What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-03 · 377 added, 248 removed, 188 unchanged (77% of the section changed)

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relationships with our major customers and in the timing, size and continuation of our customers’ programs;

changes in our supply chain financing arrangements, such as changes in terms, termination of contracts and/or the impact of rising interest

changes in our supply chain financing arrangements, such as changes in terms, termination of contracts and/or the impact of rising

interest rates;

the ability of our customers to achieve their projected sales;

competitive product and pricing pressures;

increases in production or material costs, including procurement costs resulting from higher tariffs, and inflationary cost increases

in raw materials, labor and transportation, that cannot be recouped in product pricing;

increases in production or material costs, including procurement costs resulting from higher tariffs, and inflationary cost

increases in raw materials, labor and transportation, that cannot be recouped in product pricing;

the performance of the aftermarket, non-aftermarket, industrial equipment and original equipment markets;

changes in the product mix and distribution channel

changes in the product mix and

distribution channel mix;

economic and market conditions;

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our ability to achieve benefits from our cost savings initiatives;

product liability and environmental matters (including, without limitation, those related to

asbestos-related contingent liabilities and remediation costs at certain properties);

product liability and environmental matters (including, without

limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties);

the effects of a widespread public health crisis, including the coronavirus (COVID-19) pandemic;

the effects of disruptions in the supply chain;

Russia’s invasion

of the Ukraine and resultant sanctions imposed by the U.S.

the effects of disruptions in the

supply chain;

Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S.

and other governments;

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climate-related risks, such as physical and transition risks;

as well as other risks and uncertainties, such as

those described under Risk Factors, Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC.

Forward-looking statements are made only as of the date

hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, historical information should not be considered as an indicator of

future performance.

other risks and uncertainties, such as those described under Risk Factors, Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC.

Forward-looking

statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, historical information

should not be considered as an indicator of future performance.

The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report.

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providing customized solutions for vehicle control and thermal management products in diversified end markets represented by our Engineered Solutions segment.

We are a global manufacturer with over 6,000 employees (inclusive of temporary and joint

venture employees) across nearly 39 manufacturing, distribution and engineering facilities and offices located in North America, Europe and Asia.

We sell our products primarily to automotive aftermarket retailers, warehouse distributors, original

equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.

We are a global manufacturer with over 6,000 employees (inclusive of temporary and

joint venture employees) across nearly 39 manufacturing, distribution and engineering facilities and offices located in North America, Europe and Asia.

We sell our products primarily to automotive aftermarket retailers, warehouse distributors,

original equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.

Beginning on January 1, 2023, we reorganized our business into three operating segments – Engineered Solutions , Vehicle Control and Temperature Control .

Engineered Solutions is a new operating segment created by carving out all non-aftermarket business from our prior Engine Management and Temperature Control operating segments,

which will now solely reflect parts sales to aftermarket channels.

Our Engineered Solutions segment supplies custom-engineered solutions to vehicle and equipment manufacturers in highly diversified global end-markets such as commercial and light

vehicles, construction, agriculture, power sports and marine, and is expected to provide a platform for growth.

Segment offerings include product categories from both of our legacy operating segments, and offer a broad array of conventional and

future-oriented technologies, including those that are specific to vehicle electrification as well as those that are powertrain-neutral.

Engineered Solutions is a new operating segment created by carving out all non-aftermarket business from our prior Engine Management and Temperature Control operating

segments, which will now solely reflect parts sales to aftermarket channels.

Our Engineered Solutions segment supplies custom-engineered solutions to vehicle and equipment manufacturers in highly diversified global end-markets such as commercial

and light vehicles, construction, agriculture, power sports and marine, and is expected to provide a platform for growth.

Segment offerings include product categories from both of our legacy operating segments, and offer a broad array of

conventional and future-oriented technologies, including those that are specific to vehicle electrification as well as those that are powertrain-neutral.

Vehicle Control is the new name for our Engine Management operating segment.

It includes our core aftermarket business after carving out of all non-aftermarket business to our

Engineered Solutions operating segment.

The Vehicle Control segment includes sales from three new major product groups – (1) Ignition, Emissions & Fuel Delivery , which includes the traditional internal

combustion engine (ICE) dependent categories;

(2) Electrical & Safety , which includes powertrain neutral vehicle technologies such as electrical switches/relays, safety related products such as

anti-lock brake and vehicle speed sensors, tire pressure monitoring, park assist sensors, and advanced driver assistance components;

and (3) Wire Sets & Other , which includes spark plug wire sets and

other related products, and are product categories we have noted to be in secular decline based upon product life cycle.

It includes our core aftermarket business after carving out of all non-aftermarket business to

our Engineered Solutions operating segment.

The Vehicle Control segment includes sales from three new major product groups – (1) Ignition, Emissions & Fuel Delivery , which includes the traditional

internal combustion engine (ICE) dependent categories;

(2) Electrical & Safety , which includes powertrain neutral vehicle technologies such as electrical switches/relays, safety related products such

as anti-lock brake and vehicle speed sensors, tire pressure monitoring, park assist sensors, and advanced driver assistance components;

and (3) Wire Sets & Other , which includes spark plug wire sets

and other related products, and are product categories we have noted to be in secular decline based upon product life cycle.

Our Temperature Control operating segment remains substantially unchanged, as only a small portion of its business moved to Engineered Solutions, and this legacy aftermarket

business segment is poised to benefit from the broader adoption of air conditioning and other thermal systems.

Those systems will provide passenger comfort regardless of the vehicles’ powertrain, and are being developed to cool batteries and other

products used on electric vehicles.

Segment offerings include sales from thermal products in the aftermarket business under two major product groups – (1) AC System Components, which includes compressors,

connecting lines, heat exchangers, and expansion devices;

and (2) Other Thermal Component s, which includes parts that provide engine, transmission, electric drive motor, and battery temperature management.

Those systems will provide passenger comfort regardless of the vehicles’ powertrain, and are being developed to cool batteries and

other products used on electric vehicles.

Segment offerings include sales from thermal products in the aftermarket business under two major product groups – (1) AC System Components, which includes

compressors, connecting lines, heat exchangers, and expansion devices;

and (2) Other Thermal Component s, which includes parts that provide engine, transmission, electric drive motor, and battery

temperature management.

The reorganization of our operating segments provides clarity regarding the unique dynamics and margin profiles of the markets served by each segment, better aligns with our strategic focus on diversification, and provides greater transparency

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Vehicle Control (Aftermarket):

Engine Management (Ignition,

Ignition, Emissions, Fuel & Safety

Emissions & Fuel Delivery)

Engine Management (Ignition, Emissions & Fuel Delivery)

Wire and Cable

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This discussion summarizes the significant factors affecting our results of operations and the financial condition of our

business during the three months ended March 31, 2023 and 2022.

business during the three months ended June 30, 2023 and 2022.

Three Months Ended

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Net earnings per common share

Consolidated net sales for the three months ended March 31, 2023 were $328 million, an increase of $5.2 million, or 1.6%, compared to net sales of $322.8 million in the same period in 2022.

Net sales in our Vehicle Control operating segment

increased $7.3 million, or 4.1%, while net sales in both our Temperature Control and Engineered Solutions operating segments declined slightly when compared to the comparable period in the prior year.

