331				367,816
Gross profit			90,666				87,076				174,776				160,072
Selling, general and administrative expenses			60,076				54,758				117,436				107,756
Restructuring and integration expenses			1,235				771				2,782				1,012
Other income, net			314				297				630				559
Operating income			29,669				31,844				55,188				51,863
Other non-operating income, net			740				265				1,563				598
Interest expense			722				394				1,190				705
Earnings from continuing operations before taxes			29,687				31,715				55,561				51,756
Provision for income taxes			11,426				11,853				20,933				19,238
Earnings from continuing operations			18,261				19,862				34,628				32,518
Loss from discontinued operations, net of income taxes			(497	)			(618	)			(1,130	)			(1,070	)
Net earnings		$	17,764			$	19,244			$	33,498			$	31,448
Per Share Data:
Net earnings per common share – Basic:
Earnings from continuing operations		$	0.80			$	0.87			$	1.52			$	1.43
Discontinued operations			(0.02	)			(0.02	)			(0.05	)			(0.04	)
Net earnings per common share – Basic		$	0.78			$	0.85			$	1.47			$	1.39
Net earnings per common share – Diluted:
Earnings from continuing operations		$	0.78			$	0.86			$	1.48			$	1.41
Discontinued operations			(0.02	)			(0.02	)			(0.04	)			(0.04	)
Net earnings per common share – Diluted		$	0.76			$	0.84			$	1.44			$	1.37
Dividend declared per share		$	0.19			$	0.17			$	0.38			$	0.34
Average number of common shares			22,820,079				22,705,310				22,833,263				22,673,811
Average number of common shares and dilutive common shares			23,329,082				23,018,730				23,332,480				22,988,502

 

See accompanying notes to consolidated financial statements (unaudited).

 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)		2017				2016				2017				2016
		(Unaudited)								(Unaudited)
Net earnings		$	17,764			$	19,244			$	33,498			$	31,448
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			2,733				(1,938	)			5,456				(153	)
Pension and postretirement plans:
Amortization of:
Prior service benefit			—				(14	)			—				(27	)
Unrecognized loss			(271	)			115				(330	)			390
Unrecognized actuarial gains			472				301				472				301
Foreign currency exchange rate changes			—				—				—				4
Income tax expense related to pension and postretirement plans			(81	)			(164	)			(57	)			(272	)
Pension and postretirement plans, net of tax			120				238				85				396
Total other comprehensive income (loss), net of tax			2,853				(1,700	)			5,541				243
Comprehensive income		$	20,617			$	17,544			$	39,039			$	31,691

See accompanying notes to consolidated financial statements (unaudited).

 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)		June 30, 2017				December 31, 2016
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	16,389			$	19,796
Accounts receivable, less allowances for discounts and doubtful  accounts of $5,883 and $4,425 for 2017 and 2016, respectively			187,759				134,630
Inventories			340,886				312,477
Prepaid expenses and other current assets			9,436				7,318
Total current assets			554,470				474,221
Property, plant and equipment, net of accumulated depreciation of $191,874 and $191,551 for 2017 and 2016, respectively			81,973				78,499
Goodwill			67,401				67,231
Other intangibles, net			60,008				64,056
Deferred income taxes			50,407				51,127
Other assets			36,174				33,563
Total assets		$	850,433			$	768,697

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Notes payable		$	78,946			$	54,812
Current portion of long-term debt			46				43
Accounts payable			104,074				83,878
Sundry payables and accrued expenses			43,991				45,147
Accrued customer returns			45,779				40,176
Accrued rebates			36,797				29,127
Payroll and commissions			25,519				30,658
Total current liabilities			335,152				283,841
Long-term debt			101				120
Other accrued liabilities			13,573				12,380
Accrued asbestos liabilities			29,383				31,328
Total liabilities			378,209				327,669
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			101,183				96,850
Retained earnings			361,288				336,464
Accumulated other comprehensive income			(5,487	)			(11,028	)
Treasury stock – at cost (1,142,469 shares and 1,101,487 shares in 2017 and 2016, respectively)			(32,632	)			(29,130	)
Total stockholders’ equity			472,224				441,028
Total liabilities and stockholders’ equity		$	850,433			$	768,697

See accompanying notes to consolidated financial statements (unaudited).

