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

FORM 10-Q

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

For the quarterly period ended September 30, 2018

or

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

Commission file number:  1-4743

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑      No ☐

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

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

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

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

As of the close of business on October 26, 2018, there were 22,431,618 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.



STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION

   
Page No.
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
28
     
Item 3.
43
     
Item 4.
44

PART II – OTHER INFORMATION

Item 1.
45
     
Item 2.
45
     
Item 6.
46
     
47

2

PART I – FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands, except share and per share data)
 
2018
   
2017
   
2018
   
2017
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net sales
 
$
296,619
   
$
281,058
   
$
845,081
   
$
876,165
 
Cost of sales
   
209,313
     
198,523
     
603,897
     
618,854
 
Gross profit
   
87,306
     
82,535
     
241,184
     
257,311
 
Selling, general and administrative expenses
   
60,137
     
54,963
     
175,604
     
172,726
 
Restructuring and integration expenses
   
6
     
1,132
     
3,073
     
3,914
 
Other income, net
   
15
     
316
     
328
     
946
 
Operating income
   
27,178
     
26,756
     
62,835
     
81,617
 
Other non-operating income, net
   
351
     
482
     
800
     
2,372
 
Interest expense
   
1,254
     
595
     
3,137
     
1,785
 
Earnings from continuing operations before taxes
   
26,275
     
26,643
     
60,498
     
82,204
 
Provision for income taxes
   
7,002
     
9,535
     
15,801
     
30,468
 
Earnings from continuing operations
   
19,273
     
17,108
     
44,697
     
51,736
 
Loss from discontinued operations, net of income taxes
   
(3,524
)
   
(3,983
)
   
(5,014
)
   
(5,113
)
Net earnings
 
$
15,749
   
$
13,125
   
$
39,683
   
$
46,623
 
                                 
Per Share Data:
                               
Net earnings per common share – Basic:
                               
Earnings from continuing operations
 
$
0.86
   
$
0.75
   
$
1.99
   
$
2.27
 
Discontinued operations
   
(0.16
)
   
(0.17
)
   
(0.22
)
   
(0.22
)
Net earnings per common share – Basic
 
$
0.70
   
$
0.58
   
$
1.77
   
$
2.05
 
                                 
Net earnings per common share – Diluted:
                               
Earnings from continuing operations
 
$
0.84
   
$
0.74
   
$
1.95
   
$
2.22
 
Discontinued operations
   
(0.15
)
   
(0.17
)
   
(0.22
)
   
(0.22
)
Net earnings per common share – Diluted
 
$
0.69
   
$
0.57
   
$
1.73
   
$
2.00
 
                                 
Dividend declared per share
 
$
0.21
   
$
0.19
   
$
0.63
   
$
0.57
 
                                 
Average number of common shares
   
22,424,962
     
22,660,157
     
22,464,697
     
22,774,927
 
Average number of common shares and dilutive common shares
   
22,938,925
     
23,174,700
     
22,954,649
     
23,287,052
 

See accompanying notes to consolidated financial statements (unaudited).

3

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands)
 
2018
   
2017
   
2018
   
2017
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net earnings
 
$
15,749
   
$
13,125
   
$
39,683
   
$
46,623
 
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation adjustments
   
719
     
1,595
     
(2,997
)
   
7,051
 
Pension and postretirement plans:
                               
Amortization of:
                               
Unrecognized gain
   
(10
)
   
(165
)
   
(31
)
   
(496
)
Unrecognized actuarial gains
   
     
     
12
     
472
 
Income tax related to pension and postretirement plans
   
4
     
66
     
8
     
10
 
Pension and postretirement plans, net of tax
   
(6
)
   
(99
)
   
(11
)
   
(14
)
Total other comprehensive income (loss), net of tax
   
713
     
1,496
     
(3,008
)
   
7,037
 
Comprehensive income
 
$
16,462
   
$
14,621
   
$
36,675
   
$
53,660
 

See accompanying notes to consolidated financial statements (unaudited).

4

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
(In thousands, except share and per share data)
 
September 30,
2018
   
December 31,
2017
 
   
(Unaudited)
       
ASSETS
 
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
27,321
   
$
17,323
 
Accounts receivable, less allowances for discounts and doubtful accounts of $5,537 and $4,967 for 2018 and 2017, respectively
   
163,309
     
140,057
 
Inventories
   
318,420
     
326,411
 
Unreturned customer inventories
   
21,295
     
 
Prepaid expenses and other current assets
   
11,681
     
12,300
 
Total current assets
   
542,026
     
496,091
 
                 
Property, plant and equipment, net of accumulated depreciation of $190,015 and $191,081 for 2018 and 2017, respectively
   
