What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-02-20 · 252 added, 359 removed, 956 unchanged (39% of the section changed)

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To the Stockholders and Board of Directors

Standard Motor Products, Inc.and Subsidiaries:

Standard Motor Products, Inc.

and Subsidiaries:

Opinion on the Consolidated Financial Statements

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Assessment of Asbestos Liability and Litigation

As discussed in Notes 1 and 22 to the consolidated financial statements, the Company is involved in asbestos litigation and has potential asbestos liability.

The Company’s asbestos liability represents the actuarially determined estimate of the undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers.

The Company’s asbestos liability includes key assumptions regarding disease distribution, future claim filings, payment rates, settlement values, large claims, and ratios of allocated loss adjustment expense (ALAE) to indemnity.

We identified the assessment of the asbestos liability recorded and related disclosure for these legal proceedings as a critical audit matter.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Asbestos Liability and Litigation

As discussed in Notes 1 and 21 to the consolidated financial statements, the Company is involved in asbestos litigation and has a potential asbestos liability.

As of December 31, 2020, the accrued asbestos liability was $60.7 million.

The Company’s asbestos liability represents the low end of the actuarially determined range of the undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers.

We identified the assessment of the asbestos liability recorded as a critical audit matter.

This required subjective auditor judgment, due to the nature of the estimate and assumptions, including the applicability of those assumptions to the current facts and circumstances, as well as judgments about future events and uncertainties.

Specialized skills were needed to evaluate the Company’s key assumptions.

Minor changes to these key assumptions could have a significant effect on the Company’s assessment of the accrual for the asbestos liability.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s asbestos liability and asbestos litigation process, including controls related to the key assumptions and the underlying data utilized in the process, and the potential need for an updated actuarial evaluation.

We read letters received directly from the Company’s external and internal legal counsel confirming the asbestos related legal cases settled during the year and the number of open cases as of year-end.

We involved an actuarial professional with specialized skills and knowledge, who:

assessed the actuarial model used by the Company’s asbestos actuary in preparing their annual report which contained an analysis of the Company’s asbestos exposure;

assessed the annual report prepared by the Company’s asbestos actuary for consistency with generally accepted actuarial standards;

evaluated the key assumptions and judgments, including consideration of changes of assumptions from those used in the prior year, underlying the actuarial estimates contained within the Company’s asbestos report prepared by the Company’s asbestos actuary.

We tested a sample of claims data used in the actuarial model by comparing the sampled items to underlying claims documentation.

We evaluated the activity of legal claims since the most recent actuarial evaluation to determine if an updated actuarial evaluation is necessary.

We compared the Company’s related disclosure to the data utilized in the process and the Company’s asbestos report.

Initial measurement of the customer relationship intangible assets acquired in the Pollak business combination

As discussed in Notes 3 and 9 to the consolidated financial statements, on April 1, 2019, the Company acquired the Pollak business from Stoneridge, Inc.

(Pollak) in a business combination.

As a result of the transaction, the Company acquired customer relationship intangible assets associated with the generation of future income from Pollak’s existing customers.

The acquisition-date fair value for the customer relationship assets was $24.4 million.

We identified the evaluation of the initial measurement of the customer relationship intangible assets acquired in the Pollak transaction as a critical audit matter.

There was a high degree of subjectivity in evaluating the multi-period excess earnings method (a form of the income approach) used to calculate the acquisition-date fair value of the customer relationship assets.

The multi-period excess earnings method included the following internally-developed assumptions for which there was limited observable market information, and the calculated fair value of such assets was sensitive to possible changes to these assumptions:

Forecasted revenues attributable to existing customers

Estimated annual attrition

Forecasted earnings before interest, and taxes (EBIT) margins for the acquired business

Discount rates

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s process to develop the key acquisition-date assumptions.

We compared the Company’s year one forecasted revenues attributable to existing customers to the acquired business’s historical information.

We evaluated the Company’s forecasted revenues attributable to existing customers and EBIT margins by comparing these forecasted assumptions to historical Company information.

In addition, valuation professionals with specialized skills and knowledge, assisted us to:

evaluate the Company’s discount rates by comparing these rates against a discount rate range that was independently developed using publicly available market data for comparable companies,

evaluate the estimated annual attrition rate by comparing the selected attrition rates against the realized range of attrition rates in prior company specific acquisitions, and

compare the Company’s fair value estimate of the customer relationship assets acquired, using the significant assumptions utilized by the Company and our independently developed discount rate range, to an independent calculation of the multi-period excess earnings model.

The key assumptions included future claim filings, closed with pay ratios, closed with pay lag patterns, settlement values, large claims, and ratios of allocated loss adjustment exposure (ALAE) to indemnity.

Minor changes to these key assumptions could have had a significant effect on the Company’s assessment of the accrual for the asbestos liability.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the asbestos liability estimation process.

This included controls related to the key assumptions and the claims data utilized in the process, and the potential need for an updated actuarial valuation.

We evaluated the asbestos related legal cases settled during the year and the number of open cases as of year-end by reading letters received directly from the Company’s external and internal legal counsel.

We tested a selection of claims data used in the actuarial model by comparing the selection items to underlying claims documentation.

We involved an actuarial professional with specialized skills and knowledge, who assisted in:

evaluating the future claim filings assumption by developing an independent expectation and comparing it against the Company’s future claim filing assumption

evaluating the closed with pay ratios, closed with pay lag patterns, settlement values, large claims, and ratios of ALAE to indemnity by comparing them to the Company’s historical experience

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

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Selling, general and administrative expenses

Intangible asset impairment

Restructuring and integration expenses

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Gain on sale of property, plant and equipment

Intangible asset impairment

Equity (income) loss from joint ventures

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(Increase) decrease in deferred income taxes

Increase (decrease) in tax valuation allowance

Increase in tax valuation allowance

Loss on discontinued operations, net of tax

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(Increase) decrease in accounts receivable

Increase in inventories

(Increase) decrease in inventories

(Increase) decrease in prepaid expenses and other current assets

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Effect of exchange rate changes on cash

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

CASH AND CASH EQUIVALENTS at beginning of year

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Noncash investing activity:

Accrual for final contribution of acquired investment

Receivable related to net proceeds from sale of Grapevine, Texas facility

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Comprehensive

Income (Loss)

(In thousands)

BALANCE AT DECEMBER 31, 2017

Other comprehensive income, net of tax

Cumulative effect adjustment

Other comprehensive loss, net of tax

Cash dividends paid ($ 0.84 per share)

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BALANCE AT DECEMBER 31, 2018

Cumulative effect adjustment

Other comprehensive loss, net of tax

Other comprehensive income, net of tax

Cash dividends paid ($ 0.92 per share)

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Use of Estimates

In conformity with generally accepted accounting principles, we have made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements.