 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)		Six Months Ended June 30,
		2017				2016
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	33,498			$	31,448
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization			11,316				9,269
Amortization of deferred financing cost			172				167
Increase to allowance for doubtful accounts			1,230				412
Increase to inventory reserves			767				2,351
Amortization of deferred gain on sale of building			(524	)			(524	)
Equity income from joint ventures			(1,111	)			(385	)
Employee Stock Ownership Plan allocation			1,080				1,011
Stock-based compensation			4,005				2,736
Excess tax benefits related to exercise of  employee stock grants			—				(137	)
Decrease in deferred income taxes			749				1,383
Loss on discontinued operations, net of tax			1,130				1,070
Change in assets and liabilities:
Increase in accounts receivable			(53,069	)			(41,726	)
Increase in inventories			(27,048	)			(20,819	)
Decrease (increase) in prepaid expenses and other current assets			(943	)			4,073
Increase in accounts payable			17,475				18,989
Increase in sundry payables and accrued expenses			5,663				13,381
Net change in other assets and liabilities			(1,225	)			1,029
Net cash provided by (used in) operating activities			(6,835	)			23,728
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and investments in businesses			—				(67,289	)
Capital expenditures			(8,843	)			(10,134	)
Other investing activities			2				5
Net cash used in investing activities			(8,841	)			(77,418	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements			24,134				52,567
Net borrowings (payments) of long-term debt and capital lease obligations			(21	)			109
Purchase of treasury stock			(5,176	)			(377	)
Increase in overdraft balances			1,488				2,472
Excess tax benefits related to the exercise of employee stock grants			—				137
Dividends paid			(8,674	)			(7,705	)
Net cash provided by financing activities			11,751				47,203
Effect of exchange rate changes on cash			518				82
Net decrease in cash and cash equivalents			(3,407	)			(6,405	)
CASH AND CASH EQUIVALENTS at beginning of period			19,796				18,800
CASH AND CASH EQUIVALENTS at end of period		$	16,389			$	12,395
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	956			$	516
Income taxes		$	19,499			$	13,376

See accompanying notes to consolidated financial statements (unaudited).

 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2017

(Unaudited)

		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total
(In thousands)
Balance at December 31, 2016		$	47,872			$	96,850			$	336,464			$	(11,028	)		$	(29,130	)		$	441,028
Net earnings			—				—				33,498				—				—				33,498
Other comprehensive income, net of tax			—				—				—				5,541				—				5,541
Cash dividends paid			—				—				(8,674	)			—				—				(8,674	)
Purchase of treasury stock			—				—				—				—				(5,333	)			(5,333	)
Stock-based compensation			—				3,319				—				—				686				4,005
Employee Stock Ownership Plan			—				1,014				—				—				1,145				2,159
Balance at June 30, 2017		$	47,872			$	101,183			$	361,288			$	(5,487	)		$	(32,632	)		$	472,224

 

See accompanying notes to consolidated financial statements (unaudited).

 

Note 1.

Basis of Presentation

Standard Motor Products, Inc. and subsidiaries (referred to as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of 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.

 

The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.  The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership.  Our investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence.  All significant inter-company items have been eliminated.

 

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

Reclassification

Certain prior period amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 2017 presentation.

Note 2.

Summary of Significant Accounting Policies

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

 

There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

Recently Issued Accounting Pronouncements

The following table provides a brief description of recent accounting pronouncements that could have a material effect on our financial statements:

Standard		Description		Date of adoption		Effects on the financial statements or other significant matters
Standards that are not yet adopted as of June 30, 2017
Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers		This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  Under the new guidance, “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”		January 1, 2018, with early adoption permitted but not before January 1, 2017		The new standard provides entities the option of using either a full retrospective or a modified approach to adopt the guidance. To date we performed an assessment of the potential impacts of the pronouncement including certain contract reviews.  Based on our initial assessment we do not anticipate that the adoption of this standard will have a material effect on our consolidated financial statements.  We will be continuously assessing the new standard and reviewing contracts through January 1, 2018, the date of implementation.  We are currently evaluating the method of adoption.
ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date		This standard defers by one year the mandatory effective date of its revenue recognition standard, and provides entities the option to adopt the standard as of the original effective date.
ASU 2016-02, Leases		This standard outlines the need to recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease).  For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or financing.  Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern.		January 1, 2019, with early adoption permitted		The new standard must be adopted utilizing a modified retrospective transition, and provides for certain expedients.  The new standard will require that we recognize all of our leases, including our current operating leases, on the balance sheet.  We are currently in the process of taking an inventory of our leases and are evaluating the impact the new standard will have on our consolidated financial statements, and when we will adopt the new standard.