91,735
     
89,103
 
Goodwill
   
67,387
     
67,413
 
Other intangibles, net
   
50,263
     
56,261
 
Deferred income taxes
   
34,907
     
32,420
 
Investments in unconsolidated affiliates
   
33,785
     
31,184
 
Other assets
   
16,284
     
15,095
 
Total assets
 
$
836,387
   
$
787,567
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
CURRENT LIABILITIES:
               
Notes payable
 
$
45,000
   
$
57,000
 
Current portion of other debt
   
5,980
     
4,699
 
Accounts payable
   
84,031
     
77,990
 
Sundry payables and accrued expenses
   
30,879
     
40,012
 
Accrued customer returns
   
53,717
     
35,916
 
Accrued core liability
   
30,002
     
11,899
 
Accrued rebates
   
35,329
     
35,346
 
Payroll and commissions
   
24,013
     
23,035
 
Total current liabilities
   
308,951
     
285,897
 
                 
Long-term debt
   
26
     
79
 
Other accrued liabilities
   
18,039
     
14,561
 
Accrued asbestos liabilities
   
35,319
     
33,376
 
Total liabilities
   
362,335
     
333,913
 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock – par value $2.00 per share:
               
Authorized – 30,000,000 shares; issued 23,936,036 shares
   
47,872
     
47,872
 
Capital in excess of par value
   
104,876
     
100,057
 
Retained earnings
   
381,503
     
357,153
 
Accumulated other comprehensive income
   
(7,117
)
   
(4,109
)
Treasury stock – at cost (1,520,524 shares and 1,424,025 shares in 2018 and 2017, respectively)
   
(53,082
)
   
(47,319
)
Total stockholders’ equity
   
474,052
     
453,654
 
Total liabilities and stockholders’ equity
 
$
836,387
   
$
787,567
 

See accompanying notes to consolidated financial statements (unaudited).

5

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
(In thousands)
 
Nine Months Ended
September 30,
 
   
2018
   
2017
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings
 
$
39,683
   
$
46,623
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
   
17,745
     
17,439
 
Amortization of deferred financing cost
   
258
     
258
 
Increase to allowance for doubtful accounts
   
40
     
889
 
Increase to inventory reserves
   
2,753
     
1,579
 
Amortization of deferred gain on sale of building
   
(218
)
   
(786
)
Equity income from joint ventures
   
(603
)
   
(970
)
Employee Stock Ownership Plan allocation
   
1,918
     
1,619
 
Stock-based compensation
   
5,614
     
5,663
 
(Increase) decrease in deferred income taxes
   
(2,556
)
   
700
 
Loss on discontinued operations, net of tax
   
5,014
     
5,113
 
Change in assets and liabilities:
               
Increase in accounts receivable
   
(23,428
)
   
(27,753
)
(Increase) decrease in inventories
   
2,761
     
(18,746
)
(Increase) decrease in prepaid expenses and other current assets
   
1,202
     
(4,805
)
Increase in accounts payable
   
5,193
     
90
 
Increase in sundry payables and accrued expenses
   
12,828
     
8,728
 
Net change in other assets and liabilities
   
(619
)
   
1,120
 
Net cash provided by operating activities
   
67,585
     
36,761
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisitions of and investments in businesses
   
(9,852
)
   
 
Capital expenditures
   
(15,633
)
   
(17,710
)
Other investing activities
   
37
     
6
 
Net cash used in investing activities
   
(25,448
)
   
(17,704
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net borrowings (payments) under line-of-credit agreements
   
(12,000
)
   
18,188
 
Net borrowings (payments) of other debt and capital lease obligations
   
1,463
     
(35
)
Purchase of treasury stock
   
(9,271
)
   
(20,000
)
Increase in overdraft balances
   
1,382
     
658
 
Dividends paid
   
(14,144
)
   
(12,990
)
Net cash used in financing activities
   
(32,570
)
   
(14,179
)
Effect of exchange rate changes on cash
   
431
     
724
 
Net increase in cash and cash equivalents
   
9,998
     
5,602
 
CASH AND CASH EQUIVALENTS at beginning of period
   
17,323
     
19,796
 
CASH AND CASH EQUIVALENTS at end of period
 
$
27,321
   
$
25,398
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
2,896
   
$
1,456
 
Income taxes
 
$
11,829
   
$
30,181
 

See accompanying notes to consolidated financial statements (unaudited).

6

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2018
(Unaudited)

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

See accompanying notes to consolidated financial statements (unaudited).

7

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1.
Basis of Presentation

Standard Motor Products, Inc. and subsidiaries (referred to as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of 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, 2017.  The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership, except in instances where the minority shareholder maintains substantive participating rights, in which case we follow the equity method of accounting.  Investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence.  All significant inter-company items have been eliminated.

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

Reclassification

Certain prior period amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 2018 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, 2017, except for changes made as a result of the adoption of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, described under the heading, “Recently Issued Accounting Pronouncements” below and in Note 3, “Net Sales.”

