UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended September 30, 2010
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934.

Commission file number:  1-4743
 
Standard Motor Products, Inc.
(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes o      No o

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

        Large Accelerated Filer o                     Accelerated Filer þ 
        Non-Accelerated Filer    o (Do not check if a smaller reporting company)     Smaller reporting company   o

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

As of the close of business on October 31, 2010, there were 22,655,492 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.
 
 
 
 
 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

INDEX
 
   
Page No.
PART I - FINANCIAL INFORMATION
     
Item 1.
Consolidated Financial Statements:
  
     
 
Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2010 and 2009
3
     
 
Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009
4
     
 
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2010 and 2009
5
     
 
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Three Months and Nine Months Ended September 30, 2010
6
     
 
Notes to Consolidated Financial Statements (Unaudited)
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
37
     
Item 4.
Controls and Procedures
38
     
PART II – OTHER INFORMATION
     
Item 1.
Legal Proceedings
39
     
Item 6.
Exhibits
41
     
Signatures
  
41
 
 
 
 

PART I - FINANCIAL INFORMATION
 
ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ended
    
Nine Months Ended
  
(In thousands, except share and per share data)
  
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(Unaudited)
    
(Unaudited)
  
                         
Net sales
   $ 227,540     $ 205,577     $ 637,939     $ 575,297  
Cost of sales
     167,526       155,774       475,718       438,195  
Gross profit
     60,014       49,803       162,221       137,102  
Selling, general and administrative expenses
     41,991       36,775       120,459       109,607  
Restructuring and integration expenses
     1,388       3,304       3,430       5,677  
Operating income
     16,635       9,724       38,332       21,818  
Other income, net
     1,736       783       2,432       4,310  
Interest expense
     1,844       2,423       5,710       7,225  
Earnings from continuing operations before taxes
     16,527       8,084       35,054       18,903  
Provision for income taxes
     5,430       3,360       13,029       7,754  
Earnings from continuing operations
     11,097       4,724       22,025       11,149  
Loss from discontinued operations, net of income taxes
     (1,441 )     (1,639 )     (2,309 )     (2,221 )
Net earnings
   $ 9,656     $ 3,085     $ 19,716     $ 8,928  
                                 
Per share data:
                                
Net earnings per common share – Basic:
                                
Earnings from continuing operations
   $ 0.49     $ 0.25     $ 0.98     $ 0.59  
Discontinued operations
     (0.06 )     (0.09 )     (0.10 )     (0.11 )
Net earnings per common share – Basic
   $ 0.43     $ 0.16     $ 0.88     $ 0.48  
                                 
Net earnings per common share – Diluted:
                                
Earnings from continuing operations
   $ 0.48     $ 0.25     $ 0.97     $ 0.59  
Discontinued operations
     (0.06 )     (0.09 )     (0.10 )     (0.11 )
Net earnings per common share – Diluted
   $ 0.42     $ 0.16     $ 0.87     $ 0.48  
                                 
Average number of common shares
     22,597,117       18,895,299       22,528,108       18,769,791  
Average number of common shares and dilutive common shares
     23,472,411       19,088,673       22,604,344       18,790,155  

See accompanying notes to consolidated financial statements.

 
3
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)
  
September 30,
2010
    
December 31,
2009
  
   
(Unaudited)
        
ASSETS
  
CURRENT ASSETS:
            
Cash and cash equivalents
   $ 13,407     $ 10,618  
Accounts receivable, less allowance for discounts and doubtful accounts of $8,026 and $6,962 for 2010 and 2009, respectively
     171,212       124,823  
Inventories, net
     231,578       199,752  
Deferred income taxes
     17,346       18,129  
Assets held for sale
     216       1,405  
Prepaid expenses and other current assets
     8,675       9,487  
Total current assets
     442,434       364,214  
                 
Property, plant and equipment, net
     62,104       61,478  
Goodwill
     1,437       1,437  
Other intangibles, net
     11,500       12,368  
Deferred income taxes
     24,781       29,542  
Other assets
     14,096       15,420  
Total assets
   $ 556,352     $ 484,459  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
CURRENT LIABILITIES:
                
Notes payable
   $ 61,657     $ 58,430  
Current portion of long-term debt
     12,385       67  
Accounts payable
     85,690       54,381  
Sundry payables and accrued expenses
     30,176       24,114  
Accrued customer returns
     35,419       20,442  
Accrued rebates
     28,720       25,276  
Payroll and commissions
     24,265       21,913  
Total current liabilities
     278,312       204,623  
Long-term debt
     262       17,908  
Post-retirement medical benefits
     21,091       19,355  
Other accrued liabilities
     22,706       23,821  
Accrued asbestos liabilities
     24,722       24,874  
Total liabilities
     347,093       290,581  
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
     77,759       77,238  
Retained earnings
     96,423       80,083  
Accumulated other comprehensive income
     1,591       5,475  
Treasury stock – at cost 1,338,919 and 1,562,649 shares in
                
2010 and 2009, respectively
     (14,386 )     (16,790 )
Total stockholders’ equity
     209,259       193,878  
Total liabilities and stockholders’ equity
   $ 556,352     $ 484,459  

See accompanying notes to consolidated financial statements.