The increase in net sales in our Vehicle Control operating segment reflects the continued strength in the demand of our Engine Management (Ignition, Emissions and Fuel Delivery) aftermarket product line and the impact of increased pricing.

increase in net sales in the Vehicle Control segment in the first quarter of 2023 is in line with our expected growth rate of low single digits in the automotive aftermarket.

Net sales in both our Temperature Control and Engineered Solutions operating segments declined slightly when compared to the comparable period in the prior year.

Temperature Control’s net sales for the first quarter of 2023 reflect the impact

of the timing of pre-season customer orders in 2023, and are in line with the strong pre-season customer orders of the first quarter of 2022 when sales were up 30% and customers replenished their prior year inventory levels.

Overall, full year

results at Temperature Control will be dependent upon summer weather conditions and customer inventory levels.

Engineered Solutions’ net sales decreased slightly year-over-year due to a change in one customer’s production schedule however, we

continue to be optimistic about the long-term growth potential of the complementary markets served in our newly created Engineered Solutions operating segment.

Gross margins as a percentage of net sales were flat at 27.8% in both the first quarter of 2023 and 2022.

Gross margins in the first three months of 2023 reflect the positive impact of higher net sales and increased pricing, which were offset by

lower fixed cost absorption due to lower production levels than those achieved in the same period in 2022, as we continued to work down our inventory levels, and continued inflationary cost increases in certain raw materials, labor and

transportation expense.

While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost initiatives coupled with our ability to pass through higher prices to our customers should help to offset

much of this impact to our margins.

Operating margin as a percentage of net sales for the three months ended March 31, 2023 was 6.3% as compared to 8.3% for the same period in 2022.

Included in our operating margin were selling, general and administrative expenses (“SG&A”) of

$69.6 million, or 21.2% of net sales for the three months ended March 31, 2023 compared to $62.9 million, or 19.5% of net sales, for the same period in 2022.

The $6.7 million increase in SG&A expenses in the first quarter of 2023 as compared to

the first quarter of 2022 is principally due to (1) higher interest rate related costs of $5.5 million incurred in our supply chain financing arrangements, and (2) higher distribution and freight costs related to higher sales.

Overall, our core automotive aftermarket business remains strong, and we continue to be optimistic about the long term growth potential of the complementary markets we serve in our newly created Engineered Solutions operating segment.

Consolidated net sales for the three months ended June 30, 2023 were $353.1 million, a decrease of $6.3 million, or 1.8%, compared to net sales of $359.4 million in the same period in 2022.

Net sales decreased in our Vehicle Control and

Temperature Control operating segments, while net sales in our Engineered Solutions operating segment increased when compared to the comparable period in the prior year.

The decrease in net sales in our Vehicle Control segment primarily reflects the impact of lower sales to a customer that filed for bankruptcy in the first quarter of the year;

while Temperature Control’s net sales for the second quarter of

2023 reflects the impact of a rainy spring and early summer season across key markets, and thus impacted the timing of early season customer orders in 2023, which were lower than the strong customer orders of the second quarter of 2022 when sales

were up 6.4% and customers replenished their prior year inventory levels.

Net sales in our Engineered Solutions segment showed year-over-year improvement driven by increased pricing and new business wins, and we continue to be optimistic about

the long-term growth potential of the complementary markets served in our newly created Engineered Solutions operating segment.

Gross margins as a percentage of net sales increased to 28.7% in the second quarter of 2023 compared to 26.8% in the second quarter of 2022.

The gross margin percentages in both our Vehicle Control and Engineered Solutions segments increased

year-over-year, while the gross margin percentage decreased in our Temperature Control segment.

The overall consolidated gross margin percentage increase reflects the impact of increased pricing and operating performance, which more than offset

the lower fixed cost absorption due to lower production levels as we work down our inventory balances, the lower sales volumes in Temperature Control, the weakening of the U.S.

dollar on our international operations and the negative impact from

the different margin profile in Engineered Solutions.

Although all of our operating segments were negatively impacted by ongoing inflationary cost increases in certain raw materials, labor and transportation expenses, we anticipate that our

annual cost savings initiatives and ability to pass through higher prices to our customers should continue offset much of the impact on our gross margins.

Operating margin as a percentage of net sales for the three months ended June 30, 2023 was essentially flat at 7.7% as compared to 7.8% for the same period in 2022.

Included in our operating margin were selling, general and administrative

expenses (“SG&A”) of $73.8 million, or 20.9% of net sales for the three months ended June 30, 2023 compared to $68.5 million, or 19% of net sales, for the same period in 2022.

The $5.3 million increase in SG&A expenses in the second

quarter of 2023 as compared to the second quarter of 2022 is principally due to higher interest rate related costs of $4.8 million incurred in our supply chain financing arrangements.

Excluding the impact of the incremental interest rate costs

incurred in our supply chain financing arrangements, SG&A expenses in the second quarter of 2023 were 19.6% of consolidated net sales, slightly higher than the percentage in the comparable prior year period.

Overall, we remain optimistic for the balance of the year.

Our sales team continues to explore new sales opportunities, we remain optimistic about the long-term potential growth opportunities in our Engineered Solutions segment, our cost

savings programs remain on track and we are confident that our focus on cash flow will result in generating significant operating cash flow for the balance of 2023.

Impact of Russia’s Invasion of the Ukraine

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In response to the global supply chain volatility and inflationary cost increases, we have taken, and continue to take, several actions to mitigate the impact by working closely with our suppliers and customers to minimize any

potential adverse impacts on our business, including implementing cost savings initiatives and the pass through of higher costs to our customers in the form of price increases, and increasing inventory levels to minimize the obvious disruptions

potential adverse impacts on our business, including implementing cost savings initiatives and the pass through of higher costs to our customers in the form of price increases, and maintaining inventory at levels to minimize potential disruptions

from out-of-stock raw materials and components to ensure higher fill rates with our customers.

We believe that we have also benefited from our geographically diversified manufacturing footprint and our strategy to bring more product manufacturing

in-house, especially with respect to product availability and fill rates.

We expect these inflationary trends to continue for some time, and while we believe that we will be able to somewhat offset the impact, there can be no assurances that

unforeseen future events in the global supply chain affecting the availability of materials and components, and/or increasing commodity pricing, will not have an adverse effect on our business, financial condition and results of operations.

We believe that we have also benefited from our geographically diversified manufacturing footprint and our strategy to bring more product

manufacturing in-house, especially with respect to product availability and fill rates.

We expect these inflationary trends to continue for some time, and while we believe that we will be able to somewhat offset the impact, there can be no

assurances that unforeseen future events in the global supply chain affecting the availability of materials and components, and/or increasing commodity pricing, will not have an adverse effect on our business, financial condition and results of

Environmental, Social, & Governance (“ESG”)

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serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business.

These values also serve as the foundation for our increased focus on many important environmental, social

and governance issues, such as environmental stewardship and our efforts to identify and implement practices that reduce our environmental impact while achieving our business goals;

our attention to diversity, equity and inclusion, employee

development, retention, and health and safety;

These values also serve as the foundation for our increased focus on many important environmental,

social and governance issues, such as environmental stewardship and our efforts to identify and implement practices that reduce our environmental impact while achieving our business goals;

our attention to diversity, equity and inclusion,

employee development, retention, and health and safety;

and our community engagement initiatives, to name a few.