Some of the more significant estimates include allowances for doubtful accounts, cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability exposures, asbestos, environmental and litigation matters, valuation of deferred tax assets, share based compensation and sales returns and other allowances.

The preparation of consolidated 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 assurances that actual results will not differ from those estimates.

Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimate or in the assumptions that we use in calculating the estimate, unforeseen changes in the industry, or business could materially impact the estimate and may have a material adverse effect on our business, financial condition and results of operations.

Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of the COVID -19 pandemic, and other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.

Reclassification

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Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future.

These allowances are established based on a combination of write-off history, aging analysis, and specific account evaluations.

These allowances are established based on a combination of write-off history, supportable forecasts, aging analysis, and specific account evaluations.

When a receivable balance is known to be uncollectible, it is written off against the allowance for doubtful accounts.

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We review the fair values using the discounted cash flows method and market multiples.

When performing our evaluation of goodwill for impairment, if we conclude qualitatively that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two -step impairment test is not required.

If we are unable to reach this conclusion, then we would perform the two -step impairment test.

Initially, the fair value of the reporting unit is compared to its carrying amount.

To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit;

we are required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired.

In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill and recognize a charge for impairment to the extent the carrying value exceeds the implied fair value.

The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation.

The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

On January 1, 2020, we will adopt Accounting Standards Update (“ASU”) 2017 - 04, Simplifying the Test for Goodwill Impairment (“ASU 2017 - 04 ”) .

ASU 2017 - 04 removes the second step of the impairment test, which requires a hypothetical purchase price allocation to determine the implied fair value of the reporting unit goodwill.

Instead, under ASU 2017 - 04, goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

ASU 2017 - 04 will be applied prospectively.

If we are unable to reach this conclusion, then we would perform a goodwill quantitative impairment test.

In performing the quantitative test, the fair value of the reporting unit is compared to its carrying amount.

A charge for impairment is recognized by the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

STANDARD MOTOR PRODUCTS, INC.

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New customer acquisition costs refer to arrangements pursuant to which we incur change-over costs to induce a new customer to switch from a competitor’s brand.

In addition, change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory commonly referred to as a stocklift.

In addition, change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory commonly referred to as a stock lift.

New customer acquisition costs are recorded as a reduction to revenue when incurred.

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We perform ongoing credit evaluations of our customers’ financial conditions.

Our five largest individual customers accounted for approximately 69 % of our consolidated net sales in 2019, and approximately 70 % of our consolidated net sales in 2018 and 2017.

During 2019, O’Reilly, Advance, NAPA, and AutoZone accounted for 22 % , 16 % , 15 % and 11 % of our consolidated net sales, respectively.

Net sales from each of the customers were reported in both our Engine Management and Temperature Control Segments.

A significant portion of our net sales are concentrated from our five largest individual customers.

The loss of one or more of these customers or, a significant reduction in purchases of our products from any one of them, could have a materially adverse impact on our business, financial condition and results of operations.

For further information on net sales to our five largest customers and our concemtration our customer risk, see Note 19 , “Industry Segment and Geographic Data.”

Foreign Cash Balances

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Standards that were adopted

Effective January 1, 2019, we adopted ASU 2016 - 02, Leases, (“ASU 2016 - 02 ”) using the modified retrospective approach.

The modified retrospective approach provides a method for recording existing leases at adoption.

The most significant impact in adopting the new standard was the recognition of right-of-use (“ROU”) assets and lease liabilities on our consolidated balance sheet for operating leases, while the accounting for finance leases remained substantially unchanged.

The adoption of the new standard did not materially impact our consolidated statements of operations or cash flows.

In adopting ASU 2016 - 02, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward our historical lease identification and lease classifications.

In addition, upon adoption, we evaluated all of our leases, and in particular our real estate leases, to determine the appropriate lease term.

In evaluating our leases, we determined that the lease term for one of our leases should be lengthened, as we concluded that it is reasonably certain that we will exercise the five-year renewal option in the lease.

The lease term for all of our other leases remained unchanged.

Additionally, we elected to apply the provisions of ASU 2018 - 11, Targeted Improvements , which allows us to initially apply the new lease requirements as of the effective date.

Comparative financial information for the prior periods presented were not restated but instead are reported under the accounting standards in effect in those prior periods.

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

ASU 2016 - 02

Balance Sheet

Operating lease right-of-use asset

Sundry payables and accrued expenses

Noncurrent operating lease liabilities

See Note 2 for further information regarding our adoption of ASU 2016 - 02.

Standards that are not yet adopted as of December 31, 2019

The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted as of December 31, 2019, and that could have an impact on our financial statements:

Effects on the financial

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ASU 2017-04 , Simplifying the Test for Goodwill Impairment

This standard is intended to simplify the accounting for goodwill impairment.

This standard simplifies 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

We will adopt the new standard on January 1, 2020.

The new standard will be applied prospectively.

We anticipate that the adoption of this standard will not materially impact the amount of goodwill impairment, if any, when performing our annual impairment test.

January 1, 2020

We applied the new standard in the fourth quarter of 2020 when we performed our annual impairment test of goodwill.

In performing our impairment test, we concluded that the fair value for each of our reporting units exceeded its carrying value and, as such, the adoption of the new standard did not impact the manner in which we performed the 2020 goodwill quantitative impairment test.

ASU 2016-13 , Financial Instruments – Credit Losses

This standard creates a single model to measure impairment on financial assets, which includes trade accounts receivable.

This standard creates a single model to measure impairment of financial assets, which includes trade accounts receivable.

An estimate of expected credit losses on trade accounts receivable over their contractual life will be required to be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts.

January 1, 2020, with early adoption permitted

We will adopt the new standard on January 1, 2020.

We anticipate that the adoption of this standard will not have a material impact on the manner in which we estimate our allowance for doubtful accounts on trade accounts receivable, or on our consolidated financial statements.

January 1, 2020

The adoption of the standard did not have a material impact on the manner in which we estimate our allowance for doubtful accounts on trade accounts receivable, or on our consolidated financial statements.

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Quantitative Lease Disclosures

We have operating and finance leases for our manufacturing facilities, warehouses, office space, automobiles, and certain equipment.