 

 

Standard		Description		Date of adoption		Effects on the financial statements or other significant matters
Standards that are not yet adopted as of June 30, 2017
ASU 2016-15, Statement of Cash Flows		This standard is intended to reduce diversity in practice and to provide guidance as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows.		January 1, 2018, with early adoption permitted		The new standard requires application using a retrospective transition method.  We do not anticipate that the adoption of this standard will have a material effect on our consolidated financial statements.
ASU 2017-04, Simplifying the Test for Goodwill Impairment		This standard is intended to simplify the accounting for goodwill impairment.  ASU 2017-04 removes Step 2 of the test, which requires a hypothetical purchase price allocation.  A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.		January 1, 2020, with early adoption permitted		The new standard should be applied prospectively.  We will consider the new standard when performing our annual impairment test and evaluate when we will adopt the new standard.
ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost		This standard requires employers that present operating income in their consolidated statement of operations to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs).  The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in other non-operating income (expense).  The new standard requires retrospective reclassification of the effects of the new standard on the statement of operations.		January 1, 2018, with early adopted permitted		The new standard will require that we retrospectively reclassify all components of net periodic pension cost and net periodic postretirement benefit cost, other than the service cost component, in our statement of operations from selling, general and administrated expenses, as presently reported, to other non-operating income (expense).

 

 

Standard		Description		Date of adoption		Effects on the financial statements or other significant matters
Standards that were adopted
ASU 2015-17, Balance Sheet Classification of Deferred Taxes		This standard requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The new guidance requires entities to offset all deferred tax assets and liabilities (and valuation allowances) for each tax-paying jurisdiction within each tax-paying component.  The net deferred tax must be presented as a single noncurrent amount.		January 1, 2017		The adoption of the new standard resulted in the reclassification of deferred tax assets previously reported as current deferred tax assets to noncurrent deferred tax assets in our consolidated balance sheets.  We adopted the new standard retrospectively, and as such, all prior period current deferred tax assets in our consolidated balance sheets have also been reclassified to noncurrent deferred tax assets for comparative purposes.
ASU 2015-11, Simplifying the Measurement of Inventory		This standard changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value for entities that measure inventory using first-in, first-out or average cost.  In addition, this standard eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximate normal profit margin when measuring inventory.		January 1, 2017		The prospective adoption of the new standard did not have a material effect on our consolidated financial statements.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting		This standard requires (1) that the tax effects related to share-based payments at settlement (or expiration) be recorded through the tax provision (benefit) in the income statement rather than in equity as permitted under prior guidance under certain circumstances; (2) that all tax-related cash flows resulting from share-based payments be reported as operating activities on the statement of cash flows, a change from the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities; and (3) that when computing diluted earnings per share, the effect of “windfall” tax benefits be excluded from the hypothetical proceeds used to calculate the repurchase of shares under the treasury stock method.		January 1, 2017		We adopted the new standard prospectively.  The adoption of the new standard did not have a material effect on our consolidated financial statements for the three months and six months ended June 30, 2017, and based upon the current price of our common stock, we do not expect that the adoption of the new standard will have a material effect on our consolidated financial statements for the year ended December 31, 2017.

Note 3.

Business Acquisitions and Investments

2016 Business Acquisitions

In May 2016, we acquired the North American automotive ignition wire business of General Cable Corporation for approximately $67.5 million.  The acquisition was paid for in cash funded by our revolving credit facility with JPMorgan Chase, as agent.  The acquisition includes the purchase of certain assets and the assumption of certain liabilities of General Cable Corporation’s (and certain of its affiliates) automotive ignition wire business in North America as well as 100% of the equity interests of a General Cable subsidiary in Nogales, Mexico.

 

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

Purchase Price						$	67,451
Assets acquired and liabilities assumed:
Receivables		$	3,130
Inventory			12,567
Other current and noncurrent assets (1)			334
Property, plant and equipment, net			2,660
Intangible assets			42,440
Goodwill			12,746
Current liabilities			(6,426	)
Net assets acquired						$	67,451

(1)

Other current and noncurrent assets includes $0.2 million of cash acquired.

