STANDARD MOTOR PRODUCTS, INC. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties. Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, changes or loss in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our supply chain financing arrangements, such as changes in terms, termination of contracts and/or the impact of rising interest rates; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs, including procurement costs resulting from higher tariffs, 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 mix; economic and market conditions; successful integration of acquired businesses; our ability to achieve benefits from our cost savings initiatives; product liability and environmental matters (including, without limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties); the effects of 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. and other governments; the geo-political impact of U.S. relations with China; 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. The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report. Overview With over 100 years in business, we are a leader in the industries we serve and a trusted partner for all of our stakeholders. We manufacture and distribute premium replacement parts for our customers in the automotive aftermarket, and custom-engineered 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 40 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. 30 Index Vehicle Control is the new name for our Engine Management operating segment. It includes our core aftermarket business after carving out all non-aftermarket business, which moved 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 more complex air conditioning and other thermal systems. These 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 into how we are positioned to capture growth opportunities of the future. The following table summarizes the reorganization of our operating segments, and provides a comparison of our operating segments during 2022 and in 2023: Operating Segments as of 2022 Operating Segments in 2023 Engine Management: Vehicle Control (Aftermarket): Ignition, Emissions, Fuel & Safety Engine Management (Ignition, Emissions & Fuel Delivery) Wire and Cable Electrical & Safety Wire Sets & Other Temperature Control: Temperature Control (Aftermarket): Compressors AC System Components Other Climate Control Parts Other Thermal Components Engineered Solutions (non-Aftermarket): Commercial Vehicle Light Vehicle Construction & Agriculture All Other 31 Index Overview of Financial Performance The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during the three months ended September 30, 2023 and 2022. Three Months Ended September 30, (In thousands, except per share data) 2023 2022 Net sales $ 386,413 $ 381,373 Gross profit 114,760 106,784 Gross profit % 29.7 % 28 % Operating income 34,806 33,615 Operating income % 9.0 % 8.8 % Earnings from continuing operations before income taxes 32,917 31,472 Provision for income taxes 7,995 8,280 Earnings from continuing operations 24,922 23,192 Loss from discontinued operations, net of income taxes (18,200 ) (14,294 ) Net earnings 6,722 8,898 Net earnings attributable to noncontrolling interest 63 52 Net earnings attributable to SMP 6,659 8,846 Per share data attributable to SMP – Diluted: Earnings from continuing operations $ 1.12 $ 1.06 Discontinued operations (0.82 ) (0.66 ) Net earnings per common share $ 0.30 $ 0.40 Consolidated net sales for the three months ended September 30, 2023 were $386.4 million, an increase of $5 million, or 1.3%, compared to net sales of $381.4 million in the same period in 2022. Net sales increased in our Temperature Control and Engineered Solutions operating segments, while net sales in our Vehicle Control operating segment decreased when compared to the comparable period in the prior year. Vehicle Control’s net sales for the three months ended September 30, 2023 decreased $6.8 million, or 3.4%, to $190.9 million; while Temperature Control’s net sales increased $6.2 million, or 5.3%, to $123.6 million. The decrease in net sales in our Vehicle Control segment reflects the impact of lower sales to a customer that filed for bankruptcy in the first quarter of 2023, as well as the negative impact in 2023 of customer pipeline orders in the third quarter of 2022 that did not recur in the third quarter of 2023. Net sales in our Temperature Control segment increased in the third quarter of 2023 as compared to the comparable period in 2022 reflecting the impact of the timing of customer orders. Customer orders in the first half of 2023 were lower than orders in the same period of 2022, resulting from lower customer demand caused by a rainy spring and cool early summer temperatures across key markets. As summer temperatures increased, customer demand increased significantly in the third quarter of 2023 resulting in strong third quarter 2023 sales. Net sales in our Engineered Solutions segment for the three months ended September 30, 2023 increased $5.5 million, or 8.4%, to $71.8 million. The year-over-year improvement reflects the impact of strong demand 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 29.7% in the third quarter of 2023 compared to 28% in the third quarter of 2022. The gross margin percentages increased year-over-year in each of our Vehicle Control, Temperature Control and Engineered Solutions operating segments. Overall, the consolidated gross margin percentage increase reflects the impact of increased pricing, improved operating performance, higher sales volumes in Temperature Control, and favorable sales mix in Engineered Solutions, which more than offset the lower fixed cost absorption due to lower production levels as we work down our inventory balances, and the weakening of the U.S. dollar on our international operations. 