STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017			2019			2018			2019			2018
	(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)

Net earnings	$	15,945		$	17,764		$	23,934		$	33,498		$	19,432		$	15,945		$	31,648		$	23,934
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(5,935	)		2,733			(3,716	)		5,456			398			(5,935	)		1,093			(3,716	)
Pension and postretirement plans:
Amortization of:
Unrecognized gain		(12	)		(271	)		(21	)		(330	)
Unrecognized actuarial gains		12			472			12			472
Income tax related to pension and postretirement plans		—			(81	)		4			(57	)
Pension and postretirement plans, net of tax		—			120			(5	)		85
Pension and postretirement plans														(5	)		—			(10	)		(5	)
Total other comprehensive income (loss), net of tax		(5,935	)		2,853			(3,721	)		5,541			393			(5,935	)		1,083			(3,721	)
Comprehensive income	$	10,010		$	20,617		$	20,213		$	39,039		$	19,825		$	10,010		$	32,731		$	20,213

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED ~~CONSOLIDATED~~ BALANCE SHEETS

(In thousands, except share and per share data)		June 30, 2018			December 31, 2017				June 30, 2019			December 31, 2018
		(Unaudited)							(Unaudited)
ASSETS	ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	18,573		$	17,323			$	17,419		$	11,138
Accounts receivable, less allowances for discounts and doubtful accounts of $5,533 and $4,967 for 2018 and 2017, respectively			173,861			140,057
Accounts receivable, less allowances for discounts and doubtful accounts of $6,090 and $5,687 for 2019 and 2018, respectively										179,386			157,535
Inventories			331,453			326,411				375,258			349,811
Unreturned customer inventories			18,246			—				18,677			20,484
Prepaid expenses and other current assets			16,458			12,300				14,972			7,256
Total current assets			558,591			496,091				605,712			546,224

Property, plant and equipment, net of accumulated depreciation of $186,603 and $191,081 for 2018 and 2017, respectively			91,277			89,103
Property, plant and equipment, net of accumulated depreciation of $192,515 and $186,135 for 2019 and 2018, respectively										89,197			90,754
Operating lease right-of-use assets										35,648			—
Goodwill			67,360			67,413				77,728			67,321
Other intangibles, net			52,216			56,261				69,017			48,411
Deferred income taxes			31,842			32,420				39,825			42,334
Investments in unconsolidated affiliates			34,725			31,184				34,400			32,469
Other assets			15,934			15,095				18,000			15,619
Total assets		$	851,945		$	787,567			$	969,527		$	843,132

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable		$	88,528		$	57,000			$	130,000		$	43,689
Current portion of other debt			5,169			4,699				5,085			5,377
Accounts payable			94,988			77,990				89,149			94,357
Sundry payables and accrued expenses			29,391			40,012				34,280			31,033
Accrued customer returns			42,536			35,916				53,420			57,433
Accrued core liability			26,138			11,899				26,671			31,263
Accrued rebates			34,142			35,346				32,598			28,870
Payroll and commissions			20,861			23,035				22,737			20,564
Total current liabilities			341,753			285,897				393,940			312,586

Long-term debt			34			79				153			153
Noncurrent operating lease liabilities										28,613			—
Other accrued liabilities			15,449			14,561				20,452			18,075
Accrued asbestos liabilities			32,339			33,376				41,104			45,117
Total liabilities			389,575			333,913				484,262			375,931

Commitments and contingencies

Stockholders’ equity:
Common stock – par value $2.00 per share:
Authorized – 30,000,000 shares; issued 23,936,036 shares			47,872			47,872				47,872			47,872
Capital in excess of par value			103,403			100,057				105,347			102,470
Retained earnings			370,461			357,153				401,465			380,113
Accumulated other comprehensive income			(7,830	)		(4,109	)			(8,511	)		(9,594	)
Treasury stock – at cost (1,490,526 shares and 1,424,025 shares in 2018 and 2017, respectively)			(51,536	)		(47,319	)
Treasury stock – at cost (1,629,398 shares and 1,503,284 shares in 2019 and 2018, respectively)										(60,908	)		(53,660	)
Total stockholders’ equity			462,370			453,654				485,265			467,201
Total liabilities and stockholders’ equity		$	851,945		$	787,567			$	969,527		$	843,132

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019			2018
	(Unaudited)						(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	23,934		$	33,498		$	31,648		$	23,934
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		11,706			11,316			12,744			11,706
Amortization of deferred financing cost		172			172			113			172
Increase to allowance for doubtful accounts		93			1,230			337			93
Increase to inventory reserves		1,553			767			1,552			1,553
Amortization of deferred gain on sale of building		(218	)		(524	)		—			(218	)
Equity income from joint ventures		(125	)		(1,111	)
Employee Stock Ownership Plan allocation		1,278			1,080
Equity (income) loss from joint ventures								(2,047	)		(125	)
Employee stock ownership plan allocation								1,260			1,278
Stock-based compensation		3,896			4,005			3,848			3,896
Decrease in deferred income taxes		502			749			2,547			502
Loss on discontinued operations, net of tax		1,490			1,130			2,011			1,490
Change in assets and liabilities:
Increase in accounts receivable		(34,524	)		(53,069	)		(26,622	)		(34,524	)
Increase in inventories		(6,650	)		(27,048	)		(19,691	)		(6,650	)
Increase in prepaid expenses and other current assets		(2,988	)		(943	)		(6,406	)		(2,988	)
Increase in accounts payable		15,684			17,475
Increase (decrease) in sundry payables and accrued expenses		(9,115	)		5,663
Increase (decrease) in accounts payable								(6,994	)		15,684
Decrease in sundry payables and accrued expenses								(7,545	)		(9,115	)
Net change in other assets and liabilities		(2,502	)		(1,225	)		(6,261	)		(2,502	)
Net cash provided by (used in) operating activities		4,186			(6,835	)		(19,506	)		4,186

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and investments in businesses		(8,572	)		—			(38,427	)		(8,572	)
Net proceeds from sale of Grapevine, Texas facility								4,801			—
Capital expenditures		(11,325	)		(8,843	)		(7,578	)		(11,325	)
Other investing activities		16			2			46			16
Net cash used in investing activities		(19,881	)		(8,841	)		(41,158	)		(19,881	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements		31,529			24,134			86,311			31,529
Net borrowings (payments) of other debt and capital lease obligations		758			(21	)		(355	)		758
Purchase of treasury stock		(7,640	)		(5,176	)		(10,738	)		(7,640	)
Increase in overdraft balances		1,990			1,488			1,691			1,990
Dividends paid		(9,437	)		(8,674	)		(10,296	)		(9,437	)
Net cash provided by financing activities		17,200			11,751			66,613			17,200
Effect of exchange rate changes on cash		(255	)		518			332			(255	)
Net increase (decrease) in cash and cash equivalents		1,250			(3,407	)
Net increase in cash and cash equivalents								6,281			1,250
CASH AND CASH EQUIVALENTS at beginning of period		17,323			19,796			11,138			17,323
CASH AND CASH EQUIVALENTS at end of period	$	18,573		$	16,389		$	17,419		$	18,573

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,656		$	956		$	2,516		$	1,656
Income taxes	$	9,622		$	19,499		$	13,785		$	9,622
Noncash investing activity:
Accrual for additional investment in China joint venture	$	1,373		$	—		$	—		$	1,373

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

~~Six~~

Three Months Ended June 30, 2019

(Unaudited)

	Common Stock		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
(In thousands)
Balance at March 31, 2019	$	47,872	$	104,467	$	387,170		$	(8,904	)	$	(57,565	)	$	473,040
Net earnings		—		—		19,432			—			—			19,432
Other comprehensive income, net of tax		—		—		—			393			—			393
Cash dividends paid		—		—		(5,137	)		—			—			(5,137	)
Purchase of treasury stock		—		—		—			—			(4,411	)		(4,411	)
Stock-based compensation		—		880		—			—			1,068			1,948
Employee Stock Ownership Plan		—		—		—			—			—			—

Balance at June 30, 2019	$	47,872	$	105,347	$	401,465		$	(8,511	)	$	(60,908	)	$	485,265

Three Months Ended June 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 — — 23,934 — — 23,934
Other comprehensive income, net of tax — — — (3,721 ) — (3,721 )
Cash dividends paid — — (9,437 ) — — (9,437 )
Purchase of treasury stock — — — — (7,324 ) (7,324 )
Stock-based compensation — 2,581 — — 1,315 3,896
Employee Stock Ownership Plan — 765 — — 1,792 2,557

Balance at June 30, 2018 $ 47,872 $ 103,403 $ 370,461 $ (7,830 ) $ (51,536 ) $ 462,370

	Common Stock		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
(In thousands)
Balance at March 31, 2018	$	47,872	$	102,646	$	359,232		$	(1,895	)	$	(48,346	)	$	459,509
Net earnings		—		—		15,945			—			—			15,945
Other comprehensive income, net of tax		—		—		—			(5,935	)		—			(5,935	)
Cash dividends paid		—		—		(4,716	)		—			—			(4,716	)
Purchase of treasury stock		—		—		—			—			(4,412	)		(4,412	)
Stock-based compensation		—		757		—			—			1,222			1,979

Balance at June 30, 2018	$	47,872	$	103,403	$	370,461		$	(7,830	)	$	(51,536	)	$	462,370

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2019

(Unaudited)

	Common Stock		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
(In thousands)
Balance at December 31, 2018	$	47,872	$	102,470	$	380,113		$	(9,594	)	$	(53,660	)	$	467,201
Net earnings		—		—		31,648			—			—			31,648
Other comprehensive income, net of tax		—		—		—			1,083			—			1,083
Cash dividends paid		—		—		(10,296	)		—			—			(10,296	)
Purchase of treasury stock		—		—		—			—			(10,738	)		(10,738	)
Stock-based compensation		—		2,132		—			—			1,716			3,848
Employee Stock Ownership Plan		—		745		—			—			1,774			2,519

Balance at June 30, 2019	$	47,872	$	105,347	$	401,465		$	(8,511	)	$	(60,908	)	$	485,265

Six Months Ended June 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		—		—		23,934			—			—			23,934
Other comprehensive income, net of tax		—		—		—			(3,721	)		—			(3,721	)
Cash dividends paid		—		—		(9,437	)		—			—			(9,437	)
Purchase of treasury stock		—		—		—			—			(7,324	)		(7,324	)
Stock-based compensation		—		2,581		—			—			1,315			3,896
Employee Stock Ownership Plan		—		765		—			—			1,792			2,557

Balance at June 30, 2018	$	47,872	$	103,403	$	370,461		$	(7,830	)	$	(51,536	)	$	462,370

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Note 1.~~

Note 1. Basis of Presentation

Standard Motor Products, Inc. and subsidiaries (referred to as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of premium replacement parts for motor vehicles in the automotive aftermarket industry with a complementary focus on 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.~~2018. The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership, except in instances where the minority shareholder maintains substantive participating rights, in which case we follow the equity method of accounting. Investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence. All significant inter-company items have been eliminated.

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

~~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.~~

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~~cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability ~~other postretirement benefits,~~exposures, asbestos, environmental and litigation matters, ~~the~~ valuation of deferred tax assets, share based compensation and sales ~~return~~returns and other allowances.

There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, 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,~~ 2016-02, Leases, (“ASU 2016-02”), described under the heading, “Recently Issued Accounting Pronouncements” below and in Note 3, ~~“Net Sales.~~“Leases.”

Index

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~~Leases

~~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 provide 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,~~2019, we adopted ~~the requirements of~~ ASU ~~2014-09,~~ ~~Revenue from Contracts with Customers~~,2016-02, Leases, (“ASU 2016-02”) 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.~~approach. The ~~comparative information has not been restated and continues to be reported under the accounting standards~~modified retrospective approach provides a method for recording existing leases at adoption. The most significant impact in ~~effect for those periods. We expect the impact of the adoption of~~adopting the new standard ~~to be immaterial to~~was the recognition of right-of-use (“ROU”) assets and lease liabilities on our ~~net income on an ongoing basis.~~

consolidated balance sheet for operating leases, while the accounting for finance leases remained substantially unchanged. The adoption of the new standard did not ~~result in a material difference between~~materially impact our consolidated statements of operations or cash flows.

In adopting ASU 2016-02, we elected the ~~recognition~~package of ~~revenue~~practical expedients permitted under ~~ASU 2014-09~~the transition guidance within the new standard, which among other things, allowed us to carry forward our historical lease identification and ~~prior accounting standards. For the majority~~lease classifications. In addition, upon adoption, we evaluated all of our ~~net sales, revenue continues~~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 ~~recognized when products are shipped from~~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 ~~distribution facilities, or when received by our customers, depending upon~~other leases remained unchanged.

Additionally, we elected to apply the ~~terms~~provisions of ASU 2018-11, Targeted Improvements, which allows us to initially apply the new lease requirements as of the ~~contract. Under~~effective date. Comparative financial information for the ~~new revenue standard, (1)~~prior periods presented were not restated but instead are reported under the ~~return of cores from customers used~~accounting standards 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. effect in those prior periods.

