UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☑

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

For the quarterly period ended June 30, 2020

☐

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

Commission file number: 001-04743

Standard Motor Products, Inc.

(Exact name of registrant as specified in its charter)

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

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

(718) 392-0200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

As of the close of business on July 27, 2020, there were 22,348,271 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION

		Page No.
Item 1.	Consolidated Financial Statements:

	Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2020 and 2019	3

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 2020 and 2019	4

	Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019	5

	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2020 and 2019	6

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months and Six Months Ended June 30, 2020 and 2019	7

	Notes to Consolidated Financial Statements (Unaudited)	9

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	42

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 6.	Exhibits	45

Signatures		46

Index

PART I - FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except share and per share data)	2020			2019			2020			2019
	(Unaudited)						(Unaudited)

Net sales	$	247,939		$	305,172		$	502,241		$	588,938
Cost of sales		183,581			216,267			367,488			422,070
Gross profit		64,358			88,905			134,753			166,868
Selling, general and administrative expenses		48,328			60,536			104,201			120,536
Restructuring and integration expenses		9			644			214			644
Other income (expense), net		—			3			6			(3	)
Operating income		16,021			27,728			30,344			45,685
Other non-operating income, net		602			1,411			78			2,057
Interest expense		772			1,722			1,645			2,811
Earnings from continuing operations before taxes		15,851			27,417			28,777			44,931
Provision for income taxes		4,009			6,862			7,314			11,272
Earnings from continuing operations		11,842			20,555			21,463			33,659
Loss from discontinued operations, net of income taxes		(875	)		(1,123	)		(1,869	)		(2,011	)
Net earnings	$	10,967		$	19,432		$	19,594		$	31,648

Per Share Data:
Net earnings per common share – Basic:
Earnings from continuing operations	$	0.53		$	0.92		$	0.96		$	1.50
Discontinued operations		(0.04	)		(0.05	)		(0.08	)		(0.09	)
Net earnings per common share – Basic	$	0.49		$	0.87		$	0.88		$	1.41

Net earnings per common share – Diluted:
Earnings from continuing operations	$	0.52		$	0.90		$	0.94		$	1.47
Discontinued operations		(0.04	)		(0.05	)		(0.08	)		(0.09	)
Net earnings per common share – Diluted	$	0.48		$	0.85		$	0.86		$	1.38

Dividend declared per share	$	—		$	0.23		$	0.25		$	0.46

Average number of common shares		22,330,476			22,328,292			22,384,281			22,374,785
Average number of common shares and dilutive common shares		22,718,680			22,795,677			22,793,606			22,857,435

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2020			2019			2020			2019
	(Unaudited)						(Unaudited)

Net earnings	$	10,967		$	19,432		$	19,594		$	31,648
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		1,877			398			(4,424	)		1,093
Pension and postretirement plans		(4	)		(5	)		(8	)		(10	)
Total other comprehensive income (loss), net of tax		1,873			393			(4,432	)		1,083
Comprehensive income	$	12,840		$	19,825		$	15,162		$	32,731

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)	June 30, 2020			December 31, 2019
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	22,510		$	10,372
Accounts receivable, less allowances for discounts and doubtful accounts of $5,774 and $5,212 for 2020 and 2019, respectively		184,518			135,516
Inventories		353,315			368,221
Unreturned customer inventories		18,868			19,722
Prepaid expenses and other current assets		10,687			15,602
Total current assets		589,898			549,433

Property, plant and equipment, net of accumulated depreciation of $205,897 and $199,476 for 2020 and 2019, respectively		88,022			89,649
Operating lease right-of-use assets		32,536			36,020
Goodwill		77,593			77,802
Other intangibles, net		60,594			64,861
Deferred income taxes		37,040			37,272
Investments in unconsolidated affiliates		39,319			38,858
Other assets		19,763			18,835
Total assets	$	944,765		$	912,730

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable	$	85,000		$	52,460
Current portion of other debt		6,084			4,456
Accounts payable		72,133			92,535
Sundry payables and accrued expenses		33,518			38,819
Accrued customer returns		64,803			44,116
Accrued core liability		19,440			24,357
Accrued rebates		35,550			26,072
Payroll and commissions		21,078			26,649
Total current liabilities		337,606			309,464

Long-term debt		108			129
Noncurrent operating lease liabilities		25,148			28,376
Other accrued liabilities		23,539			20,837
Accrued asbestos liabilities		47,708			49,696
Total liabilities		434,109			408,502
Commitments and contingencies

Stockholders’ equity:
Common stock – par value $2.00 per share:
Authorized – 30,000,000 shares; issued 23,936,036 shares		47,872			47,872
Capital in excess of par value		104,128			102,742
Retained earnings		431,416			417,437
Accumulated other comprehensive income		(13,021	)		(8,589	)
Treasury stock – at cost (1,587,765 shares and 1,477,594 shares in 2020 and 2019, respectively)		(59,739	)		(55,234	)
Total stockholders’ equity		510,656			504,228
Total liabilities and stockholders’ equity	$	944,765		$	912,730

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,
	2020			2019
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	19,594		$	31,648
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		12,877			12,744
Amortization of deferred financing cost		114			113
Increase to allowance for doubtful accounts		376			337
Increase to inventory reserves		3,048			1,552
Equity income from joint ventures		(429	)		(2,047	)
Employee stock ownership plan allocation		1,150			1,260
Stock-based compensation		3,306			3,848
Decrease in deferred income taxes		232			2,547
Loss on discontinued operations, net of tax		1,869			2,011
Change in assets and liabilities:
Increase in accounts receivable		(51,326	)		(26,622	)
(Increase) decrease in inventories		12,725			(19,691	)
(Increase) decrease in prepaid expenses and other current assets		5,664			(6,406	)
Decrease in accounts payable		(21,804	)		(6,994	)
Increase (decrease) in sundry payables and accrued expenses		14,788			(7,545	)
Net change in other assets and liabilities		(3,069	)		(6,261	)
Net cash used in operating activities		(885	)		(19,506	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and investments in businesses		—			(38,427	)
Net proceeds from sale of Grapevine, Texas facility		—			4,801
Capital expenditures		(9,026	)		(7,578	)
Other investing activities		6			46
Net cash used in investing activities		(9,020	)		(41,158	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreements		32,540			86,311
Net borrowings (payments) of other debt and capital lease obligations		1,809			(355	)
Purchase of treasury stock		(8,726	)		(10,738	)
Increase in overdraft balances		1,818			1,691
Dividends paid		(5,615	)		(10,296	)
Net cash provided by financing activities		21,826			66,613
Effect of exchange rate changes on cash		217			332
Net increase in cash and cash equivalents		12,138			6,281
CASH AND CASH EQUIVALENTS at beginning of period		10,372			11,138
CASH AND CASH EQUIVALENTS at end of period	$	22,510		$	17,419

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,561		$	2,516
Income taxes	$	1,030		$	13,785

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended June 30, 2020

(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, 2020	$	47,872	$	104,245		$	420,449	$	(14,894	)	$	(61,059	)	$	496,613
Net earnings		—		—			10,967		—			—			10,967
Other comprehensive income, net of tax		—		—			—		1,873			—			1,873
Cash dividends paid		—		—			—		—			—			—
Purchase of treasury stock		—		—			—		—			—			—
Stock-based compensation		—		(117	)		—		—			1,320			1,203

Balance at June 30, 2020	$	47,872	$	104,128		$	431,416	$	(13,021	)	$	(59,739	)	$	510,656

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

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

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, 2020

(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, 2019	$	47,872	$	102,742	$	417,437		$	(8,589	)	$	(55,234	)	$	504,228
Net earnings		—		—		19,594			—			—			19,594
Other comprehensive income, net of tax		—		—		—			(4,432	)		—			(4,432	)
Cash dividends paid		—		—		(5,615	)		—			—			(5,615	)
Purchase of treasury stock		—		—		—			—			(8,726	)		(8,726	)
Stock-based compensation		—		756		—			—			2,550			3,306
Employee Stock Ownership Plan		—		630		—			—			1,671			2,301

Balance at June 30, 2020	$	47,872	$	104,128	$	431,416		$	(13,021	)	$	(59,739	)	$	510,656

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

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

Standard Motor Products, Inc. and subsidiaries (referred to hereinafter in these notes to the consolidated financial statements as “we,” “us,” “our” or the “Company”) is engaged in the manufacture and distribution of replacement parts for motor vehicles in the automotive aftermarket industry with a complementary focus on the heavy duty, industrial equipment and original equipment service markets.

