SEC Company Response from STANDARD MOTOR PRODUCTS, INC. (SMP) (CIK 0000093389) (SMP) — Dec 2, 2005
STANDARD MOTOR PRODUCTS, INC. (SMP) (CIK 0000093389)
Date: Dec. 2, 2005 · CIK: 0000093389 · Accession: 0000909012-05-000942
AI Filing Summary & Sentiment
File numbers found in text: 001-04743
Referenced dates: November 9, 2005
Letter
VIA EDGAR Securities and Exchange Commission Division of Corporate Finance 450 Fifth Street N.W. Washington, DC 20549 Attention: Martin F. James, Senior Assistant Chief Accountant Praveen Kartholy, Staff Accountant
RE: STANDARD MOTOR PRODUCTS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004 FORMS 10-Q FOR THE QUARTERS ENDED MARCH 31, 2005 AND JUNE 30, 2005 FILE NO. 001-04743
Dear Sirs:
On behalf of Standard Motor Products, Inc. (the "Company"), we are responding to the comments of the staff (the "Staff") of the Securities and Exchange Commission contained in a letter dated November 9, 2005 in connection with the above-referenced Annual Report on Form 10-K and the above-referenced Quarterly Reports on Form 10-Q. The following responses are numbered to correspond to the Staff's numbered comments contained in the Staff's letter.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
1. Reports of Independent Registered Public Accounting Firm
With respect to the Staff's previous comment 1, we note that the Staff is continuing to evaluate our response contained in our letter to the Staff of August 30, 2005.
2. Summary of Significant Accounting Policies--Revenue Recognition
As we disclosed in our previous filings, we use components and cores in the remanufacturing of computerized electronics and air conditioning compressors. In connection with our remanufacturing processes of air conditioning compressors, we acquire cores from exchanges with customers or (because the cores acquired in our customer exchange program are not sufficient to meet all of our production needs) from direct purchases. With respect to computerized electronics, we are a reseller of such products and forward any core returns from customers to our vendor. <PAGE>
We believe that our accounting methodologies described below follow fundamental accounting concepts of revenue recognition, inventory costing, and liability recognition and are consistent with accounting principles generally accepted in the United States of America. We advise the Staff that we will provide further disclosure in our future periodic reports regarding our accounting for cores.
o ACCOUNTING FOR CORE PURCHASES FROM BROKERS AND EXCHANGES WITH CUSTOMERS AND ACCOUNTING AND VALUATION FOR RELATED REVENUES, COST OF REVENUES AND INVENTORY: (dollar amounts listed below are examples only)
With respect to the first two bullet points contained in the Staff's comment, we have combined our responses to provide an explanation of the accounting issues throughout the entire process of when we receive cores until we sell our products to our customers. The following discusses our accounting for air conditioning compressors and computerized electronics separately. As noted below, we do not recognize any revenue related to the core liability.
Air Conditioning Compressor Cores--Customers Exchanges: The production of air conditioning compressors involves the rebuilding of used compressors, which we acquire from returns pursuant to an exchange program with customers. In order to have an exchange with customers, we first must have a previous sale to that customer. The customer provides us a deposit at the time of purchasing a compressor from us and is refunded their deposit when they send us a replacement core. The deposit is carried as a core liability on our books, and the core is placed in inventory only at the time we receive and process the core return.
The next step is the remanufacturing of an air conditioning compressor, which begins with a core and then we apply to it additional materials, labor and overhead to create a finished good compressor. To illustrate, we could have:
Core Inventory (at standard cost) $ 20 Direct materials, direct labor, overhead $ 80 ---- Total in finished good including core $100
Upon the sale of a remanufactured finished good, we invoice the customer for the sale as well as a core deposit. To illustrate, we could have:
Debit Credit ----- ------ Accounts Receivable - Sales $150 Accounts Receivable - Cores $ 30 Sales $150 Core deposit liability $ 30
<PAGE>
At the time of the sale to our customer, we remove from inventory the cost of the total finished good including the core. To illustrate, we could have:
Debit Credit ----- ------ Cost of Sale $100 Inventory - Compressors $80 Inventory - Core $20
In the future, when the customer returns the used core to us, it is recorded to inventory at our standard cost, which is updated annually by referencing the average acquisition cost of direct purchases and, at that time, we effectively refund the core deposit to the customer. Our journal entry to record the core return would be:
Debit Credit ----- ------ Core deposit liability $30 Accounts Receivable - Cores $30
Core Inventory $20 Cost of Sale $20
Air Conditioning Compressor Cores--Direct Purchases: When we directly purchase air conditioning compressor cores, the cores are treated as an ordinary inventory purchase and at that time recorded to inventory at our standard cost, as described above. Only these outright arms length purchases (and not core returns under the exchange program with customers) serve as a basis to establish our standard cost. Any difference between actual purchase price and standard cost is treated as a purchase price variance; this variance is treated as a component of cost of goods sold as the inventory turns. To illustrate, we could have:
Debit Credit ----- ------ Core Inventory $20 Accounts Payable $20
Thereafter, the remaining steps in the remanufacturing process are similar to the discussion described above.