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 to offset much of the impact on our gross margins. 32 Index Operating margin as a percentage of net sales for the three months ended September 30, 2023 increased slightly to 9% when compared to 8.8% for the same period in 2022. Included in our operating margin were selling, general and administrative expenses (“SG&A”) of $79.8 million, or 20.6% of net sales for the three months ended September 30, 2023 compared to $73.2 million, or 19.2% of net sales, for the same period in 2022. The $6.6 million increase in SG&A expenses in the third quarter of 2023 as compared to the third quarter of 2022 is principally due to higher interest rate related costs of $4 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 third quarter of 2023 were 19.6% of consolidated net sales, slightly higher than the percentage in the comparable prior year period. Overall, our core automotive aftermarket business remains strong, and we continue to be optimistic about the long-term growth potential of the complementary markets served in our Engineered Solutions operating segment. New Distribution Facility in Shawnee, Kansas In May 2023, we signed a lease for a new distribution facility in Shawnee, Kansas with a lease commencement date of July 1, 2023. The new facility will expand our total distribution network square footage to meet our growing demands in the automotive aftermarket industry. The new 575,000 square foot facility will replace our current 363,000 square foot facility in Edwardsville, Kansas, and integrate state-of-the-art technologies to deliver improved logistics capabilities, operational efficiencies, as well as enhanced employee, customer and supplier experiences. The new facility is located just five miles away from our Edwardsville facility, enabling us to retain our existing workforce avoiding the additional costs of hiring and training. The facility will have a phased opening beginning in early 2025. We will incur additional costs in 2023 and 2024 during the phase-in period while we operate the two facilities. Impact of Russia’s Invasion of the Ukraine Russia’s invasion of the Ukraine, and the resultant sanctions imposed by the U.S. and other governments, have created risks, uncertainties and disruptions impacting business continuity, liquidity and asset values not only in the Ukraine and Russia, but in markets worldwide. Significant price increases have occurred in gas and energy markets, as well as in other commodities. Although we have no facilities or business operations in either the Ukraine or Russia, have historically had only minor sales to customers in Russia, which we have subsequently discontinued, and have not experienced additional significant disruptions in the supply chain, the inherent risks and uncertainties surrounding the invasion are being closely monitored. We have manufacturing and distribution facilities in Bialystok, Poland and Pecel, Hungary. Our facility in Bialystok, Poland does not use natural gas in its production process, or for heating, and, as such, is not impacted by Russia’s decision to halt the export of all natural gas to Poland and Bulgaria. While we have not been impacted by the war to date, there can be no assurances that any escalation of the invasion will not have an adverse impact on our business, financial condition and results of operations. Impact of Global Supply Chain Disruption and Inflation Disruptions in the global economy have impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. 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 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. 33 Index Environmental, Social, & Governance (“ESG”) Our Company was founded in 1919 on the values of integrity, common decency and respect for others. These values continue to this day and are embodied in our Code of Ethics, which has been adopted by the Board of Directors of the Company to serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business. 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 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 smpcorp.com under “Sustainability” (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. 