Our leases have remaining lease terms of up to ten years , some of which may include one or more five-year renewal options.

We have included the five-year renewal option for one of our leases in our operating lease payments as we concluded that it is reasonably certain that we will exercise the option.

Leases with an initial term of twelve months or less are not recorded on the balance sheet.

Operating lease expense is recognized on a straight-line basis over the lease term.

Finance leases are not material.

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

Balance Sheet Information

Operating lease right-of-use assets

Sundry payables and accrued expenses

Noncurrent operating lease liabilities

Total operating lease liabilities

Weighted Average Remaining Lease Term

Operating leases

Weighted Average Discount Rate

Operating leases

Expense and Cash Flow Information

December 31, 2019

Lease Expense

Operating lease expense (a)

Supplemental Cash Flow Information

Cash Paid for the amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for new lease obligations:

Operating leases

Excludes expenses of approximately $ 2.4 million related to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less, which is not material .

Minimum Lease Payments

At December 31, 2019, we are obligated to make minimum lease payments through 2028, under operating leases, which are as follows (in thousands):

Total lease payments

Present value of lease liabilities

Standards that are not yet adopted as of December 31, 2020

The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted as of December 31, 2020 , and that could have an impact on our financial statements:

Effects on the financial

statements or other

significant matters

ASU 2019-12 , Income Taxes (Topic 740 ) :

Simplifying the Accounting for Income Taxes

This standard is intended to simplify the accounting for income taxes by removing certain ASC Topic 740 exceptions in performing intra-period tax allocations among income statement components, in calculating certain deferred tax liabilities related to outside basis differences, and in calculating income taxes in interim periods with year-to-date losses.

In addition, this standard is also intended to improve consistency and add simplification by clarifying and amending the reporting of franchise taxes and other taxes partially based on income, the recognition of deferred income taxes related to the step-up in tax basis goodwill, and the reporting in interim periods of the recognition of the enactment of tax laws or rate changes.

January 1, 2021, with early adoption permitted

The new standard clarifies the accounting for income taxes in certain technical areas that will not impact all companies.

We anticipate that the adoption of the technical clarifications in this standard will not materially impact our accounting for income taxes, our consolidated financial statements and related disclosures.

The new standard can be applied on a prospective basis in certain instances and in other instances on a retrospective or modified retrospective basis.

ASU 2020-04 , Reference Rate Reform (Topic 848 ) :

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

This standard is intended to provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The new standard is applicable to contracts that reference LIBOR, or another reference rate, expected to be discontinued due to reference rate reform.

Effective March 12, 2020 through December 31, 2022

The new standard may be applied as of the beginning of an interim period that includes March 12, 2020 through December 31, 2022 .

As certain of our contracts reference LIBOR, including our revolving credit facility and supply chain financing arrangements, we are currently reviewing the optional guidance in the standard to determine its impact upon the discontinuance of LIBOR.

At this time, we do not believe that the new guidance, nor the discontinuance of LIBOR, will have a material impact on our consolidated financial statements and related disclosures.

STANDARD MOTOR PRODUCTS, INC.

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We have not acquired any of the Pollak facilities or employees, and have relocated all production to our existing facilities.

Revenues generated from the acquired business were approximately $ 45 million for the year ended December 31, 2018.

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

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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 expected synergies.

Incremental net sales from the acquired Pollak business were $ 9.5 million for the three months ended March 31, 2020, and were included in our consolidated statements of operations for the year ended December 31, 2020 .

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenues included in our consolidated statements of operations for the acquisition were $ 28.2 million from the date of acquisition through December 31, 2019.

2018 Increase in Equity Investment

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

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 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 throughout 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.

Sale of Grapevine, Texas Property

In December 2018, we completed the sale of our property located in Grapevine, Texas.

The net proceeds from the sale of the property of $ 4.8 million was received in January 2019 and was used to reduce borrowings under our revolving credit facility.

The gain on the sale of the property of $3.9 million is included in other income (expense), net in operating income on our consolidated statement of operations.

Restructuring and Integration Expense

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Amounts provided for during 2019 (1)

Non-cash usage, including asset write-downs

Cash payments

Reclassification of environmental liability (1)

Foreign currency exchange rate changes

Reclassification of inventory reserves

Exit activity liability at December 31, 2019

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Reclassification of environmental liability (1)

Reclassification of inventory reserves

Exit activity liability at December 31, 2020

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The environmental liability has been reclassed to accrued liabilities as of December 31, 2020 and 2019 , respectively .

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 of 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.

In December 2018, we completed the sale of the property located in Grapevine, Texas.

Net proceeds from the sale of $ 4.8 million were received in January 2019.

See Note 4, “Sale of Grapevine, Texas Property,” for additional information.

In February 2016, in connection with our ongoing efforts to improve operating efficiencies and reduce costs, we implemented a plant rationalization initiative.

As part of the plant rationalization, all of our Grapevine, Texas production activities have been relocated to facilities in Greenville, South Carolina and Reynosa, Mexico;

certain production activities at our Greenville, South Carolina facility were moved to our facility in Bialystok, Poland;

certain service functions were relocated from Grapevine, Texas to our administrative offices in Lewisville, Texas;

and our vacated Grapevine, Texas facility was sold in December 2018 at a net gain of $ 3.9 million.

The net proceeds from the sale of the property of $ 4.8 million was received in January 2019 and was used to reduce borrowings under our revolving credit facility.

The gain on the sale of the property is included in other income (expense), net in operating income on our consolidated statement of operations.

The Plant Rationalization Program has been completed.

Cash payments made during 2019 and the remaining aggregate liability related to the program as of December 31, 2019 consists of severance payments to former employees.

Activity, by segment, for the year ended December 31, 2019 and 2018 related to our Plant Rationalization Program consisted of the following (in thousands):

Exit activity liability at December 31, 2017

Restructuring and integration costs:

Amounts provided for during 2018

Cash payments

Exit activity liability at December 31, 2018

Restructuring and integration costs:

Amounts provided for during 2019

Cash payments

Exit activity liability at December 31, 2019

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.

The Orlando Plant Rationalization Program has been completed.

Cash payments made during 2019 and the remaining aggregate liability related to the program as of December 31, 2019 consists of severance payments to former employees.

Cash payments made of $ 111,000 during the year ended December 31, 2020, and the remaining aggregate liability related to the program as of December 31, 2020 of $ 65,000 consists of severance payments to former Temperature Control employees.