Computerized Electronics: With respect to computerized electronics, we acquire computerized electronic finished goods from a joint venture company, which remanufactures and supplies these products to us. We then resell the finished goods to our customers. We do not directly purchase cores for such computerized electronics from core brokers. However, in connection with product returns, we receive the underlying core from customers, and we forward such cores to our joint venture manufacturer.
<PAGE>
When we acquire a computerized electronic product, we are invoiced for a finished good component as well as a core deposit. For example, a purchase invoice would be detailed as follows:
Finished Good $ 20 Core $ 50 ---- Total in finished good including core $ 70
Our journal entry would be:
Debit Credit ----- ------ Inventory $20 Core inventory $50 Accounts Payable $70
We then sell the computerized electronic product to our customers for $30 plus the core for $50. The accounting is as follows:
Debit Credit ----- ------ Accounts Receivable $80.00 Sale $30.00 Core Inventory $50.00
At the time of the sale to our customer, we remove from inventory the cost of the total finished good including the core. As noted above, the core value was removed from inventory in the above journal entry when we recorded the sale. To illustrate, we could have:
Debit Credit ----- ------ Cost of Sale $20.00 Inventory $20.00
When a customer returns a computerized electronic core to us, we in turn return it to our joint venture manufacturer with the following accounting:
Debit Credit ----- ------ Inventory $50.00 Accounts Receivable $50.00 (To account for the customer's core return to us.)
Debit Credit ----- ------ Accounts Payable $50.00 Inventory $50.00 (To account for the core returned to our joint venture manufacturer.)
<PAGE>
o ACCOUNTING LITERATURE:
With respect to inventory valuation, our core inventories are valued in conformity with accounting principles generally accepted in the United States of America, at the lower of cost or market. Cost is generally determined on the first-in, first-out basis.
With respect to revenue recognition, as we do not recognize any revenue related to core activity, we believe there are no revenue recognition issues associated with the manner in which we account for cores in our remanufacturing process. Further, we conservatively recognize a core in inventory only at the time the core is actually received.
o DESCRIPTION OF SIGNIFICANT TERMS WITH CUSTOMERS REGARDING EXCHANGES:
The significant terms of our core exchange arrangements with our customers include the following elements:
a. Cores must be returned in our factory boxes with part numbers matching those included in our remanufacturing program. b. Cores must be for compressors for which a core charge is listed in our current price sheet. c. Cores must be free of tampering and must be fully assembled. d. Cores for compressors sold complete with a clutch assembly must consist of a compressor and a clutch assembly. e. Credit for core returns will be issued in the amount up to the available dollars accrued in a customer's core account (i.e., core returns cannot be greater than units purchased). f. Cores returned in excess of a customer's available core account will have no monetary value, and we will generally not issue any credit to a customer. g. There is no handling charge to customer. h. Returned cores will not be accepted if they are rusted, weather-beaten, water damaged, stripped or missing parts.
o QUANTIFY IMPACT OF CORE PURCHASES AND SALES ON TOTAL REVENUES, COST OF REVENUES AND INVENTORY:
Air Conditioning Compressors: In 2004, our total air conditioning compressor gross sales were $112.8 million, of which $58.1 million were made to exchange program customers. For that period, our total air conditioning compressor cost of goods sold was $73.2 million, of which $34.3 million was to exchange program customers. In addition, in 2004 we acquired and placed in inventory $10.8 million of cores, of which $4.3 million was from customers under the exchange program.
Computerized Electronics: In 2004, our total computerized electronics gross sales were $10.7 million, and the related cost of goods sold was $7.3 million. In addition, in 2004 we acquired and placed in inventory $7.6 million of cores.
<PAGE>
3. Controls and Procedures
We confirm to the Staff that our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by the annual report. In addition, we advise the Staff that we will include similar language as stated above in our future filings.
FORMS 10-Q FOR THE QUARTERS ENDED MARCH 31, 2005 AND JUNE 30, 2005
4. Controls and Procedures
As separately discussed with the Staff, we note that our conclusion as to whether our disclosure controls and procedures were effective as of the end of the period covered by the Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 is adequate. However, with respect to the Quarterly Reports on Form 10
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STANDARD MOTOR PRODUCTS, INC.