 
4
 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
  
Nine Months Ended
September 30,
  
   
2010
    
2009
  
   
(Unaudited)
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net earnings
   $ 19,716     $ 8,928  
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
                
Depreciation and amortization
     10,030       10,856  
Increase in allowance for doubtful accounts
     778       758  
Increase in inventory reserves
     4,801       4,686  
Amortization of deferred gain on sale of building
     (786 )     (786 )
Gain on disposal of property, plant and equipment
     (1,615 )  
—
  
Gain on sale of investment
  
—
       (2,336 )
Equity income from joint ventures
     (116 )     (164 )
Employee stock ownership plan allocation
     1,225       256  
Stock-based compensation
     1,256       804  
Decrease (increase) in deferred income taxes
     5,585       (1,804 )
Decrease in unrecognized tax benefit
     (1,084 )  
—
  
Loss from discontinued operations, net of income taxes
     2,309       2,221  
Change in assets and liabilities:
                
Decrease (increase) in accounts receivable
     (47,166 )     1,350  
Decrease (increase) in inventories
     (35,769 )     37,074  
Decrease in prepaid expenses and other current assets
     481       266  
Increase in accounts payable
     20,683       11,107  
Increase in sundry payables and accrued expenses
     26,932       27,934  
Net changes in other assets and liabilities
     (2,324 )     (912 )
Net cash provided by operating activities
     4,936       100,238  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Proceeds from the sale of property, plant and equipment
     11       69  
Net cash received from the sale of land and buildings
     2,559    
—
  
Divestiture of joint ventures
     1,000       4,000  
Proceeds from sale of preferred stock investment
  
—
       3,896  
Capital expenditures
     (9,112 )     (5,246 )
Acquisitions of businesses and assets
     (2,024 )     (12,770 )
Net cash used in investing activities
     (7,566 )     (10,051 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Net borrowings (repayments) under line-of-credit agreements
     3,228       (56,410 )
Repurchase of convertible debentures
  
—
       (433 )
Net repayment of long-term debt
     (5,399 )     (32,154 )
Issuance of unsecured promissory notes
  
—
       5,370  
Proceeds from exercise of employee stock options
  
—
       456  
Excess tax benefit from share-based payments arrangements
  
—
       (60 )
Increase (decrease) in overdraft balances
     10,625       (2,052 )
Adjustment to costs related to issuance of common stock
     36    
—
  
Payments of debt issuance cost
     (56 )     (3,755 )
Dividends paid
     (3,376 )  
—
  
Net cash provided by (used in) financing activities
     5,058       (89,038 )
Effect of exchange rate changes on cash
     361       2,699  
Net increase in cash and cash equivalents
     2,789       3,848  
CASH AND CASH EQUIVALENTS at beginning of the period
     10,618       6,608  
CASH AND CASH EQUIVALENTS at end of the period
   $ 13,407     $ 10,456  
                 
Supplemental disclosure of cash flow information:
                
Cash paid during the period for:
                
Interest
   $ 3,919     $ 6,369  
Income taxes
   $ 1,529     $ 1,746  
 
See accompanying notes to consolidated financial statements.

 
5
 

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months Ended September 30, 2010
(Unaudited)
 
(In thousands)
  
Common
Stock
    
Capital in
Excess of
Par Value
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income
    
Treasury 
Stock
    
Total
  
                                     
Balance at June 30, 2010
   $ 47,872     $ 77,424     $ 87,897     $ 2,465     $ (14,386 )   $ 201,272  
Comprehensive income:
                                                
Net earnings
                     9,656                       9,656  
Foreign currency translation adjustment
                              1,060                1,060  
Pension and retiree medical adjustment, net of tax
                             (1,934 )             (1,934 )
Total comprehensive income
                                             8,782  
Cash dividends paid
                     (1,130 )                     (1,130 )
Stock-based compensation
             335                               335  
                                                 
Balance at September 30, 2010
   $ 47,872     $ 77,759     $ 96,423     $ 1,591     $ (14,386 )   $ 209,259  
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2010
 (Unaudited)
 
 
 (In thousands)
  
Common
Stock
    
Capital in
Excess of
Par Value
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income
    
Treasury 
Stock
    
Total
  
                                     
Balance at December 31, 2009
   $ 47,872     $ 77,238     $ 80,083     $ 5,475     $ (16,790 )   $ 193,878  
Comprehensive income:
                                                
Net earnings
                     19,716                       19,716  
Foreign currency translation adjustment
                             337               337  
Pension and retiree medical adjustment, net of tax
                             (4,221 )             (4,221 )
Total comprehensive income
                                             15,832  
Cash dividends paid
                     (3,376 )                     (3,376 )
Adjustment to costs related to issuance of common stock
             36                               36  
Stock-based compensation
             734                       522       1,256  
Employee Stock Ownership Plan
             (249 )                     1,882       1,633  
                                                 
Balance at September 30, 2010
   $ 47,872     $ 77,759     $ 96,423     $ 1,591     $ (14,386 )   $ 209,259  
 
See accompanying notes to consolidated financial statements.