 

Intangible assets acquired of $42.4 million consists of customer relationships of $39.4 million that will be amortized on a straight-line basis over the estimated useful life of 15 years; a non-compete agreement of $2.2 million that will be amortized on a straight-line basis over the estimated useful life of 5 years; and a supply agreement of $0.8 million that will be amortized on a straight-line basis over the estimated useful life of 1 year.  Goodwill of $12.7 million was allocated to the Engine Management Segment and is deductible for income tax purposes.  The goodwill reflects relationships, business specific knowledge and the replacement cost of an assembled workforce associated with personal reputations, as well as the value of anticipated synergies.

 

Incremental net sales from the acquisition included in our consolidated statements of operations were $15 million and $38.4 million for the three months and six months ended June 30, 2017, respectively.

Note 4.

Restructuring and Integration 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 December 31, 2016 and June 30, 2017 and activity for the six months ended June 30, 2017 consisted of the following (in thousands):

		Workforce Reduction				Other Exit Costs				Total
Exit activity liability at December 31, 2016		$	2,576			$	—			$	2,576
Restructuring and integration costs:
Amounts provided for during 2017			1,788				994				2,782
Cash payments			(1,300	)			(994	)			(2,294	)
Foreign Currency Exchange Rate Changes			84				—				84
Exit activity liability at June 30, 2017		$	3,148			$	—			$	3,148

 

 

Restructuring Costs

Plant Rationalization Program

In February 2016, in connection with our ongoing efforts to improve operating efficiencies and reduce costs, we finalized our intention to implement a plant rationalization initiative.  As part of the plant rationalization, certain production activities will be relocated from our Grapevine, Texas manufacturing facility to facilities in Greenville, South Carolina and Reynosa, Mexico, certain service functions will be relocated from Grapevine, Texas to our administrative offices in Lewisville, Texas, and our Grapevine, Texas facility will be closed.  In addition, certain production activities will be relocated from our Greenville, South Carolina manufacturing facility to our manufacturing facility in Bialystok, Poland.  Restructuring and integration expenses expected to be incurred related to the program of approximately $5.7 million, consisting of employee severance and relocation of certain machinery and equipment, will be recognized throughout the program.  Through June 30, 2017, total restructuring and integration expenses related to the program of $4.8 million were recognized.  We anticipate that the plant rationalization will be completed by the end of 2017.

 

Activity, by segment, for the six months ended June 30, 2017 related to our plant rationalization program consisted of the following (in thousands):

 

		Engine Management				Temperature Control				Other				Total
Exit activity liability at December 31, 2016		$	11			$	2,043			$	—			$	2,054
Restructuring and integration costs:
Amounts provided for during 2017			602				1,038				—				1,640
Cash payments			(613	)			(1,132	)			—				(1,745	)
Exit activity liability at June 30, 2017		$	—			$	1,949			$	—			$	1,949

Orlando Plant Rationalization Program

In January 2017, to further our ongoing efforts to improve operating efficiencies and reduce costs, we finalized our intention to implement another plant rationalization initiative at our Orlando, Florida facility.  As part of the plant rationalization, we will relocate production activities from our Orlando, Florida manufacturing facility to Independence, Kansas, and close our Orlando, Florida facility.  Restructuring and integration expenses expected to be incurred related to the program of approximately $3.1 million, consisting of employee severance and relocation of certain machinery and equipment, will be recognized throughout the program.  Through June 30, 2017, total restructuring and integration expenses related to the program of $0.6 million were recognized.  We anticipate that the Orlando plant rationalization will be completed by the end of the second quarter of 2018.

Activity, by segment, for the six months ended June 30, 2017 related to our Orlando plant rationalization program consisted of the following (in thousands):

 

		Engine Management				Temperature Control				Other				Total
Exit activity liability at December 31, 2016		$	—			$	—			$	—			$	—
Restructuring and integration costs:
Amounts provided for during 2017			617				—				—				617
Cash payments			(87	)			—				—				(87	)
Exit activity liability at June 30, 2017		$	530			$	—			$	—			$	530

 

Integration Costs

Wire and Cable Relocation

In connection with our acquisition of the North American automotive ignition wire business of General Cable Corporation in May 2016, we expect to incur certain integration expenses, including costs to be incurred in connection with the consolidation of the General Cable Corporation Altoona, Pennsylvania distribution center into our existing wire distribution center in Edwardsville, Kansas and the relocation of certain machinery and equipment.  In October 2016, we further announced our plan to relocate all production from the acquired Nogales, Mexico wire set assembly operation to our existing wire assembly facility in Reynosa, Mexico and to close the Nogales, Mexico plant.  Integration expenses expected to be incurred related to the closure of the Nogales, Mexico plant include employee severance and the relocation of certain machinery and equipment.  Total integration expenses of $2.6 million are expected to be incurred related to the program.  Through June 30, 2017, integration expenses related to the program of $1.2 million were recognized.  We anticipate that the wire and cable relocation program will be completed by the end of the first quarter of 2018.