We have made significant strides with respect to our ESG initiatives, building awareness of the environmental impact of our operations, and challenging ourselves to reduce our impact by reducing our usage of energy and water, reducing our

generation of waste, increasing our recycling efforts and reducing our greenhouse gas emissions (“GHG”), with the ambition of achieving net-zero GHG emissions by 2050.

With each year, we intend to further our commitment to improving our

environmental stewardship and finding ways to give back to our communities.

Additional information on our ESG initiatives can be found on our corporate website at ir.smpcorp.com under “Environmental &

Social Responsibility” (including our most recent sustainability report) and at smpcares.smpcorp.com.

Information on our corporate websites regarding our ESG initiatives are referenced for general

information only and are not incorporated by reference in this Report.

generation of waste, increasing our recycling efforts and reducing our greenhouse gas emissions (“GHG”), with the ambition of achieving net-zero total Scope 1 and Scope 2 GHG emissions by 2050.

With each year, we intend to further our commitment

to improving our environmental stewardship and finding ways to give back to our communities.

Additional information on our ESG initiatives can be found on our corporate website at ir.smpcorp.com under

“Environmental & Social Responsibility” (including our most recent sustainability report) and at smpcares.smpcorp.com.

Information on our corporate websites regarding our ESG initiatives are

referenced for general information only and are not incorporated by reference in this Report.

Interim Results of Operations

Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022

Consolidated net sales for the three months ended March 31, 2023 were $328 million, an increase of $5.2 million, or 1.6%, compared to

Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022

Consolidated net sales for the three months ended June 30, 2023 were $353.1 million, a decrease of $6.3 million, or 1.8%, compared to

$359.4 million in the same period of 2022, with the majority of our net sales to customers located in the United States.

Net sales in our Vehicle Control operating segment increased $7.3 million, or 4.1%, while net sales in both our Temperature

Control and Engineered Solutions operating segments declined slightly when compared to the comparable period in the prior year.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the three months ended March 31, 2023 and 2022 (in thousands):

Net sales decreased in our Vehicle Control and Temperature Control operating segments, while net sales in our Engineered

Solutions operating segment increased when compared to the comparable period in the prior year.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the three months ended June 30, 2023 and 2022 (in thousands):

Three Months Ended

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Total Engineered Solutions

Vehicle Control’s net sales for the three months ended March 31, 2023 increased $7.3 million, or 4.1%, to $184.6 million compared to $177.3 million in the same period of 2022.

Net sales in the engine management (ignition, emissions, and fuel

delivery) product group for the three months ended March 31, 2023 were $116.1 million, an increase of $7 million, or 6.4%, compared to $109.1 million in the same period of 2022.

Net sales in the electrical and safety product group for the three

months ended March 31, 2023 were $51.8 million, a decrease of $0.5 million, or 1%, compared to $52.3 million in the three months ended March 31, 2022.

Net sales in the wire sets and other product group for the three months ended March 31, 2023

were $16.7 million, an increase of $0.8 million, or 5.2%, compared to $15.9 million in the three months ended March 31, 2022.

Demand in the Vehicle Control aftermarket segment remains relatively strong and our net sales performance in the first

quarter of 2023 is in line with our expected growth rate of low single digits in the automotive aftermarket.

Temperature Control’s net sales for the three months ended March 31, 2023 were essentially flat at $72.4 million compared to $73.1 million in the same period of 2022.

Net sales in the AC systems components product group for the three months

ended March 31, 2023 were $45.8 million, a decrease of $1.6 million, or 3.4%, compared to $47.4 million in the same period of 2022.

Net sales in the other thermal components product group for the three months ended March 31, 2023 were $26.7

million, an increase of $1 million, or 3.8%, compared to $25.7 million in the three months ended March 31, 2022.

Temperature Control’s net sales for the first quarter of 2023 reflect the impact of the timing of pre-season customer orders in 2023,

and are in line with the strong pre-season customer orders of the first quarter of 2022 when sales were up 30% and customers replenished their prior year inventory levels.

Overall, full year results at Temperature Control will be dependent upon

summer weather conditions and customer inventory levels.

Engineered Solutions’ net sales for the three months ended March 31, 2023 decreased $1.5 million, or 2%, to $71 million compared to $72.5 million in the same period of 2022.

Net sales in the commercial vehicle product group for the three months

ended March 31, 2023 were $19.9 million, a decrease of $1.6 million, or 7.4%, compared to $21.5 million in the same period of 2022.

Net sales in the construction and agriculture product group for the three months ended March 31, 2023 were $12.8

million, an increase of $1.8 million, or 16.4%, when compared to $11 million in the three months ended March 31, 2022.

Net sales in the light vehicle product group for the three months ended March 31, 2023 were $23 million, a decrease of $3.1

million, or 11.9%, when compared to $26.1 million in the three months ended March 31, 2022.

Net sales in the all other product group for the three months ended March 31, 2023 were $15.4 million, an increase of $1.4 million, or 10%, when compared

to $14 million in the three months ended March 31, 2022.

Although Engineered Solutions net sales decreased slightly year-over-year due to a change in one customer’s production schedule however, we continue to be optimistic about the long-term

growth potential of the complementary markets served in our newly created Engineered Solutions operating segment.

Vehicle Control’s net sales for the three months ended June 30, 2023 decreased slightly to $183.8 million compared to $185.8 million in the same period of 2022.

Net sales in the electrical and safety product group for the three months ended

June 30, 2023 decreased year-over-year;

while net sales increased slightly in the engine management (ignition, emissions, and fuel delivery) product group and remained essentially flat in the wire sets and other product group when compared to the

three months ended June 30, 2022.

The decrease in net sales in our Vehicle Control operating segment primarily reflects lower sales to a customer that filed for bankruptcy in the first quarter of the year.

Temperature Control’s net sales for the three months ended June 30, 2023 decreased $8.5 million, or 8.1%, to $97.1 million compared to $105.6 million in the same period of 2022.

Net sales declined in each of the AC systems components and

other thermal components product groups for the three months ended June 30, 2023 when compared to the comparable period in the prior year.

Temperature Control’s net sales for the second quarter of 2023 reflects the impact of a rainy spring and

early summer season across key markets, and thus impacted the timing of early season customer orders in 2023, which were lower than the strong customer orders of the second quarter of 2022 when sales were up 6.4% and customers replenished their

prior year inventory levels.

Overall, full year results at Temperature Control will be dependent upon summer weather conditions and customer inventory levels.

Engineered Solutions’ net sales for the three months ended June 30, 2023 increased $4.2 million, or 6.2%, to $72.2 million compared to $68 million in the same period of 2022.

Net sales increased in the each of the commercial vehicle and light

vehicle product groups for the three months ended June 30, 2023 when compared to the three month ended June 30, 2022;

while net sales in the construction and agriculture, and all other product groups declined year-over-year.