8

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Recently Issued Accounting Pronouncements

Standards that were adopted

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”) which replaces numerous requirements in U.S. generally accepted accounting principles, including industry-specific requirements, and provides companies with a single comprehensive revenue recognition model for recognizing revenue from contracts with customers. 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.  The two permitted transition methods under the new standard are (1) the full retrospective method, in which case the standard would be applied to each prior reporting period presented, with the cumulative effect of applying the standard recognized at the earliest period presented, or (2) the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application.

Effective January 1, 2018, we adopted the requirements of ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective method.  We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings.  The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.  We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

The adoption of the new standard did not result in a material difference between the recognition of revenue under ASU 2014-09 and prior accounting standards.  For the majority of our net sales, revenue continues to be recognized when products are shipped from our distribution facilities, or when received by our customers, depending upon the terms of the contract.  Under the new revenue standard, (1) the return of cores from customers used in our manufacturing processes for air conditioning compressors, diesel injectors, and diesel pumps is estimated and recorded as unreturned customer inventories at the time of sale, and (2) overstock returns are recorded gross of expected recoveries.  Adoption of the new standard resulted in the recording of unreturned customer inventories, and an increase in accrued core liabilities and accrued customer returns, with partially offsetting changes in net sales and cost of sales, and no material change to our net income on an ongoing basis.

The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2018 for the adoption of ASU 2014-09 is as follows (in thousands):

   
Balance at
December 31,
2017
   
Adjustments
Due to
Adoption of
ASU 2014-09
   
Balance at
January 1,
2018
 
Balance Sheet
                 
Unreturned customer inventories
 
$
   
$
19,950
   
$
19,950
 
Accrued customer returns
   
35,916
     
6,670
     
42,586
 
Accrued core liability
   
11,899
     
14,469
     
26,368
 
Retained earnings
   
357,153
     
(1,189
)
   
355,964
 

9

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

The adoption of ASU 2014-09 resulted in the following changes to our consolidated balance sheet as of September 30, 2018 and our consolidated statement of operations for the three months and nine months ended September 30, 2018 (in thousands):

   
As Reported
   
Balances Without
Adoption of ASU
2014-09
   
Effect of Change
 
Balance Sheet
                 
Unreturned customer inventories
 
$
21,295
   
$
   
$
21,295
 
Prepaid expenses and other current assets
   
11,681
     
11,907
     
(226
)
Accrued customer returns
   
53,717
     
45,934
     
7,783
 
Accrued core liability
   
30,002
     
16,165
     
13,837
 
Retained earnings
   
381,503
     
382,054
     
(551
)

   
Three Months Ended
September 30, 2018
   
Nine Months Ended
September 30, 2018
 
   
As
Reported
   
Balances
Without
Adoption
of ASU
2014-09
   
Effect of
Change
   
As
Reported
   
Balances
Without
Adoption
of ASU
2014-09
   
Effect of
Change
 
Statement of Operations
                                   
Net sales
 
$
296,619
   
$
298,440
   
$
(1,821
)
 
$
845,081
   
$
844,449
   
$
632
 
Cost of sales
   
209,313
     
210,930
     
(1,617
)
   
603,897
     
604,129
     
(232
)
Earnings from continuing operations operations before taxes
   
26,275
     
26,479
     
(204
)
   
60,498
     
59,634
     
864
 
Provision for income taxes
   
7,002
     
7,051
     
(49
)
   
15,801
     
15,575
     
226
 
Net earnings
   
15,749
     
15,904
     
(155
)
   
39,683
     
39,045
     
638
 

See Note 3 for further information regarding our adoption of ASU 2014-09.

The following table provides a brief description of the impact of additional recently adopted accounting pronouncements on our financial statements:

Standard
 
Description
 
Date of
adoption
 
Effects on the financial
statements or other significant
matters
 
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
 
The retrospective adoption of the new standard did not result in any changes in our reporting of cash receipts and cash payments in our consolidated statement of cash flows.
             
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
 
 
The adoption of the new standard resulted in the reclassification of 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, to other non-operating income (expense). We adopted the new standard retrospectively, and as such, all prior period amounts have been reclassified for comparative purposes.

10

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Standards that are not yet adopted as of September 30, 2018

Leases

In February 2016, the FASB issued ASU 2016-02, Leases, (“ASU 2016-02”), which outlines the need to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with a term longer than twelve months.   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.  The new standard is effective for annual reporting periods beginning after December 15, 2018, which for us is January 1, 2019, and interim periods within those annual periods.  The new standard will require that we recognize all of our leases, including our current operating leases, on the balance sheet.  The new standard requires adoption using a modified retrospective approach and provides a number of optional practical expedients in transition.