 
6
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1. Basis of Presentation
 
Standard Motor Products, Inc. (referred to hereinafter in these notes to consolidated financial statements as the “Company,” “we,” “us,” or “our”) is engaged in the manufacture and distribution of replacement parts for motor vehicles in the automotive aftermarket industry with an increasing focus on the original equipment service market.

The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership. Our investments in unconsolidated affiliates are accounted for on the equity method, as we do not have controlling financial interest. All significant inter-company items have been eliminated.

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

Reclassification

Certain prior period amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 2010 presentation.

Note 2. Summary of Significant Accounting Policies

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

The impact and any associated risks related to significant accounting 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, 2009.

 
7
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Recently Issued Accounting Pronouncements

Fair Value Measurements

On March 31, 2010, we adopted Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements that requires companies to enhance the usefulness of fair value measurements by requiring both the disaggregation of information in certain existing disclosures, as well as the inclusion of more robust disclosures about valuation techniques and inputs to recurring and nonrecurring fair value measurements. The adoption of this standard will impact how we disclose in the future any material transfers into and out of Level 1 (measurements based on quoted prices in active markets) and Level 2 inputs (measurements based on other observable inputs) of the fair value hierarchy. There were no such transfers in the nine months of 2010.

Revenue Arrangements with Multiple Deliverables

In October 2009, the FASB issued ASU 2009-13, which will update Accounting Standard Codification (“ASC”) 605, Revenue Recognition, and changes the accounting for certain revenue arrangements. The new standard sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010, which for us is January 1, 2011. The adoption of these provisions is not expected to have a material impact on our consolidated financial position, results of operations and cash flows.

Note 3. Restructuring and Integration Costs

The aggregate liabilities relating to the restructuring and integration activities as of December 31, 2009 and September 30, 2010 and activity for the nine months ended September 30, 2010 consisted of the following (in thousands):

   
Workforce
Reduction
    
Other Exit
Costs
    
Total
  
Exit activity liability at December 31, 2009
   $ 8,774     $ 1,971     $ 10,745  
Restructuring and integration costs:
                        
Amounts provided for during 2010
     1,847       1,583       3,430  
Non-cash usage, including asset write-downs
     —       (99 )     (99 )
Cash payments
     (3,274 )     (454 )     (3,728 )
Exit activity liability at September 30, 2010
   $ 7,347     $ 3,001     $ 10,348  

Restructuring Costs

Voluntary Separation Program

During 2008 as part of an initiative to improve the effectiveness and efficiency of operations, and to reduce costs in light of economic conditions, we implemented certain organizational changes and offered eligible employees a voluntary separation package. The restructuring accrual relates to severance and other retiree benefit enhancements to be paid through 2015. Of the original restructuring charge of $8 million, we have $2.2 million remaining as of September 30, 2010 that is expected to be paid in the amounts of $0.5 million in 2010, $0.6 million in 2011, and $1.1 million for the period 2012-2015.


 
8
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Activity, by segment, for the nine months ended September 30, 2010 related to the voluntary separation program consisted of the following (in thousands):

   
Engine
Management
    
Temperature
Control
    
Other
    
Total
  
Exit activity liability at December 31, 2009
   $ 1,395     $ 385     $ 1,422     $ 3,202  
Restructuring costs:
                                
Amounts provided for during 2010
     105       —       —       105  
Cash payments
     (557 )     (38 )     (463 )     (1,058 )
Exit activity liability at September 30, 2010
   $ 943     $ 347     $ 959     $ 2,249  

Integration Expenses

Overhead Cost Reduction Program

Beginning in 2007 in connection with our efforts to improve our operating efficiency and reduce costs, we have focused on company-wide overhead and operating expense cost reduction activities, such as closing excess facilities and reducing redundancies. Integration expenses under this program to date relate primarily to the integration of operations to our facilities in Mexico, and the closure of our production operations in Corona, California and Hong Kong, China. We expect that all payments related to the current liability will be made within twelve months.

Activity for the nine months ended September 30, 2010 related to our overhead cost reduction program, consisted of the following (in thousands):

   
Workforce
Reduction
    
Other Exit
Costs
    
Total
  
Exit activity liability at December 31, 2009
   $ 1,347     $ —     $ 1,347  
Integration costs:
                        
Amounts provided for during 2010
     1,769       1,426       3,195  
Non-cash usage, including asset write-downs
     —       (99 )     (99 )
Cash payments
     (1,402 )     (230 )     (1,632 )
Exit activity liability at September 30, 2010
   $ 1,714     $ 1,097     $ 2,811  

Wire and Cable Relocation

As a result of our acquisition during 2009 of a wire and cable business and the relocation of certain machinery and equipment to our Reynosa, Mexico manufacturing facility, integration costs were incurred related to employee severance and equipment relocation. As of September 30, 2010, all such costs have been fully paid.

   
Workforce
Reduction
    
Other Exit
Costs
    
Total
  
Exit activity liability at December 31, 2009
   $ 532     $ —     $ 532  
Integration costs:
                        
Amounts provided for during 2010
     —       131       131  
Cash payments
     (532 )     (131 )     (663 )
Exit activity liability at September 30, 2010
   $ —     $ —     $ —  
 
 
9
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Reynosa Integration Program

During 2008, we closed our Long Island City, New York and Puerto Rico manufacturing facilities and integrated these operations in Reynosa, Mexico. In connection with the shutdown of the manufacturing operations at Long Island City, we incurred severance costs and costs associated with equipment removal, capital expenditures and environmental clean-up. As of September 30, 2010, the reserve balance related to environmental clean-up at Long Island City of $1.9 million is included in other exit costs.

In connection with the shutdown of the manufacturing operations at Long Island City, we entered into an agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 365 (“UAW”). As part of the agreement, we incurred a withdrawal liability from a multi-employer plan. The pension plan withdrawal liability is related to trust asset under-performance in a plan that covers our former UAW employees at the Long Island City facility and is payable quarterly for 20 years at $0.3 million per year, which commenced in December 2008. As of September 30, 2010, the reserve balance related to the pension withdrawal liability of $3.1 million is included in the workforce reduction reserve.

Activity for the nine months ended September 30, 2010 related to the Reynosa integration program, consisted of the following (in thousands):

   
Workforce
Reduction
    
Other Exit
Costs
    
Total
  
Exit activity liability at December 31, 2009
   $ 3,693     $ 1,971     $ 5,664  
Integration costs:
                        
Amounts provided for during 2010
     (27 )     26       (1 )
Cash payments
     (282 )     (93 )     (375 )
Exit activity liability at September 30, 2010
   $ 3,384     $ 1,904     $ 5,288  
 
Integration activity, by segment, for the nine months ended September 30, 2010 related to our aggregate integration programs consisted of the following (in thousands):

   
Engine
Management
    
Temperature
Control
    
Other
    
Total
  
Exit activity liability at December 31, 2009
   $ 7,017     $ 364     $ 162     $ 7,543  
Integration costs:
                                
Amounts provided for during 2010
     1,664       1,661       —       3,325  
Non-cash usage, including asset write-downs
     (99 )     —       —       (99 )
Cash payments
     (2,126 )     (382 )     (162 )     (2,670 )
Exit activity liability at September 30, 2010
   $ 6,456     $ 1,643     $ —     $ 8,099  

Assets Held for Sale

As of September 30, 2010, we have reported $0.2 million as assets held for sale on our consolidated balance sheet related to the net book value of vacant land located in the U.K. Following plant closures resulting from integration activities, this facility had been vacant, and we have solicited bids for the sale of such property. We will record any resulting gain or loss in other income, net as appropriate, when a sale occurs. In January 2010, we sold our Wilson, North Carolina property; in February 2010, we sold vacant land at one of our locations in the U.K.; and in September 2010, we sold our Reno, Nevada property.

 
10
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 4. Sale of Receivables

From time to time, we sell undivided interests in certain of our receivables to financial institutions. We enter these agreements at our discretion when we determine that the cost of factoring is less than the cost of servicing our receivables with existing debt. Pursuant to these agreements, we sold $113.7 million and $307.9 million of receivables during the three months and nine months ended September 30, 2010, respectively. 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. A charge in the amount of $1.8 million and $4.8 million related to the sale of receivables is included in selling, general and administrative expense in our consolidated statements of operations for the three months and nine months ended September 30, 2010, respectively, and $1 million and $2 million for the comparable periods in 2009.

Note 5. Inventories

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

   
September 30,
    
December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
Finished goods, net
   $ 153,277     $ 130,054  
Work in process, net
     5,624       4,472  
Raw materials, net
     72,677       65,226  
Total inventories, net
   $ 231,578     $ 199,752  

Note 6. Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

   
September 30,
    
December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
             
Revolving credit facilities
   $ 61,657     $ 58,430  
15% convertible subordinated debentures
     12,300       12,300  
15% unsecured promissory notes (1)
     —       5,339  
Other
     347       336  
Total debt
   $ 74,304     $ 76,405  
                 
Current maturities of debt
   $ 74,042     $ 58,497  
Long-term debt
     262       17,908  
Total debt
   $ 74,304     $ 76,405  
 
(1)
The 15% unsecured promissory notes were repaid in full in July 2010 with funds from our revolving credit facility.

 
11
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Deferred Financing Costs

We had deferred financing costs of $4.2 million and $5.6 million as of September 30, 2010 and December 31, 2009, respectively. These costs relate to our revolving credit facility and the 15% convertible subordinated debentures. Deferred financing costs as of September 30, 2010 are being amortized, assuming no further prepayments of principal, in the amount of $0.5 million in 2010, $1.7 million in 2011, $1.6 million in 2012 and $0.4 million in 2013.

Revolving Credit Facility

In March 2007, we entered into a Second Amended and Restated Credit Agreement with General Electric Capital Corporation, as agent, and a syndicate of lenders for a secured revolving credit facility. This restated credit agreement replaced our prior credit facility with General Electric Capital Corporation. The restated credit agreement (as amended) provides for a line of credit of up to $200 million (inclusive of the Canadian revolving credit facility described below) and expires in March 2013. Direct borrowings under the restated credit agreement bear interest at the LIBOR rate plus the applicable margin (as defined), or floating at the index rate plus the applicable margin, at our option. The interest rate may vary depending upon our borrowing availability. The restated credit agreement is guaranteed by certain of our subsidiaries and secured by certain of our assets.

Borrowings under the restated credit agreement are collateralized by substantially all of our assets, including accounts receivable, inventory and fixed assets, and those of certain of our subsidiaries. After taking into account outstanding borrowings under the restated credit agreement, there was an additional $117 million available for us to borrow pursuant to the formula at September 30, 2010. At September 30, 2010 and December 31, 2009, the interest rate on our restated credit agreement was 4.1%. Outstanding borrowings under the restated credit agreement (inclusive of the Canadian revolving credit facility described below), which are classified as current liabilities, were $61.7 million and $58.4 million at September 30, 2010 and December 31, 2009, respectively.

At any time that our average borrowing availability over the previous thirty days is less than $30 million or if our borrowing availability is $20 million or less, and until such time that we have maintained an average borrowing availability of $30 million or greater for a continuous period of ninety days, the terms of our restated credit agreement provide for, among other provisions, financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of fixed charge coverage at the end of each fiscal quarter (rolling twelve months), and (2) to limit capital expenditure levels. As of September 30, 2010, we were not subject to these covenants. Availability under our restated credit agreement is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. Based upon amounts outstanding as of September 30, 2010, beginning October 15, 2010 and on a monthly basis thereafter, our borrowing availability will be reduced by approximately $2 million for the repayment, repurchase or redemption of the aggregate outstanding amount of our 15% convertible subordinated debentures due April 15, 2011. In July 2010, we prepaid the remaining outstanding principal amount of our 15% unsecured promissory notes due April 15, 2011. As a result of the prepayment, the reduction of our borrowing availability beginning October 15, 2010 was reduced on a monthly basis from $2.9 million to $2 million. Our restated credit agreement also permits dividends and distributions by us provided specific conditions are met.

 
12
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Canadian Revolving Credit Facility

In May 2010, we amended our credit agreement with GE Canada Finance Holding Company, for itself and as agent for the lenders. The amended Canadian Credit Agreement provides for the conversion of the then existing $10 million line of credit into a revolving credit facility. The amendment also modifies certain provisions of the amended Canadian Credit Agreement to parallel the revolving credit provisions of our restated credit agreement with General Electric Capital Corporation (described above). As of September 30, 2010, we have no outstanding borrowings under the Canadian line of credit. The Canadian $10 million line of credit is part of the $200 million available for borrowing under our restated credit agreement with General Electric Capital Corporation. The amended credit agreement is guaranteed and secured by us and certain of our wholly-owned subsidiaries and expires in March 2013. Direct borrowings under the amended credit agreement bear interest at the same rate as our restated credit agreement with General Electric Capital Corporation.

Subordinated Debentures

In May 2009, we exchanged $12.3 million aggregate principal amount of our outstanding 6.75% convertible subordinated debentures due 2009 for a like principal amount of newly issued 15% convertible subordinated debentures due 2011. The 15% convertible subordinated debentures carry an interest rate of 15% payable semi-annually, and will mature on April 15, 2011. As of September 30, 2010, the $12.3 million principal amount of the 15% convertible subordinated debentures is convertible into 820,000 shares of our common stock; each at the option of the holder. The convertible subordinated debentures are subordinated in right of payment to all of our existing and future senior indebtedness. In addition, if a change in control, as defined in the agreement, occurs at the Company, we will be required to make an offer to purchase the convertible subordinated debentures at a purchase price equal to 101% of their aggregate principal amount, plus accrued interest.

Unsecured Promissory Notes to Related Parties

In July 2009, we issued $5.4 million aggregate principal amount of 15% unsecured promissory notes to certain directors and executive officers and to the trustees of our Supplemental Executive Retirement Plan on behalf of the plan participants. In July 2010, we prepaid the remaining outstanding principal amount with funds from our revolving credit facility. The 15% unsecured promissory notes would have matured on April 15, 2011, carried an interest rate of 15%, payable semi-annually, and were not convertible into common stock. The 15% unsecured promissory notes were subordinated in right of payment to all of our existing and future senior indebtedness. Prepayments of the principal amount had been made to fund annual or quarterly unfunded Supplemental Executive Retirement Plan distributions to participants, as required.

Capital Leases

During 2010 and 2009, we entered into capital lease obligations related to certain equipment for use in our operations of $0.1 million and $0.4 million, respectively. As of September 30, 2010, our remaining capital lease obligations totaled $0.3 million. Assets held under capitalized leases are included in property, plant and equipment and depreciated over the lives of the respective leases or over their economic useful lives, whichever is less.

 
13
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
 
Note 7. Stock-Based Compensation Plans

We account for our five stock-based compensation plans in accordance with the provisions of Accounting Standards Codification 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. That cost is recognized in the statement of operations over the period during which an employee is required to provide service in exchange for the award.

Stock Option Grants
 
The following is a summary of the changes in outstanding stock options for the nine months ended September 30, 2010:
 
         
Weighted
    
Weighted Average
  
         
Average
    
Remaining
  
         
Exercise
    
Contractual
  
   
Shares
    
Price
    
Term (Years)
  
                   
Outstanding at December 31, 2009
     378,095     $ 13.26       3.7  
Expired
     (52,671 )   $ 14.33       —  
Exercised
     —       —       —  
Forfeited, other
     (8,900 )   $ 12.75       5.5  
Outstanding at September 30, 2010
     316,524     $ 13.10       3.2  
                         
Options exercisable at September 30, 2010
     316,524     $ 13.10       3.2  

There was no aggregate intrinsic value of all outstanding stock options as of September 30, 2010. All outstanding stock options as of September 30, 2010 are fully vested and exercisable. There were no stock options granted in the nine months ended September 30, 2010 and 2009, and for the period ended September 30, 2010, we had no unrecognized compensation cost related to stock options and non-vested stock options. There were no options exercised during the nine months of 2010.

Restricted and Performance Stock Grants

As part of the 2006 Omnibus Incentive Plan, we currently grant shares of restricted and performance-based stock to eligible employees and directors. 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 become fully vested upon the third and first anniversary of the date of grant for employees and directors, respectively. Forfeitures on restricted stock grants are estimated at 5% for employees and 0% for executives and directors, respectively, based on our evaluation of historical and expected future turnover.

 
14
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Our restricted and performance-based share activity was as follows for the nine months ended September 30, 2010:
         
Weighted Average
  
         
Grant Date Fair
  
   
Shares
    
Value Per Share
  
Balance at December 31, 2009
     288,425     $ 9.40  
Granted
     114,025     $ 9.71  
Vested
     (6,000 )   $ 4.70  
Forfeited
     (2,425 )   $ 10.43  
Balance at September 30, 2010
     394,025     $ 9.56  

We recorded compensation expense related to restricted shares and performance-based shares of $874,000 ($550,000 net of tax) and $421,000 ($248,400 net of tax) for the nine months ended September 30, 2010 and 2009, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $2.2 million at September 30, 2010, and is expected to be recognized as they vest over a weighted average period of 1.5 and 0.6 years for employees and directors, respectively.

Note 8. Employee Benefits

The components of net periodic benefit cost for our defined benefit plans and post retirement benefit plans for the three months and nine months ended September 30, 2010 and 2009 were as follows (in thousands):

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
  
  
2010
    
2009
    
2010
    
2009
  
Pension Benefits (1)
                        
Service cost
   $ 22     $ 22     $ 67     $ 65  
Interest cost
     36       72       109       217  
Amortization of prior service cost
     40       28       120       83  
Actuarial net (gain) loss
     —       (33 )     —       (98 )
Net periodic benefit cost
   $ 98     $ 89     $ 296     $ 267  
                                 
Postretirement Benefits
                                
Service cost
   $ 47     $ 3     $ 143     $ 152  
Interest cost
     290       287       903       834  
Amortization of prior service cost
     (2,257 )     (2,317 )     (6,772 )     (6,951 )
Amortization of transition obligation
     1       1       3       3  
Actuarial net loss
     315       218       1,001       984  
Net periodic benefit cost
   $ (1,604 )   $ (1,808 )   $ (4,722 )   $ (4,978 )

(1)
The components of net periodic benefit costs for the three and nine months ended September 30, 2009 include the cost related to the U.K. pension plan which was disposed of in November 2009 in connection with the sale of our European distribution business.

For the nine months ended September 30, 2010, we made employee benefit contributions of $0.5 million related to our postretirement plans. Based on current actuarial estimates, we believe we will be required to make approximately $0.8 million in contributions for 2010.

In August 1994, we established an unfunded Supplemental Executive Retirement Plan (SERP) 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 August 2009, contributions of $73,500 were made related to calendar year 2008. In March 2010, contributions of $67,000 were made related to calendar year 2009.

 
15
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

In 2000, we created an employee benefits trust to which we contributed 750,000 shares of treasury stock. We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under employee benefit plans. 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 2010, we contributed to the trust an additional 170,000 shares from our treasury and released 175,075 shares from the trust leaving 6,930 shares remaining in the trust as of September 30, 2010.

Note 9. Fair Value Measurements

We follow a three-level fair value hierarchy that prioritizes the inputs to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date.
 
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3: Significant unobservable inputs that reflect assumptions that market participants would use in pricing an asset or liability.
 
The following is a summary of the carrying amounts and estimated fair values of our financial instruments at September 30, 2010 and December 31, 2009 (in thousands):
 
   
September 30, 2010
    
December 31, 2009
  
   
Carrying
Amount
    
Fair Value
    
Carrying
Amount
    
Fair Value
  
                         
Cash and cash equivalents
   $ 13,407     $ 13,407     $ 10,618     $ 10,618  
Deferred compensation
     5,838       5,838       5,319       5,319  
Short term borrowings
     74,042       74,042       58,497       58,497  
Long-term debt
     262       262       17,908       17,908  

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 underlying assets held by the deferred compensation plan are based on the quoted market prices of the funds in registered investment companies, which are considered Level 1 inputs. 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. The fair value of our 15% convertible subordinated debentures, classified as current borrowings, is based upon the quoted market price, which is considered a Level 1 input.
 
 
16
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 10. 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
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Basic Net Earnings per Common Shares:
                        
Earnings from continuing operations
   $ 11,097     $ 4,724     $ 22,025     $ 11,149  
Loss from discontinued operations
     (1,441 )     (1,639 )     (2,309 )     (2,221 )
Net earnings available to common stockholders
   $ 9,656     $ 3,085     $ 19,716     $ 8,928  
                                 
Weighted average common shares outstanding
     22,597       18,895       22,528       18,770  
                                 
Net earnings from continuing operations per common share
   $ 0.49     $ 0.25     $ 0.98     $ 0.59  
Loss from discontinued operations per common share
     (0.06 )     (0.09 )     (0.10 )     (0.11 )
Basic net earnings per common share
   $ 0.43     $ 0.16     $ 0.88     $ 0.48  
                                 
Diluted Net Earnings per Common Share:
                                
Earnings from continuing operations
   $ 11,097     $ 4,724     $ 22,025     $ 11,149  
Interest income on debenture conversions (net of income tax expense)
      277        32        –        –  
Earnings from continuing operations plus assumed conversions
     11,374        4,756       22,025       11,149  
Loss from discontinued operations
     (1,441 )     (1,639 )     (2,309 )     (2,221 )
Net earnings available to common stockholders plus assumed conversions
   $ 9,933     $ 3,117     $ 19,716     $ 8,928  
                                 
Weighted average common shares outstanding
     22,597       18,895       22,528       18,770  
Plus incremental shares from assumed conversions:
                                
Dilutive effect of restricted stock
     55       39       76       20  
Dilutive effect of stock options
     –       3       –       –  
Dilutive effect of convertible debentures
     820       152       –       –  
Weighted average common shares outstanding – Diluted
      23,472        19,089        22,604        18,790  
                                 
Net earnings from continuing operations per common share
   $ 0.48     $ 0.25     $ 0.97     $ 0.59  
Loss from discontinued operations per common share
     (0.06 )     (0.09 )     (0.10 )     (0.11 )
Diluted net earnings per common share
   $ 0.42     $ 0.16     $ 0.87     $ 0.48  
 
 
17
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

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
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Stock options
     317       381       317       384  
Restricted shares
     152       102       126       144  
15% convertible subordinated debentures
     —       820       820       445  

Note 11. Comprehensive Income

Comprehensive income, net of income tax expense is as follows (in thousands):

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Net earnings as reported
   $ 9,656     $ 3,085     $ 19,716     $ 8,928  
Foreign currency translation adjustment
     1,060       965       337       3,014  
Postretirement benefit plans:
                                
Reclassification adjustment for recognition of prior period amounts
     (2,123 )     (1,478 )     (4,822 )     (4,416 )
Unrecognized amounts
     189       111       601       532  
Total comprehensive income
   $ 8,782     $ 2,683     $ 15,832     $ 8,058  

Note 12. Industry Segments

In November 2009, we sold our European distribution business to the managers of the business for £1.8 million ($3 million) in cash and a promissory note and approximately £1.4 million ($2.3 million) in assumed debt. In connection with the sale, we retained our manufacturing operation in Poland, certain land available for sale in the United Kingdom, and a small investment in a joint venture. The third-party owned European operations will continue to buy manufactured product from our facility in Poland and from our domestic operations through two separate supply agreements. As such, we are expected to receive significant continuing cash flows as a result of a continuation of activities between us and the disposed business (the European operations), and therefore the European operation’s results of operations have not been presented as a discontinued operation.

Effective January 1, 2010, as a result of the sale of our European distribution business, we realigned our business segments to more clearly reflect our evolving business model. The realignment consisted of moving the results of our Poland manufacturing facility within the Engine Management Segment to reflect the change in responsibility for the operating activities, financial results, forecasts, and strategic plans for the facility to the management of this segment. Results for the three months and nine months ended September 30, 2009 have been reclassified to reflect this realignment.
 
 
18
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

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

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Net Sales
                        
Engine Management
   $ 153,577     $ 136,971     $ 443,489     $ 384,270  
Temperature Control
     71,774       59,505       185,714       165,426  
Europe
     –       7,213       –       21,259  
All Other
     2,189       1,888       8,736       4,342  
Consolidated
   $ 227,540     $ 205,577     $ 637,939     $ 575,297  
                                 
Intersegment Revenue
                                
Engine Management
   $ 5,016     $ 5,404     $ 14,024     $ 16,610  
Temperature Control
     898       999       2,821       2,819  
Europe
     –       141       –       233  
All Other
     (5,914 )     (6,544 )     (16,845 )     (19,662 )
Consolidated
   $ –     $ –     $ –     $ –  
                                 
Operating Profit
                                
Engine Management
   $ 13,845     $ 7,115     $ 33,734     $ 23,493  
Temperature Control
     5,443       4,728       12,747       6,366  
Europe
     –       (82 )     –       (729 )
All Other
     (2,653 )     (2,037 )     (8,149 )     (7,312 )
Consolidated
   $ 16,635     $ 9,724     $ 38,332     $ 21,818  

Note 13. 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. 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 1, 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 1, 2001 and the amounts paid for indemnity and defense thereof. At September 30, 2010, approximately 1,530 cases were outstanding for which we were responsible for any related liabilities. Since inception in September 2001 through September 30, 2010, the amounts paid for settled claims are approximately $11.2 million. In September 2007, we entered into an agreement with an insurance carrier to provide us with limited insurance coverage for the defense and indemnity costs associated with certain asbestos-related claims. We have submitted various asbestos-related claims for coverage under this agreement, and received approximately $2.5 million in reimbursement for settlement claims and defense costs. We have submitted additional asbestos-related claims to such insurance carrier for coverage. In addition, in May 2010 we entered into an agreement with an excess insurance carrier to provide us with limited insurance coverage for defense and indemnity costs associated with asbestos-related claims. We will submit claims to this carrier after we have exhausted our coverage under the agreement with the primary insurance carrier discussed above.
 
 
19
 
 
STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study performed by an independent actuarial firm with expertise in assessing asbestos-related liabilities, our settlement amounts and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of settlement discussions. As is our accounting policy, we engage actuarial consultants with experience in assessing asbestos-related liabilities to estimate our potential claim liability. The methodology used to project asbestos-related liabilities and costs in the 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.

The most recent actuarial study was performed as of August 31, 2010. The updated study has estimated an undiscounted liability for settlement payments, excluding legal costs and any potential recovery from insurance carriers, ranging from $25.7 million to $66.9 million for the period through 2059. The change from the prior year study was a $0.9 million decrease for the low end of the range and a $0.6 million increase for the high end of the range. Based on the information contained in the actuarial study and all other available information considered by us, we concluded that no amount within the range of settlement payments was more likely than any other and, therefore, recorded the low end of the range as the liability associated with future settlement payments through 2059 in our consolidated financial statements. Accordingly, an incremental $1.8 million provision in our discontinued operation was added to the asbestos accrual in September 2010 increasing the reserve to approximately $25.7 million. According to the updated study, legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operation in the accompanying statement of operations, are estimated to range from $20.3 million to $61.3 million during the same period.

We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future. 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 the circumstances surrounding these potential liabilities in determining 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.

Antitrust Litigation.  In November 2004, we were served with a summons and complaint in the U.S. District Court for the Southern District of New York by The Coalition for a Level Playing Field, which is an organization comprised of a large number of auto parts retailers. The complaint alleges antitrust violations by us and a number of other auto parts manufacturers and retailers and seeks injunctive relief and unspecified monetary damages. In August 2005, we filed a motion to dismiss the complaint, following which the plaintiff filed an amended complaint dropping, among other things, all claims under the Sherman Act. The remaining claims allege violations of the Robinson-Patman Act. Motions to dismiss those claims were filed by us in February 2006. Plaintiff filed opposition to our motions, and we subsequently filed replies in June 2006.  Oral arguments were originally scheduled for September 2006, however the court adjourned these proceedings until a later date to be determined. Subsequently, the judge initially assigned to the case recused himself, and a new judge has been assigned before whom further preliminary proceedings have been held culminating in a decision and order dated September 16, 2010 granting the motion to dismiss and, in view of an intervening change in pleading standards, deferring decision on whether to grant plaintiff leave to amend to allow an opportunity to propose curative amendments. On October 18, 2010, the plaintiff filed an amended complaint changing certain alleged claims relating to the Robinson-Patman Act. By Order dated October 26, 2010, the court directed that the Third Amended Complaint be deemed withdrawn and gave plaintiffs until November 9, 2010 to file a motion for leave to amend identifying the curative amendments to the Second Amended Complaint setting forth why the amendments accord with the rules. Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, deny all of the plaintiff’s allegations of wrongdoing and believe we have meritorious defenses to the plaintiff’s claims. We intend to defend this lawsuit vigorously.

 
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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Other Litigation. We are involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of any asbestos-related matters or any other litigation or product liability matter cannot be determined, based on our understanding and evaluation of the relevant facts and circumstances, it is our opinion that the final outcome of these matters will not 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 September 30, 2010 and 2009, we have accrued $14.4 million and $12.3 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.

The following table provides the changes in our product warranties (in thousands):
 
   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Balance, beginning of period
   $ 13,823     $ 12,005     $ 10,476     $ 10,162  
Liabilities accrued for current year sales
     14,757       13,872       39,361