Overall, net sales

in our Engineered Solutions operating segment showed year-over-year improvement driven by increased pricing and new business wins, and we continue to be optimistic about the long-term growth potential of the complementary markets served in our

newly created Engineered Solutions operating segment.

Gross Margins.

Gross margins, as a percentage of consolidated net sales, were flat at 27.8% in both the first quarter of 2023 and 2022.

The following table summarizes gross margins by

segment for the three months ended March 31, 2023 and 2022, respectively (in thousands):

Gross margins, as a percentage of consolidated net sales, increased to 28.7% in the second quarter of 2023, compared to 26.8% in the second quarter of 2022.

following table summarizes gross margins by segment for the three months ended June 30, 2023 and 2022, respectively (in thousands):

Three Months Ended

Vehicle Control

Temperature Control

Engineered Solutions

Gross margins

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Gross margin percentage

Compared to the first three months of 2022, gross margins at Vehicle Control increased 0.4 percentage points from 31.3% to 31.7%.

Compared to the second quarter of 2022, gross margins at Vehicle Control increased 3.8 percentage points from 28.9% to 32.7%.

Gross margins at Temperature Control decreased 0.5 percentage points from 27.8% to 27.3%, and gross margins at

Engineered Solutions decreased 1.4 percentage points from 20.6% to 19.2%.

Engineered Solutions gross margin as a percentage of sales is lower than that achieved in our Vehicle Control and Temperature Control aftermarket segments due to the

different business profile with lower gross margins but comparable operating margins.

Gross margins in the first three months of 2023 reflect the positive impact of higher net sales and increased pricing, which were offset by lower fixed cost absorption due to lower production levels than those achieved in the same period in

2022, as we continued to work down our inventory levels, and continued inflationary cost increases in certain raw materials, labor and transportation expense.

While we anticipate continued margin pressure resulting from inflationary headwinds, we

believe that our annual cost initiatives coupled with our ability to pass through higher prices to our customers should help to offset much of this impact to our margins.

Engineered Solutions increased 0.7 percentage points from 19.6% to 20.3%.

The gross margin percentage increase in our Vehicle Control operating segment reflects the positive impact of increased pricing and operating performance, which more than offset higher material and labor costs, as well as the lower fixed cost

absorption due to lower production levels than those achieved in the same period in 2022.

The gross margin percentage decrease in our Temperature Control operating segment reflects the impact of lower sales volumes;

while the gross margin

percentage increase at our Engineered Solutions operating segment is driven primarily by higher sales and increased pricing, which more than offset the negative impact of customer sales mix.

All of our operating segments were negatively impacted

by the ongoing inflationary cost increases in certain raw materials, labor and transportation expenses.

While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost savings initiatives

coupled with our ability to pass through higher prices to our customers should help to offset much of this impact to our gross margins.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses (“SG&A”) increased to $69.6 million, or 21.2% of consolidated net sales, in the first

quarter of 2023, as compared to $62.9 million, or 19.5% of consolidated net sales in the first quarter of 2022.

The $6.7 million increase in SG&A expenses in the first quarter of 2023 as compared to the first quarter of 2022 is principally due

to (1) higher interest rate related costs of $5.5 million incurred in our supply chain financing arrangements, and (2) higher distribution and freight costs related to higher sales.

Excluding the impact of the incremental interest rate costs

incurred in our supply chain financing arrangements, SG&A expenses in the first quarter of 2023 were 19.5% of consolidated net sales, matching the percentage in the comparable prior year period.

Selling, general and administrative expenses (“SG&A”) were $73.8 million, or 20.9% of consolidated net sales, in the second quarter

of 2023, as compared to $68.5 million, or 19% of consolidated net sales, in the second quarter of 2022.

The $5.3 million increase in SG&A expenses as compared to the second quarter of 2022 is principally due to higher interest rate related

costs of $4.8 million incurred in our supply chain financing arrangements.

Excluding the impact of the incremental interest rate costs incurred in our supply chain financing arrangements, SG&A expenses in the second quarter of 2023 were

19.6% of consolidated net sales, slightly higher than the percentage in the comparable prior year period, primarily due to lower sales volume.

Restructuring and Integration Expenses.

Restructuring and integration expenses were $0.9 million in first three months of 2023 compared to $41,000 in the same period of 2022.

Restructuring and integration expenses incurred in the first three months of 2023 relate to product line relocations from our Independence, Kansas manufacturing facility and from our St.

Thomas, Canada manufacturing facility to our manufacturing

facilities in Reynosa, Mexico, as part of our Cost Reduction Initiative announced during the fourth quarter of 2022.

Total restructuring expenses incurred during the three months ended March 31, 2023 related to the initiative of $0.9 million

consisted of (1) expenses of approximately $0.8 million consisting of employee severance related to our product line relocations, and (2) expenses of approximately $0.1 million related to the relocation of machinery and equipment to our

manufacturing facilities in Reynosa, Mexico.

Restructuring and integration expenses were $0.3 million for the three months ended June 30, 2023.

Restructuring and integration expenses

incurred in the second quarter of 2023 relate to product line relocations from our Independence, Kansas manufacturing facility and from our St.

Thomas, Canada manufacturing facility to our manufacturing facilities in Reynosa, Mexico, as part of

our Cost Reduction Initiative announced during the fourth quarter of 2022.

Total restructuring expenses incurred during the three months ended June 30, 2023 related to the initiative of $0.3 million consisted of (1) expenses of approximately

$0.1 million consisting of employee severance and bonuses related to our product line relocations, and (2) expenses of approximately $0.2 million related to the relocation of machinery and equipment to our manufacturing facilities in Reynosa,

Additional restructuring costs related to the initiative, and expected to be incurred, are approximately $1.6 million.

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Operating Income.

Operating income was $20.7 million, or 6.3% of consolidated net sales, in the first quarter of 2023 compared to $26.9 million, or 8.3% of consolidated net sales, in

the first quarter of 2022.

The year-over-year decrease in operating income of $6.2 million is primarily the result of the impact of higher interest rate related costs of $5.5 million incurred in our supply chain financing arrangements included in

SG&A expenses offset, in part, by higher consolidated net sales.

Operating income was $27.2 million, or 7.7% of consolidated net sales, in the second quarter of 2023, compared to $27.9 million, or 7.8% of consolidated net sales,

in the second quarter of 2022.

The year-over-year decrease in operating income of $0.7 million is primarily the result of the impact of lower operating income in the Temperature Control segment stemming from lower net sales, and higher interest

rate related costs of $4.8 million incurred in our supply chain financing arrangements included in SG&A expenses offset, in part, by higher gross margins as a percentage of sales in the Vehicle Control and Engineered Solutions segments.

Other Non-Operating Income (Expense), Net.

Other non-operating income, net was $0.2 million in the first quarter of 2023, compared to other non-operating income, net of $1.4 million

in the first quarter of 2022.

The year-over-year decrease in other non-operating income (expense), net results from the decrease in year-over-year equity income from our joint ventures, due in part to lower production related to inventory

reduction plans, and the unfavorable impact of changes in foreign currency exchange rates.

Other non-operating income, net was $0.8 million in the second quarter of 2023, compared to $1.9 million in the second quarter of 2022.

impact of changes in foreign currency exchange rates.