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~~following 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~~2019 (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

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

~~Index~~

~~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 June 30, 2018 and our consolidated statement of operations for the three months and six months ended June 30, 2018 (in thousands):

As Reported
Balances Without
Adoption of ASU
2014-09
Effect of Change
Balance Sheet
Unreturned customer inventories $ 18,246 $ — $ 18,246
Prepaid expenses and other current assets 16,458 16,733 (275 )
Accrued customer returns 42,536 36,184 6,352
Accrued core liability 26,138 14,123 12,015
Retained earnings 370,461 370,857 (396 )

Three Months Ended June 30, 2018 Six Months Ended June 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 $ 286,636 $ 286,531 $ 105 $ 548,462 $ 546,009 $ 2,453
Cost of sales 205,347 205,781 (434 ) 394,584 393,199 1,385
Earnings from continuing operations before taxes 22,579 22,040 539 34,223 33,155 1,068
Provision for income taxes 5,752 5,615 137 8,799 8,524 275
Net earnings 15,945 15,543 402 23,934 23,141 793

See Note 3 for further information regarding our adoption of ASU ~~2014-09.~~2016-02.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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

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

Standard	Description	Date of adoption		Effects on the financial statements or other significant matters

~~ASU 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.

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

~~Standards that are not yet adopted as of June 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 asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or financing. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. 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 must be adopted utilizing a modified retrospective transition and provides for certain expedients.

To date, we have taken an inventory of all of our operating leases, which consists primarily of real estate, equipment and auto leases, started our review of key lease agreements including contract reviews for embedded leases, and are currently evaluating lease terms, lease payments and appropriate discount rates to use in calculating the right-of-use asset and lease liability. In addition, we are currently evaluating the transition package of practical expedients permitted within the new standard, which among other things, allows us to use hindsight to determine the reasonably certain lease term for existing leases, and allows for the adoption of the new standard at the effective date without adjusting the comparative prior periods presented. We will be continuously assessing the impact of the new standard and the impact on our systems, processes and controls through January 1, 2019, our planned adoption date.

The following table provides a brief description of additional recently issued accounting pronouncements that have not yet been adopted as of June 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	~~The new standard requires adoption through a cumulative-effect adjustment to retained earnings as of the effective date, without adjusting period periods.~~	We do not anticipate that the adoption of this standard will have a material impact on the manner in which we estimate our allowance for doubtful accounts on trade accounts receivable, or on our consolidated financial statements.

Note 3. Leases

Significant Accounting Policy

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

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

Quantitative Lease Disclosures

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

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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

Balance Sheet Information	June 30, 2019
Assets
Operating lease right-of-use assets	$	35,648

Liabilities
Sundry payables and accrued expenses	$	8,053
Noncurrent operating lease liabilities		28,613
Total operating lease liabilities	$	36,666

Weighted Average Remaining Lease Term
Operating leases	6.1 Years

Weighted Average Discount Rate
Operating leases		3.8	%

Lease Expense	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019

Operating Lease Expense (a)	$	2,210	$	4,434

~~Note 3.~~

~~Net Sales~~(a)

Excludes expenses of approximately $1.1 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.

~~Significant Accounting Policy~~

Supplemental Cash Flow Information	Six Months Ended June 30, 2019

Cash Paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	4,239
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	744

~~We recognize revenues when our performance obligation has been satisfied and the control of products has been transferred~~

Minimum Lease Payments

At June 30, 2019, we are obligated to ~~a customer~~make minimum lease payments through 2028, under operating leases, which ~~typically occurs upon shipment. Revenue is measured~~are 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.follows (in thousands):

2019	$	4,342
2020		7,689
2021		7,027
2022		5,818
2023		5,281
Thereafter		11,316
Total lease payments	$	41,473
Less: Interest		(4,807	)
Present value of lease liabilities	$	36,666

~~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.

~~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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

~~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 six months ended June 30, 2018 and 2017 (in thousands):

Three months ended June 30, 2018 (a)
Engine
Management

Temperature
Control

Other (c)
Total
Geographic Area:
United States $ 182,383 $ 74,267 $ — $ 256,650
Canada 7,288 5,516 2,837 15,641
Mexico 4,447 173 — 4,620
Europe 2,406 147 — 2,553
Other foreign 6,905 267 — 7,172
Total $ 203,429 $ 80,370 $ 2,837 $ 286,636
Major Product Group:
Ignition, emissions and fuel system parts $ 162,462 $ — $ 1,191 $ 163,653
Wire and cable 40,967 — 158 41,125
Compressors — 46,940 818 47,758
Other climate control parts — 33,430 670 34,100
Total $ 203,429 $ 80,370 $ 2,837 $ 286,636
Major Sales Channel:
Aftermarket $ 171,864 $ 70,679 $ 2,837 $ 245,380
OE/OES 25,801 9,296 — 35,097
Export 5,764 395 — 6,159
Total $ 203,429 $ 80,370 $ 2,837 $ 286,636

Three months ended June 30, 2017 (a)(b)
Engine
Management

Temperature
Control

Other (c)
Total
Geographic Area:
United States $ 201,142 $ 80,874 $ — $ 282,016
Canada 8,056 5,554 1,989 15,599
Mexico 5,056 208 — 5,264
Europe 3,151 320 — 3,471
Other foreign 5,944 435 — 6,379
Total $ 223,349 $ 87,391 $ 1,989 $ 312,729
Major Product Group:
Ignition, emissions and fuel system parts $ 178,105 $ — $ 840 $ 178,945
Wire and cable 45,244 — 150 45,394
Compressors — 49,644 601 50,245
Other climate control parts — 37,747 398 38,145
Total $ 223,349 $ 87,391 $ 1,989 $ 312,729
Major Sales Channel:
Aftermarket $ 191,846 $ 76,799 $ 1,989 $ 270,634
OE/OES 26,168 9,810 — 35,978
Export 5,335 782 — 6,117
Total $ 223,349 $ 87,391 $ 1,989 $ 312,729

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

Six months ended June 30, 2018 (a)
Engine
Management

Temperature
Control

Other (c)
Total
Geographic Area:
United States $ 356,967 $ 129,838 $ — $ 486,805
Canada 15,092 9,448 4,944 29,484
Mexico 12,669 385 — 13,054
Europe 5,886 311 — 6,197
Other foreign 12,303 619 — 12,922
Total $ 402,917 $ 140,601 $ 4,944 $ 548,462
Major Product Group:
Ignition, emissions and fuel system parts $ 323,539 $ — $ 2,853 $ 326,392
Wire and cable 79,378 — 349 79,727
Compressors — 76,838 762 77,600
Other climate control parts — 63,763 980 64,743
Total $ 402,917 $ 140,601 $ 4,944 $ 548,462
Major Sales Channel:
Aftermarket $ 341,174 $ 122,309 $ 4,944 $ 468,427
OE/OES 50,857 17,397 — 68,254
Export 10,886 895 — 11,781
Total $ 402,917 $ 140,601 $ 4,944 $ 548,462

Six months ended June 30, 2017 (a)(b)
Engine
Management

Temperature
Control

Other (c)
Total
Geographic Area:
United States $ 387,044 $ 145,913 $ — $ 532,957
Canada 17,823 9,910 2,763 30,496
Mexico 12,087 432 — 12,519
Europe 6,965 524 — 7,489
Other foreign 10,744 902 — 11,646
Total $ 434,663 $ 157,681 $ 2,763 $ 595,107
Major Product Group:
Ignition, emissions and fuel system parts $ 343,258 $ — $ 1,564 $ 344,822
Wire and cable 91,405 — 376 91,781
Compressors — 87,545 299 87,844
Other climate control parts — 70,136 524 70,660
Total $ 434,663 $ 157,681 $ 2,763 $ 595,107
Major Sales Channel:
Aftermarket $ 371,611 $ 138,598 $ 2,763 $ 512,972
OE/OES 52,672 17,799 — 70,471
Export 10,380 1,284 — 11,664
Total $ 434,663 $ 157,681 $ 2,763 $ 595,107

~~(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)~~

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

~~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.

~~Note 4.~~

Note 4. Business Acquisitions and Investments

2019 Business Acquisition

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

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

Purchase Price			$	38,427
Assets acquired and liabilities assumed:
Inventory	$	3,331
Property, plant and equipment, net		45
Intangible assets		24,650
Goodwill		10,401
Net assets acquired			$	38,427

Intangible assets acquired of $24.7 million consists 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. Goodwill of $10.4 million was allocated to the Engine Management Segment and is deductible for income tax purposes. The goodwill reflects relationships, business specific knowledge and the replacement cost of an assembled workforce associated with personal reputations, as well as the value of expected synergies.

Revenues included in our consolidated statements of operations for the acquisition was $10.7 million from the date of acquisition through June 30, 2019.

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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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%. ~~Payment~~The $4.2 million payment for our additional 15% investment ~~will be~~was made in ~~six~~multiple cash installments, with $2.8 million paid through June 30, 2018 and the balance paid on various dates ~~through the end of~~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.

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

~~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.~~

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~~2018 and June 30, ~~2018~~2019 and activity for the six months ended June 30, ~~2018~~2019 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 50 3,017 3,067
Non-cash usage, including asset write-downs — (181 ) (181 )
Cash payments (1,748 ) (2,836 ) (4,584 )
Foreign currency exchange rate changes 26 — 26
Exit activity liability at June 30, 2018
$ 1,182 $ — $ 1,182

	Workforce Reduction			Other Exit Costs			Total
Exit activity liability at December 31, 2018	$	742		$	—		$	742
Restructuring and integration costs:
Amounts provided for during 2019		—			644			644
Cash payments		(91	)		(352	)		(443	)
Reclassification to inventory reserves		—			(292	)		(292	)
Exit activity liability at June 30, 2019	$	651		$	—		$	651

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. AsIn December 2018, we completed the sale of ~~June 30, 2018,~~ the property located in Grapevine, Texas. Net proceeds from the sale of $4.8 million were received in January 2019.

The plant rationalization program is substantially completed. Cash payments made during the first six months of ~~2018 consisted primarily~~2019 and the remaining aggregate liability related to the program as of June 30, 2019 consists of severance payments to former employees.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Activity, by segment, for the six months ended June 30, ~~2018~~2019 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 — 204 — 204
Cash payments — (1,204 ) — (1,204 )
Exit activity liability at June 30, 2018
$ — $ 476 $ — $ 476

	Engine Management		Temperature Control			Other		Total
Exit activity liability at December 31, 2018	$	—	$	304		$	—	$	304
Restructuring and integration costs:
Amounts provided for during 2019		—		—			—		—
Cash payments		—		(56	)		—		(56	)
Exit activity liability at June 30, 2019	$	—	$	248		$	—	$	248

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

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 June 30, 2018, the~~

The Orlando plant rationalization program is substantially completed. ~~The~~Cash payments made during the first six months of 2019 and the remaining aggregate liability related to the program as of June 30, ~~2018~~2019 consists of ~~future cash~~ severance payments to ~~be made to~~ former employees.

Activity, by segment, for the six months ended June 30, ~~2018~~2019 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 1,471 — — 1,471
Non-cash usage, including asset write-downs (12 ) — — (12 )
Cash payments (1,739 ) — — (1,739 )
Exit activity liability at June 30, 2018
$ 706 $ — $ — $ 706

	Engine Management			Temperature Control		Other		Total
Exit activity liability at December 31, 2018	$	438		$	—	$	—	$	438
Restructuring and integration costs:
Amounts provided for during 2019		—			—		—		—
Cash payments		(35	)		—		—		(35	)
Exit activity liability at June 30, 2019	$	403		$	—	$	—	$	403

Integration Costs

~~Wire and Cable~~Pollak Relocation

In connection with our April 2019 acquisition of certain assets and liabilities of the ~~North American automotive ignition wire~~Pollak business of ~~General Cable Corporation in May 2016,~~Stoneridge, Inc., we ~~incurred~~expect to incur certain integration expenses ~~including costs incurred~~ in connection with the ~~consolidation~~relocation of ~~the General Cable Corporation Altoona, Pennsylvania wire~~certain inventory, machinery, and equipment from Pollak’s distribution ~~center into~~and manufacturing facilities in El Paso, Texas, Canton, Massachusetts, and Juarez, Mexico, to our existing ~~wire distribution center~~facilities in ~~Edwardsville, Kansas~~Disputanta, Virginia, Reynosa, Mexico and Independence, Kansas. Total integration expenses of approximately $1.6 million are expected to be incurred related to the relocation. During the six months ended June 30, 2019, integration expenses related to the relocation of ~~certain machinery and equipment. In October 2016, we further announced our plan to relocate all production from~~$0.6 million were recognized. We anticipate that 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 June 30, 2018, the wire and cable~~Pollak 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.~~will be completed within 12 months.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Activity, by segment, for the six months ended June 30, ~~2018~~2019 related to ~~our wire and cable~~the Pollak 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 June 30, 2018
$ — $ — $ — $ —

	Engine Management			Temperature Control		Other		Total
Exit activity liability at December 31, 2018	$	—		$	—	$	—	$	—
Restructuring and integration costs:
Amounts provided for during 2019		644			—		—		644
Cash payments		(352	)		—		—		(352	)
Reclassification to inventory reserves		(292	)		—		—		(292	)
Exit activity liability at June 30, 2019	$	—		$	—	$	—	$	—

~~Note 6.~~

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.