In July 2018, the FASB issued ASU 2018-11, Targeted Improvements, (“ASU 2018-11”), which provides an alternative modified retrospective transition method.  Under this new transition method, a reporting entity would initially apply the new lease requirements at the effective date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  Comparative financial information for the prior periods presented would not be restated but instead would continue to be reported under accounting standards in effect in those prior periods.

To date, we have taken an inventory of all of our operating leases, which consists primarily of real estate, equipment and auto leases, have reviewed key lease agreements, and have begun a review of contracts for embedded leases.  We continue to evaluate lease terms, lease payments and appropriate discount rates to use in calculating the ROU asset and lease liability. We anticipate using the alternative modified retrospective method of adoption permitted pursuant to ASU 2018-11, whereby financial information will not be updated, and the disclosure required under the new standard will not be provided, for dates and periods before January 1, 2019. In addition, we expect to elect the “package of practical expedients,” which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs and permits the use-of-hindsight in determining the lease term.

We do not expect that the adoption of this standard will have a material effect on our statement of operations, or our operating cash flows.  While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our operating leases, and providing significant new disclosures about our leasing activities.  We do not expect a significant change in our leasing activities between now and adoption, and will be continuously assessing the impact of the new standard on our systems, processes and controls through January 1, 2019, our planned adoption date.

11

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

The following table provides a brief description of additional recently issued accounting pronouncements that have not yet been adopted as of September 30, 2018, and that could have an impact on our financial statements:

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

Note 3.
Net Sales

Significant Accounting Policy

We recognize revenues when our performance obligation has been satisfied and the control of products has been transferred to a customer which typically occurs upon shipment.  Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of goods or providing services. Shipping and handling costs, as well as freight to customers, are included in distribution expenses as part of selling, general and administrative expenses.

Revenue Recognition

We derive our revenue primarily from sales of replacement parts for motor vehicles from both our Engine Management and Temperature Control Segments. The amount of consideration we receive and revenue we recognize depends on the marketing incentives, product warranty and overstock returns we offer to our customers.  For certain of our sales of remanufactured products, we also charge our customers a deposit for the return of a used core component which we can use in our future remanufacturing activities.  Such deposit is not recognized as revenue at the time of the sale but rather carried as a core liability.  At the same time, we estimate the core expected to be returned from the customer and record the estimated return as unreturned customer inventory.  The liability is extinguished when a core is actually returned to us, or at period end when we estimate and recognize revenue for the core deposits not expected to be returned.  We estimate and record provisions for cash discounts, quantity rebates, sales returns and warranties in the period the sale is recorded, based upon our prior experience and current trends.  Significant management judgments and estimates must be made and used in estimating sales returns and allowances relating to revenue recognized in any accounting period.

12

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Product 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. At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return.  At the same time, we record an estimate of anticipated customer returns as unreturned customer inventory.  Revision to these estimates is made when necessary, based upon changes in these factors.  We regularly study trends of such claims.

Disaggregation of Net Sales

We disaggregate our net sales from contracts with customers by geographic area, major product group, and major sales channels for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our net sales are affected by economic factors.  The following tables provide disaggregation of net sales information for the three months and nine months ended September 30, 2018 and 2017 (in thousands):

Three months ended September 30, 2018 (a)
 
Engine
Management
   
Temperature
Control
   
Other (c)
   
Total
 
Geographic Area:
                       
United States
 
$
175,875
   
$
91,687
   
$
   
$
267,562
 
Canada
   
9,297
     
3,591
     
2,970
     
15,858
 
Mexico
   
4,909
     
219
     
     
5,128
 
Europe
   
2,041
     
156
     
     
2,197
 
Other foreign
   
5,448
     
426
     
     
5,874
 
Total
 
$
197,570
   
$
96,079
   
$
2,970
   
$
296,619
 
Major Product Group:
                               
Ignition, emissions and fuel system parts
 
$
159,101
   
$
   
$
1,171
   
$
160,272
 
Wire and cable
   
38,469
     
     
118
     
38,587
 
Compressors
   
     
54,842
     
1,070
     
55,912
 
Other climate control parts
   
     
41,237
     
611
     
41,848
 
Total
 
$
197,570
   
$
96,079
   
$
2,970
   
$
296,619
 
Major Sales Channel:
                               
Aftermarket
 
$
168,836
   
$
88,681
   
$
2,970
   
$
260,487
 
OE/OES
   
23,345
     
6,718
     
     
30,063
 
Export
   
5,389
     
680
     
     
6,069
 
Total
 
$
197,570
   
$
96,079
   
$
2,970
   
$
296,619
 

13

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Three months ended September 30, 2017 (a)(b)
 
Engine
Management
   
Temperature
Control
   
Other (c)
   
Total
 
Geographic Area:
                       