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, 2019. 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.

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 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 estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects of the COVID-19 pandemic based upon the volatility, uncertainty and potential economic disruption caused by the pandemic, and other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations. Some of the more significant estimates include allowances for doubtful accounts, cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability exposures, asbestos, environmental and litigation matters, valuation of deferred tax assets, share based compensation and sales returns and other allowances.

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, 2019.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Recently Issued Accounting Pronouncements

Standards that were adopted

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 simplifies the accounting for goodwill impairment. ASU 2017-04 removes Step 2 of the test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.	January 1, 2020	The new standard will be applied prospectively when performing our annual impairment test of goodwill, or in an interim period if an event occurs, or circumstances change, that may indicate that the fair value of a reporting unit is below its carrying amount. We anticipate that the prospective adoption of the standard will not materially impact the amount of goodwill impairment, if any.

ASU 2016-13, Financial Instruments – Credit Losses	This standard creates a single model to measure impairment on financial assets, which includes trade accounts receivable. An estimate of expected credit losses on trade accounts receivable over their contractual life will be required to be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts.	January 1, 2020	The adoption of the standard did not have a material impact on the manner in which we estimate our allowance for doubtful accounts on trade accounts receivable, or on our consolidated financial statements.

Standards that are not yet adopted as of June 30, 2020

The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted as of June 30, 2020, and that could have an impact on our financial statements:

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

ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	This standard is intended to simplify the accounting for income taxes by removing certain ASC Topic 740 exceptions in performing intra-period tax allocations among income statement components, in calculating certain deferred tax liabilities related to outside basis differences, and in calculating income taxes in interim periods with year-to-date losses. In addition, this standard is also intended to improve consistency and add simplification by clarifying and amending the reporting of franchise taxes and other taxes partially based on income, the recognition of deferred income taxes related to the step-up in tax basis goodwill, and the reporting in interim periods of the recognition of the enactment of tax laws or rate changes.	January 1, 2021, with early adoption permitted	The new standard clarifies the accounting for income taxes in certain technical areas that will not impact all companies. Although we currently believe that the technical clarifications in the new standard will not materially impact our accounting for income taxes, our consolidated financial statements and related disclosures upon adoption, we are currently evaluating its potential impact. The new standard can be applied on a prospective basis in certain instances and in other instances on a retrospective or modified retrospective basis.

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	This standard is intended to provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The new standard is applicable to contracts that reference LIBOR, or another reference rate, expected to be discontinued due to reference rate reform.	Effective March 12, 2020 through December 31, 2022	The new standard may be applied as of the beginning of an interim period that includes March 12, 2020 through December 31, 2022. As certain of our contracts reference LIBOR, including our revolving credit facility and supply chain financing arrangements, we are currently reviewing the optional guidance in the standard to determine its impact upon the discontinuance of LIBOR. At this time, we do not believe that the new guidance, nor the discontinuance of LIBOR, will have a material impact on our consolidated financial statements and related disclosures.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Note 3. Business Acquisitions and Investments

2019 Business Acquisition and Investment

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

In August 2019, we acquired an approximate 29% minority interest in Jiangsu Che Yijia New Energy Technology Co., Ltd. (“CYJ”) for approximately $5.1 million. Our investment in CYJ was funded through borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A. CYJ is a manufacturer of air conditioning compressors for electric vehicles and is located in China. Our minority interest in CYJ is accounted for using the equity method of accounting.

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

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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 consist of customer relationships related to the acquired OE/OES business of $17.2 million that will be amortized on a straight-line basis over the estimated useful life of 10 years; customer relationships related to the acquired aftermarket business of $7.2 million that will be amortized on a straight-line basis over the estimated useful life of 15 years; a trademark of $0.2 million that will be amortized on a straight-line basis over the estimated useful life of 10 years; and a non-compete agreement of $0.1 million that will be amortized on a straight-line basis over the estimated useful life of 5 years. 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.

Incremental net sales from the acquired Pollak business were $9.5 million for the three months ended March 31, 2020, and were included in our consolidated statements of operations for the six months ended June 30, 2020.

Note 4. Restructuring and Integration Expenses

The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of December 31, 2019 and June 30, 2020 and activity for the six months ended June 30, 2020 consisted of the following (in thousands):

	Workforce Reduction			Other Exit Costs			Total
Exit activity liability at December 31, 2019	$	336		$	—		$	336
Restructuring and integration costs:
Amounts provided for during 2020		—			214			214
Cash payments		(60	)		(214	)		(274	)
Exit activity liability at June 30, 2020	$	276		$	—		$	276

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Restructuring Costs

Plant Rationalization Program

In February 2016, in connection with our ongoing efforts to improve operating efficiencies and reduce costs, we implemented a plant rationalization initiative. As part of the plant rationalization, all of our Grapevine, Texas production activities have been relocated to facilities in Greenville, South Carolina and Reynosa, Mexico; certain production activities at our Greenville, South Carolina facility were moved to our facility in Bialystok, Poland; certain service functions were relocated from Grapevine, Texas to our administrative offices in Lewisville, Texas; and our vacated Grapevine, Texas facility was sold.

The Plant Rationalization Program has been completed. Cash payments made of $34,000 during the six months ended June 30, 2020, and the remaining aggregate liability related to the program as of June 30, 2020 of $142,000 consists of severance payments to former Temperature Control employees.

Orlando Plant Rationalization Program

In January 2017, to further our ongoing efforts to improve operating efficiencies and reduce costs, we implemented a plant rationalization initiative at our Orlando, Florida facility. As part of the initiative, all of our Orlando, Florida production activities were moved to our facility in Independence, Kansas; certain production activities at our Independence, Kansas facility were moved to our facility in Reynosa, Mexico; and our Orlando, Florida facility was closed.

The Orlando Plant Rationalization Program has been completed. Cash payments made of $26,000 during the six months ended June 30, 2020, and the remaining aggregate liability related to the program as of June 30, 2020 of $134,000 consists of severance payments to former Engine Management employees.

Integration Costs

Pollak Relocation

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

The Pollak Relocation has been completed. Integration expense recognized and cash payments made of $214,000 during the six months ended June 30, 2020 related to residual relocation activities in our Engine Management segment. There is no remaining aggregate liability related to the Pollak Relocation as of June 30, 2020.

Note 5. Sale of Receivables

We are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions. We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements 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.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Pursuant to these agreements, we sold $147.7 million and $297.9 million of receivables during the three months and six months ended June 30, 2020, respectively, and $190 million and $361 million for the comparable periods in 2019, all of which were reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale. A charge in the amount of $3.1 million and $5.9 million related to the sale of receivables was included in selling, general and administrative expense in our consolidated statements of operations for the three months and six months ended June 30, 2020, respectively, and $6.4 million and $12.1 million for the comparable periods in 2019.