Interest Expense.

Interest expense increased to $3.9 million in the first quarter of 2023 compared to $0.8 million in the same period of 2022.

The year-over-year increase in interest

expense reflects the impact of higher year-over-year average interest rates on our credit facilities, and the impact of higher average outstanding borrowings in the first quarter of 2023 when compared to the first quarter of 2022.

Interest expense increased to $3.3 million in the second quarter of 2023, compared to $1.8 million in the second quarter of 2022.

The year-over-year increase in

interest expense reflects the impact of higher year-over-year average interest rates on our credit facilities offset, in part, by the impact of slightly lower average outstanding borrowings in the second quarter of 2023 when compared to the

second quarter of 2022.

Income Tax Provision .

The income tax provision in the first quarter of 2023 was $4.4 million at an

effective tax rate of 25.6% compared to $7 million at an effective tax rate of 25.4% for the same period in 2022.

The income tax provision in the second quarter of 2023 was $6.3 million at an effective tax rate of 25.5% compared to

$7.1 million at an effective tax rate of 25.4% for the same period in 2022.

The effective tax rate was essentially flat year-over-year.

Loss from Discontinued Operations.

During the first quarter of 2023 and 2022, the loss from discontinued operations, net of tax was $0.8 million and $1.1 million, respectively.

loss from discontinued operations, net of tax, reflects legal expenses associated with our asbestos-related liability.

As discussed more fully in Note 18, “Commitments and Contingencies” in the notes to our consolidated financial statements

(unaudited), we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.

Net Earnings (Loss) Attributable to Noncontrolling Interest.

Net earnings (loss) attributable to noncontrolling interest relates to our 70% ownership in a joint venture in Hong Kong,

with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”).

Net earnings attributable to the noncontrolling interest of $39,000 during the three months ended March 31, 2023 and the net loss attributable to the noncontrolling interest of

$8,000 during the three months ended March 31, 2022 represents 30% of the net earnings (loss) of Trombetta Asia, Ltd.

Loss from discontinued operations, net of income tax, reflects legal expenses and other costs associated with our asbestos-related liability.

During the second quarter of 2023 and 2022, the loss from discontinued operations, net of tax was $9.2 million and $1.7 million, respectively.

The loss from discontinued operations includes an $11 million pre-tax provision in the second quarter

of 2023 which arose from the May 11, 2023 court ruling in a breach of contract claim in connection with a legal proceeding with a third party;

and legal and other administrative expenses, before taxes, of $1.5 million and $2.3 million in the

second quarter of 2023 and 2022, respectively.

As discussed more fully in Note 18, “Commitments and Contingencies” in the notes to our consolidated financial statements (unaudited), we are responsible for certain future liabilities relating to

alleged exposure to asbestos containing products.

Net Earnings Attributable to Noncontrolling Interest.

Net earnings (loss) attributable to noncontrolling interest relates to our 70% ownership in a joint venture in Hong Kong, with

operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”).

Net earnings attributable to the noncontrolling interest of $50,000 and $85,000 during the three months ended June 30, 2023 and 2022, respectively, represents 30% of the net

earnings of Trombetta Asia, Ltd.

Comparison of the Six Months Ended June 30, 2023 to the Six Months Ended June 30, 2022

Consolidated net sales for the six months ended June 30, 2023 were $681.1 million, a slight decrease of $1.1 million, compared to

$682.2 million in the same period of 2022, with the majority of our net sales to customers in the United States.

Net sales decreased in our Temperature Control operating segment, while net sales in our Vehicle Control and Engineered Solutions

operating segments increased when compared to the comparable period in the prior year.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the six months ended June 30, 2023 and 2022 (in thousands):

Six Months Ended

Vehicle Control

Engine Management (Ignition, Emissions and Fuel Delivery)

Electrical and Safety

Wire Sets and Other

Total Vehicle Control

Temperature Control

AC System Components

Other Thermal Components

Total Temperature Control

Engineered Solutions

Commercial Vehicle

Construction/Agriculture

Light Vehicle

Total Engineered Solutions

Vehicle Control’s net sales for the six months ended June 30, 2023 increased $5.4 million, or 1.5%, to $368.4 million compared to $363 million in the same period of 2022.

Net sales in the electrical and safety, and wire sets and other product

groups for the six months ended June 30, 2023 increased year-over-year;

while net sales in the electrical and safety product group decreased in the six months ended June 30, 2023 when compared to the comparable period in the prior year.

the increase in net sales in our Vehicle Control operating segment reflects the positive impact of increased pricing and the $7.3 million increase in net sales in the first quarter of 2023, offset in part, by lower sales to a customer that filed

for bankruptcy in the first quarter of the year.

Temperature Control’s net sales for the six months ended June 30, 2023 decreased $9.2 million, or 5.2%, to $169.5 million compared to $178.7 million in the same period of 2022.

Net sales declined in the AC systems components product group for

the six months ended June 30, 2023 when compared to the comparable period in the prior year;

while net sales in the other thermal components product group was essentially flat year-over-year.

Temperature Control’s net sales for the first six

months of 2023 reflect the impact of a rainy spring and early summer season across key markets, and thus impacted the timing of early season customer orders in 2023, which were lower than the strong customer orders of the comparable period of

2022 when sales were up 14.7% and customers replenished their prior year inventory levels.

Overall, full year results at Temperature Control will be dependent upon summer weather conditions and customer inventory levels.

Engineered Solutions’ net sales for the six months ended June 30, 2023 increased $2.8 million, or 2%, to $143.3 million compared to $140.5 million in the same period of 2022.

Net sales increased in the each of the commercial vehicle and all

other product groups for the six months ended June 30, 2023 when compared to the six months ended June 30, 2022;

while net sales in the construction and agriculture, and light vehicle product groups declined year-over-year.

Overall, net sales in

our Engineered Solutions operating segment showed a year-over-year improvement driven by increased pricing and new business wins, and we continue to be optimistic about the long-term growth potential of the complementary markets served in our

newly created Engineered Solutions operating segment.

Gross Margins.

Gross margins, as a percentage of consolidated net sales, increased to 28.3% in the first six months of 2023, compared to 27.3% during the same period in 2022.

following table summarizes gross margins by segment for the six months ended June 30, 2023 and 2022, respectively (in thousands):

Six Months Ended

Temperature Control

Engineered Solutions

Gross margins

Gross margin percentage

Gross margins

Gross margin percentage

Compared to the first six months of 2022, gross margins at Vehicle Control increased 2.1 percentage points from 30.1% to 32.2%.

Gross margins at Temperature Control decreased 0.4 percentage points from 27.3% to 26.9%, and gross margins at

Engineered Solutions decreased 0.4 percentage points from 20.1% to 19.7%.

The gross margin percentage increase in our Vehicle Control operating segment reflects the positive impact of increased pricing and operating performance, which more offset increases in material and labor costs, as well as the lower fixed cost

absorption due to lower production levels than those achieved in the same period in 2022.

The gross margin percentage decrease in our Temperature Control operating segment reflects the impact of lower sales volumes;

while the gross margin

percentage decrease at our Engineered Solutions operating segment is primarily driven by the negative impact of customer sales mix.