34 Index Interim Results of Operations Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022 Sales . Consolidated net sales for the three months ended September 30, 2023 were $386.4 million, an increase of $5 million, or 1.3%, compared to $381.4 million in the same period of 2022, with the majority of our net sales to customers located in the United States. Net sales increased in our Temperature Control and Engineered Solutions operating segments, while net sales in our Vehicle Control operating segment decreased 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 September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, 2023 2022 Vehicle Control Engine Management (Ignition, Emissions and Fuel Delivery) $ 113,188 $ 117,750 Electrical and Safety 62,049 63,867 Wire Sets and Other 15,700 16,082 Total Vehicle Control 190,937 197,699 Temperature Control AC System Components 96,794 90,341 Other Thermal Components 26,849 27,080 Total Temperature Control 123,643 117,421 Engineered Solutions Commercial Vehicle 16,253 19,299 Construction/Agriculture 13,643 10,971 Light Vehicle 24,667 21,409 All Other 17,270 14,574 Total Engineered Solutions 71,833 66,253 Other — — Total $ 386,413 $ 381,373 Vehicle Control’s net sales for the three months ended September 30, 2023 decreased $6.8 million, or 3.4%, to $190.9 million compared to $197.7 million in the same period of 2022. The decrease in net sales in our Vehicle Control operating segment reflects the impact of lower sales to a customer that filed for bankruptcy in the first quarter of 2023, as well as the negative impact in 2023 of customer pipeline orders in the third quarter of 2022 that did not recur in the third quarter of 2023. Temperature Control’s net sales for the three months ended September 30, 2023 increased $6.2 million, or 5.3%, to $123.6 million compared to $117.4 million in the same period of 2022. The increase in net sales in our Temperature Control segment reflects the impact of the timing of customer orders. Customer orders in the first half of 2023 were lower than orders in the same period of 2022, resulting from lower customer demand caused by a rainy spring and cool early summer temperatures across key markets. As summer temperatures increased, customer demand increased significantly in the third quarter of 2023 resulting in strong third quarter 2023 sales. Overall, full year results at Temperature Control is dependent upon ongoing weather conditions and customer inventory levels. Engineered Solutions’ net sales for the three months ended September 30, 2023 increased $5.5 million, or 8.4%, to $71.8 million compared to $66.3 million in the same period of 2022. Overall, net sales in our Engineered Solutions operating segment showed year-over-year improvement driven by strong demand 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. 35 Index Gross Margins. Gross margins, as a percentage of consolidated net sales, increased to 29.7% in the third quarter of 2023, compared to 28% in the third quarter of 2022. The following table summarizes gross margins by segment for the three months ended September 30, 2023 and 2022, respectively (in thousands): Three Months Ended September 30, Vehicle Control Temperature Control Engineered Solutions Other Total 2023 Net sales $ 190,937 $ 123,643 $ 71,833 $ — $ 386,413 Gross margins 60,865 37,785 16,110 — 114,760 Gross margin percentage 31.9 % 30.6 % 22.4 % — 29.7 % 2022 Net sales $ 197,699 $ 117,421 $ 66,253 $ — $ 381,373 Gross margins 60,350 35,105 11,329 — 106,784 Gross margin percentage 30.5 % 29.9 % 17.1 % — 28 % Compared to the third quarter of 2022, gross margins at Vehicle Control increased 1.4 percentage points from 30.5% to 31.9%. Gross margins at Temperature Control increased 0.7 percentage points from 29.9% to 30.6%, and gross margins at Engineered Solutions increased 5.3 percentage points from 17.1% to 22.4%. 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 increase in our Temperature Control operating segment reflects the impact of increased pricing and higher sales volumes; while the gross margin percentage increase at our Engineered Solutions operating segment is driven primarily by favorable customer sales mix and increased pricing. 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 $79.8 million, or 20.6% of consolidated net sales, in the third quarter of 2023, as compared to $73.2 million, or 19.2% of consolidated net sales, in the third quarter of 2022. The $6.6 million increase in SG&A expenses as compared to the third quarter of 2022 is principally due to (1) higher interest rate related costs of $4 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 third 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 $0.2 million for the three months ended September 30, 2023. Restructuring and integration expenses incurred in the third 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 September 30, 2023 related to the initiative of $0.2 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 $0.1 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 $0.5 million. We anticipate that the Cost Reduction Initiative will be substantially completed by the end of 2023. 