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Activity, by segment, for the year ended December 31, 2019 and 2018 related to our Orlando Plant Rationalization Program consisted of the following (in thousands):

Exit activity liability at December 31, 2017

Restructuring and integration costs:

Amounts provided for during 2018

Non-cash usage, including asset writedowns

Cash payments

Exit activity liability at December 31, 2018

Restructuring and integration costs:

Amounts provided for during 2019

Cash payments

Exit activity liability at December 31, 2019

Orlando Plant Rationalization Program

In January 2017, to further our ongoing efforts to improve operating efficiencies and reduce costs, we implemented a plant rationalization initiative at our Orlando, Florida facility.

As part of the initiative, all of our Orlando, Florida production activities were moved to our facility in Independence, Kansas;

certain production activities at our Independence, Kansas facility were moved to our facility in Reynosa, Mexico;

and our Orlando, Florida facility was closed.

The Orlando Plant Rationalization Program has been completed.

Cash payments made of $ 46,000 during the year ended December 31, 2020, and the remaining aggregate liability related to the program as of December 31, 2020 of $ 114,000 consists of severance payments to former Engine Management employees.

Integration Costs

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In connection with our April 2019 acquisition of certain assets and liabilities of the Pollak business of Stoneridge, Inc., we incurred certain integration expenses in connection with the relocation of certain inventory, machinery, and equipment from Pollak’s distribution and manufacturing facilities in El Paso, Texas, Canton, Massachusetts, and Juarez, Mexico, to our existing facilities in Disputanta, Virginia, Reynosa, Mexico and Independence, Kansas.

Total integration expenses related to the relocation of $ 2.2 million were recognized during the year ended December 31, 2019.

The Pollak relocation is substantially completed.

Activity, by segment, for the year ended December 31, 2019 related to the Pollak relocation consisted of the following (in thousands):

Exit activity liability at December 31, 2018

Restructuring and integration costs:

Amounts provided for during 2019

Cash payments

Reclassification of inventory reserves

Exit activity liability at December 31, 2019

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 December 31, 2018, the wire and cable relocation program has been completed.

All of our Nogales, Mexico production activities have been relocated to our Reynosa, Mexico assembly facility and our Nogales, Mexico plant was closed.

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Activity, by segment, for the year ended December 31, 2018 related to our wire and cable relocation program consisted of the following (in thousands):

Exit activity liability at December 31, 2017

Restructuring and integration costs:

Amounts provided for during 2018

Non-cash usage, including asset write-downs

Cash payments

Foreign currency exchange rate changes

Exit activity liability at December 31, 2018

The Pollak Relocation has been completed.

Integration expense recognized and cash payments made of $ 214,000 during the year ended December 31, 2020 related to residual relocation activities in our Engine Management segment.

There is no remaining aggregate liability related to the Pollak Relocation as of December 31, 2020.

Sale of Receivables

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If the LIBOR rate increases significantly, we may be negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands)

4 unchanged sentences

Total inventories

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Property, Plant and Equipment

10 unchanged sentences

Depreciation expense was $ 17.8 million in 2020, $ 17.4 million in 2019 and $ 16.1 million in 2018.

Quantitative Lease Disclosures

We have operating and finance leases for our manufacturing facilities, warehouses, office space, automobiles, and certain equipment.

Our leases have remaining lease terms of up to ten years , some of which may include one or more five-year renewal options.

We have included the five-year renewal option for one of our leases in our operating lease payments as we concluded that it is reasonably certain that we will exercise the option.

Leases with an initial term of twelve months or less are not recorded on the balance sheet.

Operating lease expense is recognized on a straight-line basis over the lease term.

Finance leases are not material.

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Balance Sheet Information

Operating lease right-of-use assets

Sundry payables and accrued expenses

Noncurrent operating lease liabilities

Total operating lease liabilities

Weighted Average Remaining Lease Term

Operating leases

Weighted Average Discount Rate

Operating leases

Year Ended, December 31,

Expense and Cash Flow Information

Lease Expense

Operating lease expense (a)

Supplemental Cash Flow Information

Cash Paid for the amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for new lease obligations:

Operating leases

Excludes expenses of approximately $ 2.5 million and 2.4 million for the years ended December 31, 2020 and 2019, respectively, related to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less, which is not material.

Minimum Lease Payments

At December 31, 2020, we are obligated to make minimum lease payments through 2028, under operating leases, which are as follows (in thousands):

Total lease payments

Present value of lease liabilities

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Goodwill and Other Intangible Assets

2 unchanged sentences

We completed our annual impairment test of goodwill as of December 31, 2020.

If we are unable to reach this conclusion, then we would perform the two -step impairment test.

In the first step, the fair value of the reporting unit is compared to its carrying amount.

To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit;

we are required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired.

As of December 31, 2019, we performed a qualitative assessment of the likelihood of a goodwill impairment for both the Engine Management and Temperature Control reporting units.

Based upon our qualitative assessment, we determined that it was not more likely than not that the fair value of the each of the Engine Management and Temperature Control reporting units were less than their respective carrying amounts.

As such, we concluded that the two -step impairment test would not be required, and that there would be no required goodwill impairment charge as of December 31, 2019 at each of the Engine Management and Temperature Control reporting units.

We did not have a goodwill impairment charge as of December 31, 2019, and we do not believe that future impairments are probable.

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

If we are unable to reach this conclusion, then we would perform a goodwill quantitative impairment test.

In performing the quantitative test, the fair value of the reporting unit is compared to its carrying amount.

A charge for impairment is recognized by the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

In light of the recent loss of business in our Engine Management product line from a large retail customer, we elected to bypass the qualitative assessment at December 31, 2020 and have decided to perform a quantitative impairment test for goodwill at both the Engine Management and Temperature Control reporting units.

The fair values of the Engine Management and Temperature Control reporting units were determined based upon the Income Approach, which estimates the fair value based on future discounted cash flows, and the Market Approach, which estimates the fair value based on market prices of comparable companies.

We base our fair value estimates on projected financial information which we believe to be reasonable.

We also considered our total market capitalization as of December 31, 2020.

Our December 31, 2020 annual goodwill impairment analysis did not result in an impairment charge as it was determined that the fair values of our Engine Management and Temperature Control reporting units were in excess of their carrying amounts.

While the fair values exceed the carrying amounts at the present time and we do not believe that impairments are probable, we will need to maintain the ongoing performance of the business at current projected levels in future periods to sustain their carrying values.