37-18 Northern Boulevard
Long Island City, New York 11101
December 2, 2005
VIA EDGAR
Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street N.W.
Washington, DC 20549
Attention: Martin F. James, Senior Assistant Chief Accountant
Praveen Kartholy, Staff Accountant
RE: STANDARD MOTOR PRODUCTS, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2004 FORMS 10-Q FOR THE QUARTERS ENDED
MARCH 31, 2005 AND JUNE 30, 2005 FILE NO. 001-04743
Dear Sirs:
On behalf of Standard Motor Products, Inc. (the "Company"), we are
responding to the comments of the staff (the "Staff") of the Securities and
Exchange Commission contained in a letter dated November 9, 2005 in connection
with the above-referenced Annual Report on Form 10-K and the above-referenced
Quarterly Reports on Form 10-Q. The following responses are numbered to
correspond to the Staff's numbered comments contained in the Staff's letter.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
1. Reports of Independent Registered Public Accounting Firm
With respect to the Staff's previous comment 1, we note that the
Staff is continuing to evaluate our response contained in our letter
to the Staff of August 30, 2005.
2. Summary of Significant Accounting Policies--Revenue Recognition
As we disclosed in our previous filings, we use components and cores
in the remanufacturing of computerized electronics and air
conditioning compressors. In connection with our remanufacturing
processes of air conditioning compressors, we acquire cores from
exchanges with customers or (because the cores acquired in our
customer exchange program are not sufficient to meet all of our
production needs) from direct purchases. With respect to
computerized electronics, we are a reseller of such products and
forward any core returns from customers to our vendor.
<PAGE>
We believe that our accounting methodologies described below follow
fundamental accounting concepts of revenue recognition, inventory
costing, and liability recognition and are consistent with
accounting principles generally accepted in the United States of
America. We advise the Staff that we will provide further disclosure
in our future periodic reports regarding our accounting for cores.
o ACCOUNTING FOR CORE PURCHASES FROM BROKERS AND EXCHANGES WITH CUSTOMERS
AND ACCOUNTING AND VALUATION FOR RELATED REVENUES, COST OF REVENUES AND
INVENTORY: (dollar amounts listed below are examples only)
With respect to the first two bullet points contained in the Staff's
comment, we have combined our responses to provide an explanation of
the accounting issues throughout the entire process of when we
receive cores until we sell our products to our customers. The
following discusses our accounting for air conditioning compressors
and computerized electronics separately. As noted below, we do not
recognize any revenue related to the core liability.
Air Conditioning Compressor Cores--Customers Exchanges: The
production of air conditioning compressors involves the rebuilding
of used compressors, which we acquire from returns pursuant to an
exchange program with customers. In order to have an exchange with
customers, we first must have a previous sale to that customer. The
customer provides us a deposit at the time of purchasing a
compressor from us and is refunded their deposit when they send us a
replacement core. The deposit is carried as a core liability on our
books, and the core is placed in inventory only at the time we
receive and process the core return.
The next step is the remanufacturing of an air conditioning
compressor, which begins with a core and then we apply to it
additional materials, labor and overhead to create a finished good
compressor. To illustrate, we could have:
Core Inventory (at standard cost) $ 20
Direct materials, direct labor, overhead $ 80
----
Total in finished good including core $100
Upon the sale of a remanufactured finished good, we invoice the
customer for the sale as well as a core deposit. To illustrate, we
could have:
Debit Credit
----- ------
Accounts Receivable - Sales $150
Accounts Receivable - Cores $ 30
Sales $150
Core deposit liability $ 30
2
<PAGE>
At the time of the sale to our customer, we remove from inventory
the cost of the total finished good including the core. To
illustrate, we could have:
Debit Credit
----- ------
Cost of Sale $100
Inventory - Compressors $80
Inventory - Core $20
In the future, when the customer returns the used core to us, it is
recorded to inventory at our standard cost, which is updated
annually by referencing the average acquisition cost of direct
purchases and, at that time, we effectively refund the core deposit
to the customer. Our journal entry to record the core return would
be:
Debit Credit
----- ------
Core deposit liability $30
Accounts Receivable - Cores $30
Core Inventory $20
Cost of Sale $20
Air Conditioning Compressor Cores--Direct Purchases: When we
directly purchase air conditioning compressor cores, the cores are
treated as an ordinary inventory purchase and at that time recorded
to inventory at our standard cost, as described above. Only these
outright arms length purchases (and not core returns under the
exchange program with customers) serve as a basis to establish our
standard cost. Any difference between actual purchase price and
standard cost is treated as a purchase price variance; this variance
is treated as a component of cost of goods sold as the inventory
turns. To illustrate, we could have:
Debit Credit
----- ------
Core Inventory $20
Accounts Payable $20
Thereafter, the remaining steps in the remanufacturing process are
similar to the discussion described above.
Computerized Electronics: With respect to computerized electronics,
we acquire computerized electronic finished goods from a joint
venture company, which remanufactures and supplies these products to
us. We then resell the finished goods to our customers. We do not
directly purchase cores for such computerized electronics from core
brokers. However, in connection with product returns, we receive the
underlying core from customers, and we forward such cores to our
joint venture manufacturer.
3
<PAGE>
When we acquire a computerized electronic product, we are invoiced
for a finished good component as well as a core deposit. For
example, a purchase invoice would be detailed as follows:
Finished Good $ 20
Core $ 50
----
Total in finished good including core $ 70
Our journal entry would be:
Debit Credit
----- ------
Inventory $20
Core inventory $50
Accounts Payable $70
We then sell the computerized electronic product to our customers
for $30 plus the core for $50. The accounting is as follows:
Debit Credit
----- ------
Accounts Receivable $80.00
Sale $30.00
Core Inventory $50.00
At the time of the sale to our customer, we remove from inventory
the cost of the total finished good including the core. As noted
above, the core value was removed from inventory in the above
journal entry when we recorded the sale. To illustrate, we could
have:
Debit Credit
----- ------
Cost of Sale $20.00
Inventory $20.00
When a customer returns a computerized electronic core to us, we in
turn return it to our joint venture manufacturer with the following
accounting:
Debit Credit
----- ------
Inventory $50.00
Accounts Receivable $50.00
(To account for the
customer's core return
to us.)
Debit Credit
----- ------
Accounts Payable $50.00
Inventory $50.00
(To account for the core
returned to our joint
venture manufacturer.)
4
<PAGE>
o ACCOUNTING LITERATURE:
With respect to inventory valuation, our core inventories are valued
in conformity with accounting principles generally accepted in the
United States of America, at the lower of cost or market. Cost is
generally determined on the first-in, first-out basis.
With respect to revenue recognition, as we do not recognize any
revenue related to core activity, we believe there are no revenue
recognition issues associated with the manner in which we account
for cores in our remanufacturing process. Further, we conservatively
recognize a core in inventory only at the time the core is actually
received.
o DESCRIPTION OF SIGNIFICANT TERMS WITH CUSTOMERS REGARDING EXCHANGES:
The significant terms of our core exchange arrangements with our
customers include the following elements:
a. Cores must be returned in our factory boxes with part
numbers matching those included in our remanufacturing
program.
b. Cores must be for compressors for which a core charge is
listed in our current price sheet.
c. Cores must be free of tampering and must be fully
assembled.
d. Cores for compressors sold complete with a clutch
assembly must consist of a compressor and a clutch
assembly.
e. Credit for core returns will be issued in the amount up
to the available dollars accrued in a customer's core
account (i.e., core returns cannot be greater than units
purchased).
f. Cores returned in excess of a customer's available core
account will have no monetary value, and we will
generally not issue any credit to a customer.
g. There is no handling charge to customer.
h. Returned cores will not be accepted if they are rusted,
weather-beaten, water damaged, stripped or missing
parts.
o QUANTIFY IMPACT OF CORE PURCHASES AND SALES ON TOTAL REVENUES, COST OF
REVENUES AND INVENTORY:
Air Conditioning Compressors: In 2004, our total air conditioning
compressor gross sales were $112.8 million, of which $58.1 million
were made to exchange program customers. For that period, our total
air conditioning compressor cost of goods sold was $73.2 million, of
which $34.3 million was to exchange program customers. In addition,
in 2004 we acquired and placed in inventory $10.8 million of cores,
of which $4.3 million was from customers under the exchange program.
Computerized Electronics: In 2004, our total computerized
electronics gross sales were $10.7 million, and the related cost of
goods sold was $7.3 million. In addition, in 2004 we acquired and
placed in inventory $7.6 million of cores.
5
<PAGE>
3. Controls and Procedures
We confirm to the Staff that our principal executive officer and
principal financial officer evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period
covered by the annual report. In addition, we advise the Staff that
we will include similar language as stated above in our future
filings.
FORMS 10-Q FOR THE QUARTERS ENDED MARCH 31, 2005 AND JUNE 30, 2005
4. Controls and Procedures
As separately discussed with the Staff, we note that our conclusion
as to whether our disclosure controls and procedures were effective
as of the end of the period covered by the Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 is adequate. However, with
respect to the Quarterly Reports on Form 10