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

Pursuant to these agreements, we sold ~~$184.1~~$190 million and ~~$341.6~~$361 million of receivables during the three months and six months ended June 30, ~~2018~~,2019, respectively, and ~~$224.3~~$184.1 million and ~~$404.1~~$341.6 million for the comparable periods in ~~2017.~~2018. A charge in the amount of ~~$6.3~~$6.4 million and ~~$11.7~~$12.1 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months and six months ended June 30, ~~2018,~~2019, respectively, and ~~$6.4~~$6.3 million and ~~$11.6~~$11.7 million for the comparable periods in ~~2017.~~2018. 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.~~

Note 7. Inventories

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

	June 30, 2018		December 31, 2017
	(In thousands)				June 30, 2019		December 31, 2018
					(In thousands)
Finished goods	$	218,000	$	209,800	$	245,327	$	226,802
Work in process		9,029		7,536		8,638		10,527
Raw materials		104,424		109,075		121,293		112,482
Subtotal		331,453		326,411		375,258		349,811
Unreturned customer inventories (1)		18,246		—
Unreturned customer inventories						18,677		20,484
Total inventories	$	349,699	$	326,411	$	393,935	$	370,295

~~(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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

~~Note 8.~~

Note 8. Acquired Intangible Assets

Acquired identifiable intangible assets consist of the following:

June 30,
2018

December 31,
2017

(In thousands)

Customer relationships $ 87,226 $ 87,290
Trademarks and trade names 6,800 6,800
Non-compete agreements 3,192 3,193
Patents 723 723
Supply agreements 800 800
Leaseholds 160 160
Total acquired intangible assets 98,901 98,966
Less accumulated amortization (1) (47,668 ) (43,853 )
Net acquired intangible assets $ 51,233 $ 55,113

	June 30, 2019			December 31, 2018
	(In thousands)
Customer relationships	$	111,604		$	87,195
Trademarks and trade names		6,980			6,800
Non-compete agreements		3,275			3,193
Patents		723			723
Supply agreements		800			800
Leaseholds		160			160
Total acquired intangible assets		123,542			98,871
Less accumulated amortization (1)		(55,313	)		(51,391	)
Net acquired intangible assets	$	68,229		$	47,480

(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.

In April 2019, we acquired certain assets and liabilities of the Pollak business of Stoneridge, Inc. Intangible assets acquired of $24.7 million consists 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.

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

Total amortization expense for acquired intangible assets was $2.1 million and $3.9 million for the three months and six months ended June 30, 2019 respectively, and $1.9 million and $3.8 million for the ~~three months and six months ended June 30, 2018, respectively, and $2.1 million and $4.2 million for the~~ comparable periods in ~~2017.~~2018. Based on the current estimated useful lives assigned to our acquired intangible assets, amortization expense is estimated to be ~~$3.7~~$4.1 million for the remainder of ~~2018, $6.3 million in~~ 2019, ~~$5.9~~$8.2 million in 2020, ~~$4.6~~$6.8 million in 2021, $5.2 million in 2022 and ~~$25.5~~$38.7 million in the aggregate for the years ~~2022~~2023 through ~~2031.~~2034.

~~Note 9.~~

Note 9. Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
	(In thousands)				(In thousands)
Revolving credit facilities	$	88,528	$	57,000	$	130,000	$	43,689
Other (1)		5,203		4,778		5,238		5,530
Total debt	$	93,731	$	61,778	$	135,238	$	49,219

Current maturities of debt	$	93,697	$	61,699	$	135,085	$	49,066
Long-term debt		34		79		153		153
Total debt	$	93,731	$	61,778	$	135,238	$	49,219

(1)

Other includes borrowings under our Polish overdraft facility of Zloty ~~19.1~~18.8 million (approximately ~~$5.1~~$5 million). and Zloty 19.9 million (approximately $5.3 million) as of June 30, 2019 and December 31, 2018, respectively.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Revolving Credit Facility

In ~~October 2015,~~December 2018, we ~~entered into a~~amended our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and a syndicate of ~~lenders~~lenders. The amended credit agreement provides 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 aextends the maturity date ~~in October 2020.~~to December 2023. The line of credit under the amended credit 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 amended 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 amended credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.

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 factoring agreements, eligible inventory, eligible equipment and eligible fixed assets. After taking into account outstanding borrowings under the amended credit agreement, there was an additional ~~$158.3~~$116.8 million available for us to borrow pursuant to the formula at June 30, ~~2018~~.2019. Outstanding borrowings under the amended credit ~~agreements,~~agreement, which are classified as current liabilities, were ~~$88.5~~$130 million and ~~$57~~$43.7 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Borrowings under the ~~restated~~amended credit agreement have been classified as current liabilities based upon the accounting rules and certain provisions in the agreement.

At June 30, 2019, the weighted average interest rate on our amended credit agreement was 3.7%, which consisted of $130 million in direct borrowings. At December 31, 2018, the weighted average interest rate on our amended credit agreement was ~~3.5%~~3.9%, which consisted of ~~$80~~$40 million in direct borrowings at ~~3.3%~~3.4% and an alternative base rate loan of ~~$8.5~~$3.7 million at ~~5.3%~~5.8%. 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 six months ended June 30, ~~2018,~~2019, our average daily alternative base rate loan balance was ~~$1.9~~$1.6 million, compared to a balance of ~~$5.2~~$1.9 million for the six months ended June 30, ~~2017,~~2018, and a balance of ~~$3.8~~$1.8 million for the year ended December 31, ~~2017.~~2018.

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (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). As of June 30, ~~2018,~~ 2019, we were not subject to these covenants. The amended 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 amended 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~~Our Polish subsidiary, SMP Poland ~~sp.z.o.o.~~sp. z.o.o., has entered into an overdraft facility with HSBC Bank Polska S.A. (“HSBC Poland”) for Zloty 30 million (approximately $8 million). The facility, as amended, expires in December ~~2018.~~2019. 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 June 30, 2019 and December 31, 2018, borrowings under the overdraft facility were Zloty ~~19.1~~18.8 million (approximately ~~$5.1~~$5 million). and Zloty 19.9 million (approximately $5.3 million), respectively.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Deferred Financing Costs

We had deferred financing costs of ~~$0.8~~$1 million and $1$1.1 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Deferred financing costs are related to our revolving credit facility. Deferred financing costs as of June 30, ~~2018~~2019 are being amortized in the amounts of $0.2 million for the remainder of ~~2018, $0.3~~2019, $0.2 million in ~~2019 and $0.3~~2020, $0.2 million in ~~2020.~~2021, $0.2 million in 2022 and $0.2 million in 2023.

~~Note 10. Accumulated Other Comprehensive Income~~

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

Three Months Ended June 30, 2018

Foreign
Currency
Translation
Adjustments

Unrecognized
Postretirement
Benefit Costs
(Credit)
Total
Balance at March 31, 2018 $ (2,006 ) $ 111 $ (1,895 )
Other comprehensive income before reclassifications (5,935 ) 7 (5,928 )
Amounts reclassified from accumulated other comprehensive income — (7 ) (7 )
Other comprehensive income, net (5,935 ) — (5,935 )
Balance at June 30, 2018
$ (7,941 ) $ 111 $ (7,830 )

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

Six Months Ended June 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 (3,716 ) 7 (3,709 )
Amounts reclassified from accumulated other comprehensive income — (12 ) (12 )
Other comprehensive income, net (3,716 ) (5 ) (3,721 )
Balance at June 30, 2018
$ (7,941 ) $ 111 $ (7,830 )

~~Reclassifications Out of Accumulated Other Comprehensive Income (in thousands)~~

Details About Accumulated Other Comprehensive Income Components
Three Months Ended
June 30, 2018

Six Months Ended
June 30, 2018

Amortization of postretirement benefit plans:
Prior service benefit (1) $ — $ —
Unrecognized gain (1) (12 ) (21 )
Total before income tax (12 ) (21 )
Income tax expense 5 9
Total reclassifications for the period $ (7 ) $ (12 )

~~(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.~~

Note 10. Stock-Based Compensation Plans

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

Restricted and Performance Stock Grants

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

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

Our restricted and performance-based share activity was as follows for the six months ended June 30, ~~2018:~~2019:

	Shares			Weighted Average Grant Date Fair Value Per Share		Shares			Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2017		853,958		$	33.25
Balance at December 31, 2018							870,041		$	34.59
Granted		9,129			37.53		8,000			40.11
Vested		(25,845	)		35.38		(36,889	)		32.72
Forfeited		(3,950	)		42.82		(8,975	)		44.27
Balance at June 30, 2018		833,292		$	33.18
Balance at June 30, 2019							832,177		$	34.62

We recorded compensation expense related to restricted shares and performance-based shares of ~~$3.3~~$3.4 million ($2.5 million, net of tax) and ~~$3.5~~$3.3 million ($~~2.2~~2.5 million, net of tax) for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The unamortized compensation expense related to our restricted and performance-based shares was ~~$12.8~~$12.2 million at June 30, ~~2018,~~2019, and is expected to be recognized as they vest over a weighted average period of ~~4.2~~4.1 years and 0.8 years for employees and directors, respectively.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

~~Note 12.~~

Note 11. Employee Benefits

We provided, and continue to provide, certain medical and dental care benefits to eligible retired U.S. and Canadian employees. ~~Under~~The 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. ~~plan, for~~ non-union employees, ~~a Health Reimbursement Account (“HRA”) was established beginning January 1, 2009 for each qualified U.S. retiree. Annually,~~annually and through the year ended December 31, 2016, a fixed amount was credited into ~~the HRA~~a Health Reimbursement account (“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, balancesBalances in the HRA accounts upon termination of the plan at December 31, 2016 ~~will remain~~remained available for use until December 31, 2018. Any remaining balance at December 31, 2018 ~~will be~~was forfeited. Postretirement medical and dental benefits to the remaining eligible ~~employees will continue to be provided to the 20~~19 former union employees in the U.S.

will continue to be provided. The ~~components~~postretirement medical and dental benefit obligation for the former union employees in the U.S. as of June 30, 2019, and the net periodic benefit cost for our postretirement benefit plans for the three months and six months ended June 30, 2019 and 2018 ~~and 2017~~ were ~~as follows (in thousands):~~not material.

Three Months Ended
June 30,

Six Months Ended
June 30,

Postretirement benefits 2018 2017 (1) 2018 2017 (1)
Service cost $ — $ — $ — $ —
Interest cost 1 2 3 4
Amortization of prior service cost — — — —
Actuarial net gain (12 ) (271 ) (21 ) (330 )
Net periodic benefit cost (credit) $ (11 ) $ (269 ) $ (18 ) $ (326 )

~~(1)~~

Net periodic benefit cost (credit) has been reclassified from selling, general and administrative expenses to other non-operating income (expense), net on our consolidated statement of operations upon adoption of ASU 2017-07, ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, see Note 2, “Summary of Significant Accounting Policies” for additional information.~~

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

We maintain a defined contribution Supplemental Executive Retirement Plan for key employees. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, we may at our discretion make contributions to the plan on behalf of the employees. In March ~~2018,~~2019, we made company contributions to the plan of ~~$0.6~~$0.3 million related to calendar year ~~2017.~~2018.

We also have an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. In connection therewith, we maintain an employee benefits trust to which we contribute shares of treasury stock. We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under the plan. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with their fiduciary duties. During the six months ended June 30, ~~2018,~~2019, we contributed to the trust an additional ~~53,300~~49,100 shares from our treasury and released ~~53,300~~49,100 shares from the trust leaving 200 shares remaining in the trust as of June 30, ~~2018.~~2019.

~~Note 13.~~

Note 12. Fair Value Measurements

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

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

~~Note 14.~~

Note 13. Earnings Per Share

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

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Basic Net Earnings Per Common Share:
Earnings from continuing operations	$	16,827		$	18,261		$	25,424		$	34,628		$	20,555		$	16,827		$	33,659		$	25,424
Loss from discontinued operations		(882	)		(497	)		(1,490	)		(1,130	)		(1,123	)		(882	)		(2,011	)		(1,490	)
Net earnings available to common stockholders	$	15,945		$	17,764		$	23,934		$	33,498		$	19,432		$	15,945		$	31,648		$	23,934

Weighted average common shares outstanding		22,471			22,820			22,485			22,833			22,328			22,471			22,375			22,485

Earnings from continuing operations per common share	$	0.75		$	0.80		$	1.13		$	1.52		$	0.92		$	0.75		$	1.50		$	1.13
Loss from discontinued operations per common share		(0.04	)		(0.02	)		(0.07	)		(0.05	)		(0.05	)		(0.04	)		(0.09	)		(0.07	)
Basic net earnings per common share	$	0.71		$	0.78		$	1.06		$	1.47		$	0.87		$	0.71		$	1.41		$	1.06

Diluted Net Earnings Per Common Share:
Earnings from continuing operations	$	16,827		$	18,261		$	25,424		$	34,628		$	20,555		$	16,827		$	33,659		$	25,424
Loss from discontinued operations		(882	)		(497	)		(1,490	)		(1,130	)		(1,123	)		(882	)		(2,011	)		(1,490	)
Net earnings available to common stockholders	$	15,945		$	17,764		$	23,934		$	33,498		$	19,432		$	15,945		$	31,648		$	23,934

Weighted average common shares outstanding		22,471			22,820			22,485			22,833			22,328			22,471			22,375			22,485
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock and performance-based stock		487			509			477			499			468			487			482			477
Weighted average common shares outstanding – Diluted		22,958			23,329			22,962			23,332			22,796			22,958			22,857			22,962

Earnings from continuing operations per common share	$	0.73		$	0.78		$	1.11		$	1.48		$	0.90		$	0.73		$	1.47		$	1.11
Loss from discontinued operations per common share		(0.04	)		(0.02	)		(0.07	)		(0.04	)		(0.05	)		(0.04	)		(0.09	)		(0.07	)
Diluted net earnings per common share	$	0.69		$	0.76		$	1.04		$	1.44		$	0.85		$	0.69		$	1.38		$	1.04

The shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or because they were excluded under the treasury method (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,

2018 2017 2018 2017
Restricted and performance-based shares 251 228 265 240

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Restricted and performance-based shares		248		251		242		265

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

~~Note 15.~~

Note 14. Industry Segments

We have two major reportable operating segments, each of which focuses on a specific line of replacement parts. Our Engine Management Segment manufactures and remanufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicle systems. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories and windshield washer system parts.