36 Index Operating Income. Operating income was $34.8 million, or 9% of consolidated net sales, in the third quarter of 2023, compared to $33.6 million, or 8.8% of consolidated net sales, in the third quarter of 2022. The year-over-year increase in operating income of $1.2 million is the result of higher net sales and gross margins as a percentage of sales offset, in part, by higher SG&A expenses, consisting primarily of higher interest rate related costs of $4 million incurred in our supply chain financing arrangements, and slightly higher restructuring and integration expenses. Other Non-Operating Income (Expense), Net. Other non-operating income, net was $1.7 million in the third quarter of 2023, compared to $1.5 million in the third quarter of 2022. The year-over-year increase in other non-operating income, net results from the increase in year-over-year equity income from our Foshan FGD SMP Automotive Compressor Co., Ltd. (“FGD”) joint venture, which more than offset the lower year-over-year equity income achieved in our joint ventures other than FGD. The decline in equity income from our joint ventures other than FGD is due, in part, to lower production levels related to inventory reduction plans, and the impact of our acquisition of an additional 15% equity interest in Gwo Yng. Commencing in July 2023, on the date of our 15% increase equity interest, the financial results of Gwo Yng were no longer accounted for under the equity method of accounting. Instead, Gwo Yng’s financial results were reported on a consolidated basis, resulting in lower joint venture equity income. Interest Expense. Interest expense is essentially flat at $3.6 million in the third quarter of 2023, compared to $3.7 million in the third quarter of 2022. Interest expense reflects the impact of higher year-over-year average interest rates on our credit facilities offset by the impact of lower average outstanding borrowings in the third quarter of 2023 when compared to the third quarter of 2022. Income Tax Provision . The income tax provision in the third quarter of 2023 was $8 million at an effective tax rate of 24.3% compared to $8.3 million at an effective tax rate of 26.3% for the same period in 2022. The lower effective tax rate in the third quarter of 2023 compared to the comparable period in 2022 results primarily from the income tax provision impact in 2022 related to the exercise of restricted stock. The exercise of annual restricted stock grants will occur in the fourth quarter of 2023 rather than in the third quarter as was the case in 2022. Loss from Discontinued Operations. Loss from discontinued operations, net of income tax, during the third quarter of 2023 and 2022, reflects information contained in the actuarial studies performed as of August 31, 2023 and 2022, other information available and considered by us, and legal expenses associated with our asbestos related liability. During the third quarter of 2023 and 2022, the loss from discontinued operations, net of tax was $18.2 million and $14.3 million, respectively. The loss from discontinued operations for the third quarter of 2023 and 2022 includes (1) a $23.8 million and $18.5 million pre-tax provision, respectively, to increase our indemnity liability in line with the August 31, 2023 and 2022 actuarial studies; (2) legal and other administrative expenses, before taxes, of $1.3 million and $0.8 million in the third quarter of 2023 and 2022, respectively, and; (3) a $0.5 million credit, before taxes, in the third quarter of 2023 related the final settlement of a breach of contract legal proceeding. 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 the minority shareholders’ interest in our 70% owned joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”) and, in our 80% ownership in Gwo Yng, commencing in July 2023 upon the completion of our step acquisition. Net earnings attributable to the noncontrolling interest was $63,000 and $52,000 during the three months ended September 30, 2023 and 2022, respectively. For additional information on the Gwo Yng step acquisition, see Note 3, “Business Acquisitions and Investments,” in the notes to our consolidated financial statements (unaudited). 37 Index Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022 Sales . Consolidated net sales for the nine months ended September 30, 2023 were $1,067.5 million, an increase of $3.9 million, compared to $1,063.6 million in the same period of 2022, with the majority of our net sales to customers in the United States. Net sales increased in our Engineered Solutions operating segment, while net sales in our Vehicle Control and Temperature Control operating segments decreased 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 nine months ended September 30, 2023 and 2022 (in thousands): Nine Months Ended September 30, 2023 2022 Vehicle Control Engine Management (Ignition, Emissions and Fuel Delivery) $ 342,860 $ 338,480 Electrical and Safety 166,720 173,178 Wire Sets and Other 49,723 49,076 Total Vehicle Control 559,303 560,734 Temperature Control AC System Components 216,995 219,323 Other Thermal Components 76,128 76,793 Total Temperature Control 293,123 296,116 Engineered Solutions Commercial Vehicle 62,852 60,253 Construction/Agriculture 34,541 33,177 