All of our operating segments were negatively impacted by the ongoing inflationary cost increases in certain raw

materials, labor and transportation expenses.

While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost savings initiatives coupled with our ability to pass through higher prices to our

customers should help to offset much of this impact to our gross margins.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses (“SG&A”) were $143.5 million, or 21.1% of consolidated net sales, in the first six

months of 2023, as compared to $131.4 million, or 19.3% of consolidated net sales in the first six months of 2022.

The $12.1 million increase in SG&A expenses as compared to the first six months of 2022 is principally due to (1) higher

interest rate related costs of $10.3 million incurred in our supply chain financing arrangements, and (2) higher distribution costs.

Excluding the impact of the incremental interest rate costs incurred in our supply chain financing arrangements,

SG&A expenses in the six months of 2023 were 19.6% of consolidated net sales, slightly higher than the percentage in the comparable prior year period.

Restructuring and Integration Expenses.

Restructuring and integration expenses were $1.2 million in six months ended June 30, 2023 compared to $44,000 in the comparable period of

Restructuring and integration expenses incurred in the first six months of 2023 relate to product line relocations from our Independence, Kansas manufacturing facility and from our St.

Thomas, Canada manufacturing facility to our

manufacturing facilities in Reynosa, Mexico, as part of our Cost Reduction Initiative announced during the fourth quarter of 2022.

Total restructuring expenses incurred during the six months ended June 30, 2023 related to the initiative of $1.2

million consisted of (1) expenses of approximately $1 million consisting of employee severance and bonuses related to our product line relocations, and (2) expenses of approximately $0.2 million related to the relocation of machinery and

equipment to our manufacturing facilities in Reynosa, Mexico.

Additional restructuring costs related to the initiative and expected to be incurred, are approximately $1.6 million.

We anticipate that the Cost Reduction Initiative will be

completed by the end of 2023.

Operating Income.

Operating income was $47.9 million, or 7% of consolidated net sales, in the six months ended June 30, 2023, compared to $54.8 million, or 8% of consolidated net

sales, in the six months ended June 30, 2022.

The year-over-year decrease in operating income of $6.9 million is primarily the result of the impact of lower operating income in the Temperature Control segment stemming from lower net sales, and

higher interest rate related costs of $10.3 million incurred in our supply chain financing arrangements included in SG&A expenses offset, in part, by higher gross margins as a percentage of net sales in the Vehicle Control and Engineered

Solutions segments.

Other Non-Operating Income (Expense), Net.

Other non-operating income, net was $1 million in the first six months of 2023, compared to $3.4 million in the first six months of 2022.

impact of changes in foreign currency exchange rates.

Interest Expense.

Interest expense increased to $7.1 million in the first six months of 2023, compared to $2.6 million for the same period in 2022.

The year-over-year increase in

interest expense reflects the impact of higher year-over-year average interest rates on our credit facilities, and the impact of higher average outstanding borrowings in the first half of 2023 when compared to the first half of 2022.

Income Tax Provision .

The income tax provision for the six months ended June 30, 2023 was $10.7 million at an effective tax rate of 25.5%,

compared to $14.1 million at an effective tax rate of 25.4% for the same period in 2022.

The effective tax rate was essentially flat year-over-year.

Loss from Discontinued Operations.

Loss from discontinued operations, net of income tax, reflects legal expenses and other costs associated with our asbestos-related liability.

During the first six months of 2023 and 2022, the loss from discontinued operations, net of tax was $10 million and $2.8 million, respectively.

The loss from discontinued operations includes an $11 million pre-tax provision in the second quarter

of 2023 which arose from the May 11, 2023 court ruling in a breach of contract claim in connection with a legal proceeding with a third party;

and legal and other administrative expenses, before taxes, of $2.5 million and $3.8 million in the

first six months of 2023 and 2022, respectively.

alleged exposure to asbestos containing products.

Net Earnings Attributable to Noncontrolling Interest.

Net earnings (loss) attributable to noncontrolling interest relates to our 70% ownership in a joint venture in Hong Kong, with

operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”).

Net earnings attributable to the noncontrolling interest of $89,000 and $77,000 during the six months ended June 30, 2023 and 2022, respectively, represents 30% of the net earnings

of Trombetta Asia, Ltd.

Restructuring and Integration Programs

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Liquidity and Capital Resources

Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions.

The following table summarizes our primary sources

of funds including ongoing net cash flows from operating activities and availability under our Credit Agreement.

(In thousands)

Operating cash flows

Remaining borrowing capacity

Total liquidity

Operating Activities.

During the first three months of 2023, cash used in operating activities was $20.4 million compared to $104 million in the same period of 2022.

The decrease in

cash used in operating activities resulted primarily from the smaller year-over-year increase in accounts receivable, the decrease in inventories compared to an increase in inventories in the prior year, the larger year-over-year increase in

accounts payable, and the smaller year-over-year decrease in sundry payables and accrued expenses, partially offset by the decrease in net earnings, and the smaller year-over-year decrease in prepaid expenses and other current assets.

Net earnings during the first quarter of 2023 were $12 million compared to $19.4 million in the first quarter of 2022.

During the first three months of 2023, (1) the increase in accounts receivable was $42.6 million compared to the

During the first six months of 2023, cash provided by operating activities was $39.4 million compared to cash used in operating activities of $95.3 million in

the same period of 2022.

The increase in cash provided by operating activities resulted primarily from the smaller year-over-year increase in accounts receivable, the decrease in inventories compared to an increase in inventories in the prior

year, the larger year-over-year increase in accounts payable, the smaller year-over-year increase in prepaid expenses and other current assets, and the increase in sundry payables and accrued expenses compared to a decrease in sundry payables

and accrued expenses in the prior year offset, in part, by the decrease in net earnings.

Net earnings during the first six months of 2023 were $21.1 million compared to $38.6 million in the first six months of 2022.

During the first six months of 2023, (1) the increase in accounts receivable was $48.3 million compared to the

year-over-year increase in accounts receivable of $49.7 million in 2022;

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$4.3 million compared to the year-over-year increase in accounts payable of $1.6 million in 2022;

(4) the decrease in prepaid expenses and other current assets was $1.2 million compared to the year-over-year decrease in prepaid expenses and other

(4) the increase in prepaid expenses and other current assets was $0.5 million compared to the year-over-year increase in prepaid expenses and other

current assets of $7.1 million in 2022;

and (5) the decrease in sundry payables and accrued expenses was $10.7 million compared to the year-over-year decrease in sundry payables of $21.2 million in 2022.

The $66.7 million increase in inventories

during the first quarter of 2022 reflects actions taken to meet continued strong customer demand, the timing of inventory purchases at our Temperature Control segment in anticipation of the upcoming summer selling season, and to serve as a hedge

against the continuing disruptions in the supply chain.

Inventories during the first quarter of 2023 decreased $6.2 million, as we continue to actively manage our working capital to maximize our operating cash flow.

We anticipate further

inventory decreases during 2023 as we reach more normalized inventory levels.

and (5) the increase in sundry payables and accrued expenses was $2.8 million compared to the year-over-year decrease in sundry payables and accrued expenses of $5 million in 2022.