~~Index~~

~~STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES~~

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

The following tables show our net sales, intersegment revenue and operating income by our operating segments (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Net Sales (a)
Engine Management	$	203,429		$	223,349		$	402,917		$	434,663		$	218,042		$	203,429		$	431,231		$	402,917
Temperature Control		80,370			87,391			140,601			157,681			84,406			80,370			153,330			140,601
All Other		2,837			1,989			4,944			2,763			2,724			2,837			4,377			4,944
Consolidated	$	286,636		$	312,729		$	548,462		$	595,107		$	305,172		$	286,636		$	588,938		$	548,462

Intersegment Revenue (a)
Engine Management	$	4,981		$	5,831		$	10,972		$	13,143		$	4,921		$	4,981		$	10,270		$	10,972
Temperature Control		2,140			2,095			3,820			4,124			1,786			2,140			3,719			3,820
All Other		(7,121	)		(7,926	)		(14,792	)		(17,267	)		(6,707	)		(7,121	)		(13,989	)		(14,792	)
Consolidated	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Operating Income
Engine Management	$	23,138		$	26,489		$	40,514		$	53,774		$	25,709		$	23,138		$	48,053		$	40,514
Temperature Control		4,882			8,262			5,713			12,229			7,154			4,882			9,204			5,713
All Other		(4,670	)		(5,352	)		(10,570	)		(11,142	)		(5,135	)		(4,670	)		(11,572	)		(10,570	)
Consolidated	$	23,350		$	29,399		$	35,657		$	54,861		$	27,728		$	23,350		$	45,685		$	35,657

(a)

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

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 3,15, “Net Sales.”

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Note 15. Net Sales

Disaggregation of Net Sales

The following tables provide disaggregation of net sales information for the three months and six months ended June 30, 2019 and 2018 (in thousands):

Three months ended June 30, 2019 (a)	Engine Management		Temperature Control		Other (b)			Total
Geographic Area:
United States	$	194,127	$	80,655	$	—		$	274,782
Canada		6,736		3,311		2,724			12,771
Mexico		4,879		208		—			5,087
Europe		3,577		117		—			3,694
Other foreign		8,723		115		—			8,838
Total	$	218,042	$	84,406	$	2,724		$	305,172
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	181,831	$	—	$	1,492		$	183,323
Wire and cable		36,211		—		(68	)		36,143
Compressors		—		52,493		792			53,285
Other climate control parts		—		31,913		508			32,421
Total	$	218,042	$	84,406	$	2,724		$	305,172
Major Sales Channel:
Aftermarket	$	177,154	$	75,331	$	2,724		$	255,209
OE/OES		35,966		8,641		—			44,607
Export		4,922		434		—			5,356
Total	$	218,042	$	84,406	$	2,724		$	305,172

Three months ended June 30, 2018 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	181,845	$	75,991	$	—	$	257,836
Canada		7,288		3,792		2,837		13,917
Mexico		4,894		173		—		5,067
Europe		3,646		147		—		3,793
Other foreign		5,756		267		—		6,023
Total	$	203,429	$	80,370	$	2,837	$	286,636
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	162,462	$	—	$	1,191	$	163,653
Wire and cable		40,967		—		158		41,125
Compressors		—		46,940		818		47,758
Other climate control parts		—		33,430		670		34,100
Total	$	203,429	$	80,370	$	2,837	$	286,636
Major Sales Channel:
Aftermarket	$	171,864	$	70,679	$	2,837	$	245,380
OE/OES		25,801		9,296		—		35,097
Export		5,764		395		—		6,159
Total	$	203,429	$	80,370	$	2,837	$	286,636

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Six months ended June 30, 2019 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	382,021	$	145,506	$	—	$	527,527
Canada		13,802		6,773		4,377		24,952
Mexico		9,367		363		—		9,730
Europe		6,674		274		—		6,948
Other foreign		19,367		414		—		19,781
Total	$	431,231	$	153,330	$	4,377	$	588,938
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	357,892	$	—	$	2,883	$	360,775
Wire and cable		73,339		—		12		73,351
Compressors		—		92,304		532		92,836
Other climate control parts		—		61,026		950		61,976
Total	$	431,231	$	153,330	$	4,377	$	588,938
Major Sales Channel:
Aftermarket	$	355,693	$	135,872	$	4,377	$	495,942
OE/OES		65,106		16,516		—		81,622
Export		10,432		942		—		11,374
Total	$	431,231	$	153,330	$	4,377	$	588,938

Six months ended June 30, 2018 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	358,762	$	132,192	$	—	$	490,954
Canada		15,092		7,093		4,944		27,129
Mexico		9,233		385		—		9,618
Europe		7,126		311		—		7,437
Other foreign		12,704		620		—		13,324
Total	$	402,917	$	140,601	$	4,944	$	548,462
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	323,539	$	—	$	2,853	$	326,392
Wire and cable		79,378		—		349		79,727
Compressors		—		76,838		762		77,600
Other climate control parts		—		63,763		980		64,743
Total	$	402,917	$	140,601	$	4,944	$	548,462
Major Sales Channel:
Aftermarket	$	341,174	$	122,309	$	4,944	$	468,427
OE/OES		50,857		17,397		—		68,254
Export		10,886		895		—		11,781
Total	$	402,917	$	140,601	$	4,944	$	548,462

(a)

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

(b)

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. Intersegment wire and cable sales for the three months ended June 30, 2019 exceeded third party sales from our Canadian business unit.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Geographic Area

Major Product Group

The Engine Management segment of the Company principally generates revenue from the sale of automotive engine replacement parts including ignition, emission control, fuel and safety related system products, 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

~~Note 16.~~

Note 16. Commitments and Contingencies

Index

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties. Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, changes in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our receivables factoring arrangements, such as changes in terms, termination of contracts and/or the impact of rising interest rates; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs, including procurement costs resulting from higher tariffs, that cannot be recouped in product pricing; the performance of the aftermarket, heavy duty, industrial equipment and original equipment markets; changes in the product mix and distribution channel mix; economic and market conditions; successful integration of acquired businesses; our ability to achieve benefits from our cost savings initiatives; product liability and environmental matters (including, without limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties); as well as other risks and uncertainties, such as those described under Risk Factors, Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC. Forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, historical information should not be considered as an indicator of future performance. The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report.

~~Business~~ Overview

We are a leading independent manufacturer and distributor of premium replacement parts for the engine management and temperature control systems of motor vehicles in the automotive aftermarket industry with a complementary focus on heavy duty, industrial equipment and the original equipment market.

We are organized into two ~~major~~ operating ~~segments, each of which~~segments. Each segment focuses on ~~specific lines~~providing our customers with full-line coverage of ~~replacement parts. Our Engine Management Segment manufactures~~premium engine management or temperature control products, and ~~remanufactures ignition~~a full suite of complimentary services that are tailored to our customers’ business needs and ~~emission parts, ignition wires, battery cables, fuel system parts and sensors~~driving end-user demand for vehicle systems. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories, and windshield washer system parts.

our products. We sell our products primarily to ~~large retail chains,~~automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Mexico, Europe, Asia and other Latin ~~America,~~American countries.

Our Culture

Our Company was founded on the values of ethics, integrity, common decency and ~~Europe. Our customers consist~~respect for others. These values are embodied in our Code of ~~many~~Ethics, which has been adopted by the Board of Directors of the ~~leading auto parts retail chains, such~~Company to serve as ~~NAPA Auto Parts (National Automotive Parts Association, Inc.), Advance Auto Parts, Inc./CARQUEST Auto Parts, AutoZone, Inc., O’Reilly Automotive, Inc., Canadian Tire Corporation Limited~~a statement of principles to guide our decision-making and ~~The Pep Boys Manny, Moe & Jack,~~reinforce our commitment to these values in all aspects of our business. We believe that our commitment to our Company, our employees and the communities within which we operate has led to high employee satisfaction and low employee turnover, and our commitment to our customers, suppliers and business parties has resulted in high customer satisfaction, as ~~well as national program distribution groups, such as Auto Value~~evidenced by the customer awards that we routinely win, and ~~All Pro/Bumper~~decades-long customer relationships. We also seek ways to ~~Bumper (Aftermarket Auto Parts Alliance, Inc.), Automotive Distribution Network LLC, The National Pronto Association (“Pronto”), Federated Auto Parts Distributors, Inc. (“Federated”), Pronto~~positively contribute to our local communities by operating our facilities with conservation in mind, holding charitable drives, and Federated’s affiliate, the Automotive Parts Services Group or The Group, Auto Plus and specialty market distributors. We distribute parts under our own brand names, such as Standard®, Blue Streak®, BWD®, Select®, Intermotor®, GP Sorensen®, TechSmart®, Tech Expert®, OEM®, LockSmart®, Four Seasons®, EVERCO®, ACi® and Hayden® and through co-labels and private labels, such as CARQUEST®, Duralast®, Duralast Gold®, Import Direct®, Master Pro®, Omni-Spark®, Ultima Select®, Murray®, NAPA® Echlin®, NAPA Proformer™ Mileage Plus®, NAPA Temp Products™, NAPA® Belden®, Cold Power®, Driveworks^TM ~~and ToughOne.~~^TM

being a good neighbor.

Index

Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by being the best-in-class, full-line, full-service supplier of premium products to the engine management and temperature control markets. Our management places significant emphasis on improving our financial performance by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates. We intend to continue to improve our operating efficiency, customer satisfaction and cost position by increasing cost‑effective vertical integration in key product lines through internal development and improving our cost effectiveness and competitive responsiveness to better serve our customer base, including sourcing certain products from low cost regions such as those in Asia without compromising product quality.Seasonality

~~Seasonality.~~Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business. In addition to this seasonality, the demand for our ~~Temperature Control~~temperature control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories. For example, a ~~cool~~warm summer, as we experienced in 2018, may increase the demand for our temperature control products, while a mild summer, as we experienced in 2017, may lessen ~~the demand for our Temperature Control products, while a warm summer, as we experienced in 2016, may increase~~ such demand. As a result of this seasonality and variability in demand of our ~~Temperature Control~~temperature control products, our working capital requirements typically peak near the end of the second quarter, as the inventory ~~build‑up~~build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility.

Inventory ~~Management.~~ Management

We face inventory management issues as a result of overstock returns. We permit our customers to return new, undamaged products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories. In addition, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns. We accrue for overstock returns as a percentage of sales after giving consideration to recent returns history.

Discounts, Allowances, and ~~Incentives.~~ Incentives

We offer a variety of usual customer discounts, allowances and incentives. First, we offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice. Second, we offer pricing discounts based on volume purchased from us and participation in our cost reduction initiatives. These discounts are principally in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale. For those customers that choose to receive a payment on a quarterly basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly. Finally, rebates and discounts are provided to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided. Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. We account for these discounts and allowances as a reduction to revenues, and record them when sales are recorded.

~~Tax Cuts and Jobs Act~~Impact of Changes in U.S. Trade Policy

~~In December 2017, the~~Changes in U.S. ~~enacted the Tax Cuts and Jobs Act (the “Act”), which included a broad range~~trade policy, particularly as it relates to China, as with much of ~~tax reform affecting businesses, including the reduction of the federal corporate income tax rate from 35% to 21%, changes~~our industry, have resulted in the ~~deductibility~~assessment of ~~certain business expenses, and~~increased tariffs on goods that we import into the ~~manner in which international operations are taxed~~United States. Although our operating results in the ~~U.S. Reflecting~~first six months of 2019 have been slightly impacted by the timing of Chinese sourced products, we have taken, and continue to take, several actions to mitigate the impact of the ~~Act~~increased tariffs, including but not limited to, price increases to our customers. We do not anticipate that the increased tariffs will have a significant impact on our ~~income tax provision,~~future operating results. Although we are confident that we will be able to pass along the ~~effective income tax rate for~~impact of the ~~three months and six months ended June 30, 2018 was 25.5% and 25.7%, respectively, as compared~~increased tariffs to ~~an effective income tax rate of 38.5% and 37.7% for~~our customers, there can be no assurances that we will be able to pass on the ~~comparable periods of 2017, respectively.~~

entire increased costs imposed by the tariffs.

Index

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. tax. In accordance with the guidelines provided in the Act, as of December 31, 2017 we have aggregated the estimated foreign earnings and profits, 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. The net repatriation tax of $1.4 million was recorded in the fourth quarter of 2017. During the second quarter of 2018, we updated our estimate of the gross repatriation tax to $2.5 million, which was paid in full to the U.S. Treasury and which has been reflected in the second quarter 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.