Light Vehicle 71,181 70,523 All Other 46,516 42,813 Total Engineered Solutions 215,090 206,766 Other — — Total $ 1,067,516 $ 1,063,616 Vehicle Control’s net sales for the nine months ended September 30, 2023 decreased slightly to $559.3 million compared to $560.7 million in the same period of 2022. Overall, the decrease in net sales in our Vehicle Control operating segment reflects the impact of lower sales to a customer that filed for bankruptcy in the first quarter of 2023, as well as the negative impact in 2023 of customer pipeline orders that occurred in the third quarter of 2022 that did not recur in the third quarter of 2023. Temperature Control’s net sales for the nine months ended September 30, 2023 decreased slightly to $293.1 million compared to $296.1 million in the same period of 2022. The lower year-over-year Temperature Control net sales reflects the impact of a slow start to the season caused by a rainy spring and cool early summer temperatures across key markets which negatively impacted first and second quarter 2023 net sales. After the slow start to the season, demand increased significantly in the third quarter of 2023 as summer temperatures increased. The result was strong third quarter 2023 net sales, which somewhat offset the lower year-over-year first half 2023 results. Overall, full year results at Temperature Control is dependent upon ongoing weather conditions and customer inventory levels. Engineered Solutions’ net sales for the nine months ended September 30, 2023 increased $8.3 million, or 4%, to $215.1 million compared to $206.8 million in the same period of 2022. Overall, net sales in our Engineered Solutions operating segment showed a year-over-year improvement driven by strong demand 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. 38 Index Gross Margins. Gross margins, as a percentage of consolidated net sales, increased to 28.8% in the first nine months of 2023, compared to 27.5% during the same period in 2022. The following table summarizes gross margins by segment for the nine months ended September 30, 2023 and 2022, respectively (in thousands): Nine Months Ended September 30, Vehicle Control Temperature Control Engineered Solutions Other Total 2023 Net sales $ 559,303 $ 293,123 $ 215,090 $ — $ 1,067,516 Gross margins 179,446 83,452 44,398 — 307,296 Gross margin percentage 32.1 % 28.5 % 20.6 % — 28.8 % 2022 Net sales $ 560,734 $ 296,116 $ 206,766 $ — $ 1,063,616 Gross margins 169,502 83,908 39,565 — 292,975 Gross margin percentage 30.2 % 28.3 % 19.1 % — 27.5 % Compared to the first nine months of 2022, gross margins at Vehicle Control increased 1.9 percentage points from 30.2% to 32.1%. Gross margins at Temperature Control increased 0.2 percentage points from 28.3% to 28.5%, and gross margins at Engineered Solutions increased 1.5 percentage points from 19.1% to 20.6%. 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 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 increase in our Temperature Control operating segment reflects the impact increased pricing and the higher sales volumes in the third quarter of 2023; while the gross margin percentage increase at our Engineered Solutions operating segment is driven primarily by favorable customer sales mix and increased pricing. 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 $223.3 million, or 20.9% of consolidated net sales, in the first nine months of 2023, as compared to $204.6 million, or 19.2% of consolidated net sales in the first nine months of 2022. The $18.7 million increase in SG&A expenses as compared to the first nine months of 2022 is principally due to (1) higher interest rate related costs of $14.3 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 nine 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 $1.4 million in nine months ended September 30, 2023 compared to $44,000 in the comparable period of 2022. Restructuring and integration expenses incurred in the first nine 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 nine months ended September 30, 2023 related to the initiative of $1.4 million consisted of (1) expenses of approximately $1.1 million consisting of employee severance and bonuses related to our product line relocations, and (2) expenses of approximately $0.3 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 $0.5 million. We anticipate that the Cost Reduction Initiative will be substantially completed by the end of 2023. 