To the extent that these arrangements are terminated, our financial condition, results of operations, cash flows and liquidity could be adversely affected by extended payment terms, delays or failures in collecting trade accounts receivables. The utility of the supply chain financing arrangements also depends upon the LIBOR rate, as it is a component of the discount rate applicable to each arrangement. If the LIBOR rate increases significantly, we may be negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

Note 6. Inventories

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

	June 30, 2020		December 31, 2019
	(In thousands)
Finished goods	$	216,541	$	241,472
Work in process		12,659		11,138
Raw materials		124,115		115,611
Subtotal		353,315		368,221
Unreturned customer inventories		18,868		19,722
Total inventories	$	372,183	$	387,943

Note 7. Acquired Intangible Assets

Acquired identifiable intangible assets consist of the following:

	June 30, 2020			December 31, 2019
	(In thousands)
Customer relationships	$	111,409		$	111,692
Trademarks and trade names		6,980			6,980
Non-compete agreements		3,264			3,276
Patents		723			723
Supply agreements		800			800
Leaseholds		160			160
Total acquired intangible assets		123,336			123,631
Less accumulated amortization (1)		(63,435	)		(59,431	)
Net acquired intangible assets	$	59,901		$	64,200

(1)

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

Total amortization expense for acquired intangible assets was $2 million and $4.1 million for the three months and six months ended June 30, 2020, respectively, and $2.1 million and $3.9 million for the comparable periods in 2019. Based on the current estimated useful lives assigned to our intangible assets, amortization expense is estimated to be $4.1 million for the remainder of 2020, $6.8 million in 2021, $5.2 million in 2022, $4.9 million in 2023 and $33.7 million in the aggregate for the years 2024 through 2034.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Note 8. Leases

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

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

Balance Sheet Information	June 30, 2020			December 31, 2019
Assets
Operating lease right-of-use assets	$	32,536		$	36,020

Liabilities
Sundry payables and accrued expenses	$	8,555		$	8,739
Noncurrent operating lease liabilities		25,148			28,376
Total operating lease liabilities	$	33,703		$	37,115

Weighted Average Remaining Lease Term
Operating leases	5.3 Years			5.6 Years

Weighted Average Discount Rate
Operating leases		3.7	%		3.7	%

	Three Months Ended June 30,
Expense and Cash Flow Information	2020		2019
Lease Expense
Operating lease expense (a)	$	2,303	$	2,210

	Six Months Ended June 30,
	2020		2019
Lease Expense
Operating lease expense (a)	$	4,616	$	4,434

Supplemental Cash Flow Information
Cash paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	4,544	$	4,239
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	380	$	744

(a)

Excludes expenses of approximately $0.5 million and $0.9 million for the three and six months ended June 30, 2020, respectively, and approximately $0.6 million and $1.1 million for the comparable periods in 2019, respectively, related to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less, which is not material.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Minimum Lease Payments

At June 30, 2020, we are obligated to make minimum lease payments through 2028, under operating leases, which are as follows (in thousands):

2020	$	4,461
2021		8,421
2022		7,020
2023		5,685
2024		3,881
Thereafter		7,844
Total lease payments	$	37,312
Less: Interest		(3,609	)
Present value of lease liabilities	$	33,703

Note 9. Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

	June 30, 2020		December 31, 2019
	(In thousands)
Revolving credit facilities	$	85,000	$	52,460
Other (1)		6,192		4,585
Total debt	$	91,192	$	57,045

Current maturities of debt	$	91,084	$	56,916
Long-term debt		108		129
Total debt	$	91,192	$	57,045

(1)

Other includes borrowings under our Polish overdraft facility of Zloty 24.1 million (approximately $6 million) and Zloty 16.7 million (approximately $4.4 million) as of June 30, 2020 and December 31, 2019, respectively.

Revolving Credit Facility

In December 2018, we amended our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and a syndicate of 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 extends the maturity date 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.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

In April 2020, we borrowed an additional $75 million under the amended credit agreement. The borrowing was made as a precautionary measure to increase our cash position and preserve financial flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. In June 2020, we repaid the additional $75 million of borrowed funds.

After taking into account outstanding borrowings under the amended credit agreement, there was an additional $146.4 million available for us to borrow pursuant to the formula at June 30, 2020. Outstanding borrowings under the amended credit agreement, which are classified as current liabilities, were $85 million and $52.5 million at June 30, 2020 and December 31, 2019, respectively; while letters of credit outstanding under the credit agreement were $3.1 million at June 30, 2020 and December 31, 2019. Borrowings under the credit agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.

At June 30, 2020, the weighted average interest rate on our amended credit agreement was 1.4%, which consisted of $85 million in direct borrowings. At December 31, 2019, the weighted average interest rate on our amended credit agreement was 3.5%, which consisted of $40 million in direct borrowings at 2.3% and an alternative base rate loan of $12.5 million at 5%. During the six months ended June 30, 2020, our average daily alternative base rate loan balance was $1.7 million, compared to a balance of $1.6 million for the six months ended June 30, 2019 and a balance of $1.7 million for the year ended December 31, 2019.

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, 2020, 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

Our Polish subsidiary, SMP Poland sp. z.o.o., has entered into an overdraft facility with HSBC France (Spolka Akcyjna) Oddzial w Polsce, formerly HSBC Bank Polska S.A., for Zloty 30 million (approximately $7.5 million). The facility, as amended, expires in December 2020. 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, 2020 and December 31, 2019, borrowings under the overdraft facility were Zloty 24.1 million (approximately $6 million) and Zloty 16.7 million (approximately $4.4 million), respectively.

Deferred Financing Costs

We had deferred financing costs of $0.7 million and $0.9 million as of June 30, 2020 and December 31, 2019, respectively. Deferred financing costs are related to our revolving credit facility. Deferred financing costs as of June 30, 2020 are being amortized in the amounts of $0.1 million for the remainder of 2020, $0.2 million in 2021, $0.2 million in 2022, and $0.2 million in 2023.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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

Our restricted and performance-based share activity was as follows for the six months ended June 30, 2020:

	Shares			Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2019		852,540		$	35.26
Granted		8,000			33.09
Vested		(59,086	)		32.56
Forfeited		(6,150	)		43.74
Balance at June 30, 2020		795,304		$	35.41

We recorded compensation expense related to restricted shares and performance-based shares of $3 million ($2.2 million, net of tax) and $3.4 million ($2.5 million, net of tax) for the six months ended June 30, 2020 and 2019, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $11.9 million at June 30, 2020, and is expected to be recognized as they vest over a weighted average period of 4.4 years and 0.8 years for employees and directors, respectively.

Note 11. Employee Benefits

We provide certain medical and dental care benefits to 16 former U.S. union employees. The postretirement medical and dental benefit obligation to the former union employees as of June 30, 2020, and the related net periodic benefit cost for the plan for the three and six months ended June 30, 2020 and 2019 were not material.

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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 2020, we made company contributions to the plan of $0.3 million related to calendar year 2019.

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, 2020, we contributed to the trust an additional 44,700 shares from our treasury and released 44,700 shares from the trust leaving 200 shares remaining in the trust as of June 30, 2020.

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 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,
	2020			2019			2020			2019
Basic Net Earnings Per Common Share:
Earnings from continuing operations	$	11,842		$	20,555		$	21,463		$	33,659
Loss from discontinued operations		(875	)		(1,123	)		(1,869	)		(2,011	)
Net earnings available to common stockholders	$	10,967		$	19,432		$	19,594		$	31,648

Weighted average common shares outstanding		22,330			22,328			22,384			22,375

Earnings from continuing operations per common share	$	0.53		$	0.92		$	0.96		$	1.50
Loss from discontinued operations per common share		(0.04	)		(0.05	)		(0.08	)		(0.09	)
Basic net earnings per common share	$	0.49		$	0.87		$	0.88		$	1.41

Diluted Net Earnings Per Common Share:
Earnings from continuing operations	$	11,842		$	20,555		$	21,463		$	33,659
Loss from discontinued operations		(875	)		(1,123	)		(1,869	)		(2,011	)
Net earnings available to common stockholders	$	10,967		$	19,432		$	19,594		$	31,648

Weighted average common shares outstanding		22,330			22,328			22,384			22,375
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock and performance-based stock		389			468			410			482
Weighted average common shares outstanding – Diluted		22,719			22,796			22,794			22,857

Earnings from continuing operations per common share	$	0.52		$	0.90		$	0.94		$	1.47
Loss from discontinued operations per common share		(0.04	)		(0.05	)		(0.08	)		(0.09	)
Diluted net earnings per common share	$	0.48		$	0.85		$	0.86		$	1.38

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,
	2020		2019		2020		2019
Restricted and performance-based shares		261		248		257		242

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 for each reportable segment (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net Sales (a)
Engine Management	$	173,153		$	218,042		$	374,271		$	431,231
Temperature Control		72,392			84,406			123,834			153,330
All Other		2,394			2,724			4,136			4,377
Consolidated	$	247,939		$	305,172		$	502,241		$	588,938

Intersegment Revenue (a)
Engine Management	$	2,666		$	4,921		$	6,680		$	10,270
Temperature Control		1,387			1,786			2,778			3,719
All Other		(4,053	)		(6,707	)		(9,458	)		(13,989	)
Consolidated	$	—		$	—		$	—		$	—

Operating Income
Engine Management	$	16,722		$	25,709		$	38,155		$	48,053
Temperature Control		3,967			7,154			3,619			9,204
All Other		(4,668	)		(5,135	)		(11,430	)		(11,572	)
Consolidated	$	16,021		$	27,728		$	30,344		$	45,685

(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 15, “Net Sales.”