Interim Results of Operations:

Comparison of the Three Months Ended June 30, ~~2018~~2019 to the Three Months Ended June 30, ~~2017~~2018

Sales. Consolidated net sales for the three months ended June 30, ~~2018~~2019 were ~~$286.6~~$305.2 million, ~~a decrease~~an increase of ~~$26.1~~$18.6 million, or ~~8.3%~~6.5%, compared to ~~$312.7~~$286.6 million in the same period of ~~2017.~~2018, with the majority of our net sales to customers located in the United States. Consolidated net sales ~~decreased~~increased in both our Engine Management and Temperature Control Segments.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the three months ended June 30, ~~2018~~2019 and ~~2017~~2018 (in thousands):

	Three Months Ended June 30,				Three Months Ended June 30,
	2018		2017		2019		2018
Engine Management:
Ignition, Emission and Fuel System Parts	$	162,462	$	178,105
Ignition, Emission Control, Fuel and Safety Related System Products					$	181,831	$	162,462
Wire and Cable		40,967		45,244		36,211		40,967
Total Engine Management		203,429		223,349		218,042		203,429

Temperature Control:
Compressors		46,940		49,644		52,493		46,940
Other Climate Control Parts		33,430		37,747		31,913		33,430
Total Temperature Control		80,370		87,391		84,406		80,370

All Other		2,837		1,989		2,724		2,837

Total	$	286,636	$	312,729	$	305,172	$	286,636

Engine Management’s net sales ~~decreased $19.9~~increased $14.6 million, or ~~8.9%~~7.2%, to ~~$203.4~~$218 million for the three months ended June 30, ~~2018.~~2019. Net sales in ~~the~~ ignition, ~~emissions~~emission control, fuel and ~~fuel systems parts product group~~safety related system products for the three months ended June 30, ~~2018~~2019 were ~~$162.5~~$181.8 million, ~~a decrease~~an increase of ~~$15.6~~$19.3 million, or ~~8.8%~~11.9%, compared to ~~$178.1~~$162.5 million in the same period of ~~2017.~~2018. Net sales in the wire and cable product group for the three months ended June 30, ~~2018~~2019 were ~~$41~~$36.2 million, a decrease of ~~$4.3~~$4.8 million, or ~~9.5%~~11.7%, compared to ~~$45.2~~$41 million in the three months ended June 30, ~~2017.~~2018. Engine Management’s ~~decrease~~increase in net sales for the second quarter of ~~2018~~2019 compared to the same period in ~~2017~~2018 primarily reflects the impact of ~~a strong second quarter in 2017 driven by pipeline orders~~incremental sales from our April 2019 acquisition of certain ~~customers, who were in~~assets and liabilities of the ~~process~~Pollak business of ~~increasing the breadth~~Stoneridge, Inc., as well as general price increases and ~~depth of their inventories. In addition,~~tariff costs passed on to customers. Engine Management’s year-over-year ~~decrease~~increase in net sales ~~reflects~~was offset, in part, by the ~~impact of the gradual~~general decline in our wire and cable business ~~which is an older technology used on fewer cars, and~~ due to its product lifecycle. Incremental sales from our acquisition of the ~~product lifecycle will continue~~Pollak business of $10.7 million were included in the net sales of the ignition, emission control, fuel and safety related system products market from the date of acquisition through June 30, 2019. Compared to ~~reduce overall~~the second quarter of 2018, excluding the incremental net sales from the acquisition, net sales in the ignition, emission control, fuel and safety related products market increased $8.6 million, or 5.3%, and Engine Management net sales. Excluding the impact of the prior year pipeline orders and the decline in the wire and cable business, our Engine Management business experienced increases in the low single digits, in line with our long term forecast for the division. Furthermore, our customers are reporting increases in Engine Management sell-through, showing sequential improvement over the last few quarters.sales increased $3.9 million, or 1.9%.

~~Index~~

Temperature Control’s net sales ~~decreased $7~~increased $4 million, or 8%5%, to ~~$80.4~~$84.4 million for the three months ended June 30, ~~2018.~~2019. Net sales in the compressors product group for the three months ended June 30, ~~2018~~2019 were ~~$46.9~~$52.5 million, ~~a decrease~~an increase of ~~$2.7~~$5.6 million, or ~~5.4%~~11.8%, compared to ~~$49.6~~$46.9 million in the same period of ~~2017.~~2018. Net sales in the other climate control parts product group for the three months ended June 30, ~~2018~~2019 were ~~$33.4~~$31.9 million, a decrease of ~~$4.3~~$1.5 million, or ~~11.4%~~4.5%, compared to ~~$37.7~~$33.4 million in the three months ended June 30, ~~2017.~~2018. Temperature Control’s ~~decrease~~increase in net sales for the second quarter of ~~2018~~2019 compared to the same period in ~~2017 reflects~~2018 is primarily due to strong pre-season orders as customers rebuild their inventory levels after a very strong 2018 selling season, and to a lesser extent due to incremental pricing for tariff costs passed on to customers. The decline in net sales in the other climate control parts product group results from the impact of the introduction of air conditioner repair kits, which are sold as a ~~mild 2017 summer leaving~~complete repair kit inclusive of the compressor and other climate control parts. These air conditioner repair kits have been well received and are classified as sales under the compressor product group, resulting in a shift in reported sales from the other climate control parts product group into the compressor product group. Demand for our customers with higher than normal inventory levels going into 2018, and a cool early spring. As such, 2018 pre-season orders were significantly lower than 2017. However, in mid-May, the weather finally turned warm, and we began to see a large influx of orders in June. A portion of these were shipped in June, with the balance carrying over into July. Due to the continuing warm weather, our customers are experiencing substantial POS increases over 2017. As such, incoming business remains robust, and we anticipate healthy Temperature Control ~~sales in the third quarter.~~products may vary significantly with summer weather conditions and customer inventory levels.

Index

Gross Margins. Gross margins, as a percentage of consolidated net sales, ~~decreased~~increased to 29.1% in the second quarter of 2019, compared to 28.4% in the second quarter of ~~2018, compared to 29% in the second quarter of 2017.~~2018. The following table summarizes gross margins by segment for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively (in thousands):

Three Months Ended June 30,	Engine Management			Temperature Control			Other		Total			Engine Management			Temperature Control			Other		Total
2019
Net sales												$	218,042		$	84,406		$	2,724	$	305,172
Gross margins													63,780			22,551			2,574		88,905
Gross margin percentage													29.3	%		26.7	%		—		29.1	%

2018
Net sales	$	203,429		$	80,370		$	2,837	$	286,636		$	203,429		$	80,370		$	2,837	$	286,636
Gross margins		57,782			20,800			2,707		81,289			57,782			20,800			2,707		81,289
Gross margin percentage		28.4	%		25.9	%		—		28.4	%		28.4	%		25.9	%		—		28.4	%

2017
Net sales	$	223,349		$	87,391		$	1,989	$	312,729
Gross margins		65,599			23,111			1,956		90,666
Gross margin percentage		29.4	%		26.4	%		—		29	%

Compared to the second quarter of ~~2017,~~2018, gross margins at Engine Management ~~decreased 1~~increased 0.9 percentage points from ~~29.4%~~28.4% to ~~28.4%~~29.3%, while gross margins at Temperature Control ~~decreased 0.5~~increased 0.8 percentage points from ~~26.4%~~25.9% to ~~25.9%~~26.7%. The gross margin percentage ~~decrease~~increase in Engine Management compared to the prior year reflects ~~a year-over-year increase~~our return to historical productivity in ~~inefficiencies and redundant costs incurred during~~ our ~~various planned production moves,~~Reynosa, Mexico wire plant after the lengthy integration of General Cable, as well as ~~a decline in production volumes.~~certain pricing actions, which more than offset the negative impact of tariff costs passed on to customers without any markup. The gross margin percentage ~~decrease~~increase in Temperature Control compared to the prior year resulted primarily from ~~lower~~the favorable impact of higher production volumes ~~following a mild 2017 summer season.~~offset, in part, by tariffs passed on to customers without any markup.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) were $60.5 million, or 19.8% of consolidated net sales, in the second quarter of 2019, as compared to $57.8 million, or 20.1% of consolidated net sales, in the second quarter of ~~2018, as compared to $60.3~~2018. The $2.7 million ~~or 19.3% of consolidated net sales, in the second quarter of 2017. The $2.5 million decrease~~increase in SG&A expenses as compared to the second quarter of ~~2017~~2018 is principally due to ~~lower~~(1) incremental expenses of $1.5 million from our acquisition of certain assets and liabilities of the Pollak business of Stoneridge. Inc., including amortization of intangible assets acquired; and (2) higher selling and marketing expenses, and higher costs incurred in our accounts receivable factoring program, all of which are associated with ~~our decline in~~higher sales ~~volumes.~~volumes, along with slightly higher other general and administrative costs.

Restructuring and Integration Expenses. Restructuring and integration expenses for the second quarter of ~~2018~~2019 were ~~$0.2~~$0.6 million compared to restructuring and integration expenses of ~~$1.2~~$0.2 million for the second quarter of ~~2017. The $1~~2018. Restructuring and integration expenses incurred in the second quarter of 2019 of $0.6 million ~~year-over-year decrease~~related to the relocation of certain inventory, machinery, and equipment acquired in our April 2019 acquisition of the Pollak business of Stoneridge, Inc. to our existing facilities in Disputanta, Virginia, Reynosa, Mexico and Independence, Kansas; while the restructuring and integration expenses ~~reflects the impact of lower expenses~~ incurred in ~~connection with~~the second quarter of 2018 of $0.2 million related to the plant rationalization program that commenced in February 2016, the Orlando plant rationalization program that commenced in January 2017, and the wire and cable relocation program announced in October 2016, all of which were winding down during 2018 and substantially completed as of December 31, 2018.

Other Income (Expense), Net. Other income, net was $3,000 in the second quarter of 2019, compared to $42,000 in the second quarter of 2018. Other Income, net in the second quarter of 2019 and 2018 included gains and losses on disposal of property, plant and equipment, and sublease rental income in 2018 of a portion of our facility in Canada.

Index

Operating Income. Operating income increased to $27.7 million in the second quarter of 2019, compared to $23.4 million in the second quarter of 2018. The year-over-year increase in operating income of $4.3 million is the result of impact of higher consolidated net sales and higher gross margins as a percentage of consolidated net sales offset, in part, by higher restructuring and integration expenses and higher SG&A expenses.

Other Non-Operating Income, Net. Other non-operating income, net was $1.4 million in the second quarter of 2019, compared to $0.5 million in the second quarter of 2018. The year-over-year increase in other non-operating income, net results primarily from the increase in year-over-year equity income from our joint ventures offset, in part, by the unfavorable impact of changes in foreign currency exchange rates.

Interest Expense. Interest expense increased to $1.7 million in the second quarter of 2019, compared to $1.3 million in the second quarter of 2018. The year-over-year increase in interest expense reflects the impact of both higher average outstanding borrowings in 2019 when compared to 2018, and higher year-over-year average interest rates on our revolving credit facility.

Income Tax Provision. The income tax provision in the second quarter of 2019 was $6.9 million at an effective tax rate of 25% compared to $5.8 million at an effective tax rate of 25.5% for the same period in 2018. The lower effective tax rate in the second quarter of 2019 compared to the second quarter of 2018 results primarily from the reduced state and local effective tax rate, and a change in the U.S. and foreign mix of pre-tax income.

Loss from Discontinued Operations. During the second quarter of 2019 and 2018, the loss from discontinued operations, net of tax was $1.1 million and $0.9 million, respectively. The loss from discontinued operations, net of tax reflects legal related expenses associated with our asbestos liability, and interest accrued in the second quarter of 2019 related to the November 2018 verdict in an asbestos case in California which we are currently appealing. As discussed more fully in Note 16, “Commitments and Contingencies” in the notes to our consolidated financial statements (unaudited), we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

Comparison of the Six Months Ended June 30, 2019 to the Six Months Ended June 30, 2018

Sales. Consolidated net sales for the six months ended June 30, 2019 were $588.9 million, an increase of $40.4 million, or 7.4%, compared to $548.5 million in the same period of 2018, with the majority of our net sales to customers in the United States. Consolidated net sales increased in both our Engine Management and Temperature Control Segments.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the six months ended June 30, 2019 and 2018 (in thousands):

	Six Months Ended June 30,
	2019		2018
Engine Management:
Ignition, Emission Control, Fuel and Safety Related System Products	$	357,892	$	323,539
Wire and Cable		73,339		79,378
Total Engine Management		431,231		402,917
Temperature Control:
Compressors		92,304		76,838
Other Climate Control Parts		61,026		63,763
Total Temperature Control		153,330		140,601

All Other		4,377		4,944

Total	$	588,938	$	548,462

Index

Engine Management’s net sales increased $28.3 million, or 7%, to $431.2 million for the first six months of 2019. Net sales in ignition, emission control, fuel and safety related system products for the six months ended June 30, 2019 were $357.9 million, an increase of $34.4 million, or 10.6%, compared to $323.5 million in the same period of 2018. Net sales in the wire and cable product group for the six months ended June 30, 2019 were $73.3 million, a decrease of $6.1 million, or 7.6%, compared to $79.4 million in the six months ended June 30, 2018. Engine Management’s increase in net sales for the first six months of 2019 compared to the same period in 2018 primarily reflects the impact of incremental sales from our April 2019 acquisition of certain assets and liabilities of the Pollak business of Stoneridge, Inc., as well as pipeline orders from certain customers in the first quarter of 2019, general price increases and tariff costs passed on to customers. Engine Management’s year-over-year increase in net sales was offset, in part, by the general decline in our wire and cable business due to its product lifecycle. Incremental sales from our acquisition of the Pollak business of $10.7 million were included in the net sales of the ignition, emission control, fuel and safety related system products market from the date of acquisition through June 30, 2019. Compared to the first six months of 2018, excluding the incremental net sales from the acquisition, net sales in the ignition, emission control, fuel and safety related system products market increased $23.7 million, or 7.3%, and Engine Management net sales increased $17.6 million, or 4.4%. The 4.4% increase in Engine Management net sales reflects the impact of pipeline orders from certain customers in the first quarter of 2019, general price increases, tariff costs passed on to customers, and low single digit organic growth.

Temperature Control’s net sales increased $12.7 million, or 9%, to $153.3 million for the first six months of 2019. Net sales in the compressors product group for the six months ended June 30, 2019 were $92.3 million, an increase of $15.5 million, or 20.1%, compared to $76.8 million in the same period of 2018. Net sales in the other climate control parts product group for the six months ended June 30, 2019 were $61 million, a decrease of $2.8 million, or 4.3%, compared to $63.8 million in the six months ended June 30, 2018. Temperature Control’s increase in net sales for the first six months of 2019 compared to the same period in 2018 is primarily due to strong pre-season orders as customers rebuild their inventory levels after a very strong 2018 selling season, and to a lesser extent due to incremental pricing for tariff costs passed on to customers. The decline in net sales in the other climate control parts product group results from the impact of the introduction of air conditioner repair kits, which are sold as a complete repair kit inclusive of the compressor and other climate control parts. These air conditioner repair kits have been well received and are classified as sales under the compressor product group, resulting in a shift in reported sales from the other climate control parts product group into the compressor product group. Demand for our Temperature Control products may vary significantly with summer weather conditions and customer inventory levels.