39 Index Operating Income. Operating income was $82.7 million, or 7.7% of consolidated net sales, in the nine months ended September 30, 2023, compared to $88.4 million, or 8.3% of consolidated net sales, in the nine months ended September 30, 2022. The year-over-year decrease in operating income of $5.7 million is the result of higher SG&A expenses, consisting primarily of higher interest rate related costs of $14.3 million incurred in our supply chain financing arrangements, and higher restructuring and integration expenses offset, in part, by higher net sales and gross margins as a percentage of sales. Other Non-Operating Income (Expense), Net. Other non-operating income, net was $2.8 million in the first nine months of 2023, compared to $4.9 million in the first nine months of 2022. The year-over-year decrease in other non-operating income, net results from the decrease in year-over-year equity income from our joint ventures, and the unfavorable impact of changes in foreign currency exchange rates. The decline in equity income from our joint ventures is due, in part, to lower production levels related to inventory reduction plans, and the impact of our acquisition of an additional 15% equity interest in Gwo Yng. Commencing in July 2023, on the date of our 15% increase equity interest, the financial results of Gwo Yng were no longer accounted for under the equity method of accounting. Instead, Gwo Yng’s financial results were reported on a consolidated basis, resulting in lower joint venture equity income. Interest Expense. Interest expense increased to $10.8 million in the first nine months of 2023, compared to $6.3 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 when compared to the first nine months of 2022. Income Tax Provision . The income tax provision for the nine months ended September 30, 2023 was $18.7 million at an effective tax rate of 25%, compared to $22.4 million at an effective tax rate of 25.7% for the same period in 2022. The lower effective tax rate in the nine months ended September 30, 2023 compared to the comparable period in 2022 results primarily from the income tax provision impact in 2022 related to the exercise of restricted stock in the third quarter of 2022. The exercise of annual restricted stock grants will occur in the fourth quarter of 2023 rather than in the third quarter as was the case in 2022. Loss from Discontinued Operations. Loss from discontinued operations, net of income tax, during the nine months ended September 30, 2023 and 2022, reflects information contained in the actuarial studies performed as of August 31, 2023 and 2022, other information available and considered by us, and legal expenses associated with our asbestos related liability. During the first nine months of 2023 and 2022, the loss from discontinued operations, net of tax was $28.2 million and $17.1 million, respectively. The loss from discontinued operations for the nine months ended September 30, 2023 and 2022 includes (1) a $23.8 million and $18.5 million pre-tax provision, respectively, to increase our indemnity liability in line with the August 31, 2023 and 2022 actuarial studies; (2) legal and other administrative expenses, before taxes, of $3.8 million and $4.6 million for the nine months ended September 30, 2023 and 2022, respectively, and; (3) a $10.5 million pre-tax provision for the nine months ended September 30, 2023 related to a breach of contract legal proceeding. 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 the minority shareholders’ interest in our 70% owned joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”) and, in our 80% ownership in Gwo Yng, commencing in July 2023 upon the completion of our step acquisition. Net earnings attributable to the noncontrolling interest was $152,000 and $129,000 during the nine months ended September 30, 2023 and 2022, respectively. For additional information on the Gwo Yng step acquisition, see Note 3, “Business Acquisitions and Investments,” in the notes to our consolidated financial statements (unaudited). 40 Index Restructuring and Integration Programs For a detailed discussion on the restructuring and integration costs, see Note 4, “Restructuring and Integration Expenses,” of the notes to our consolidated financial statements (unaudited). 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. September 30, December 31, (In thousands) 2023 2022 2022 Operating cash flows $ 132,893 $ (75,475 ) Total debt $ 147,596 $ 269,536 $ 239,620 Cash and cash equivalents 28,485 17,525 21,150 Net debt $ 119,111 $ 252,011 $ 218,470 Remaining borrowing capacity $ 343,981 $ 227,881 $ 255,631 Total liquidity 372,466 245,406 276,781 Operating Activities. During the first nine months of 2023, cash provided by operating activities was $132.9 million compared to cash used in operating activities of $75.5 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 increase in accounts payable compared to a decrease in accounts payable in the prior year, the decrease in prepaid expenses and other current assets compared to an increase in prepaid expenses and other current assets in the prior year, and the larger year-over-year increase in sundry payables and accrued expenses offset, in part, by the decrease in net earnings. Net earnings during the first nine months of 2023 were $27.9 million compared to $47.5 million in the first nine months of 2022. During the first nine months of 2023, (1) the increase in accounts receivable was $38.9 million compared to the year-over-year increase in accounts receivable of $51.9 million in 2022; (2) the decrease in inventories was $54.3 million compared to the year-over-year increase in inventories of $75.3 million in 2022; (3) the increase in accounts payable was $15.9 million compared to the year-over-year