Note 15. Net Sales

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, 2020 and 2019 (in thousands):

Three months ended June 30, 2020 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	153,891	$	69,770	$	—	$	223,661
Canada		4,525		2,257		2,394		9,176
Mexico		3,409		41		—		3,450
Europe		2,526		75		—		2,601
Other foreign		8,802		249		—		9,051
Total	$	173,153	$	72,392	$	2,394	$	247,939

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Three months ended June 30, 2020 (a)	Engine Management		Temperature Control		Other (b)		Total
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	142,787	$	—	$	1,841	$	144,628
Wire and cable		30,366		—		14		30,380
Compressors		—		44,878		493		45,371
Other climate control parts		—		27,514		46		27,560
Total	$	173,153	$	72,392	$	2,394	$	247,939
Major Sales Channel:
Aftermarket	$	141,476	$	66,437	$	2,394	$	210,307
OE/OES		28,351		5,696		—		34,047
Export		3,326		259		—		3,585
Total	$	173,153	$	72,392	$	2,394	$	247,939

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

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

Six months ended June 30, 2020 (a)	Engine Management		Temperature Control		Other (b)			Total
Geographic Area:
United States	$	328,270	$	117,646	$	—		$	445,916
Canada		11,114		5,398		4,136			20,648
Mexico		9,523		100		—			9,623
Europe		5,874		198		—			6,072
Other foreign		19,490		492		—			19,982
Total	$	374,271	$	123,834	$	4,136		$	502,241
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	307,313	$	—	$	3,325		$	310,638
Wire and cable		66,958		—		(8	)		66,950
Compressors		—		70,226		351			70,577
Other climate control parts		—		53,608		468			54,076
Total	$	374,271	$	123,834	$	4,136		$	502,241
Major Sales Channel:
Aftermarket	$	302,059	$	110,831	$	4,136		$	417,026
OE/OES		63,471		12,475		—			75,946
Export		8,741		528		—			9,269
Total	$	374,271	$	123,834	$	4,136		$	502,241

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

(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 six months ended June 30, 2020 and for the three months ended June 30, 2019 exceeded third party sales from our Canadian business unit.

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 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.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

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 16. Commitments and Contingencies

Asbestos

In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying statement of operations. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed on or after September 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 2001, and the amounts paid for settlements, awards of asbestos-related damages, and defense of such claims. At June 30, 2020, approximately 1,600 cases were outstanding for which we may be responsible for any related liabilities. Since inception in September 2001 through June 30, 2020, the amounts paid for settled claims are approximately $33.4 million. We do not have insurance coverage for the indemnity and defense costs associated with the claims we face.

In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study of the asbestos related liabilities performed by an independent actuarial firm, our settlement amounts and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of such claims. As is our accounting policy, we consider the advice of actuarial consultants with experience in assessing asbestos-related liabilities to estimate our potential claim liability; and perform an actuarial evaluation in the third quarter of each year and whenever events or changes in circumstances indicate that additional provisions may be necessary. The methodology used to project asbestos-related liabilities and costs in our actuarial study considered: (1) historical data available from publicly available studies; (2) an analysis of our recent claims history to estimate likely filing rates into the future; (3) an analysis of our currently pending claims; and (4) an analysis of our settlements to date in order to develop average settlement values. Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments and awards of asbestos-related damages was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.

In accordance with our policy to perform an annual actuarial evaluation in the third quarter of each year, an updated actuarial study was performed as of August 31, 2019. The results of the August 31, 2019 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers, ranging from $52 million to $90.6 million for the period through 2064. The change from the revised prior year study, which was performed in the fourth quarter of 2018, was a $5.3 million increase for the low end of the range and a $6.7 million increase for the high end of the range. The increase in the estimated undiscounted liability from the revised prior year study at both the low end and high end of the range reflects our actual experience, our historical data and certain assumptions with respect to events that may occur in the future. Based upon the results of the August 31, 2019 actuarial study, in September 2019, we increased our asbestos liability to $52 million, the low end of the range, and recorded an incremental pre-tax provision of $9.7 million in earnings (loss) from discontinued operations in the accompanying statement of operations. Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the updated study, to range from $50.6 million to $85.2 million for the period through 2064. As related to our potential asbestos-related liability, we were found liable for $7.6 million in compensatory damages as a defendant in a 2018 asbestos liability case in California. We are pursuing all rights of appeal of this case. Total operating cash outflows related to discontinued operations, which include settlements and legal costs, were $3.4 million and $5.1 million for the six months ended June 30, 2020 and 2019, respectively.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future and whenever events or changes in circumstances indicate that additional provisions may be necessary. Given the uncertainties associated with projecting such matters into the future and other factors outside our control, we can give no assurance that additional provisions will not be required. We will continue to monitor events and changes in circumstances surrounding these potential liabilities in determining whether to perform additional actuarial evaluations and whether additional provisions may be necessary. At the present time, however, we do not believe that any additional provisions would be reasonably likely to have a material adverse effect on our liquidity or consolidated financial position.

Other Litigation

We are currently involved in various other legal claims and legal proceedings (some of which may involve substantial amounts), including claims related to commercial disputes, product liability, employment, and environmental. Although these legal claims and legal proceedings are subject to inherent uncertainties, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the ultimate outcome of these matters will not, either individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. We may at any time determine that settling any of these matters is in our best interests, which settlement may include substantial payments. Although we cannot currently predict the specific amount of any liability that may ultimately arise with respect to any of these matters, we will 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.

Warranties

We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time of the product depending on the nature of the product. As of June 30, 2020 and 2019, we have accrued $26.5 million and $22.1 million, respectively, for estimated product warranty claims included in accrued customer returns. The accrued product warranty costs are based primarily on historical experience of actual warranty claims.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

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

The following table provides the changes in our product warranties (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Balance, beginning of period	$	23,224		$	22,694		$	22,445		$	19,636
Liabilities accrued for current year sales		22,795			24,283			44,862			50,679
Settlements of warranty claims		(19,522	)		(24,891	)		(40,810	)		(48,229	)
Balance, end of period	$	26,497		$	22,086		$	26,497		$	22,086

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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 supply chain financing 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); the effects of widespread public health crises, including the novel coronavirus (COVID-19) pandemic; 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.

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 the heavy duty, industrial equipment and original equipment markets.

We are organized into two operating segments. Each segment focuses on providing our customers with full-line coverage of its products, and a full suite of complementary services that are tailored to our customers’ business needs and driving end-user demand for our products. We sell our products primarily to automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.

Our Culture

Our Company was founded in 1919 on the values of ethics, integrity, common decency and respect for others. These values continue to this day and are embodied in our Code of Ethics, which has been adopted by the Board of Directors of the Company to serve as a statement of principles to guide our decision-making and 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 partners has resulted in high customer satisfaction, as evidenced by the customer awards that we routinely win, and decades-long customer relationships.

We also take environmental and social issues seriously. We believe that our commitment to identifying and implementing positive environmental and social related business practices strengthens our Company, improves our relationship with our shareholders and better serves our customers, our communities and the broader environment within which we conduct our business.

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Seasonality

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

Inventory Management

We face inventory management issues as a result of 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

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.

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Impact of the Novel Coronavirus (“COVID-19”)

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) a pandemic, which has spread globally and created significant volatility, uncertainty and economic disruption in many countries in which we operate, including the United States, Mexico, Canada, Poland, and China. In certain countries in which we operate, national, state and local governments implemented a variety of measures in response to the COVID-19 pandemic that had the effect of restricting or limiting, among other activities, the operations of certain businesses. While many of these measures have been eased, allowing for increased economic activity during the second quarter of 2020, there can be no assurances that restrictive measures will not be implemented again if the outbreak were to increase.

As we were declared an essential business under national and regional shelter-in place orders, our business operations have continued throughout the first six months of 2020. During the three months ended March 31, 2020, our overall business remained relatively stable, with the effects of the COVID-19 pandemic weakening our sales in the second half of March 2020, as customer POS sales began to soften. In April 2020, we experienced a significant reduction in customer demand for our products. As many of the national and regional shelter-in-place orders were eased, our business began to rebound in May 2020. The trend continued into June 2020 as we continued to experience an increase in incoming orders and increased demand for our products. As we begin our third quarter of 2020, our business is improving to pre-COVID-19 levels with our customers' POS sales exceeding their comparable figures for 2019. Overall, our net sales for the three and six months ended June 30, 2020 have declined $57.2 million, or 18.8%, and $86.7 million, or 14.7%, respectively, compared to the three and six months ended June 30, 2019. Our gross margins decreased to 26% in the second quarter of 2020, compared to 29.1% in the second quarter of 2019, and decreased to 26.8% in the first six months of 2020, compared to 28.3% in the first six months of 2019.

In response to the COVID-19 pandemic, we have established a committee, comprised of our executive officers, to oversee the Company’s risk identification, management and mitigation strategies regarding the impact of the pandemic on our business and operations. Among the issues that are actively being managed by the committee are those relating to the duration, severity and scope of the pandemic, the impact of governmental measures in response to the pandemic, potentially declining customer demand for our products, the deterioration of general economic conditions, potential disruptions in our supply chain, the management of inventories and production volumes, cost reduction and cash preservation initiatives, and the enactment of policies and practices to ensure the health and safety of our employees, contractors and customers. The committee continues to meet on a regular basis, closely monitoring events related to the pandemic and any appropriate actions that may be taken.

During the second quarter of 2020, we implemented many cost reduction measures in response to the impact of the COVID-19 pandemic on our business, including the reduction of discretionary spending and the temporary reduction of production levels in several of our facilities in line with the lower customer demand levels, including the temporary closures of our facilities in Mexico and Canada. These facilities have since been reopened, and the production levels at all facilities have been adjusted to meet the increase in customer demand after considering current inventory levels and the stability of our supply chain. We continue to closely monitor customer demand and inventory levels as we manage the production levels at all of our facilities.

Additionally, as part of the cost reduction measures implemented by us in response to the impact of the COVID-19 pandemic on our business, in April 2020, our Board of Directors approved to temporarily (a) reduce base salaries of our Office of Chief Executive (i.e., the Executive Chairman, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Commercial Officer) by 25%, (b) reduce the base salaries of our other executives by 10%, (c) reduce non-employee directors’ annual cash and equity retainers by 25%, and (d) suspend our quarterly cash dividend payments and stock repurchases until further notice. We continue to analyze our cost structure in response to the challenges arising from the COVID-19 pandemic, and we may implement additional cost reduction measures, or modify or terminate any prior cost reduction measures taken as general business conditions warrant.

Regarding the health and welfare of our employees, contractors and customers, we have implemented a number of policies and practices at all of our facilities. We have provided personal protection equipment, including face masks and gloves, to all our employees and require their usage while at work, have installed plexiglas partitions where appropriate, and require temperature checks for all employees and visitors upon entering our facilities. We have established protocols for individuals who have tested positive, and for employees who have symptoms or have been exposed to the virus. All of our facilities are thoroughly cleaned and sanitized daily, and all state mandated protocols are followed as employees return to work after the lifting of shelter-in-place orders. The health and safety of our employees, vendors and visitors has always been and will continue to be our first priority.

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Finally, in April 2020, we borrowed $75 million under our amended credit agreement. The borrowing was made as a precautionary measure to increase our cash position and preserve financial flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. In June 2020, we repaid the additional $75 million of borrowed funds.

The effects of the COVID-19 pandemic on our business, financial condition and results of operations in the third quarter of 2020 and future periods may continue to be significant based upon the significant volatility, uncertainty and potential economic disruption caused by the pandemic.

See “Interim Results of Operations” and Item 1A “Risk Factors” of this Report for a further discussion of the impact of the COVID-19 pandemic on our business, results of operations and financial condition.

Impact of CARES Act

In March 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act was passed to protect Americans from the public health and economic impacts of COVID-19. The CARES Act provides for fast and direct assistance for American workers, families and small businesses, and preserves jobs for American industries. As related to the preservation of jobs for American industries, the CARES Act includes the enactment of an employee retention feature, a payroll tax deferral opportunity and, in certain instances, payroll support and business loans.

The payroll tax deferral opportunity in the CARES Act enables businesses to enhance their cash flow by permitting the cash deferral of the payment of the employer’s share of the Social Security tax they otherwise would be responsible for paying to the federal government with respect to their employees. The amount of the cash deferral will be paid over the next two years, with 50% of the amount to be paid by December 31, 2021 and the remaining 50% by December 31, 2022. In April 2020, we elected to defer our share of the employers’ Social Security tax relating to wages paid to our employees. The total cash deferral as of June 30, 2020 is $1.7 million, which we plan to pay equally by December 31, 2021 and 2022.

The employee retention feature of the CARES Act enables employers to obtain a tax credit for wages paid to employees unable to provide services to the company as a result of COVID-19. The tax credit is limited to 50% of up to $10,000 of wages per employee paid, or incurred, from March 13, 2020 through December 31, 2020. Although our manufacturing facilities were deemed to be an essential business and continued to operate, our headquarters in Long Island City, New York were forced to close under the New York State shelter-in-place mandate by the governor. We are currently reviewing the employee retention feature of the CARES Act to determine our eligibility for the 50% tax credit throughout the company. Additionally, we are in the process of investigating eligibility for wage subsidies in Canada and Poland under local law.

Impact of Changes in U.S. Trade Policy

Changes in U.S. trade policy, particularly as it relates to China, as with much of our industry, have resulted in the assessment of increased tariffs on goods that we import into the United States. Although our operating results for the first six months of 2020 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 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 future operating results. Although we are confident that we will be able to pass along the impact of the increased tariffs to our customers, there can be no assurances that we will be able to pass on the entire increased costs imposed by the tariffs.

Index

Interim Results of Operations:

Comparison of the Three Months Ended June 30, 2020 to the Three Months Ended June 30, 2019

Sales. Consolidated net sales for the three months ended June 30, 2020 were $247.9 million, a decrease of $57.2 million, or 18.8%, compared to $305.2 million in the same period of 2019, with the majority of our net sales to customers located in the United States. 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 three months ended June 30, 2020 and 2019 (in thousands):

	Three Months Ended June 30,
	2020		2019
Engine Management:
Ignition, Emission Control, Fuel and Safety Related System Products	$	142,787	$	181,831
Wire and Cable.		30,366		36,211
Total Engine Management		173,153		218,042

Temperature Control:
Compressors		44,878		52,493
Other Climate Control Parts		27,514		31,913
Total Temperature Control		72,392		84,406

All Other		2,394		2,724

Total	$	247,939	$	305,172

Engine Management’s net sales decreased $44.9 million, or 20.6%, to $173.2 million for the three months ended June 30, 2020. Net sales in ignition, emission control, fuel and safety related system products for the three months ended June 30, 2020 were $142.8 million, a decrease of $39 million, or 21.5%, compared to $181.8 million in the same period of 2019. Net sales in the wire and cable product group for the three months ended June 30, 2020 were $30.4 million, a decrease of $5.8 million, or 16.1%, compared to $36.2 million in the three months ended June 30, 2019. Engine Management’s decrease in net sales for the second quarter of 2020 compared to the same period in 2019 results primarily from the impact of the COVID-19 pandemic, and the impact of national and regional shelter-in-place orders. As many of the national and regional shelter-in-place orders were eased, Engine Management’s net sales strengthened in May 2020, and continued into June 2020.

Temperature Control’s net sales decreased $12 million, or 14.2%, to $72.4 million for the three months ended June 30, 2020. Net sales in the compressors product group for the three months ended June 30, 2020 were $44.9 million, a decrease of $7.6 million, or 14.5%, compared to $52.5 million in the same period of 2019. Net sales in the other climate control parts product group for the three months ended June 30, 2020 were $27.5 million, a decrease of $4.4 million, or 13.8%, compared to $31.9 million in the three months ended June 30, 2019. Temperature Control’s decrease in net sales for the second quarter of 2020 compared to the same period in 2019 results primarily from the impact of the COVID-19 pandemic, and the impact of national and regional shelter-in-place orders. As many of the national and regional shelter-in-place orders were eased, Temperature Control’s net sales strengthened in May 2020, and continued into June 2020. 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, decreased to 26% in the second quarter of 2020, compared to 29.1% in the second quarter of 2019. The following table summarizes gross margins by segment for the three months ended June 30, 2020 and 2019, respectively (in thousands):

Three Months Ended June 30,	Engine Management			Temperature Control			Other		Total
2020
Net sales	$	173,153		$	72,392		$	2,394	$	247,939
Gross margins		46,230			16,520			1,608		64,358
Gross margin percentage		26.7	%		22.8	%		—		26	%

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	%

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Compared to the second quarter of 2019, gross margins at Engine Management decreased 2.6 percentage points from 29.3% to 26.7%, while gross margins at Temperature Control decreased 3.9 percentage points from 26.7% to 22.8%. The gross margin percentage decrease in Engine Management compared to the prior year primarily reflects the negative impact of lower year-over-year absorption due to lower sales levels and production volumes, and was also partly impacted by the negative impact of unfavorable product and customer mix. The gross margin percentage decrease in Temperature Control compared to the prior year reflects primarily the negative impact of lower year-over-year absorption due to lower production volumes. The lower production volumes at both Engine Management and Temperature Control is reflective of the general slowdown in the worldwide economy caused by the COVID-19 pandemic, as we temporarily reduced production levels in several of our facilities in line with lower customer demand. As customer demand began to increase during the second quarter of 2020, the production levels at all of our facilities have been adjusted to meet the increase in customer demand. We continue to closely monitor customer demand and inventory levels as we manage the production levels at all of our facilities.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) were $48.3 million, or 19.5% of consolidated net sales, in the second quarter of 2020, as compared to $60.5 million, or 19.8% of consolidated net sales, in the second quarter of 2019. The $12.2 million decrease in SG&A expenses as compared to the second quarter of 2019 is principally due to (1) lower selling, marketing and distribution costs associated with lower sales volumes, (2) lower costs incurred related to our accounts receivable supply chain financing arrangements resulting from lower sales volumes, as well as lower discount rates, (3) lower incentive compensation expenses and, (4) lower other general and administrative expenses resulting from the impact of our cost reduction measures implemented in the second quarter of 2020, including the reduction of discretionary spending.

Restructuring and Integration Expenses. Restructuring and integration expenses for the second quarter of 2020 were $9,000 compared to restructuring and integration expenses of $0.6 million for the second quarter of 2019. The restructuring and integration expenses incurred in the second quarter of 2020 and 2019 consist of costs related to residual relocation activities in our Engine Management segment in connection with our integration of the Pollak business of Stoneridge, Inc., acquired in April 2019. As of June 30, 2020, all restructuring and integration initiatives have been substantially completed.

Operating Income. Operating income decreased to $16 million in the second quarter of 2020, compared to $27.7 million in the second quarter of 2019. The year-over-year decrease in operating income of $11.7 million is the result of the impact of lower consolidated net sales, and lower gross margins as a percentage of consolidated net sales, offset, in part, by lower SG&A expenses, and lower restructuring and integration expenses.

Other Non-Operating Income, Net. Other non-operating income, net was $0.6 million in the second quarter of 2020, compared to $1.4 million in the second quarter of 2019. The year-over-year decrease in other non-operating income, net results primarily from the decrease in year-over-year equity income from our joint ventures. The lower year-over-year equity income from our joint ventures is reflective of the general slowdown in the worldwide economy caused by the COVID-19 pandemic.

Interest Expense. Interest expense decreased to $0.8 million in the second quarter of 2020, compared to $1.7 million in the second quarter of 2019. The year-over-year decrease in interest expense reflects the impact of lower year-over-year average interest rates on our revolving credit facility, and slightly lower average outstanding borrowings in 2020 when compared to 2019.

Income Tax Provision. The income tax provision in the second quarter of 2020 was $4 million at an effective tax rate of 25.3% compared to $6.9 million at an effective tax rate of 25% for the same period in 2019. The slightly higher effective tax rate in the second quarter of 2020 compared to the second quarter of 2019 results primarily from lower mix of foreign income from our joint ventures compared to our U.S. taxable income.

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Loss from Discontinued Operations. During the second quarter of 2020 and 2019, the loss from discontinued operations, net of tax was $0.9 million and $1.1 million, respectively. The loss from discontinued operations, net of tax, reflects legal expenses associated with our asbestos-related liability. 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.

For further information regarding the impact of the COVID-19 pandemic on our business, refer to the paragraphs entitled, “Impact of the Novel Coronavirus (COVID-19)” and “Impact of CARES Act,” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10Q.

Comparison of the Six Months Ended June 30, 2020 to the Six Months Ended June 30, 2019

Sales. Consolidated net sales for the six months ended June 30, 2020 were $502.2 million, a decrease of $86.7 million, or 14.7%, compared to $588.9 million in the same period of 2019, with the majority of our net sales to customers in the United States. 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, 2020 and 2019 (in thousands):

	Six Months Ended June 30,
	2020		2019
Engine Management:
Ignition, Emission Control, Fuel and Safety Related System Products	$	307,313	$	357,892
Wire and Cable		66,958		73,339
Total Engine Management		374,271		431,231

Temperature Control:
Compressors		70,226		92,304
Other Climate Control Parts		53,608		61,026
Total Temperature Control		123,834		153,330

All Other		4,136		4,377

Total	$	502,241	$	588,938

Engine Management’s net sales decreased $57 million, or 13.2%, to $374.3 million for the first six months of 2020. Net sales in ignition, emission control, fuel and safety related system products for the six months ended June 30, 2020 were $307.3 million, a decrease of $50.6 million, or 14.1%, compared to $357.9 million in the same period of 2019. Net sales in the wire and cable product group for the six months ended June 30, 2020 were $67 million, a decrease of $6.3 million, or 8.7%, compared to $73.3 million in the six months ended June 30, 2019. In April 2019, we acquired certain assets and liabilities of the Pollak business of Stoneridge, Inc. Incremental sales from our acquisition of the Pollak business of $9.5 million were included in the net sales of the ignition, emission control, fuel and safety related system products market for the six months ended June 30, 2020. Excluding the incremental sales from the acquisition, net sales in the ignition, emission control, fuel and safety related system products market decreased $60.1 million, or 16.8%, and Engine Management net sales decreased $66.5 million, or 15.4%. Engine Management’s decrease in net sales for the first six months of 2020 compared to the same period in 2019 results primarily from the impact of the COVID-19 pandemic and the impact of national and regional shelter-in-place orders related thereto; and to a lesser extent the impact of several pipeline orders from certain customers in the first quarter of 2019 that did not recur in the same period of 2020. As many of the national and regional shelter-in-place orders were eased, Engine Management’s net sales strengthened in May 2020, and continued into June 2020.