Gross Margins. Gross margins, as a percentage of consolidated net sales, increased to 28.3% in the first six months of 2019, compared to 28.1% during the same period in 2018. The following table summarizes gross margins by segment for the six months ended June 30, 2019 and 2018, respectively (in thousands):

Six Months Ended June 30,	Engine Management			Temperature Control			Other		Total
2019
Net sales	$	431,231		$	153,330		$	4,377	$	588,938
Gross margins		123,473			38,742			4,653		166,868
Gross margin percentage		28.6	%		25.3	%		—		28.3	%

2018
Net sales	$	402,917		$	140,601		$	4,944	$	548,462
Gross margins		114,252			34,467			5,159		153,878
Gross margin percentage		28.4	%		24.5	%		—		28.1	%

Compared to the first six months of 2018, gross margins at Engine Management increased 0.2 percentage points from 28.4% to 28.6%, while gross margins at Temperature Control increased 0.8 percentage points from 24.5% to 25.3%. The gross margin percentage increase in Engine Management compared to the prior year reflects our return to historical productivity in our Reynosa, Mexico wire plant after the lengthy integration of General Cable, as well as certain pricing actions, which more than offset the negative impact of tariff costs passed on to customers without any markup. The gross margin percentage increase in Temperature Control compared to the prior year was attributable primarily to favorable production variances carried forward from 2018 as compared to the prior year’s unfavorable deferred production variances carried forward from 2017 offset, in part, by tariffs passed on to customers without any markup.

Index

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) increased to $120.5 million, or 20.5% of consolidated net sales, in the first six months of 2019, as compared to $115.5 million, or 21.1% of consolidated net sales in the first six months of 2018. The $5 million increase in SG&A expenses as compared to the first six months of 2018 is principally due to (1) incremental expenses of $1.5 million from our acquisition of certain assets and liabilities of the Pollak business of Stoneridge. Inc., including amortization of intangible assets acquired; and (2) higher selling, marketing and distribution expenses, and higher costs incurred in our accounts receivable factoring program, all of which are associated with higher sales volumes, along with slightly higher other general and administrative costs.

Restructuring and Integration Expenses. Restructuring and integration expenses for the six months ended June 30, 2019 were $0.6 million compared to restructuring and integration expenses of $3.1 million in the same period of 2018. Restructuring and integration expenses incurred in the first six months of 2019 of $0.6 million related to the relocation of certain inventory, machinery, and equipment acquired in our April 2019 acquisition of the Pollak business of Stoneridge, Inc. to our existing facilities in Disputanta, Virginia, Reynosa, Mexico and Independence, Kansas; while the restructuring and integration expenses incurred in the first six months of 2018 of $3.1 million related to the plant rationalization program that commenced in February 2016, the Orlando plant rationalization program that commenced in January 2017, and the wire and cable relocation program announced in October 2016, all of which were substantially completed as of ~~June 30,~~December 31, 2018.

~~Index~~

Other Income (Expense), Net. Other expense, net was $3,000 in the first six months of 2019, compared to other income, net ~~was $42,000 in the second quarter~~ of ~~2018, compared to~~ $0.3 million in the ~~second quarter~~first six months of ~~2017.~~2018. During the ~~second quarter~~first six months of ~~2017,~~2018, we recognized a deferred gain of ~~$0.3~~$0.2 million related to the sale-leaseback of our Long Island City, New York facility. The recognition of the deferred gain related to the sale-leaseback of our Long Island City, New York facility ended in the first quarter of 2018 upon the termination of the initial 10-year lease term for the facility.

Operating Income. Operating income ~~decreased to $23.4~~was $45.7 million in the ~~second quarter~~first six months of ~~2018,~~2019, compared to ~~$29.4~~$35.7 million for the same period in ~~the second quarter of 2017.~~2018. The year-over-year ~~decrease~~increase in operating income of $6$10 million is the result of ~~the~~ impact of ~~lower~~higher consolidated net sales, ~~and lower~~higher gross margins as a percentage of consolidated net sales, ~~which more than offset the impact of lower SG&A expenses~~ and lower restructuring and integration expenses offset, in part, by higher SG&A expenses.

Other Non-Operating Income, Net. Other non-operating income, net was ~~$0.5~~$2.1 million in the ~~second quarter~~first six months of ~~2018,~~2019, compared to $1other non-operating income, net of $0.4 million in the ~~second quarter~~first six months of ~~2017.~~2018. The year-over-year ~~decline~~increase in other non-operating income, net ~~resulted~~results primarily from ~~lower~~the increase in year-over-year equity income from our joint ventures offset, in part, by the unfavorable impact of changes in foreign currency exchange rates, and the year-over-year decline in the actuarial net gain related to our postretirement medical benefit plans. Our postretirement medical benefit plans to substantially all eligible U.S. and Canadian employees terminated on December 31, 2016.rates.

Interest Expense. Interest expense increased to ~~$1.3~~$2.8 million in the ~~second quarter~~first six months of ~~2018,~~2019, compared to ~~$0.7~~$1.9 million for the same period in ~~the second quarter of 2017.~~2018. The year-over-year increase in interest expense reflects the impact of both higher average outstanding borrowings ~~in 2018~~during the first six months of 2019 when compared to ~~2017,~~the same period in 2018, and the higher year-over-year average interest rates on our revolving credit facility.

Income Tax Provision. The income tax provision infor the ~~second quarter of 2018~~six months ended June 30, 2019 was ~~$5.8~~$11.3 million at an effective tax rate of ~~25.5%~~25.1%, compared to ~~$11.4~~$8.8 million at an effective tax rate of ~~38.5%~~25.7% for the same period in ~~2017.~~2018. The lower effective tax rate in the ~~second quarter~~first six months of ~~2018~~2019 compared to the ~~second quarter~~first six months of ~~2017 reflects~~2018 results primarily from the ~~impact of the Tax Cuts~~reduced state and ~~Jobs Act enacted~~local effective tax rate, and a change in the U.S. ~~in December 2017, which included a broad range~~and foreign mix 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.pre-tax income.

Index

Loss from Discontinued Operations. ~~Loss~~ During the first six months of 2019 and 2018, the loss from discontinued operations, net of tax was $2 million and $1.5 million, respectively. The loss from discontinued operations, net of tax reflects legal related expenses associated with our ~~asbestos-related liability. We recorded $0.9 million~~asbestos liability, and ~~$0.5 million as a loss from discontinued operations for~~interest accrued in the ~~second quarter~~first six months of 2019 related to the November 2018 ~~and 2017, respectively.~~verdict in an asbestos case in California which we are currently appealing. As discussed more fully in Note 16, “Commitments and Contingencies” in the notes to our consolidated financial statements (unaudited), we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

~~Index~~

~~Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017~~

~~Sales~~. Consolidated net sales for the six months ended June 30, 2018 were $548.5 million, a decrease of $46.6 million, or 7.8%, compared to $595.1 million in the same period of 2017. Consolidated net sales decreased in both our Engine Management and Temperature Control Segments.

~~The following table summarizes consolidated net sales by segment and by major product group within each segment for the six months ended June 30, 2018 and 2017 (in thousands):~~

Six Months Ended June 30,
2018 2017
Engine Management:
Ignition, Emission and Fuel System Parts $ 323,539 $ 343,258
Wire and Cable 79,378 91,405
Total Engine Management 402,917 434,663

Temperature Control:
Compressors 76,838 87,545
Other Climate Control Parts 63,763 70,136
Total Temperature Control 140,601 157,681

All Other 4,944 2,763

Total $ 548,462 $ 595,107

Engine Management’s net sales decreased $31.7 million, or 7.3%, to $402.9 million for the first six months of 2018. Net sales in the ignition, emissions and fuel systems parts product group for the six months ended June 30, 2018 were $323.5 million, a decrease of $19.8 million, or 5.8%, compared to $343.3 million in the same period of 2017. Net sales in the wire and cable product group for the six months ended June 30, 2018 were $79.4 million, a decrease of $12 million, or 13.2%, compared to $91.4 million in the first six months of 2017. Engine Management’s decrease in net sales for the first six months of 2018 compared to the same period in 2017 reflects the impact of the strong first six months of 2017 driven by pipeline orders from certain customers, who were in the process of increasing the breadth and depth of their inventories. In addition, Engine Management’s year-over-year decrease in net sales reflects the impact of the gradual decline in our wire and cable business, which is an older technology used on fewer cars, and due to the product lifecycle will continue to reduce overall Engine Management net sales. Excluding the impact of the prior year pipeline orders and the decline in the wire and cable business, our Engine Management business experienced increases in the low single digits, in line with our long term forecast for the division. Furthermore, our customers are reporting increases in Engine Management sell-through, showing sequential improvement over the last few quarters.

Temperature Control’s net sales decreased $17.1 million, or 10.8%, to $140.6 million for the first six months of 2018. Net sales in the compressors product group for the six months ended June 30, 2018 were $76.8 million, a decrease of $10.7 million, or 12.2%, compared to $87.5 million in the same period of 2017. Net sales in the other climate control parts product group for the six months ended June 30, 2018 were $63.8 million, a decrease of $6.3 million, or 9%, compared to $70.1 million in the first six months of 2017. Temperature Control’s decrease in net sales for the first six months of 2018 compared to the same period in 2017 reflects the impact of a mild 2017 summer leaving our customers with higher than normal inventory levels going into 2018, and a cool early spring. As such, 2018 pre-season orders were significantly lower than 2017. However, in mid-May, the weather finally turned warm, and we began to see a large influx of orders in June. A portion of these were shipped in June, with the balance carrying over into July. Due to the continuing warm weather, our customers are experiencing substantial POS increases over 2017. As such, incoming business remains robust, and we anticipate healthy Temperature Control sales in the third quarter.

~~Index~~

~~Gross Margins.~~ Gross margins, as a percentage of consolidated net sales, decreased to 28.1% in the first six months of 2018, compared to 29.4% during the same period in 2017. The following table summarizes gross margins by segment for the six months ended June 30, 2018 and 2017, respectively (in thousands):

Six Months Ended
June 30,

Engine
Management

Temperature
Control

Other
Total
2018

Net sales $ 402,917 $ 140,601 $ 4,944 $ 548,462
Gross margins 114,252 34,467 5,159 153,878
Gross margin percentage 28.4 % 24.5 % — 28.1 %

2017

Net sales $ 434,663 $ 157,681 $ 2,763 $ 595,107
Gross margins 129,723 40,818 4,235 174,776
Gross margin percentage 29.8 % 25.9 % — 29.4 %

Compared to the first six months of 2017, gross margins at Engine Management decreased 1.4 percentage points from 29.8% to 28.4%, and gross margins at Temperature Control decreased 1.4 percentage points from 25.9% to 24.5%. The gross margin percentage decrease in Engine Management compared to the prior year reflects a year-over-year increase in inefficiencies and redundant costs incurred during our various planned production moves, as well as the lower production volumes. The gross margin percentage decrease in Temperature Control compared to the prior year resulted primarily from lower production volumes following a mild 2017 summer season.

~~Selling, General and Administrative Expenses.~~ Selling, general and administrative expenses (“SG&A”) decreased to $115.5 million, or 21.1% of consolidated net sales, in the six months ended June 30, 2018, as compared to $117.8 million, or 19.8% of consolidated net sales, in the same period of 2017. The $2.3 million decrease in SG&A expenses as compared to the first six months of 2017 is principally due to lower selling and marketing expenses which are associated with our decline in sales volumes.

~~Restructuring and Integration Expenses.~~ Restructuring and integration expenses for the six months ended June 30, 2018 were $3.1 million compared to restructuring and integration expenses of $2.8 million in the same period of 2017. The year-over-year increase in restructuring and integration expenses in the first six months of 2018 compared to the first six months of 2017 reflects the impact of higher expenses incurred in wire and cable relocation program announced in October 2016 and the Orlando plant rationalization program that commenced in January 2017, which more than offset the lower expenses incurred in the plant rationalization program that commenced in February 2016. All of the restructuring and integration programs were substantially completed as of June 30, 2018.

~~Other Income, Net.~~ Other income, net was $0.3 million and $0.6 million in the six months ended June 30, 2018 and 2017, respectively. During 2018 and 2017, we recognized $0.2 million and $0.5 million, respectively, of deferred gain related to the sale-leaseback of our Long Island City, New York facility. The recognition of the deferred gain related to the sale-leaseback of our Long Island City, New York facility ended in the first quarter of 2018 upon the termination of the initial 10-year lease term for the facility.

~~Operating Income.~~ Operating income was $35.7 million in the first six months of 2018, compared to $54.9 million for the same period in 2017. The year-over-year decrease in operating income of $19.2 million is the result of lower consolidated net sales, lower gross margins as a percentage of consolidated net sales, slightly higher restructuring and integration expenses, which more than offset the impact of lower SG&A expenses.

~~Other Non-Operating Income, Net.~~ Other non-operating income, net was $0.4 million in the first six months of 2018, compared to other non-operating income, net of $1.9 million in the first six months of 2017. The year-over-year decline in other non-operating income, net resulted primarily from lower year-over-year equity income from our joint ventures, the unfavorable impact of changes in foreign currency exchange rates, and the year-over-year decline in the actuarial net gain related to our postretirement medical benefit plans. Our postretirement medical benefit plans to substantially all eligible U.S. and Canadian employees terminated on December 31, 2016.