 

Activity, by segment, for the six months ended June 30, 2017 related to our wire and cable relocation program consisted of the following (in thousands):

 

		Engine Management				Temperature Control				Other				Total
Exit activity liability at December 31, 2016		$	522			$	—			$	—			$	522
Restructuring and integration costs:
Amounts provided for during 2017			525				—				—				525
Cash payments			(462	)			—				—				(462	)
Foreign Currency Exchange Rate Changes			84				—				—				84
Exit activity liability at June 30, 2017		$	669			$	—			$	—			$	669

Note 5.

Sale of Receivables

From time to time, we sell undivided interests in certain of our receivables to financial institutions.  We enter these agreements at our discretion when we determine that the cost of factoring is less than the cost of servicing our receivables with existing debt.  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 $224.3 million and $404.1 million of receivables during the three months and six months ended June 30, 2017, respectively, and $201.7 million and $367.6 million for the comparable periods in 2016.  A charge in the amount of $6.4 million and $11.6 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months and six months ended June 30, 2017, respectively, and $4.9 million and $8.9 million for the comparable periods in 2016.  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.

 

Note 6.

Inventories

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

			June 30, 2017				December 31, 2016
	(In thousands)
Finished goods		$	222,414			$	203,700
Work-in-process			8,597				6,823
Raw materials			109,875				101,954
Total inventories		$	340,886			$	312,477

Note 7.

Acquired Intangible Assets

Acquired identifiable intangible assets consist of the following:

		June 30, 2017				December 31, 2016
		(In thousands)
Customer relationships		$	87,333			$	87,070
Trademarks and trade names			6,800				6,800
Non-compete agreements			3,201				3,189
Patents			723				723
Supply agreements			800				800
Leaseholds			160				160
Total acquired intangible assets			99,017				98,742
Less accumulated amortization (1)			(40,031	)			(35,830	)
Net acquired intangible assets		$	58,986			$	62,912

(1)

Applies to all intangible assets, except for trademarks and trade names totaling $5.2 million, which have indefinite useful lives and, as such, are not being amortized.

Total amortization expense for acquired intangible assets was $2.1 million and $4.2 million for the three months and six months ended June 30, 2017, respectively, and $1.5 million and $2.7 million for the comparable periods in 2016.  Based on the current estimated useful lives assigned to our acquired intangible assets, amortization expense is estimated to be $3.8 million for the remainder of 2017, $7.6 million in 2018, $6.3 million in 2019, $5.9 million in 2020 and $30.2 million in the aggregate for the years 2021 through 2031.

 

Note 8.

Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

		June 30, 2017				December 31, 2016
		(In thousands)
Revolving credit facilities		$	78,946			$	54,812
Other			147				163
Total debt		$	79,093			$	54,975
Current maturities of debt		$	78,992			$	54,855
Long-term debt			101				120
Total debt		$	79,093			$	54,975

Revolving Credit Facility

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 line of credit under the agreement also allows for a $10 million line of credit to Canada as part of the $250 million available for borrowing.  Direct borrowings under the 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 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 $162.2 million available for us to borrow pursuant to the formula at June 30, 2017.  Outstanding borrowings under the credit agreement, which are classified as current liabilities, were $78.9 million and $54.8 million at June 30, 2017 and December 31, 2016, respectively.  Borrowings under the credit agreement have been classified as current liabilities based upon the accounting rules and certain provisions in the agreement.

 

At June 30, 2017, the weighted average interest rate on our credit agreement was 2.5%, which consisted of $75 million in direct borrowings at 2.4% and an alternative base rate loan of $3.9 million at 4.5%.  At December 31, 2016, the weighted average interest rate on our credit agreement was 2.3%, which consisted of $45 million in direct borrowings at 2% and an alternative base rate loan of $9.8 million at 4%.  During the six months ended June 30, 2017, our average daily alternative base rate loan balance was $5.2 million, compared to a balance of $3 million for the six months ended June 30, 2016, and a balance of $2.6 million for the year ended December 31, 2016.