United States
 
$
172,530
   
$
77,315
   
$
   
$
249,845
 
Canada
   
8,023
     
3,087
     
3,122
     
14,232
 
Mexico
   
6,190
     
291
     
     
6,481
 
Europe
   
3,157
     
131
     
     
3,288
 
Other foreign
   
6,876
     
336
     
     
7,212
 
Total
 
$
196,776
   
$
81,160
   
$
3,122
   
$
281,058
 
Major Product Group:
                               
Ignition, emissions and fuel system parts
 
$
155,544
   
$
   
$
1,526
   
$
157,070
 
Wire and cable
   
41,232
     
     
167
     
41,399
 
Compressors
   
     
44,733
     
972
     
45,705
 
Other climate control parts
   
     
36,427
     
457
     
36,884
 
Total
 
$
196,776
   
$
81,160
   
$
3,122
   
$
281,058
 
Major Sales Channel:
                               
Aftermarket
 
$
163,634
   
$
73,664
   
$
3,122
   
$
240,420
 
OE/OES
   
26,891
     
6,584
     
     
33,475
 
Export
   
6,251
     
912
     
     
7,163
 
Total
 
$
196,776
   
$
81,160
   
$
3,122
   
$
281,058
 

Nine months ended September 30, 2018 (a)
 
Engine
Management
   
Temperature
Control
   
Other (c)
   
Total
 
Geographic Area:
                       
United States
 
$
532,842
   
$
223,861
   
$
   
$
756,703
 
Canada
   
24,389
     
10,685
     
7,914
     
42,988
 
Mexico
   
17,578
     
610
     
     
18,188
 
Europe
   
7,927
     
469
     
     
8,396
 
Other foreign
   
17,751
     
1,055
     
     
18,806
 
Total
 
$
600,487
   
$
236,680
   
$
7,914
   
$
845,081
 
Major Product Group:
                               
Ignition, emissions and fuel system parts
 
$
482,640
   
$
   
$
4,024
   
$
486,664
 
Wire and cable
   
117,847
     
     
467
     
118,314
 
Compressors
   
     
131,680
     
1,832
     
133,512
 
Other climate control parts
   
     
105,000
     
1,591
     
106,591
 
Total
 
$
600,487
   
$
236,680
   
$
7,914
   
$
845,081
 
Major Sales Channel:
                               
Aftermarket
 
$
510,010
   
$
210,990
   
$
7,914
   
$
728,914
 
OE/OES
   
74,202
     
24,115
     
     
98,317
 
Export
   
16,275
     
1,575
     
     
17,850
 
Total
 
$
600,487
   
$
236,680
   
$
7,914
   
$
845,081
 

14

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Nine months ended September 30, 2017 (a)(b)
 
Engine
Management
   
Temperature
Control
   
Other (c)
   
Total
 
Geographic Area:
                       
United States
 
$
559,574
   
$
226,041
   
$
   
$
785,615
 
Canada
   
25,846
     
10,155
     
5,885
     
41,886
 
Mexico
   
18,277
     
731
     
     
19,008
 
Europe
   
10,122
     
658
     
     
10,780
 
Other foreign
   
17,620
     
1,256
     
     
18,876
 
Total
 
$
631,439
   
$
238,841
   
$
5,885
   
$
876,165
 
Major Product Group:
                               
Ignition, emissions and fuel system parts
 
$
498,802
   
$
   
$
3,083
   
$
501,885
 
Wire and cable
   
132,637
     
     
550
     
133,187
 
Compressors
   
     
132,278
     
1,271
     
133,549
 
Other climate control parts
   
     
106,563
     
981
     
107,544
 
Total
 
$
631,439
   
$
238,841
   
$
5,885
   
$
876,165
 
Major Sales Channel:
                               
Aftermarket
 
$
535,245
   
$
212,262
   
$
5,885
   
$
753,392
 
OE/OES
   
79,563
     
24,383
     
     
103,946
 
Export
   
16,631
     
2,196
     
     
18,827
 
Total
 
$
631,439
   
$
238,841
   
$
5,885
   
$
876,165
 


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


(b)
Amounts have not been restated and are reported under accounting standards in effect in the period presented as we adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective method.


(c)
Other consists of the elimination of intersegment sales from our Engine Management and Temperature Control segments as well as sales from our Canadian business unit that does not meet the criteria of a reportable operating segment.

Geographic Area

We sell our line of products primarily in the United States, with additional sales in Canada, Mexico, Europe, Asia and Latin America.  Sales are attributed to countries based upon the location of the customer.  Our sales are substantially denominated in U.S. dollars.

Major Product Group

The Engine Management segment of the Company principally generates revenue from the sale of automotive engine replacement parts including ignition, emission and fuel system parts, and wire and cable parts.  The Temperature Control segment of the Company principally generates revenue from the sale of automotive temperature control systems replacement parts including air conditioning compressors and other climate control parts.

Major Sales Channel

In the aftermarket channel, we sell our products to warehouse distributors and retailers.  Our customers buy directly from us and sell directly to jobber stores, professional technicians and to “do-it-yourselfers” who perform automotive repairs on their personal vehicles.  In the Original Equipment (“OE”) and Original Equipment Service (“OES”) channel, we sell our products to original equipment manufacturers who redistribute our products within their distribution network, independent dealerships and service dealer technicians.  Lastly, in the Export channel, our domestic entities sell to customers outside the United States.

15

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Note 4.
Business Acquisitions and Investments

2018 Increase in Equity Investment

Foshan GWO YNG SMP Vehicle Climate Control & Cooling Products Co. Ltd.

In April 2014, we formed a 50/50 joint venture with Gwo Yng Enterprise Co., Ltd. (“Gwo Yng”), a China-based manufacturer of air conditioner accumulators, filter driers, hose assemblies and switches for the automotive aftermarket and OEM/OES markets.  We acquired our 50% interest in the joint venture for approximately $14 million.  We determined, at that time, that due to a lack of a voting majority and other qualitative factors, we do not control the operations of the joint venture and accordingly, our investment in the joint venture was accounted for under the equity method of accounting.

In March 2018, we acquired an additional 15% equity interest in the joint venture for RMB 26,475,583 (approximately $4.2 million), thereby increasing our equity interest in the joint venture to 65%.  The $4.2 million payment for our additional 15% investment was made in cash installments through September 30, 2018.  Although we have increased our equity interest in the joint venture to 65%, the minority shareholder will maintain participating rights that will allow it to participate in certain significant financial and operating decisions that occur in the ordinary course of business.  As a result of the existence of these substantive participating rights of the minority shareholder, we will continue to account for our investment in the joint venture under the equity method of accounting.

2017 Equity Investment

Foshan FGD SMP Automotive Compressor Co., Ltd.

In November 2017, we formed a 50/50 joint venture with Foshan Guangdong Automotive Air Conditioning Co., Ltd. (“FGD”), a China-based manufacturer of air conditioning compressors for the automotive aftermarket and the Chinese OE market.  We acquired our 50% interest in the joint venture for approximately $12.5 million.  Payment for our acquired interest in the joint venture was made in installments with approximately $6.8 million paid in 2017 and the balance of approximately $5.7 million paid in January 2018.  We determined that due to a lack of a voting majority, and other qualitative factors, we do not control the operations of the joint venture and accordingly, our investment in the joint venture is accounted for under the equity method of accounting.

Note 5.
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, 2017 and September 30, 2018 and activity for the nine months ended September 30, 2018 consisted of the following (in thousands):

   
Workforce
Reduction
   
Other Exit
Costs
   
Total
 
Exit activity liability at December 31, 2017
 
$
2,854
   
$
   
$
2,854
 
Restructuring and integration costs:
                       
Amounts provided for during 2018
   
9
     
3,064
     
3,073
 
Non-cash usage, including asset write-downs
   
     
(181
)
   
(181
)
Cash payments
   
(2,077
)
   
(2,883
)
   
(4,960
)
Foreign currency exchange rate changes
   
26
     
     
26
 
Exit activity liability at September 30, 2018
 
$
812
   
$
   
$
812
 

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, all our Grapevine, Texas production activities have been relocated to facilities in Greenville, South Carolina and Reynosa, Mexico, and certain production activities were relocated from our Greenville, South Carolina manufacturing facility to our manufacturing facility in Bialystok, Poland.  In addition, certain service functions were relocated from Grapevine, Texas to our administrative offices in Lewisville, Texas and our Grapevine, Texas facility was closed.  As of September 30, 2018, the plant rationalization program is substantially completed.  Cash payments made during the first nine months of 2018 consisted primarily of severance payments to employees.

16

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Activity, by segment, for the nine months ended September 30, 2018 related to our plant rationalization program consisted of the following (in thousands):

   
Engine
Management
   
Temperature
Control
   
Other
   
Total
 
Exit activity liability at December 31, 2017
 
$
   
$
1,476
   
$
   
$
1,476
 
Restructuring and integration costs:
                               
Amounts provided for during 2018
   
     
202
     
     
202
 
Cash payments
   
     
(1,338
)
   
     
(1,338
)
Exit activity liability at September 30, 2018
 
$
   
$
340
   
$
   
$
340
 

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 a plant rationalization initiative at our Orlando, Florida facility.  As part of the Orlando plant rationalization, all of our Orlando, Florida production activities have been relocated to our Independence, Kansas manufacturing facility.  In addition, certain production activities were relocated from our Independence, Kansas manufacturing facility to our Reynosa, Mexico manufacturing facility and our Orlando, Florida facility was closed.  As of September 30, 2018, the Orlando plant rationalization program is substantially completed.  The remaining aggregate liability related to the program as of September 30, 2018 consists of future cash severance payments to be made to former employees.