~~Index~~

~~Interest Expense.~~ Interest expense increased to $1.9 million in the first six months of 2018, compared to $1.2 million for the same period in 2017. The year-over-year increase reflects the impact of both higher average outstanding borrowings during the first six months of 2018 when compared to the same period in 2017, and the higher year-over-year average interest rates on our revolving credit facility.

~~Income Tax Provision~~. The income tax provision for the six months ended June 30, 2018 was $8.8 million at an effective tax rate of 25.7%, compared to $20.9 million at an effective tax rate of 37.7% for the same period in 2017. The lower effective tax rate in the first six months of 2018 compared to the first six months of 2017 reflects the impact of the Tax Cuts and Jobs Act enacted in the U.S. in December 2017, 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.

~~Loss from Discontinued Operations.~~ Loss from discontinued operations, net of tax, reflects legal expenses associated with our asbestos-related liability. We recorded $1.5 million and $1.1 million as a loss from discontinued operations for the six months ended June 30, 2018 and 2017, respectively. As discussed more fully in Note 16, “Commitments and Contingencies” in the notes to our consolidated financial statements (unaudited), we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

Restructuring and Integration Programs

~~As of June 30, 2018, the~~The plant rationalization program that commenced in February 2016, the wire and cable relocation program announced in October 2016, and the Orlando plant rationalization program that commenced in January 2017, ~~are~~were all substantially ~~completed.~~completed as of December 31, 2018. As a result of our recent acquisition of the Pollak business of Stoneridge, Inc., we expect to incur approximately $1.6 million of integration expenses related to the relocation of certain inventory, machinery, and equipment from Pollak’s distribution and manufacturing facilities to our existing facilities in Disputanta, Virginia, Reynosa, Mexico and Independence, Kansas.

For a detailed discussion on the restructuring and integration costs, see Note 5, “Restructuring and Integration Expenses,” of the notes to our consolidated financial statements (unaudited).

Liquidity and Capital Resources

Operating Activities. During the first six months of ~~2018,~~2019, cash used in operating activities was $19.5 million compared to cash provided by operating activities ~~was~~of $4.2 ~~million compared to cash used in operating activities of $6.8~~ million in the same period of ~~2017.~~2018. The year-over-year ~~increase~~decrease in operating cash flow is primarily the result of the ~~smaller~~larger year-over-year increase in inventories, the year-over-year decrease in accounts payable compared to the year-over-year increase in accounts ~~receivable, and~~payable in the ~~smaller year-over-year increase in inventories, offset, in part, by the decrease in net earnings,~~same period of 2018, and the larger year-over-year increase in prepaid expenses and other current assets offset, in part, by the increase in net earnings, the smaller year-over-year increase in accounts receivable, and the smaller year-over-year decrease in sundry payables and accrued ~~expenses compared the year-over-year increase in sundry payables and accrued expenses in the same period of 2017.~~expenses.

Net earnings during the first six months of ~~2018~~2019 were ~~$23.9~~$31.6 million compared to ~~$33.5~~$23.9 million in the first six months of ~~2017.~~2018. During the first six months of ~~2018,~~2019, (1) the increase in accounts receivable was ~~$34.5~~$26.6 million compared to the year-over-year increase in accounts receivable of ~~$53.1~~$34.5 million in ~~2017;~~2018; (2) the increase in inventories was ~~$6.7~~$19.7 million compared to the year-over-year increase in inventories of ~~$27~~$6.7 million in ~~2017;~~2018; (3) the increase in prepaid expenses and other current assets was $3$6.4 million compared to the year-over-year increase in prepaid expenses and other current assets of ~~$0.9~~$3 million in ~~2017;~~2018; (4) the decrease in accounts payable was $7 million compared to the year-over-year increase in accounts payable of $15.7 million in 2018; and ~~(4)~~(5) the decrease in sundry payables and accrued expenses was ~~$9.1~~$7.5 million compared to the year-over-year ~~increase~~decrease in sundry payables and accrued expenses of ~~$5.7~~$9.1 million in ~~2017.~~2018. The inventory increase during the first six months of 2019 reflects the impact of the inventory build-up of air conditioning products at our Temperature Control segment in anticipation of a strong 2019 summer season, as well as the inventory increases resulting from the Pollak acquisition; while the decrease in accounts payable during the first six months of 2019 results from the timing of the inventory purchases at our Temperature Control segment. We continue to actively manage our working capital to maximize our operating cash flow.

~~Index~~

Investing Activities. Cash used in investing activities was ~~$19.9~~$41.2 million in the first six months of ~~2018,~~2019, compared to ~~$8.8~~$19.9 million in the same period of ~~2017.~~2018. Investing activities during the first six months of 2019 consisted of (1) net cash proceeds of $4.8 million received in January 2019 from the December 2018 sale of our property in Grapevine, Texas; (2) the payment of $38.4 million for our acquisition of certain assets and liabilities of the Pollak business of Stoneridge, Inc.; and (3) capital expenditures of $7.6 million. Investing activities during the first six months of 2018 consisted of (1) the payment of the third and final contribution of $5.8 million for our November 2017 acquisition of a 50% interest in a joint venture with Foshan Guangdong Automotive Air Conditioning Co., Ltd., a China-based manufacturer of air conditioning compressors for the automotive aftermarket and the Chinese OE market; (2) the payment of initial installments of $2.8 million for our 15% increase in equity ownership in an joint venture with Gwo Yng Enterprise Co., Ltd., a China-based manufacturer of air conditioner accumulators, filter driers, hose assemblies and switches for the automotive aftermarket and OEM/OES markets; and (3) capital expenditures of $11.3 million. ~~Investing activities during the first six months of 2017 consisted of capital expenditures of $8.8 million.~~

Index

Financing Activities. Cash provided by financing activities was ~~$17.2~~$66.6 million in the first six months of ~~2018~~2019 as compared to ~~$11.8~~$17.2 million in the same period of ~~2017.~~2018. During the first six months of ~~2018,~~2019, (1) we increased borrowings under our revolving credit facility by ~~$31.5~~$86.3 million as compared to the increase in borrowings under our revolving credit facility of ~~$24.1~~$31.5 million in ~~2017;~~2018; (2) we made cash payments in the first six months of ~~2018~~2019 for the repurchase of shares of our common stock of ~~$7.6~~$10.7 million as compared to ~~$5.2~~$7.6 million in ~~2017;~~2018; and (3) we paid dividends of ~~$9.4~~$10.3 million in the first six months of ~~2018~~2019 as compared to ~~$8.7~~$9.4 million in the comparable period last year. In February ~~2018,~~2019, our Board of Directors voted to increase our quarterly dividend from ~~$0.19 per share in 2017 to~~ $0.21 per share in ~~2018.~~2018 to $0.23 per share in 2019.

At June 30, 2019, the weighted average interest rate on our amended credit agreement was 3.7%, which consisted of $130 million in direct borrowings. At December 31, 2018, the weighted average interest rate on our amended credit agreement was ~~3.5%~~3.9%, which consisted of ~~$80~~$40 million in direct borrowings at ~~3.3%~~3.4% and an alternative base rate loan of ~~$8.5~~$3.7 million at ~~5.3%~~5.8%. 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 six months ended June 30, ~~2018,~~2019, our average daily alternative base rate loan balance was ~~$1.9~~$1.6 million, compared to a balance of ~~$5.2~~$1.9 million for the six months ended June 30, ~~2017~~2018, and ~~our average daily alternative base rate loan~~a balance of ~~$3.8~~$1.8 million for the year ended December 31, ~~2017.~~2018.

Index

~~In December 2017, our~~

Our Polish subsidiary, SMP Poland sp.z.o.o., has entered into an overdraft facility with HSBC Bank Polska S.A. (“HSBC Poland”) for Zloty 30 million (approximately $8 million). The facility, as amended, expires onin December ~~2018.~~2019. 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 June 30, 2019 and December 31, 2018, borrowings under the overdraft facility were Zloty ~~19.1~~18.8 million (approximately ~~$5.1~~$5 million). and Zloty 19.9 million (approximately $5.3 million), respectively.

In order to reduce our accounts receivable balances and improve our cash flow, we sell undivided interests in certain of our receivables to financial institutions. We enter these agreements at our discretion when we determine that the cost of factoring is less than the cost of servicing our receivables with existing debt. Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale. As such, these transactions are being accounted for as a sale.

Pursuant to these agreements, we sold ~~$184.1~~$190 million and ~~$341.6~~$361 million of receivables during the three months and six months ended June 30,, ~~2018,~~ 2019, respectively, and ~~$224.3~~$184.1 million and ~~$404.1~~$341.6 million for the comparable periods in ~~2017.~~2018. A charge in the amount of ~~$6.3~~$6.4 million and ~~$11.7~~$12.1 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months and six months ended June 30, ~~2018,~~2019, respectively, and ~~$6.4~~$6.3 million and ~~$11.6~~$11.7 million for the comparable periods in ~~2017.~~2018. 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.

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 year ended December 31, 2017 and the ~~three~~six months ended ~~March 31,~~June 30, 2018, we repurchased 539,760 and ~~61,756~~112,307 shares of our common stock, respectively, at a total cost of $24.8 million and ~~$2.9 million, respectively. Additionally, in April 2018 and May 2018, we repurchased 20,900 and 29,651 shares of our common stock, respectively, at a total cost of $1 million and $1.3~~$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. ~~Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant.~~ Under this program, ~~in May~~during the six months ended June 30, 2018 and ~~June~~year ended December 31, 2018, we repurchased ~~29,604~~45,964 and ~~16,360~~201,484 shares of our common stock, respectively, at a total cost of ~~$1.3~~$2.1 million and ~~$0.8~~$9.3 million, respectively. ~~As of~~Additionally, during the three and six months ended June 30, ~~2018, there was approximately $17.9 million available for future stock repurchases under the program. During the period from July 1, 2018 through July 27, 2018,~~2019, we repurchased ~~an additional 17,390~~92,209 and 221,748 shares of our common stock, respectively, under the program, at a total cost of ~~$0.8~~$4.4 million, and $10.7 million, respectively, thereby ~~reducing the amount available for future stock repurchases under~~completing the 2018 Board of Directors ~~authorization to~~ ~~$17.1 million~~.authorization.

We anticipate that our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements. If material adverse developments were to occur in any of these areas, there can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs. In addition, if we default on any of our indebtedness, or breach any financial covenant in our revolving credit facility, our business could be adversely affected.

For further information regarding the risks of our business, please refer to the Risk Factors section of our Annual Report on Form 10-K for the year ending December 31, ~~2017.~~2018.

Index

The following table summarizes our contractual commitments as of June 30, ~~2018~~2019 and expiration dates of commitments through 2028 (a) (b) (c):

(In thousands)	2019		2020		2021		2022		2023			2024- 2028	Total
Operating lease obligations	$	4,342	$	7,689	$	7,027	$	5,818	$	5,281	$	11,316	$	41,473
Postretirement benefits		20		36		32		29		25		76		218
Severance payments related to restructuring and integration		333		225		69		24		—		—		651
Total commitments	$	4,695	$	7,950	$	7,128	$	5,871	$	5,306	$	11,392	$	42,342

~~Index~~

(In thousands)
2018 2019 2020 2021 2022 2023-2028 Total
Lease obligations $ 4,743 $ 8,078 $ 6,990 $ 6,355 $ 5,364 $ 3,932 $ 35,462
Postretirement benefits 317 39 36 32 29 101 554
Severance payments related to restructuring and integration
512

413

183

72

2

—

1,182

Total commitments $ 5,572 $ 8,530 $ 7,209 $ 6,459 $ 5,395 $ 4,033 $ 37,198

(a)

Indebtedness under our revolving credit facilities is not included in the table above as it is reported as a current liability in our consolidated balance sheets. As of June 30, ~~2018,~~2019, amounts outstanding under our revolving credit facilities were ~~$88.5~~$130 million.

(b)

We anticipate total aggregate future severance payments of approximately ~~$1.2~~$0.7 million related to the plant rationalization program ~~the wire and cable relocation program~~ and the Orlando plant rationalization program. ~~All~~These programs ~~are~~were substantially completed as of ~~June 30,~~December 31, 2018.

(c)

As of January 1, 2019 we adopted ASU 2016-02, Leases, which resulted in the recording of the lease obligations on our consolidated balance sheet. For information related to our adoption of ASU 2016-02, see Note 2 “Summary of Significant Accounting Policies” and Note 3 “Leases” of the notes to our consolidated financial statements (unaudited).

Critical Accounting Policies

We have identified ~~the~~several accounting policies ~~below~~ as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. 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,~~2018, 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,~~ FASB ASU 2016-02, Leases,described under the heading, “Recently Issued Accounting Pronouncements” in Note 2 and in Note 3, ~~“Net Sales,~~“Leases,” of the notes to our consolidated financial statements (unaudited).

You should be aware that preparation of our consolidated quarterly financial statements in this Report requires us 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 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.

~~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 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. As described below, significant management judgments and estimates must be made and used in estimating sales returns and allowances relating to revenue recognized in any accounting period.

~~Index~~

~~Inventory Valuation~~. Inventories are valued at the lower of cost and net realizable value. Cost is determined on the first-in, first-out basis. Where appropriate, standard cost systems are utilized for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of lower of cost and net realizable value of inventory are determined by comparing the actual cost of the product to the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation of the inventory.

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

We utilize cores (used parts) in our remanufacturing processes for air conditioning compressors, diesel injectors, and diesel pumps. The production of air conditioning compressors, diesel injectors, and diesel pumps involves the rebuilding of used cores, which we acquire either in outright purchases from used parts brokers or from returns pursuant to an exchange program with customers. Under such exchange programs, at the time of sale of air conditioning compressors, diesel injectors, and diesel pumps, we estimate the core expected to be returned from the customer and record the estimated return as unreturned customer inventory.

In addition, many of our customers can return inventory to us based upon customer warranty and overstock arrangements within customer specific limits. At the time products are sold, we accrue a liability for product warranties and overstock returns and record as unrecorded customer inventory our estimate of anticipated customer returns. Estimates are based upon historical information on the nature, frequency and probability of the customer return. Unreturned core, warranty and overstock customer inventory is recorded at standard cost. Revision to these estimates is made when necessary, based upon changes in these factors. We regularly study trends of such claims.

~~Sales Returns and Other Allowances and Allowance for Doubtful Accounts.~~ 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. Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Revision to these estimates is made when necessary, based upon changes in these factors. We regularly study trends of such claims. At June 30, 2018, the allowance for sales returns was $42.5 million.

Similarly, we must make estimates of the uncollectability of our accounts receivable. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit‑worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. At June 30, 2018, the allowance for doubtful accounts and for discounts was $5.5 million.

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

~~Index~~

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

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

The valuation allowance of $0.4 million as of June 30, 2018 is intended to provide for the uncertainty regarding the ultimate realization of our U.S. foreign tax credit carryovers and foreign net operating loss carryovers. The assessment of the adequacy of our valuation allowance is based on our estimates of taxable income in these jurisdictions and the period over which our deferred tax assets will be recoverable.

In the event that actual results differ from these estimates, or we adjust these estimates in future periods for current trends or expected changes in our estimating assumptions, we may need to modify the level of the valuation allowance which could materially impact our business, financial condition and results of operations.

In accordance with generally accepted accounting practices, we recognize in our financial statements only those tax positions that meet the more-likely-than-not-recognition threshold. We establish tax reserves for uncertain tax positions that do not meet this threshold. As of June 30, 2018, we do not believe there is a need to establish a liability for uncertain tax positions. Penalties and interest associated with income tax matters are included in the provision for income taxes in our consolidated statement of operations.

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

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

~~Index~~

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

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

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

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

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

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

~~Index~~

~~Asbestos Litigation.~~ We are responsible for certain future liabilities relating to alleged exposure to asbestos-containing products. In accordance with our accounting policy, our most recent actuarial study as of August 31, 2017 estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $35.2 million to $54 million for the period through 2060. Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required. Based upon the results of the August 31, 2017 actuarial study, in September 2017 we increased our asbestos liability to $35.2 million, the low end of the range, and recorded an incremental pre-tax provision of $6 million in loss from discontinued operations in the accompanying statement of operations. In addition, according to the updated study, future legal costs, which are expensed as incurred and reported in loss from discontinued operations in the accompanying statement of operations, are estimated to range from $44.3 million to $79.6 million for the period through 2060. We will continue to perform an annual actuarial analysis during the third quarter of each year for the foreseeable future. Based on this analysis and all other available information, we will continue to reassess the recorded liability and, if deemed necessary, record an adjustment to the reserve, which will be reflected as a loss or gain from discontinued operations.

~~Other Loss Reserves~~. We have other loss exposures, for such matters as legal claims and legal proceedings. Establishing loss reserves for these matters requires estimates, judgment of risk exposure, and ultimate liability. We record provisions when the liability is considered probable and reasonably estimable. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. As additional information becomes available, we reassess our potential liability related to these matters. Such revisions of the potential liabilities could have a material adverse effect on our business, financial condition or results of operations.

Recently Issued Accounting Pronouncements

For a detailed discussion on recently issued accounting pronouncements and their impact on our consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements (unaudited).

Index

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~ITEM 3.~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than one of our subsidiary’s functional currency. Similarly, we are exposed to market risk as the result of changes in interest rates, which may affect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. As of June 30, ~~2018,~~2019, we do not have any derivative financial instruments.

Exchange Rate Risk

We have exchange rate exposure, primarily, with respect to the Canadian Dollar, the Euro, the British Pound, the Polish Zloty, the Mexican Peso, the Taiwan Dollar, the Chinese Yuan Renminbi and the Hong Kong Dollar. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, our monetary assets and liabilities which are subject to this exposure are immaterial, therefore, the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the incremental effect of such a change on our foreign currency denominated revenues.

Interest Rate Risk

We manage our exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in our debt portfolio. To manage a portion of our exposure to interest rate changes, we have in the past entered into interest rate swap agreements. We invest our excess cash in highly liquid short-term investments. Substantially all of our debt is variable rate debt as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

In addition, from time to time, we sell undivided interests in certain of our receivables to financial institutions. We enter these agreements at our discretion when we determine that the cost of factoring is less than the cost of servicing our receivables with existing debt. During the three months and six months ended June 30, ~~2018,~~2019, we sold ~~$184.1~~$190 million and ~~$341.6~~$361 million of receivables, respectively. Depending upon the level of sales of receivables pursuant these agreements, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the margin rate may have an approximate ~~$1.8~~$1.9 million and ~~$3.4~~$3.6 million negative impact on our earnings or cash flows during the three months and six months ended June 30, ~~2018,~~2019, respectively. The charge related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations.

Other than the aforementioned, there have been no significant changes to the information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~

2018.

Index

ITEM 4.

CONTROLS AND PROCEDURES

(a)	Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

(b)	Changes in Internal Control Over Financial Reporting.

During the quarter ended June 30, ~~2018,~~2019, we have not made any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

We review, document and test our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control – Integrated Framework. We may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts may lead to various changes in our internal control over financial reporting.

Index

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The information required by this Item is incorporated herein by reference to the information set forth in Item 1, “Consolidated Financial Statements” of this Report under the captions “Asbestos” and “Other Litigation” appearing in Note 16, “Commitments and Contingencies,” of the notes to our consolidated financial statements (unaudited).

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information relating to the Company’s purchases of its common stock for the second quarter of ~~2018:~~2019:

Period
Total Number of
Shares Purchased
(1)

Average
Price Paid
Per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)

Maximum Number (or
Approximate Dollar
Value) of Shares that
may yet be Purchased
Under the Plans or
Programs (2)

April 1 – 30, 2018 20,900 $ 47.96 20,900 $ 1,307,351
May 1 – 31, 2018 59,255 44.34 59,255 18,679,954
June 1 – 30, 2018 16,360 47.87 16,360 17,896,821
Total 96,515 $ 45.72 96,515 $ 17,896,821

Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs (2)

April 1 – 30, 2019	14,400	$ 49.65	14,400	$ 3,696,761
May 1 – 31, 2019	77,809	47.51	77,809	—
June 1 – 30, 2019	—	—	—	—
Total	92,209	$ 47.84	92,209	$ —

(1)

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

(2)

~~During 2017,~~In May 2018, our Board of Directors authorized the purchase of up to ~~$30~~an additional $20 million of our common stock under a new stock repurchase ~~programs.~~program. Under ~~these programs,~~this program, during the six months ended June 30, 2018 and year ended December 31, ~~2017 and three months ended March 31,~~ 2018, we repurchased ~~539,760~~45,964 and ~~61,756~~201,484 shares of our common stock, respectively, at a total cost of ~~$24.8~~$2.1 million and ~~$2.9~~$9.3 million, respectively. Additionally, ~~in April 2018~~during the three and ~~May 2018,~~six months ended June 30, 2019, we repurchased ~~20,900~~92,209 and ~~29,651~~221,748 shares of our common stock, respectively, under the program, at a total cost of $1$4.4 million and ~~$1.3~~$10.7 million, respectively, thereby completing the ~~2017~~2018 Board of ~~Directors’ authorizations.~~Directors authorization.

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. Stock will be purchased from time to time, in the open market or through private transactions, as market conditions warrant. Under this program, in May 2018 and June 2018, we repurchased 29,604 and 16,360 shares of our common stock, respectively, at a total cost of $1.3 million and $0.8 million, respectively. As of June 30, 2018, there was approximately $17.9 million available for future stock purchases under the program. During the period from July 1, 2018 through July 27, 2018, we repurchased an additional 17~~,390~~ ~~shares of our common stock under the program at a total cost of~~ ~~$0.8 million, thereby reducing the amount available for future stock repurchases under the Board of Directors authorization to~~ ~~$17.1 million~~.

Index

ITEM 6.

EXHIBITS

Exhibit Number

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

101.SCH** XBRL Taxonomy Extension Schema Document

101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB** XBRL Taxonomy Extension Label Linkbase Document

101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF** XBRL Taxonomy Extension Definition Linkbase Document

**	In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to the Original Filing shall be deemed to be “furnished” and not “filed.”

Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STANDARD MOTOR PRODUCTS, INC.
	(Registrant)

Date: July 30, 2019
~~Date:~~ ~~July 31, 2018~~	/s/ James J. Burke
	James J. Burke
	~~Executive Vice President Finance,~~ Chief Operating Officer and
	Chief Financial Officer
	(Principal Financial and
	Accounting Officer)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $2.00 per share	SMP	New York Stock Exchange LLC

	Large Accelerated Filer ☑	Accelerated Filer ☐
	Non-Accelerated Filer ☐~~(Do not check if a smaller reporting company)~~	Smaller reporting company ☐
	Emerging growth company ☐

		Page No.
Item 1.	Consolidated Financial Statements:

	Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	3

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	4

	Consolidated Balance Sheets as of June 30, ~~2018~~2019 (Unaudited) and December 31, ~~2017~~2018	5

	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	6

	Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months and Six Months Ended June 30, 2019 and 2018	7

	Notes to Consolidated Financial Statements (Unaudited)	89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4339

Item 4.	Controls and Procedures	44

~~Item 1.~~	~~Legal Proceedings~~	4540

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4541

Item 6.	Exhibits	4642

Signatures		4743

	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

	As Reported		Balances Without Adoption of ASU 2014-09		Effect of Change
Balance Sheet
Unreturned customer inventories	$	18,246	$	—	$	18,246
Prepaid expenses and other current assets		16,458		16,733		(275	)
Accrued customer returns		42,536		36,184		6,352
Accrued core liability		26,138		14,123		12,015
Retained earnings		370,461		370,857		(396	)

	Three Months Ended June 30, 2018							Six Months Ended June 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	$	286,636	$	286,531	$	105		$	548,462	$	546,009	$	2,453
Cost of sales		205,347		205,781		(434	)		394,584		393,199		1,385
Earnings from continuing operations before taxes		22,579		22,040		539			34,223		33,155		1,068
Provision for income taxes		5,752		5,615		137			8,799		8,524		275
Net earnings		15,945		15,543		402			23,934		23,141		793

Three months ended June 30, 2017 (a)(b)	Engine Management		Temperature Control		Other (c)		Total
Geographic Area:
United States	$	201,142	$	80,874	$	—	$	282,016
Canada		8,056		5,554		1,989		15,599
Mexico		5,056		208		—		5,264
Europe		3,151		320		—		3,471
Other foreign		5,944		435		—		6,379
Total	$	223,349	$	87,391	$	1,989	$	312,729
Major Product Group:
Ignition, emissions and fuel system parts	$	178,105	$	—	$	840	$	178,945
Wire and cable		45,244		—		150		45,394
Compressors		—		49,644		601		50,245
Other climate control parts		—		37,747		398		38,145
Total	$	223,349	$	87,391	$	1,989	$	312,729
Major Sales Channel:
Aftermarket	$	191,846	$	76,799	$	1,989	$	270,634
OE/OES		26,168		9,810		—		35,978
Export		5,335		782		—		6,117
Total	$	223,349	$	87,391	$	1,989	$	312,729

Six months ended June 30, 2017 (a)(b)	Engine Management		Temperature Control		Other (c)		Total
Geographic Area:
United States	$	387,044	$	145,913	$	—	$	532,957
Canada		17,823		9,910		2,763		30,496
Mexico		12,087		432		—		12,519
Europe		6,965		524		—		7,489
Other foreign		10,744		902		—		11,646
Total	$	434,663	$	157,681	$	2,763	$	595,107
Major Product Group:
Ignition, emissions and fuel system parts	$	343,258	$	—	$	1,564	$	344,822
Wire and cable		91,405		—		376		91,781
Compressors		—		87,545		299		87,844
Other climate control parts		—		70,136		524		70,660
Total	$	434,663	$	157,681	$	2,763	$	595,107
Major Sales Channel:
Aftermarket	$	371,611	$	138,598	$	2,763	$	512,972
OE/OES		52,672		17,799		—		70,471
Export		10,380		1,284		—		11,664
Total	$	434,663	$	157,681	$	2,763	$	595,107

	Three Months Ended June 30, 2018
	Foreign Currency Translation Adjustments			Unrecognized Postretirement Benefit Costs (Credit)			Total
Balance at March 31, 2018	$	(2,006	)	$	111		$	(1,895	)
Other comprehensive income before reclassifications		(5,935	)		7			(5,928	)
Amounts reclassified from accumulated other comprehensive income		—			(7	)		(7	)
Other comprehensive income, net		(5,935	)		—			(5,935	)
Balance at June 30, 2018	$	(7,941	)	$	111		$	(7,830	)

Details About Accumulated Other Comprehensive Income Components	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018
Amortization of postretirement benefit plans:
Prior service benefit (1)	$	—		$	—
Unrecognized gain (1)		(12	)		(21	)
Total before income tax		(12	)		(21	)
Income tax expense		5			9
Total reclassifications for the period	$	(7	)	$	(12	)

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs (2)

April 1 – 30, 2018		20,900	$	47.96		20,900	$	1,307,351
May 1 – 31, 2018		59,255		44.34		59,255		18,679,954
June 1 – 30, 2018		16,360		47.87		16,360		17,896,821
Total		96,515	$	45.72		96,515	$	17,896,821