During the second quarter and first six months of 2023, we actively managed our working capital generating operating cash flow of $59.8 million and $39.4 million, respectively, reducing our inventory to more normalized levels.

We anticipate

further inventory decreases during 2023 as we continue to actively manage our working capital to maximize our operating cash flow.

Investing Activities .

Cash used in investing activities was $4.4 million in the first three months of 2023 compared to $6.4 million in the same

period of 2022.

Investing activities during the first three months of 2023 and 2022 consisted of capital expenditures of $4.4 million and $6.4 million, respectively.

Cash used in investing activities was $9.4 million in the first six months of 2023, compared to $13.2 million in the

same period of 2022.

Investing activities during the first six months of 2023 and 2022 consisted of capital expenditures of $9.5 million and $13.2 million, respectively.

Financing Activities .

Cash provided by financing activities was $27.3 million in the first three months of 2023 as compared to $108.3 million in

the same period of 2022.

During the first three months of 2023, (1) we increased borrowings under our Credit Agreement by $33.5 million;

and (2) we paid dividends of $6.3 million.

Cash provided by borrowings under our Credit Agreement in the

three months ended March 31, 2023 was used to fund our operating activities, investing activities, and pay dividends.

During the first three months of 2022, (1) we increased borrowings under our revolving credit facility by $120.2 million, (2) we made cash payments for the repurchase of shares of our common stock of $6.5 million;

and (2) we paid dividends of

$5.9 million.

Cash provided by borrowings under our revolving credit facility in the three months ended March 31, 2022 was used to fund our operating activities, investing activities, purchase shares of our common stock, and pay dividends.

Cash used in financing activities was $29.1 million in the first six months of 2023 as compared to cash provided by

financing activities of $101.7 million in the same period of 2022.

During the first six months of 2023, we (1) reduced our borrowings under our Credit Agreement by $16.5 million;

and (2) paid dividends of $12.5 million.

Cash provided by our

operating activities was used to reduce our borrowings under our Credit Agreement, fund our investing activities and pay dividends.

In June 2022, we entered into a new credit agreement with JPMorgan Chase Bank, N.A., as agent.

The new credit agreement provides for a $500 million credit facility comprised of a $100 million term loan facility and a $400 million revolving

credit facility.

During the first six months of 2022, we (1) increased our borrowings under our credit facilities by $139.2 million;

(2) made cash payments of $2.1 million for debt issuance costs in connection with our refinancing;

(3) made cash

payments for the repurchase of shares of our common stock of $25.6 million;

and (4) paid dividends of $11.8 million.

Cash provided by borrowings under our credit facilities were used to fund our operating activities, investing activities, payment

of debt issuance costs, purchase shares of our common stock and pay dividends.

Dividends of $12.5 million and $11.8 million were paid in 2023 and 2022, respectively.

In February 2023, our Board of Directors voted to increase our quarterly dividend from $0.27 per share in 2022 to $0.29 per share in 2023.

Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions.

Our primary sources of funds are ongoing net cash

flows from operating activities and availability under our Credit Agreement (as detailed below).

Our primary sources of funds are ongoing net cash flows from operating activities and availability under our Credit Agreement (as detailed below).

In June 2022, the Company entered into a new Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders (the “Credit Agreement”).

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The maturity date is June 1, 2027.

The Company may request up to two one-year extensions of the

maturity date.

The Company may request up to two one-year extensions of

the maturity date.

The Company may, upon the agreement of one or more then existing lenders or of additional financial institutions not currently party to the Credit Agreement, increase the revolving facility commitments or obtain incremental term loans by an

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alternate base rate is the greater of the prime rate, the federal funds effective rate plus 0.50%, and one-month Term SOFR plus 0.10% plus 1.00%.

Term loan borrowings are being made at one-month Term SOFR.

The applicable margin for the term

benchmark borrowings ranges from 1.0% to 2.0%, and the applicable margin for alternate base rate borrowings ranges from 0% to 1.0%, in each case, based on the total net leverage ratio of the Company and its restricted subsidiaries.

The Company may

select interest periods of one, three or six months for Term SOFR borrowings.

Term loan borrowings were made at one-month Term SOFR.

The applicable margin for the term benchmark

borrowings ranges from 1.0% to 2.0%, and the applicable margin for alternate base rate borrowings ranges from 0% to 1.0%, in each case, based on the total net leverage ratio of the Company and its restricted subsidiaries.

The Company may select

interest periods of one, three or six months for Term SOFR borrowings.

Interest is payable at the end of the selected interest period, but no less frequently than quarterly.

The Company’s obligations under the Credit Agreement are guaranteed by its material domestic subsidiaries (each, a “Guarantor”), and secured by a first priority perfected security interest in substantially all of the existing and future personal

property of the Company and each Guarantor, subject to certain exceptions.

The collateral security described above also secures certain banking services obligations and interest rate swaps and currency or other hedging obligations of the Company

owing to any of the then existing lenders or any affiliates thereof.

Concurrently with the Company’s entry into the Credit Agreement, the Company also entered into a seven year interest rate swap agreement with Wells Fargo Bank, N.A.,

Co-Syndication Agent and lender under the Credit Agreement, on $100 million of borrowings under the Credit Agreement.

personal property of the Company and each Guarantor, subject to certain exceptions.

The collateral security described above also secures certain banking services obligations and interest rate swaps and currency or other hedging obligations of

the Company owing to any of the then existing lenders or any affiliates thereof.

Concurrently with the Company’s entry into the Credit Agreement, the Company also entered into a seven year interest rate swap agreement with Wells Fargo Bank,

N.A., Co-Syndication Agent and lender under the Credit Agreement, on $100 million of borrowings under the Credit Agreement.

The interest rate swap agreement matures in May 2029.

Outstanding borrowings at March 31, 2023 under the Credit Agreement were $273 million, consisting of current borrowings of $57.6 million and long-term debt of $215.4 million;

while outstanding borrowings at December 31, 2022 were $239.5 million,

consisting of current borrowings of $55 million and long-term debt of $184.5 million.

Letters of credit outstanding under the Credit Agreement were $2.4 million at both March 31, 2023 and December 31, 2022.

At March 31, 2023, the weighted average interest rate under our Credit Agreement was 5.6%, which consisted of $273 million in borrowings under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of borrowings.

At December 31, 2022, the weighted average interest rate under our Credit Agreement was 5.2%, which consisted of $237 million in borrowings at 5.2% under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of

borrowings, and an alternative base rate borrowing of $2.5 million at 8%.

During the three months ended March 31, 2023, our average daily alternative base rate loan balance was $0.3 million, compared to a balance of $2.6 million for the three

months ended March 31, 2022 and a balance of $5.6 million for the year ended December 31, 2022.

Outstanding borrowings at June 30, 2023 under the Credit Agreement were $223 million, consisting of current borrowings of $58.7 million and long-term debt of $164.3 million;

while outstanding borrowings at December 31, 2022 were $239.5

million, consisting of current borrowings of $55 million and long-term debt of $184.5 million.

Letters of credit outstanding under the Credit Agreement were $2.4 million at both June 30, 2023 and December 31, 2022.