 

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 June 30, 2017, 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.

 

Deferred Financing Costs

We had deferred financing costs of $1.1 million and $1.3 million as of June 30, 2017 and December 31, 2016, respectively.  Deferred financing costs are related to our revolving credit facility.  Deferred financing costs as of June 30, 2017 are being amortized in the amounts of $0.2 million for the remainder of 2017, $0.3 million in 2018, $0.3 million in 2019 and $0.3 million in 2020.

Note 9.

Accumulated Other Comprehensive Income

Changes in Accumulated Other Comprehensive Income by Component (in thousands)

		Three Months Ended June 30, 2017
		Foreign Currency Translation Adjustments				Unrecognized Postretirement Benefit Costs (Credit)				Total
Balance at March 31, 2017		$	(8,529	)		$	189			$	(8,340	)
Other comprehensive income before reclassifications			2,733				283				3,016
Amounts reclassified from accumulated other comprehensive income			—				(163	)			(163	)
Other comprehensive income, net			2,733				120				2,853
Balance at June 30, 2017		$	(5,796	)		$	309			$	(5,487	)

		Six Months Ended June 30, 2017
		Foreign Currency Translation Adjustments				Unrecognized Postretirement Benefit Costs (Credit)				Total
Balance at December 31, 2016		$	(11,252	)		$	224			$	(11,028	)
Other comprehensive income before reclassifications			5,456				283				5,739
Amounts reclassified from accumulated other comprehensive income			—				(198	)			(198	)
Other comprehensive income, net			5,456				85				5,541
Balance at June 30, 2017		$	(5,796	)		$	309			$	(5,487	)

 

Reclassifications Out of Accumulated Other Comprehensive Income (in thousands)

Details About Accumulated Other Comprehensive Income Components		Three Months Ended June 30, 2017				Six Months Ended June 30, 2017
Amortization of postretirement benefit plans:
Prior service benefit (1)		$	—			$	—
Unrecognized (gain) loss (1)			(271	)			(330	)
Total before income tax			(271	)			(330	)
Income tax expense			108				132
Total reclassifications for the period		$	(163	)		$	(198	)

 

(1)

These accumulated other comprehensive income components are included in the computation of net periodic postretirement benefit costs, which are included in selling, general and administrative expenses in our consolidated statements of operations (see Note 11 for additional details).

Note 10.  Stock-Based Compensation Plans

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

Restricted and Performance Stock Grants

As part of the 2016 Omnibus Incentive Plan, we currently grant shares of restricted stock to eligible employees and our independent directors and performance-based stock to eligible employees.  Selected executives and other key personnel are granted performance awards whose vesting is contingent upon meeting various performance measures with a retention feature.  Performance-based shares are subject to a three-year measuring period and the achievement of performance targets and, depending upon the achievement of such performance targets, they may become vested on the third anniversary of the date of grant.  Each period we evaluate the probability of achieving the applicable targets, and we adjust our accrual accordingly.  Restricted shares granted to employees become fully vested upon the third anniversary of the date of grant; and for selected key executives, certain additional restricted share grants vest 25% upon the attainment of age 60, 25% upon the attainment of age 63 and become fully vested upon the attainment of age 65.  Restricted shares granted to directors become fully vested upon the first anniversary of the date of grant.  Commencing with the 2015 grants, restricted and performance shares issued to certain key executives and directors are subject to a one or two year holding period upon the lapse of the three year vesting period.  Forfeitures on restricted stock grants are estimated at 5% for employees and 0% for executives and directors, respectively, based on our evaluation of historical and expected future turnover.

 

		Shares				Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2016			822,848			$	30.46
Granted			8,450				42.83
Vested			(14,634	)			29.17
Forfeited			(4,150	)			35.66
Balance at June 30, 2017			812,514			$	30.59

We recorded compensation expense related to restricted shares and performance-based shares of $3.5 million ($2.2 million, net of tax) and $2.3 million ($1.5 million, net of tax) for the six months ended June 30, 2017 and 2016, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $12.7 million at June 30, 2017, and is expected to be recognized as they vest over a weighted average period of 5.3 years and 0.8 years for employees and directors, respectively.