Changes in the carrying values of goodwill by operating segment during the years ended December 31, 2020 and 2019 are as follows (in thousands):

2 unchanged sentences

Activity in 2019

Acquisition of Pollak Business of Stoneridge, Inc.

Foreign currency exchange rate change

2 unchanged sentences

Activity in 2020

Acquisition of Pollak Business of Stoneridge, Inc.

Foreign currency exchange rate change

1 unchanged sentence

Accumulated impairment losses

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Acquired Intangible Assets

8 unchanged sentences

Net acquired intangible assets

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

In April 2019, we acquired certain assets and liabilities of the Pollak business of Stoneridge, Inc.

Intangible assets acquired of $ 24.7 million consist of customer relationships related to the acquired OE/OES business of $ 17.2 million that will be amortized on a straight-line basis over the estimated useful life of 10 years;

customer relationships related to the acquired aftermarket business of $ 7.2 million that will be amortized on a straight-line basis over the estimated useful life of 15 years;

a trademark of $ 0.2 million that will be amortized on a straight-line basis over the estimated useful life of 10 years;

and a non-compete agreement of $ 0.1 million that will be amortized on a straight-line basis over the estimated useful life of 5 years.

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Applies to all intangible assets, except for related trademarks and trade names totaling $ 2.6 million and $ 5.2 million as of December 31, 2020 and 2019, respectively, which have indefinite useful lives and, as such, are not being amortized.

In December 2020, a large retail customer informed us of its decision to pursue a private brand strategy for its engine management product line.

As a result of this development, we anticipate that revenues sold under the BWD trademark will be significantly reduced and uncertain beyond the first quarter of 2021.

In connection with the decision, we recorded an impairment charge of $ 2.6 million in 2020.

Total amortization expense for acquired intangible assets was $ 8.2 million for the year ended December 31, 2020, $ 8 million for the year ended December 31, 2019, and $ 7.6 million for the year ended December 31, 2018.

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Foshan FGD SMP Automotive Compressor Co.

Jiangsu Che Yijia New Energy Technology Co., Ltd.

Foshan Che Yijia New Energy Technology Co., Ltd.

Orange Electronic Co.

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

In August 2019, we acquired an approximate 29 % minority interest in Jiangsu Che Yijia New Energy Technology Co., Ltd.

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Investment in Foshan Che Yijia New Energy Technology Co., Ltd.

In August 2019, we acquired an approximate 29 % minority interest in Foshan Che Yijia New Energy Technology Co., Ltd.

(“CYJ”) for approximately $ 5.1 million .

Our investment in CYJ was funded through borrowings under our revolving credit facility with JPMorgan Chase, N.A.

CYJ is a manufacturer of air conditioning compressors for electric vehicles and is located in China.

CYJ is a manufacturer of automotive electric air conditioning compressors and is located in China.

Our minority interest in CYJ is accounted for using the equity method of accounting.

1 unchanged sentence

Investment in Foshan FGD SMP Automotive Compressor Co.

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.

In November 2017, we formed Foshan FGD SMP Automotive Compressor Co., Ltd., a 50/50 joint venture with Foshan Guangdong Automotive Air Conditioning Co., Ltd.

(“FGD”), a China-based manufacturer of automotive belt driven air conditioning compressors.

We acquired our 50 % interest in the joint venture for approximately $ 12.5 million.

1 unchanged sentence

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.

During the years ended December 31, 2019 and 2018, we made purchases from FGD of approximately $ 12.8 million and $ 5.2 million, respectively.

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the years ended December 31, 2020 and 2019, we made purchases from the joint venture of approximately $ 17.4 million and $ 12.8 million, respectively.

Investment in Foshan GWOYNG SMP Vehicle Climate Control & Cooling Products Co.

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.

In April 2014, we formed Foshan GWOYNG SMP Vehicle Climate Control & Cooling Products Co.

Ltd., a 50/50 joint venture with Gwo Yng Enterprise Co., Ltd.

(“Gwo Yng”), a China-based manufacturer of automotive air conditioner accumulators, filter driers, hose assemblies and switches .

We acquired our 50 % interest in the joint venture for $ 14 million.

4 unchanged sentences

During the years ended December 31, 2019 and 2018, we made purchases from Gwo Yng of approximately $ 12.7 million and $ 14.9 million, respectively.

During the years ended December 31, 2020 and 2019, we made purchases from the joint venture of approximately $ 12.4 million and $ 12.7 million, respectively.

Investment in Orange Electronic Co.

3 unchanged sentences

As of December 31, 2020, our minority interest in Orange of 19.4 % is accounted for using the equity method of accounting as we have the ability to exercise significant influence.

During each of the fourth quarters of 2018 and 2017, after a review of the recent financial performance and near term prospects for Orange, we determined that the decline in quoted market prices below the carrying amount of our investment in Orange was other than temporary and, as such, recognized a noncash impairment charge of approximately $ 1.7 million and $ 1.8 million, respectively, in each quarter.

During the fourth quarter of 2018, after a review of recent financial performance and near term prospects for Orange, we determined that the decline in quoted market prices below the carrying amount of our investment was other than temporary and, as such, recognized a noncash impairment charge of approximately $ 1.7 million, in the quarter.

The impairment charge has been reported in our Engine Management Segment and is included in other non-operating income (expense), net in our consolidated statements of operations.

Purchases from Orange during the years ended December 31, 2020 and 2019 were approximately $ 4.4 million and $ 3.5 million, respectively.

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands)

3 unchanged sentences

Deferred compensation consists of assets held in a nonqualified defined contribution pension plan as of December 31, 2020 and 2019, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Credit Facilities and Long-Term Debt

13 unchanged sentences

Borrowings under the amended credit agreement are secured by substantially all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries.

Availability under the amended credit agreement is based on a formula of eligible accounts receivable, eligible drafts presented to the banks under our supply chain financing arrangements , eligible inventory, eligible equipment and eligible fixed assets.

After taking into account outstanding borrowings under the amended credit agreement, there was an additional $ 237.1 million available for us to borrow pursuant to the formula at December 31, 2020.

The loss of business of one or more of our key customers or, a significant reduction in purchases of our products from any one of them, could adversely impact availability under our revolving credit facility.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Outstanding borrowings under the credit agreement, which are classified as current liabilities, were $ 10 million and $ 52.5 million at December 31, 2020 and 2019, respectively ;

while letters of credit outstanding under the credit agreement were $ 3.1 million at both December 31, 2019 and 2018.

while letters of credit outstanding under the credit agreement were $ 2.8 million and $ 3.1 million at December 31, 2020 and 2019, respectively.

Borrowings under the credit agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.

At December 31, 2019, the weighted average interest rate on our amended credit agreement was 3.5 %, which consisted of $ 40 million in direct borrowings at 2.3 % and an alternative base rate loan of $ 12.5 million at 5 %.

At December 31, 2020, the weighted average interest rate on our amended credit agreement was 1.4 % , which consisted of $ 10 million in direct borrowings.

Our average daily alternative base rate loan balance was $ 1.5 million and $ 1.7 million during 2020 and 2019, respectively.

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At any time that our borrowing availability is less than the greater of either (a) $ 25 million, or 10 % of the commitments if fixed assets are not included in the borrowing base, or (b) $ 31.25 million, or 12.5 % of the commitments if fixed assets are included in the borrowing base, the terms of the amended credit agreement provide for, among other provisions, a financial covenant requiring us, on a consolidated basis, to maintain a fixed charge coverage ratio of 1 :1 at the end of each fiscal quarter (rolling four quarters).

11 unchanged sentences

Deferred financing costs as of December 31, 2020 are related to our revolving credit facility.

In connection with the amendment to our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, entered into in December 2018, we incurred and capitalized approximately $ 0.5 million of deferred financing costs related to bank, legal, and other professional fees which are being amortized, along with the preexisting deferred financing costs, through 2023, the term of the amended agreement.

Scheduled amortization for future years, assuming no prepayments of principal is as follows:

1 unchanged sentence

Total amortization

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stockholders’ Equity

5 unchanged sentences

No such shares were outstanding at December 31, 2020 and 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During 2017, our Board of Directors authorized the purchase of up to $ 30 million of our common stock under stock repurchase programs.

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

In May 2018, our Board of Directors authorized the purchase of up to an additional $ 20 million of our common stock under a new stock repurchase program.

In May 2018, our Board of Directors authorized the purchase of up to $ 20 million of our common stock under a stock repurchase program.

Under this program, during the year ended December 31, 2018 and 2019, we repurchased 201,484 and 221,748 shares of our common stock, respectively, at a total cost of $ 9.3 million and $ 10.7 million , respectively, thereby completing the 2018 Board of Directors authorization.

In March 2020, our Board of Directors authorized the purchase of up to $ 20 million of our common stock under a stock repurchase program.

Under this program, during the year ended December 31, 2020, we repurchased 323,867 shares of our common stock, at a total cost of $ 13.5 million.

As of December 31, 2020, there was approximately $ 6.5 million available for future stock purchases under the program.

In February 2021, our Board of Directors authorized the purchase of up to an additional $ 20 million of our common stock under a new stock repurchase program, thereby increasing the amount available for future stock purchases to approximately $ 26.5 million.

Stock will be purchased under the programs from time to time, in the open market or through private transactions, as market conditions warrant .

Stock-Based Compensation Plans

12 unchanged sentences

We monitor actual forfeitures for any subsequent adjustment to forfeiture rates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stock-based compensation expense under our existing plans was $ 7.8 million ($ 5.8 million, net of tax), $ 6.5 million ($ 4.9 million, net of tax), and $ 7.4 million ($ 5.5 million, net of tax) for the years ended December 31, 2020, 2019 and 2018 , respectively.

1 unchanged sentence

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.

We grant eligible employees two types of restricted stock (standard restricted shares and long-term retention restricted shares).

Standard restricted shares granted to employees become fully vested no earlier than three years after the date of grant.

Long-term retention restricted shares granted to selected executives vest at a 25 % rate on or within approximately two months of an executive reaching the ages of 60 and 63, and become fully vested on or within approximately two months of an executive reaching the age of 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 vesting period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Performance-based shares issued to eligible employees 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 no earlier than three years after the date of grant.

Each period we evaluate the probability of achieving the applicable targets, and we adjust our accrual accordingly.

Restricted shares (other than long-term retention restricted shares) 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 vesting period.

Forfeitures on stock grants are estimated at 5 % for employees and 0 % for executives and directors based upon our evaluation of historical and expected future turnover.

Prior to the time a restricted share becomes fully vested or a performance share is issued, the awardees cannot transfer, pledge, hypothecate or encumber such shares.

10 unchanged sentences

Assumptions used in calculating the discount for the lack of marketability include an estimate of stock volatility, risk-free interest rate, and a dividend yield.

The fair value of the shares at the date of grant is amortized to expense ratably over the vesting period.

Forfeitures on restricted stock grants are estimated at 5 % for employees and 0 % for executives and directors, respectively, based on evaluation of historical and expected future turnover.

As related to restricted and performance stock shares, we recorded compensation expense of $ 7.8 million ($ 5.8 million, net of tax), $ 6.5 million ($ 4.9 million, net of tax) and $ 7.4 million ($ 5.5 million, net of tax), for the years ended December 31, 2020, 2019 and 2018, respectively.

The unamortized compensation expense related to our restricted and performance-based shares was $ 15.9 million and $ 15.8 million at December 31, 2019 and 2018, respectively and is expected to be recognized over a weighted average period of 4.6 years and 0.3 years for employees and directors, respectively, as of December 31, 2019 and over a weighted average period of 4.3 years and 0.3 years for employees and directors, respectively, as of December 31, 2018.

The unamortized compensation expense related to our restricted and performance-based shares was $ 15.2 million and $ 15.9 million at December 31, 2020 and 2019, respectively and is expected to be recognized over a weighted average period of 4.6 years and 0.3 years for employees and directors, respectively, as of December 31, 2020 and 2019.

STANDARD MOTOR PRODUCTS, INC.

35 unchanged sentences

The SERP, as amended, is a defined benefit plan pursuant to which we will pay supplemental pension benefits to certain key employees upon the attainment of a contractual participant’s payment date based upon the employees’ years of service and compensation.

There was no benefit obligation outstanding related to the SERP as of December 31, 2019 and 2018.

We recorded no expense related to the plan during the years ended December 31, 2019, 2018 and 2017.

As there are no current participants in the SERP, there was no benefit obligation outstanding related to the plan as of December 31, 2020 and 2019 and we recorded no expense related to the plan during the years ended December 31, 2020, 2019 and 2018.

Postretirement Medical Benefits

We provided, and continue to provide, certain medical and dental care benefits to eligible retired U.S.

and Canadian employees.

The postretirement medical plans to eligible U.S.

employees, other than to former union employees, and eligible Canadian employees terminated on December 31, 2016.

As related to the U.S.

non-union employees, annually and through the year ended December 31, 2016, a fixed amount was credited into a Health Reimbursement account (“HRA”) to cover both medical and dental costs for all current and future eligible retirees.

Balances in the HRA accounts upon termination of the plan at December 31, 2016 remained available for use until December 31, 2018.

Any remaining balance at December 31, 2018 was forfeited.

Postretirement medical and dental benefits to the remaining eligible 16 former union employees in the U.S.

will continue to be provided.

The postretirement medical and dental benefit obligation for the former union employees in the U.S.

as of December 31, 2019, and the net periodic benefit cost for our postretirement benefit plans for the years ended December 31, 2019, 2018 and 2017 were not material.

We provide certain medical and dental care benefits to 16 former U.S.

union employees.

The postretirement medical and dental benefit obligation for the former union employees as of December 31, 2020, and the net periodic benefit cost for our postretirement benefit plans for the years ended December 31, 2020, 2019 and 2018 were not material.

Other Non-Operating Income (Expense), Net

8 unchanged sentences

Total other non-operating income (expense), net

Year ended December 31, 2018 and 2017 includes a noncash impairment charge of approximately $ 1.7 million and $ 1.8 million, respectively, related to our minority interest investment in Orange Electronic Co., Ltd.

Year ended December 31, 2018 includes a noncash impairment charge of approximately $ 1.7 million related to our minority interest investment in Orange Electronic Co., Ltd.

See Note 9, “Investments in Unconsolidated Affiliates” for additional information.

13 unchanged sentences

Total income tax provision

In December 2017, the U.S.

enacted the Tax Cuts and Jobs Act (the “Act”), which included a broad range of tax reform affecting businesses, including the reduction of the federal corporate tax rate from 35 % to 21 %, changes in the deductibility of certain business expenses, and the manner in which international operations are taxed in the U.S.

In connection with the enactment of the Act, our income tax provision for the fourth quarter of 2017 included an increase of $ 17.5 million, reflecting an increase of $ 16.1 million for the remeasurement of our net deferred tax assets and an increase in tax of $ 1.4 million due to the deemed repatriation of earnings of our foreign subsidiaries.

As related to the deemed repatriation of earnings of foreign subsidiaries, the Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries.

As a result, all previously unremitted earnings for which no U.S.

deferred tax liability had been accrued are now subject to U.S.

In accordance with the guidelines provided in the Act, as of December 31, 2017 we aggregated our estimated foreign earnings and profits, and utilized participating deductions and available foreign tax credits.

The gross repatriation tax was $ 2.3 million, which was offset by $ 0.9 million of foreign tax credits for a net repatriation tax charge of $ 1.4 million.

During 2018, we refined and updated our calculation of the gross repatriation tax to $ 2.7 million, which was paid to the U.S.

The difference in the refined and updated repatriation tax and what was previously recorded in the fourth quarter of 2017 was reflected in the 2018 tax provision.

Notwithstanding the U.S.

taxation of these amounts, we intend to continue to invest most or all of these earnings indefinitely outside of the U.S., and do not expect to incur any significant additional taxes related to such amounts.

Reconciliations between taxes at the U.S.

1 unchanged sentence

Year Ended December 31,

Federal income tax rate of 21 % in 2019 and 2018, and 35 % in 2017

Federal income tax rate of 21 %

Increase (decrease) in tax rate resulting from:

2 unchanged sentences

Other non-deductible items, net

Impact of Tax Cuts and Jobs Act

Change in valuation allowance

Provision for income taxes

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following is a summary of the components of the net deferred tax assets and liabilities recognized in the accompanying consolidated balance sheets (in thousands):

11 unchanged sentences

Net deferred tax assets

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In assessing the realizability of the deferred tax assets, we consider whether it is more likely than not that some portion or the entire deferred tax asset will be realized.

8 unchanged sentences

At December 31, 2020, we have foreign tax credit carryforwards of approximately $ 1.5 million that will expire in varying amounts by 2028 .

As related to the taxation of our foreign subsidiaries, we aggregate our foreign earnings and profits, and utilize allowable deductions and available foreign tax credits in computing our U.S.

Notwithstanding the U.S.

In accordance with generally accepted accounting practices, we recognize in our financial statements only those tax positions that meet the more-likely-than-not recognition threshold.

10 unchanged sentences

however, actual developments in this area could differ from those currently expected.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Earnings Per Share

3 unchanged sentences

Potentially dilutive common shares that are anti-dilutive are excluded from net earnings per common share.

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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):

21 unchanged sentences

Restricted and performance shares

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Industry Segment and Geographic Data

2 unchanged sentences

Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories and windshield washer system parts.

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1).

29 unchanged sentences

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

Net sales and intersegment sales for 2017 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 , on January 1, 2018 using the modified retrospective method.

Other consists of the elimination of intersegment sales from our Engine Management and Temperature Control segments, as well as items pertaining to our Canadian business unit that does not meet the criteria of a reportable operating segment and our corporate headquarters function.

STANDARD MOTOR PRODUCTS, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Reconciliation of segment operating income to net earnings:

8 unchanged sentences

Discontinued operations, net of tax

Year Ended December 31,

Revenues (a) :

(In thousands)

United States

Other foreign

Total revenues

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Long-lived assets (c) :

Long-lived assets (a) :

(In thousands)

United States

Other foreign

Total long-lived assets

Revenues are attributed to countries based upon the location of the customer.

Revenues for 2017 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 , on January 1, 2018 using the modified retrospective method.

Long-lived assets are attributed to countries based upon the location of the assets.

Our five largest individual customers accounted for approximately 69 % of our consolidated net sales in 2019, and approximately 70 % of our consolidated net sales in 2018 and 2017.

During 2019, O’Reilly, Advance, NAPA, and AutoZone accounted for 22 %, 16 %, 15 % and 11 % of our consolidated net sales, respectively.

Our five largest individual customers accounted for approximately 68 % of our consolidated net sales in 2020, approximately 69 % of our consolidated net sales in 2019 and approximately 70 % of our consolidated net sales in 2018.

During 2020, O’Reilly, NAPA, Advance and AutoZone accounted for 26 %, 15 %, 14 % and 11 % of our consolidated net sales, respectively.

Net sales from each of the customers were reported in both our Engine Management and Temperature Control Segments.

In December 2020, a large retail customer informed us of its decision to pursue a private brand strategy for its engine management product line.

This customer has historically purchased $ 140 million of engine management products annually from us.

We anticipate that sales to this customer will continue through the first quarter of 2021.

In light of this development, we plan to take the necessary steps to reduce costs.

For the disaggregation of our net sales from contracts with customers by geographic area, major product group and major sales channels for each of our segments, see Note 20, “Net Sales.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Disaggregation of Net Sales

10 unchanged sentences

Major Sales Channel:

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Year Ended December 31, 2019 (a)

7 unchanged sentences

Major Sales Channel:

Year Ended December 31, 2017 (a)(b)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Year Ended December 31, 2018 (a)

Geographic Area:

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

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 , on January 1, 2018 using the modified retrospective method .

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.

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Geographic Area

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Lastly, in the Export channel, our domestic entities sell to customers outside the United States.

Commitments and Contingencies

Total rent expense for the three years ended December 31, 2019 was as follows (in thousands):

In cludes expenses of approximately $ 2.4 million related to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less, which is not material.

For our operating lease minimal rental payments that we are obligated to make, see Note 2, “Leases.”

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Commitments and Contingencies

Total rent expense for the three years ended December 31, 2020 was as follows (in thousands):

In cludes expenses of approximately $ 2.5 million and $ 2.4 million for the years ended December 31, 2020 and 2019 , respectively, related to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less, which is no t material.

For our operating lease minimal rental payments that we are obligated to make, see Note 7, “Leases.”

We generally warrant our products against certain manufacturing and other defects.

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The contract amount of the letters of credit is a reasonable estimate of their value as the value for each is fixed over the life of the commitment.

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change of Control Arrangements

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In the event of a change of control (as defined in the agreement), the executive will receive severance payments and certain other benefits as provided in his agreement.

In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying statement of operations.

I n 1986 , we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying statement of operations.

When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business.

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At December 31, 2020 , approximately 1,560 cases were outstanding for which we may be responsible for any related liabilities.

Since inception in September 2001 through December 31, 2019, the amounts paid for settled claims are approximately $ 30.9 million.

Since inception in September 2001 through December 31, 2020 , the amounts paid for settled claims and awards of asbestos-related damages, including interest, were approximately $ 48.3 million.

We do not have insurance coverage for the indemnity and defense costs associated with the claims we face.

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(3) an analysis of our currently pending claims;

and (4) an analysis of our settlements to date in order to develop average settlement values.

(4) an analysis of our settlements and awards of asbestos-related damages to date;

and (5) an analysis of closed with pay ratios and lag patterns in order to develop average future settlement values.

Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments and awards of asbestos-related damages was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.

In accordance with our policy to perform an annual actuarial evaluation in the third quarter of each year, and whenever events or changes in circumstances indicate that additional provisions may be necessary, an actuarial study was performed as of August 31, 2020 .

The results of the August 31, 2020 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers, ranging from $ 58.1 million to $ 99.3 million for the period through 2065 .

Based upon the results of the August 31, 2020 actuarial study, in September 2020 we increased our asbestos liability to $ 58.1 million , the low end of the range, and recorded an incremental pre-tax provision of $ 8.7 million in earnings (loss) from discontinued operations in the accompanying statement of operations.

STANDARD MOTOR PRODUCTS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As related to our potential asbestos-related liability, in 2018, we were a defendant in an asbestos liability case in California, in which we were found liable for $ 7.6 million in compensatory damages.

We are pursuing all rights of appeal of this case.

During the fourth quarter of 2018, our actuarial firm revised the results of its August 31, 2018 study.

Based upon the results of the revised actuarial study, in December 2018, we increased our asbestos liability to $ 46.7 million and recorded an incremental pre-tax provision of $ 10.1 million in earnings (loss) from discontinued operations.

In accordance with our policy to perform an annual actuarial evaluation in the third quarter of each year, an updated actuarial study was performed as of August 31, 2019.

The results of the August 31, 2019 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers, ranging from $ 52 million to $ 90.6 million for the period through 2064.

The change from the revised prior year study, which was performed in the fourth quarter of 2018, was a $ 5.3 million increase for the low end of the range and a $ 6.7 million increase for the high end of the range.

The increase in the estimated undiscounted liability from the revised prior year study at both the low end and high end of the range reflects our actual experience, our historical data and certain assumptions with respect to events that may occur in the future.

Based upon the results of the August 31, 2019 actuarial study, we increased our asbestos liability to $ 52 million , the low end of the range, and recorded an incremental pre-tax provision of $ 9.7 million in earnings (loss) from discontinued operations in the accompanying statement of operations.

As related to our potential asbestos-related liability as of August 31, 2020 , we were found liable for $ 7.6 million in compensatory damages as a defendant in a 2018 asbestos liability case in California.

We actively pursued our right of appeal, and during the fourth quarter of 2020 , received notice that we lost the appeal.

The judgment against us was for the $ 7.6 million in compensatory damages plus interest at a rate of ten percent ( 10 % ) per annum.

During the fourth quarter of 2020 , we paid the compensatory damages and accrued interest.

Based upon the reduction to our asbestos-related liability resulting from the payment made in the California asbestos case and fourth quarter 2020 cash settlements, in December 2020 our actuarial firm performed an updated actuarial study.

The results of the updated study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers, ranging from $ 63 million to $ 99.1 million for the period through 2065 .

Based upon the results of the updated actuarial study and in accordance with our practice, we increased our asbestos liability as of November 2020 to $ 63 million , the low end of the range, and recorded an additional incremental pre-tax provision of $ 17 million in earnings (loss) from discontinued operations.

Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the updated study, to range from $ 48.7 million to $ 95.4 million for the period through 2065 .

Total operating cash outflows related to discontinued operations, which include settlements and legal costs, were $ 8.8 million, $ 5.7 million and $ 5.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Total operating cash outflows related to discontinued operations, which include settlements, awards of asbestos-related damages and legal costs, net of taxes, were $ 16.4 million , $ 7.6 million and $ 5.1 million for the years ended December 31, 2020, 2019 and 2018 , respectively.

We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future and whenever events or changes in circumstances indicate that additional provisions may be necessary.

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Such revisions of the potential liabilities could have a material adverse effect on our business, financial condition or results of operations.

STANDARD MOTOR PRODUCTS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Quarterly Financial Data (Unaudited)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data