At June 30, 2023, the weighted average interest rate under our Credit Agreement was 5.6%, which consisted of $223 million in borrowings under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of

million of borrowings, and an alternative base rate borrowing of $2.5 million at 8%.

During the six months ended June 30, 2023, our average daily alternative base rate loan balance was $0.2 million, compared to a balance of $10.8 million for the

six months ended June 30, 2022 and a balance of $5.6 million for the year ended December 31, 2022.

The Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other

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z.o.o., amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce to provide for borrowings under the facility in Euros and U.S.

amended terms, the overdraft facility provides for borrowings of up to Zloty 30 million (approximately $7 million) if borrowings are solely in Zloty, or up to 85% of the Zloty 30 million limit (approximately $5.9 million) if borrowings are in Euros

amended terms, the overdraft facility provides for borrowings of up to Zloty 30 million (approximately $7.3 million) if borrowings are solely in Zloty, or up to 85% of the Zloty 30 million limit (approximately $6.2 million) if borrowings are in

Euros and/or U.S.

The overdraft facility has an initial maturity date in December 2022, with automatic three-month renewals until June 2027, subject to cancellation by either party, at its sole discretion, at least 30 days prior to the

commencement of the three-month renewal period.

Borrowings under the amended overdraft facility will bear interest at a rate equal to (1) the one month Warsaw Interbank Offered Rate (“WIBOR”) + 1.5% for borrowings in Polish Zloty, (2) the one month

Euro Interbank Offered Rate (“EURIBOR”) + 1.5% for borrowings in Euros, and (3) the Mid-Point of the Fed Target Range + 1.75% for borrowings in U.S Dollars.

Borrowings under the overdraft facility are guaranteed by Standard Motor Products, Inc.,

the ultimate parent company.

There were no borrowings outstanding under the overdraft facility at both March 31, 2023 and December 31, 2022.

Borrowings under the amended overdraft facility will bear interest at a rate equal to (1) the one month Warsaw Interbank Offered Rate (“WIBOR”) + 1.5% for borrowings in Polish Zloty, (2) the one

month Euro Interbank Offered Rate (“EURIBOR”) + 1.5% for borrowings in Euros, and (3) the Mid-Point of the Fed Target Range + 1.75% for borrowings in U.S.

Borrowings under the overdraft facility are guaranteed by Standard Motor

Products, Inc., the ultimate parent company.

There were no borrowings outstanding under the overdraft facility at both June 30, 2023 and December 31, 2022.

In order to reduce our accounts receivable balances and improve our cash flow, we are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial

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As such, these transactions are being accounted for as a sale.

Pursuant to these agreements, we sold $170.9 million and $155.7 million of receivables during the three months ended March 31, 2023 and 2022, respectively.

Receivables presented at financial institutions and not yet collected as of March 31,

2023 were approximately $2.6 million and remained in our accounts receivable balance as of that date.

There were no receivables presented at financial institutions and not yet collected as of December 31, 2022.

All receivables sold were reflected

as a reduction of accounts receivable in the consolidated balance sheet at the time of sale.

A charge in the amount of $9 million and $3.5 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 ended March 31, 2023 and 2022, respectively.

To the extent that these arrangements are terminated, our financial condition, results of operations, cash flows and liquidity could be adversely affected by extended payment terms, or delays or failures in collecting trade accounts receivable.

Pursuant to these agreements, we sold $211.6 million and $382.5 million of receivables during the three months and six months ended June 30, 2023, respectively, and $218.4 million and $374.1 million for the comparable periods in 2022.

Receivables presented at financial institutions and not yet collected as of June 30, 2023 were approximately $10.7 million and remained in our accounts receivable balance as of that date.

There were no receivables presented at financial

institutions and not yet collected as of December 31, 2022.

All receivables sold were reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale.

A charge in the amount of $12.4 million and $21.5

million related to the sale of receivables was included in selling, general and administrative expense in our consolidated statements of operations for the three months and six months ended June 30, 2023, respectively, and $7.7 million and $11.2

million for the comparable periods in 2022.

The utility of the supply chain financing arrangements also depends upon a benchmark reference rate for the purpose of determining the discount rate applicable to each arrangement.

If the benchmark reference rate increases significantly, we may be

negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

If the benchmark reference rate increases

significantly, we may be negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

In July 2022, our Board of Directors authorized the purchase of up to $30 million of our common stock under a stock repurchase program.

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Material Cash Commitments

Material cash commitments as of March 31, 2023 consist of required cash payments to service our outstanding borrowings of $273 million under our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, the future minimum cash requirements of

Material cash commitments as of June 30, 2023 consist of required cash payments to service our outstanding borrowings of $223 million under our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, the future minimum cash requirements of

$93.6 million through 2034 under operating leases, and future cash payments relating to our restructuring activities of $1.7 million.

All of our other cash commitments as of March 31, 2023 are not material.

For additional information related to our

material cash commitments, see Note 4, “Restructuring and Integration Expenses”, Note 8, “Leases,” and Note 9, “Credit Facilities and Long-Term Debt,” in the notes to our consolidated financial statements (unaudited).

All of our other cash commitments as of June 30, 2023 are not material.

For additional information related to

our material cash commitments, see Note 4, “Restructuring and Integration Expenses”, Note 8, “Leases,” and Note 9, “Credit Facilities and Long-Term Debt,” in the notes to our consolidated financial statements (unaudited).

We anticipate that our cash flow from operations, available cash, and available borrowings under our Credit Agreement will be adequate to meet our future liquidity needs for at least the next twelve months.

Significant assumptions underlie this

belief, including, among other things, that we will be able to mitigate the future impact, if any, of disruptions in the supply chain caused, Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S.

and other governments, the

geo-political impact of U.S.

Significant assumptions underlie

this belief, including, among other things, that we will be able to mitigate the future impact, if any, of disruptions in the supply chain caused, Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S.

and other governments,

the geo-political impact of U.S.

relations with China, future increases in interest rates, and significant inflationary cost increases in raw materials, labor and transportation that we are unable to pass through our customers, macroeconomic

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For further information regarding the risks in our business, refer to Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Critical Accounting Policies and Estimates

Critical Accounting Policies

We have identified the accounting policies and estimates surrounding the “Valuation of Long-Lived and Intangible Assets and Goodwill,” and “Asbestos Litigation” as critical to our business operations and the understanding of our results of

The impact and any associated risks related to these policies and estimates on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies

and estimates affect our reported and expected financial results.

There have been no material changes to these and other 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, 2022.

policies and estimates affect our reported and expected financial results.

There have been no material changes to these and other 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, 2022.

You should be aware that preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the

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We can give no assurances that actual results will not differ from those estimates.

Although we do not believe that there

is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of the disruptions in the supply chain, Russia’s invasion

of the Ukraine and resultant sanctions imposed by the U.S.

Although we do not believe that

there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of the disruptions in the supply chain, Russia’s

invasion of the Ukraine and resultant sanctions imposed by the U.S.

and other governments, the geo-political impact of U.S.

relations with China, future increases in interest rates, inflation, macroeconomic uncertainty, and other unforeseen changes in the

industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.

relations with China, future increases in interest rates, inflation, macroeconomic uncertainty, and other unforeseen

changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis