# To the Stockholders of

Standard Motor Products

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NYSE_SMP_2019/NYSE_SMP_2019.mmd` · pages 47-53_

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To the Stockholders of

Standard Motor Products, Inc. and Subsidiaries:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control - Integrated Framework. Based on our assessment using those criteria, we concluded that, as of December 31, 2019, our internal control over financial reporting is effective.

Our independent registered public accounting firm, KPMG LLP, has audited our consolidated financial statements as of and for the year ended December 31, 2019 and has also audited the effectiveness of our internal control over financial reporting as of December 31, 2019. KPMG's report appears on the following pages of this "Item 8. Financial Statements and Supplementary Data."

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# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Stockholders and Board of Directors
Standard Motor Products, Inc. and Subsidiaries:

## Opinion on Internal Control Over Financial Reporting

We have audited Standard Motor Products, Inc.'s and subsidiaries (the "Company") internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement Schedule II, Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated February 20, 2020 expressed an unqualified opinion on those consolidated financial statements.

## Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

## Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

New York, New York

February 20, 2020

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# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – CONSOLIDATED FINANCIAL STATEMENTS

To the Stockholders and Board of Directors
Standard Motor Products, Inc. and Subsidiaries:

## Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement Schedule II, Valuation and Qualifying Accounts (collectively, the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

## Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

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## Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

## Assessment of Asbestos Liability and Litigation

As discussed in Notes 1 and 22 to the consolidated financial statements, the Company is involved in asbestos litigation and has potential asbestos liability. The Company's asbestos liability represents the actuarially determined estimate of the undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers. The Company's asbestos liability includes key assumptions regarding disease distribution, future claim filings, payment rates, settlement values, large claims, and ratios of allocated loss adjustment expense (ALAE) to indemnity.

We identified the assessment of the asbestos liability recorded and related disclosure for these legal proceedings as a critical audit matter. This required subjective auditor judgment, due to the nature of the estimate and assumptions, including the applicability of those assumptions to the current facts and circumstances, as well as judgments about future events and uncertainties. Specialized skills were needed to evaluate the Company's key assumptions. Minor changes to these key assumptions could have a significant effect on the Company's assessment of the accrual for the asbestos liability.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company's asbestos liability and asbestos litigation process, including controls related to the key assumptions and the underlying data utilized in the process, and the potential need for an updated actuarial evaluation. We read letters received directly from the Company's external and internal legal counsel confirming the asbestos related legal cases settled during the year and the number of open cases as of year-end. We involved an actuarial professional with specialized skills and knowledge, who:

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

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

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

We tested a sample of claims data used in the actuarial model by comparing the sampled items to underlying claims documentation. We evaluated the activity of legal claims since the most recent actuarial evaluation to determine if an updated actuarial evaluation is necessary. We compared the Company's related disclosure to the data utilized in the process and the Company's asbestos report.

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

As discussed in Notes 3 and 9 to the consolidated financial statements, on April 1, 2019, the Company acquired the Pollak business from Stoneridge, Inc. (Pollak) in a business combination. As a result of the transaction, the Company acquired customer relationship intangible assets associated with the generation of future income from Pollak's existing customers. The acquisition-date fair value for the customer relationship assets was $24.4 million.

We identified the evaluation of the initial measurement of the customer relationship intangible assets acquired in the Pollak transaction as a critical audit matter. There was a high degree of subjectivity in evaluating the multi-period excess earnings method (a form of the income approach) used to calculate the acquisition-date fair value of the customer relationship assets. The multi-period excess earnings method included the following internally-developed assumptions for which there was limited observable market information, and the calculated fair value of such assets was sensitive to possible changes to these assumptions:

• Forecasted revenues attributable to existing customers

• Estimated annual attrition

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

• Discount rates

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company's process to develop the key acquisition-date assumptions. We compared the Company's year one forecasted revenues attributable to existing customers to the acquired business's historical information. We evaluated the Company's forecasted revenues attributable to existing customers and EBIT margins by comparing these forecasted assumptions to historical Company information. In addition, valuation professionals with specialized skills and knowledge, assisted us to:

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

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

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

/s/ KPMG LLP

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

New York, New York

February 20, 2020

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

<table><tr><td rowspan="3"></td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2019</td><td>2018</td><td>2017</td></tr><tr><td colspan="3">(Dollars in thousands, except share and per share data)</td></tr><tr><td>Net sales</td><td>\( 1,137,913</td><td>\) 1,092,051</td><td>\( 1,116,143</td></tr><tr><td>Cost of sales</td><td>806,113</td><td>779,264</td><td>789,487</td></tr><tr><td>Gross profit</td><td>331,800</td><td>312,787</td><td>326,656</td></tr><tr><td>Selling, general and administrative expenses</td><td>234,715</td><td>231,336</td><td>224,237</td></tr><tr><td>Restructuring and integration expenses</td><td>2,585</td><td>4,510</td><td>6,173</td></tr><tr><td>Other income (expense), net</td><td>(5)</td><td>4,327</td><td>1,275</td></tr><tr><td>Operating income</td><td>94,495</td><td>81,268</td><td>97,521</td></tr><tr><td>Other non-operating income (expense), net</td><td>2,587</td><td>(411)</td><td>1,250</td></tr><tr><td>Interest expense</td><td>5,286</td><td>4,026</td><td>2,329</td></tr><tr><td>Earnings from continuing operations before taxes</td><td>91,796</td><td>76,831</td><td>96,442</td></tr><tr><td>Provision for income taxes</td><td>22,745</td><td>19,977</td><td>52,812</td></tr><tr><td>Earnings from continuing operations</td><td>69,051</td><td>56,854</td><td>43,630</td></tr><tr><td>Loss from discontinued operations, net of income tax benefit of \(3,912, \)4,866 and \(3,769</td><td>(11,134)</td><td>(13,851)</td><td>(5,654)</td></tr><tr><td>Net earnings</td><td>\) 57,917</td><td>\( 43,003</td><td>\) 37,976</td></tr><tr><td>Net earnings per common share - Basic:</td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations</td><td>\( 3.09</td><td>\) 2.53</td><td>\( 1.92</td></tr><tr><td>Discontinued operations</td><td>(0.50)</td><td>(0.62)</td><td>(0.25)</td></tr><tr><td>Net earnings per common share - Basic</td><td>\) 2.59</td><td>\( 1.91</td><td>\) 1.67</td></tr><tr><td>Net earnings per common share - Diluted:</td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations</td><td>\( 3.03</td><td>\) 2.48</td><td>\( 1.88</td></tr><tr><td>Discontinued operations</td><td>(0.49)</td><td>(0.60)</td><td>(0.24)</td></tr><tr><td>Net earnings per common share - Diluted</td><td>\) 2.54</td><td>\( 1.88</td><td>\) 1.64</td></tr><tr><td>Dividends declared per share</td><td>\( 0.92</td><td>\) 0.84</td><td>\( 0.76</td></tr><tr><td>Average number of common shares</td><td>22,378,414</td><td>22,456,480</td><td>22,726,491</td></tr><tr><td>Average number of common shares and dilutive common shares</td><td>22,818,451</td><td>22,931,723</td><td>23,198,392</td></tr></table>

See accompanying notes to consolidated financial statements.