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Temperature Control’s net sales decreased $29.5 million, or 19.2%, to $123.8 million for the first six months of 2020. Net sales in the compressors product group for the six months ended June 30, 2020 were $70.2 million, a decrease of $22.1 million, or 23.9%, compared to $92.3 million in the same period of 2019. Net sales in the other climate control parts product group for the six months ended June 30, 2020 were $53.6 million, a decrease of $7.4 million, or 12.1%, compared to $61 million in the six months ended June 30, 2019. Temperature Control’s decrease in net sales for the first six months of 2020 compared to the same period in 2019 results from the impact of the COVID-19 pandemic and the impact of national and regional shelter-in-place orders related thereto; and to the impact of strong pre-season orders in the first quarter of 2019 that did not occur in the first quarter of 2020, which resulted from the impact of a somewhat mild summer in 2019 which left inventory levels at our customers higher than the prior year. As many of the national and regional shelter-in-place orders were eased, Temperature Control’s net sales strengthened in May, 2020, and continued into June 2020. 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, decreased to 26.8% in the first six months of 2020, compared to 28.3% during the same period in 2019. The following table summarizes gross margins by segment for the six months ended June 30, 2020 and 2019, respectively (in thousands):

Six Months Ended June 30,	Engine Management			Temperature Control			Other		Total
2020
Net sales	$	374,271		$	123,834		$	4,136	$	502,241
Gross margins		102,935			28,616			3,202		134,753
Gross margin percentage		27.5	%		23.1	%		—		26.8	%

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	%

Compared to the first six months of 2019, gross margins at Engine Management decreased 1.1 percentage points from 28.6% to 27.5%, while gross margins at Temperature Control decreased 2.2 percentage points from 25.3% to 23.1%. The gross margin percentage decrease in Engine Management compared to the prior year primarily reflects the negative impact of lower year-over-year absorption due to lower sales levels and production volumes, and was also partly due to the negative impact of unfavorable product and customer mix. The gross margin percentage decrease in Temperature Control compared to the prior year reflects primarily the negative impact of lower year-over-year absorption due to lower production volumes. The lower production volumes at both Engine Management and Temperature Control is reflective of the general slowdown in the worldwide economy caused by the COVID-19 pandemic, as we temporarily reduced production levels in several of our facilities in line with lower customer demand. As customer demand began to increase during the second quarter of 2020, the production levels at all of our facilities have been adjusted to meet the increase in customer demand. We continue to closely monitor customer demand and inventory levels as we manage the production levels at all of our facilities.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) decreased to $104.2 million, or 20.7% of consolidated net sales, in the first six months of 2020, as compared to $120.5 million, or 20.5% of consolidated net sales in the first six months of 2019. The $16.3 million decrease in SG&A expenses as compared to the second quarter of 2019 is principally due to (1) lower selling, marketing and distribution costs associated with lower sales volumes, (2) lower costs incurred related to our accounts receivable supply chain financing arrangements resulting from lower sales volumes, as well as lower discount rates, (3) lower incentive compensation expenses and, (4) lower other general and administrative expenses resulting from the impact of our cost reduction measures implemented in the second quarter of 2020, including the reduction of discretionary spending, all of which more than offset the impact of incremental expenses of $1.1 million from our April 2019 acquisition of certain assets and liabilities of the Pollak business of Stoneridge. Inc., including amortization of intangible assets acquired.

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Restructuring and Integration Expenses. Restructuring and integration expenses for the six months ended June 30, 2020 were $0.2 million compared to restructuring and integration expenses of $0.6 million in the same period of 2019. The restructuring and integration expenses incurred for the six months ended June 30, 2020 and 2019 consist of costs related to residual relocation activities in our Engine Management segment in connection with our integration of the Pollak business of Stoneridge, Inc., acquired in April 2019. As of June 30, 2020, all restructuring and integration initiatives have been substantially completed.

Operating Income. Operating income was $30.3 million in the first six months of 2020, compared to $45.7 million for the same period in 2019. The year-over-year decrease in operating income of $15.4 million is the result of the impact of lower consolidated net sales, and lower gross margins as a percentage of consolidated net sales, offset, in part, by lower SG&A expenses and lower restructuring and integration expenses.

Other Non-Operating Income, Net. Other non-operating income, net was $0.1 million in the first six months of 2020, compared to other non-operating income, net of $2.1 million in the first six months of 2019. The year-over-year decrease in other non-operating income, net results primarily from the decrease in year-over-year equity income from our joint ventures and the unfavorable impact of changes in foreign currency exchange rates. The lower year-over-year equity income from our joint ventures is reflective of the general slowdown in the worldwide economy caused by the COVID-19 pandemic.

Interest Expense. Interest expense decreased to $1.6 million in the first six months of 2020, compared to $2.8 million for the same period in 2019. The year-over-year decrease in interest expense reflects the impact of lower year-over-year average interest rates on our revolving credit facility, and slightly lower average outstanding borrowings in 2020 when compared to 2019.

Income Tax Provision. The income tax provision for the six months ended June 30, 2020 was $7.3 million at an effective tax rate of 25.4%, compared to $11.3 million at an effective tax rate of 25.1% for the same period in 2019. The slightly higher effective tax rate in the first six months of 2020 compared to the first six months of 2019 results primarily from lower mix of foreign income from our joint ventures compared to our U.S. taxable income.

Loss from Discontinued Operations. During the first six months of 2020 and 2019, the loss from discontinued operations, net of tax was $1.9 million and $2 million, respectively. The loss from discontinued operations, net of tax, reflects legal expenses associated with our asbestos-related liability. 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

All of our restructuring and integration programs have been substantially completed. For a detailed discussion on the restructuring and integration costs, see Note 4, “Restructuring and Integration Expenses,” of the notes to our consolidated financial statements (unaudited).

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Liquidity and Capital Resources

Operating Activities. During the first six months of 2020, cash used in operating activities was $0.9 million compared to $19.5 million in the same period of 2019; and cash provided by operating activities in the second quarter of 2020 was $31.9 million compared to $7.2 million in the second quarter of 2019. The decrease in cash used in operating activities during the first six months of 2020 compared to the same period in 2019 resulted primarily from the decrease in inventories compared to an increase in inventories in the prior year, the decrease in prepaid expenses and other current assets compared an increase in prepaid expenses and other current assets in the prior year, and the increase in sundry payables and accrued expenses compared to a decrease in sundry payables and accrued expenses in the prior year, partially offset by the decrease net earnings, the larger year-over-year increase in accounts receivable, and the larger year-over-year decrease in accounts payable.

Net earnings during the first six months of 2020 were $19.6 million compared to $31.6 million in the first six month of 2019. During the first six of 2020, (1) the increase in accounts receivable was $51.3 million compared to the year-over-year increase in accounts receivable of $26.6 million in 2019; (2) the decrease in inventories was $12.7 million compared to the year-over-year increase in inventories of $19.7 million in 2019; (3) the decrease in accounts payable was $21.8 million compared to the year-over-year decrease in accounts payable of $7 million in 2019; (4) the decrease in prepaid expenses and other current assets was $5.7 million compared to the year-over-year increase in prepaid expenses and other current assets of $6.4 million in 2019; and (5) the increase in sundry payables and accrued expenses was $14.8 million compared to the year-over-year decrease in sundry payables of $7.5 million in 2019. We continue to actively manage our working capital to maximize our operating cash flow.

Investing Activities. Cash used in investing activities was $9 million in the first six months of 2020, compared to $41.2 million in the same period of 2019; and cash used in investing activities in the second quarter of 2020 was $4.6 million compared to $42.9 million in the second quarter of 2019. Investing activities during the first six months of 2020 consisted of capital expenditures of $9 million; while 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 April 2019 acquisition of certain assets and liabilities of the Pollak business of Stoneridge, Inc.; and (3) capital expenditures of $7.6 million.

Financing Activities. Cash provided by financing activities was $21.8 million in the first six months of 2020 as compared to $66.6 million in the same period of 2019; and cash used in financing activities in the second quarter of 2020 was $18.1 million compared to cash provided by financing activities of $41.4 million in the second quarter of 2019. During the first six months of 2020, (1) we increased borrowings under our revolving credit facility by $32.5 million as compared to the increase in borrowings under our revolving credit facility of $86.3 million in 2019; (2) we made cash payments in the first six months of 2020 for the repurchase of shares of our common stock of $8.7 million as compared to $10.7 million in 2019; and (3) we paid dividends of $5.6 million in the first six months of 2020 as compared to $10.3 million in the comparable period last year. In January 2020, our Board of Directors voted to increase our quarterly dividend from $0.23 per share in 2019 to $0.25 per share in 2020. In April 2020, in response to the impact of the COVID-19 pandemic on our business, our Board of Directors approved to temporarily suspend our quarterly cash dividend payments and stock repurchases until further notice, and we borrowed $75 million under our revolving credit facility as a precautionary measure to increase our cash position and preserve financial flexibility. In June 2020, we repaid the additional $75 million of borrowed funds.

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Borrowings under the amended credit agreement are secured by substantially all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries. Availability under the amended credit agreement is based on a formula of eligible accounts receivable, eligible drafts presented to the banks under our supply chain financing arrangements and eligible inventory. After taking into account outstanding borrowings under the amended credit agreement there was an additional $146.4 million available for us to borrow pursuant to the formula at June 30, 2020. Outstanding borrowings under the amended credit agreement, which are classified as current liabilities, were $85 million and $52.5 million at June 30, 2020 and December 31, 2019, respectively; while letters of credit outstanding under the amended credit agreement were $3.1 million at June 30, 2020 and December 31, 2019. Borrowings under the amended credit agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.

At June 30, 2020, the weighted average interest rate on our amended credit agreement was 1.4%, which consisted of $85 million in direct borrowings. At December 31, 2019, the weighted average interest rate on our amended credit agreement was 3.5%, which consisted of $40 million in direct borrowings at 2.3% and an alternative base rate loan of $12.5 million at 5%. During the six months ended June 30, 2020, our average daily alternative base rate loan balance was $1.7 million, compared to a balance of $1.6 million for the six months ended June 30, 2019, and a balance of $1.7 million for the year ended December 31, 2019.

In order to reduce our accounts receivable balances and improve our cash flow, we are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions. We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements 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.

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In May 2018, our Board of Directors authorized the purchase of up to $20 million of our common stock under a 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, during the year ended December 31, 2018 and six months ended June 30, 2019, we repurchased 201,484 and 221,748 shares of our common stock, respectively, at a total cost of $9.3 million and $10.7 million, respectively, thereby completing the 2018 Board of Directors authorization.

In March 2020, our Board of Directors authorized the purchase of up to $20 million of our common stock under a 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, during the three months ended March 31, 2020, we repurchased 222,741 shares of our common stock at a total cost of $8.7 million. Our last common stock repurchase was made on March 20, 2020. In April 2020, in response to the impact of the COVID-19 pandemic on our business, our Board of Directors approved to temporarily suspend our stock repurchases until further notice. As of June 30, 2020, there was approximately $11.3 million available for future stock purchases under the program.

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 we will be able to mitigate the impact of the COVID-19 pandemic on our business and operating cash flow by managing our inventories and production levels to align with customer demand for our products, and effectively managing our costs and expenses, and 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, refer to Item 1A “Risk Factors” in this Report and Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ending December 31, 2019.

The following table summarizes our contractual commitments as of June 30, 2020 and expiration dates of commitments through 2028 (a):

(In thousands)	2020		2021		2022		2023		2024			2025-2028	Total
Operating lease obligations	$	4,461	$	8,421	$	7,020	$	5,685	$	3,881	$	7,844	$	37,312
Postretirement benefits		18		32		29		25		25		50		179
Severance payments related to restructuring and integration		105		142		28		1		—		—		276
Total commitments	$	4,584	$	8,595	$	7,077	$	5,711	$	3,906	$	7,894	$	37,767

(a)

Indebtedness under our revolving credit facility is not included in the table above as it is reported as a current liability in our consolidated balance sheets. As of June 30, 2020, amounts outstanding under our revolving credit facilities were $85 million.

Critical Accounting Policies

We have identified several accounting policies 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, 2019.

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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 estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects of the COVID-19 pandemic based upon the volatility, uncertainty and potential economic disruption caused by the pandemic, and other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.

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).

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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, 2020, 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, 2020 and December 31, 2019, 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, 2020 and December 31, 2019.

In addition, we are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions. We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements is less than the cost of servicing our receivables with existing debt. During the three months and six months ended June 30, 2020, we sold $147.7 million and $297.9 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 $1.5 million and $3 million negative impact on our earnings or cash flows during the three months and six months ended June 30, 2020, 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, 2019.

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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, 2020, 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.

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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 1A.

RISK FACTORS

There have been no material changes to the risks previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, except as described below.

Our business, results of operations and financial condition could be materially adversely affected by the effects of widespread public health crises, including the novel coronavirus (COVID-19) pandemic, that are beyond our control.

The outbreak of the novel coronavirus (COVID-19) in countries in which we operate, including the United States, Mexico, Canada, Poland, the U.K. and China, could have a material adverse effect on our business, results of operations and financial condition. Ultimately, the duration and severity of the pandemic may vary depending on the characteristics of the virus and the public health response; therefore, the nature and extent of its impact on our business and operations may be uncertain and beyond our control. Customer demand for our products and customer preferences regarding product mix and distribution channels have been impacted as a result of the COVID-19 pandemic, and significant uncertainty exists with respect to the potential future impact of the pandemic as well as a deterioration of general economic conditions, including high unemployment and a possible national or global recession.

In particular, in April 2020, we experienced a significant reduction in customer demand for our products. In May 2020, our business began to rebound, and in June 2020 we experienced sales which were in line with levels in 2019. Notwithstanding these results, there can be no assurances that the recent positive trend in our business will continue, and that any decrease in customer demand will be offset by increased demand in the future. If customer demand were to decrease in future periods, or if customer preferences regarding product mix and distribution channels were to change, we may be required to adjust and reduce production volumes and implement cost reduction and cash preservation initiatives, including potential reductions in capital expenditures and employee furloughs, which could have a material adverse impact on our business, results of operations and financial condition.

In certain countries in which we operate, national, state and local governments implemented a variety of measures in response to the COVID-19 pandemic, including by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), restricting or limiting the operations of businesses deemed to be non-essential, and imposing travel restrictions on individuals, including restrictions requiring individuals to stay at their place of residence except to perform certain activities deemed to be essential. In certain jurisdictions, these governmental measures have been eased through planned, phased in “re-openings;” however, in other jurisdictions, re-opening plans have been subsequently paused or reversed in response to an increase in the number of new COVID-19 cases. Although we have been able to continue to perform, with certain modifications, all of the material operations at all of our principal facilities, we can provide no assurances that we will be able to continue to perform such operations in the future without disruption, such as temporary closures, as a result of new or modifications to existing governmental measures in response to the COVID-19 pandemic. Any restrictions or limitations on our ability to perform such operations in the future without disruption, such as temporary closures, as a result of governmental measures in response to the pandemic could have a material adverse effect on our business, results of operations and financial condition.

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The COVID-19 pandemic could cause material disruptions to our business and operations as a result of worker absenteeism due to illness or other factors, and the implementation of various exposure-reducing and infection prevention measures, such as facility modifications, updated policies for high risk employees, work-from-home allowances, cleaning and disinfecting measures, social distancing, staggered work shifts and reduced operations and production volumes. We have had to temporarily suspend operations to clean and disinfect areas within our facilities where employees, who later tested positive or exhibited symptoms of COVID-19 performed work. Depending on the extent and duration of these disruptions, and their effects on our business and operations, our costs could increase, including our costs to address the health and safety of our employees, our ability to manufacture and distribute product to satisfy demand for our products could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected.

Furthermore, the COVID-19 pandemic could have a material adverse effect on the business, operations and financial condition of our customers, suppliers and other supply chain partners as a result of the governmental measures described above, disruptions to their business and operations for reasons similar to those described above, and their ability to manage and mitigate the adverse effects of these and other risks unique to their business and operations that may arise as a result of the pandemic.

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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**	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH**	Inline XBRL Taxonomy Extension Schema Document.
101.CAL**	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB**	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF**	Inline XBRL Taxonomy Extension Definition Linkbase Document.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

**	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.”

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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, 2020	/s/ Nathan R. Iles
	Nathan R. Iles
	Chief Financial Officer
	(Principal Financial and
	Accounting Officer)