Activity, by segment, for the nine months ended September 30, 2018 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, 2017
 
$
986
   
$
   
$
   
$
986
 
Restructuring and integration costs:
                               
Amounts provided for during 2018
   
1,479
     
     
     
1,479
 
Non-cash usage, including asset write-downs
   
(12
)
   
     
     
(12
)
Cash payments
   
(1,981
)
   
     
     
(1,981
)
Exit activity liability at September 30, 2018
 
$
472
   
$
   
$
   
$
472
 

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 incurred certain integration expenses, including costs incurred in connection with the consolidation of the General Cable Corporation Altoona, Pennsylvania wire 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.  As of September 30, 2018, the wire and cable relocation program is substantially completed.  All of our Nogales, Mexico production activities have been relocated to our Reynosa, Mexico assembly facility and our Nogales, Mexico plant was closed.

17

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Activity, by segment, for the nine months ended September 30, 2018 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, 2017
 
$
392
   
$
   
$
   
$
392
 
Restructuring and integration costs:
                               
Amounts provided for during 2018
   
1,392
     
     
     
1,392
 
Non-cash usage, including asset write-downs
   
(169
)
   
     
     
(169
)
Cash payments
   
(1,641
)
   
     
     
(1,641
)
Foreign currency exchange rate changes
   
26
     
     
     
26
 
Exit activity liability at September 30, 2018
 
$
   
$
   
$
   
$
 

Note 6.
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 $224.4 million and $566 million of receivables during the three months and nine months ended September 30, 2018, respectively, and $210.6 million and $614.6 million for the comparable periods in 2017.  A charge in the amount of $7.3 million and $19 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 nine months ended September 30, 2018, respectively, and $6 million and $17.6 million for the comparable periods in 2017.  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 7.
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:

   
September 30,
2018
   
December 31,
2017
 
   
(In thousands)
 
             
Finished goods
 
$
202,976
   
$
209,800
 
Work-in-process
   
9,287
     
7,536
 
Raw materials
   
106,157
     
109,075
 
Subtotal
   
318,420
     
326,411
 
Unreturned customer inventories (1)
   
21,295
     
 
Total inventories
 
$
339,715
   
$
326,411
 


(1)
The adoption of ASU 2014-09 using the modified retrospective method resulted in the recording of unreturned customer inventories commencing on January 1, 2018, see Note 2, “Summary of Significant Accounting Policies” for additional information.

18

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Note 8.
Acquired Intangible Assets

Acquired identifiable intangible assets consist of the following:

   
September 30,
2018
   
December 31,
2017
 
   
(In thousands)
 
             
Customer relationships
 
$
87,290
   
$
87,290
 
Trademarks and trade names
   
6,800
     
6,800
 
Non-compete agreements
   
3,197
     
3,193
 
Patents
   
723
     
723
 
Supply agreements
   
800
     
800
 
Leaseholds
   
160
     
160
 
Total acquired intangible assets
   
98,970
     
98,966
 
Less accumulated amortization (1)
   
(49,587
)
   
(43,853
)
Net acquired intangible assets
 
$
49,383
   
$
55,113
 


(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 $1.9 million and $5.7 million for the three months and nine months ended September 30, 2018, respectively, and $1.9 million and $6.1 million for the comparable periods in 2017.  Based on the current estimated useful lives assigned to our acquired intangible assets, amortization expense is estimated to be $1.8 million for the remainder of 2018, $6.3 million in 2019, $5.9 million in 2020, $4.6 million in 2021 and $25.6 million in the aggregate for the years 2022 through 2031.

Note 9.
Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

   
September 30,
2018
   
December 31,
2017
 
   
(In thousands)
 
             
Revolving credit facilities
 
$
45,000
   
$
57,000
 
Other (1)
   
6,006
     
4,778
 
Total debt
 
$
51,006
   
$
61,778
 
                 
Current maturities of debt
 
$
50,980
   
$
61,699
 
Long-term debt
   
26
     
79
 
Total debt
 
$
51,006
   
$
61,778
 


(1)
Other includes borrowings under our Polish overdraft facility of Zloty 21.7 million (approximately $5.9 million) and Zloty 16.2 million (approximately $4.7 million) as of September 30, 2018 and December 31, 2017, respectively.

19

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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 $201.8 million available for us to borrow pursuant to the formula at September 30, 2018.  Outstanding borrowings under the credit agreement, which are classified as current liabilities, were $45 million and $57 million at September 30, 2018 and December 31, 2017, respectively.  Borrowings under the credit agreement have been classified as current liabilities based upon the accounting rules and certain provisions in the agreement.

At September 30, 2018, the weighted average interest rate on our credit agreement was 3.4%, which consisted of $45 million in direct borrowings.  At December 31, 2017, the weighted average interest rate on our credit agreement was 2.7%, which consisted of $57 million in direct borrowings. During the nine months ended September 30, 2018, our average daily alternative base rate loan balance was $2 million, compared to a balance of $4.6 million for the nine months ended September 30, 2017, and a balance of $3.8 million for the year ended December 31, 2017.

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 September 30, 2018, 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.

Polish Overdraft Facility

In December 2017, our Polish subsidiary, SMP Poland sp. z.o.o., entered into an overdraft facility with HSBC Bank Polska S.A. (“HSBC Poland”) for Zloty 30 million (approximately $8 million).  The facility expires in December 2018.  Borrowings under the overdraft facility will bear interest at a rate equal to WIBOR + 0.75% and are guaranteed by Standard Motor Products, Inc., the ultimate parent company.  At September 30, 2018, borrowings under the overdraft facility were Zloty 21.7 million (approximately $5.9 million).

Deferred Financing Costs

We had deferred financing costs of $0.7 million and $1 million as of September 30, 2018 and December 31, 2017, respectively.  Deferred financing costs are related to our revolving credit facility.  Deferred financing costs as of September 30, 2018 are being amortized in the amounts of $0.1 million for the remainder of 2018, $0.3 million in 2019 and $0.3 million in 2020.

20

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Note 10.
Accumulated Other Comprehensive Income

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

   
Three Months Ended September 30, 2018
 
   
Foreign
Currency
Translation
Adjustments
   
Unrecognized
Postretirement
Benefit Costs
(Credit)
   
Total
 
Balance at June 30, 2018
 
$
(7,941
)
 
$
111
   
$
(7,830
)
Other comprehensive income before reclassifications
   
719
     
     
719
 
Amounts reclassified from accumulated other comprehensive income
   
     
(6
)
   
(6
)
Other comprehensive income, net
   
719
     
(6
)
   
713
 
Balance at September 30, 2018
 
$
(7,222
)
 
$
105
   
$
(7,117
)

   
Nine Months Ended September 30, 2018
 
   
Foreign
Currency
Translation
Adjustments
   
Unrecognized
Postretirement
Benefit Costs
(Credit)
   
Total
 
Balance at December 31, 2017
 
$
(4,225
)
 
$
116
   
$
(4,109
)
Other comprehensive income before reclassifications
   
(2,997
)
   
7
     
(2,990
)
Amounts reclassified from accumulated other comprehensive income
   
     
(18
)
   
(18
)
Other comprehensive income, net
   
(2,997
)
   
(11
)
   
(3,008
)
Balance at September 30, 2018
 
$
(7,222
)
 
$
105
   
$
(7,117
)

Reclassifications Out of Accumulated Other Comprehensive Income (in thousands)

Details About Accumulated Other Comprehensive Income Components
 
Three Months Ended
September 30, 2018
   
Nine Months Ended
September 30, 2018
 
Amortization of postretirement benefit plans:
           
Prior service benefit (1)
 
$
   
$
 
Unrecognized (gain) loss (1)
   
(10
)
   
(31
)
Total before income tax
   
(10
)
   
(31
)
Income tax expense
   
4
     
13
 
Total reclassifications for the period
 
$
(6
)
 
$
(18
)


(1)
These accumulated other comprehensive income components are included in the computation of net periodic postretirement benefit costs, which are included in other non-operating income, net in our consolidated statements of operations (see Note 12 for additional details).

Note 11.
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.

21

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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.

Our restricted and performance-based share activity was as follows for the nine months ended September 30, 2018:

   
Shares
   
Weighted Average
Grant Date Fair
Value Per Share
 
Balance at December 31, 2017
   
853,958
   
$
33.25
 
Granted
   
9,129
     
37.53
 
Vested
   
(32,471
)
   
32.89
 
Forfeited
   
(9,850
)
   
42.29
 
Balance at September 30, 2018
   
820,766
   
$
33.20
 

We recorded compensation expense related to restricted shares and performance-based shares of $5 million ($3.7 million, net of tax) and $5.1 million ($3.2 million, net of tax) for the nine months ended September 30, 2018 and 2017, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $11.1 million at September 30, 2018, and is expected to be recognized as they vest over a weighted average period of 4.0 years and 0.6 years for employees and directors, respectively.

Note 12.
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 upon termination of the plan 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 20 former union employees in the U.S.

22

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

The components of net periodic benefit cost for our postretirement benefit plans for the three months and nine months ended September 30, 2018 and 2017 were as follows (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
Postretirement benefits
 
2018
   
2017 (1)
   
2018
   
2017 (1)
 
Service cost
 
$
   
$