Note 11.

Employee Benefits

We provided, and continue to provide, certain medical and dental care benefits to eligible retired U.S. and Canadian employees. Under the U.S. plan, for non-union employees, a Health Reimbursement Account (“HRA”) was established beginning January 1, 2009 for each qualified U.S. retiree.  Annually, and through the year ended December 31, 2016, a fixed amount was credited into the HRA to cover both medical and dental costs for all current and future eligible retirees.  Under the Canadian plan, retiree medical and dental benefits were funded using insurance contracts.  Premiums under the insurance contracts were funded on a pay-as-you-go basis.  The postretirement medical plans to substantially all eligible U.S. and Canadian employees terminated on December 31, 2016.  For U.S. plan participants, balances in the HRA accounts at December 31, 2016 will remain available for use until December 31, 2018.  Any remaining balance at December 31, 2018 will be forfeited.  Postretirement medical and dental benefits to eligible employees will continue to be provided to the 24 former union employees in the U.S.

The components of net periodic benefit cost for our postretirement benefit plans for the three months and six months ended June 30, 2017 and 2016 were as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
Postretirement benefits		2017				2016				2017				2016
Service cost		$	—			$	—			$	—			$	—
Interest cost			2				3				4				6
Amortization of prior service cost			—				(14	)			—				(27	)
Actuarial net loss			(271	)			115				(330	)			390
Net periodic benefit cost (credit)		$	(269	)		$	104			$	(326	)		$	369

We maintain a defined contribution Supplemental Executive Retirement Plan for key employees.  Under the plan, these employees may elect to defer a portion of their compensation and, in addition, we may at our discretion make contributions to the plan on behalf of the employees.  In March 2017, we made company contributions to the plan of $0.3 million related to calendar year 2016.

 

We also have an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement.  In connection therewith, we maintain an employee benefits trust to which we contribute shares of treasury stock.  We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under the plan. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released.  The trustees will vote the shares in accordance with their fiduciary duties.  During the six months ended June 30, 2017, we contributed to the trust an additional 43,300 shares from our treasury and released 43,300 shares from the trust leaving 200 shares remaining in the trust as of June 30, 2017.

 

Note 12.

Fair Value Measurements

The carrying value of our financial instruments consisting of cash and cash equivalents, deferred compensation, and short term borrowings approximate their fair value.  In each instance, fair value is determined after considering Level 1 inputs under the three-level fair value hierarchy.  For fair value purposes, the carrying value of cash and cash equivalents approximates fair value due to the short maturity of those investments.  The fair value of the assets held by the deferred compensation plan are based on the quoted market prices of the underlying funds which are held in registered investment companies. The carrying value of our revolving credit facilities, classified as short term borrowings, equals fair market value because the interest rate reflects current market rates.

Note 13.

Earnings Per Share

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
Basic Net Earnings Per Common Share:
Earnings from continuing operations		$	18,261			$	19,862			$	34,628			$	32,518
Loss from discontinued operations			(497	)			(618	)			(1,130	)			(1,070	)
Net earnings available to common stockholders		$	17,764			$	19,244			$	33,498			$	31,448
Weighted average common shares outstanding			22,820				22,705				22,833				22,674
Earnings from continuing operations per common share		$	0.80			$	0.87			$	1.52			$	1.43
Loss from discontinued operations per common share			(0.02	)			(0.02	)			(0.05	)			(0.04	)
Basic net earnings per common share		$	0.78			$	0.85			$	1.47			$	1.39
Diluted Net Earnings Per Common Share:
Earnings from continuing operations		$	18,261			$	19,862			$	34,628			$	32,518
Loss from discontinued operations			(497	)			(618	)			(1,130	)			(1,070	)
Net earnings available to common stockholders		$	17,764			$	19,244			$	33,498			$	31,448
Weighted average common shares outstanding			22,820				22,705				22,833				22,674
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock and performance-based stock			509				314				499				315
Weighted average common shares outstanding – Diluted			23,329				23,019				23,332				22,989
Earnings from continuing operations per common share		$	0.78			$	0.86			$	1.48			$	1.41
Loss from discontinued operations per common share			(0.02	)			(0.02	)			(0.04	)			(0.04	)
Diluted net earnings per common share		$	0.76			$	0.84			$	1.44			$	1.37