decrease in accounts payable of $31.8 million in 2022; (4) the decrease in prepaid expenses and other current assets was $2.9 million compared to the year-over-year increase in prepaid expenses and other current assets of $6.3 million in 2022; and (5) the increase in sundry payables and accrued expenses was $12.3 million compared to the year-over-year increase in sundry payables and accrued expenses of $3.8 million in 2022. During the third quarter and first nine months of 2023, we generated operating cash flow of $93.5 million and $132.9 million, respectively, by reducing our inventory to more normalized levels while actively managing our accounts receivable and accounts payable. We will continue to manage our working capital to maximize our operating cash flow. Investing Activities . Cash used in investing activities was $15.1 million in the first nine months of 2023, compared to $19.5 million in the same period of 2022. Investing activities during the first nine months of 2023 consisted of (1) the payment of $4 million for our acquisition of an additional 15% equity interest in Foshan GWO YNG SMP Vehicle Climate Control & Cooling Products Co., Ltd. (“Gwo Yng”) and (2) capital expenditures of $18 million offset, in part, by cash acquired of $6.8 million in the Gwo Yng step acquisition. Investing activities during the first nine months of 2022 consisted of capital expenditures of $19.5 million. 41 Index Financing Activities . Cash used in financing activities was $111 million in the first nine months of 2023 as compared to cash provided by financing activities of $92 million in the same period of 2022. During the first nine months of 2023, we (1) reduced our borrowings under our Credit Agreement by $92.1 million; and (2) paid dividends of $18.8 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 nine months of 2022, we (1) increased our borrowings under our credit facilities by $143.2 million; (2) repaid $1.7 million of other debt and lease obligations: (3) made cash payments of $2.1 million for debt issuance costs in connection with our refinancing; (4) made cash payments for the repurchase of shares of our common stock of $29.7 million; and (5) paid dividends of $17.6 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 $18.8 million and $17.6 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. Liquidity. 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”). The Credit Agreement provides for a $500 million credit facility comprised of a $100 million term loan facility (the “term loan”) and a $400 million multi-currency revolving credit facility available in U.S. Dollars, Euros, Sterling, Swiss Francs, Canadian Dollars and other currencies as agreed to by the administrative agent and the lenders (the “revolving facility”). The Credit Agreement replaces and refinances the 2015 Credit Agreement. Borrowings under the Credit Agreement were used to repay all outstanding borrowings under the 2015 Credit Agreement, and pay certain fees and expenses incurred in connection with the Credit Agreement, with future borrowings used for other general corporate purposes of the Company and its subsidiaries. The term loan amortizes in quarterly installments of 1.25% in each of the first four years, and quarterly installments of 2.5% in the fifth year of the Credit Agreement. The revolving facility has a $25 million sub-limit for the issuance of letters of credit and a $25 million sub-limit for the borrowing of swingline loans. The maturity date is June 1, 2027. 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 aggregate amount not to exceed (x) the greater of (i) $168 million or (ii) 100% of consolidated EBITDA (as defined in the Credit Agreement) for the four fiscal quarters ended most recently before such date, plus (y) the amount of any voluntary prepayment of term loans, plus (z) an unlimited amount so long as, immediately after giving effect thereto, the pro forma First Lien Net Leverage Ratio (as defined in the Credit Agreement) does not exceed 2.5 to 1.0. 42 Index Term loan and revolver facility borrowings in U.S. Dollars bear interest, at the Company’s election, at a rate per annum equal to Term SOFR plus 0.10% plus an applicable margin, or an alternate base rate plus an applicable margin, where the 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 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 nine 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. The interest rate swap agreement matures in May 2029. Outstanding borrowings at September 30, 2023 under the Credit Agreement were $147.4 million, consisting of current borrowings of $52.4 million and long-term debt of $95 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 September 30, 2023 and December 31, 2022. At September 30, 2023, the weighted average interest rate under our Credit Agreement was 5.2%, which consisted of $146 million in borrowings at 5.1% 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 $1.4 million at 9%. 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 nine months ended September 30, 2023, our average daily alternative base rate loan balance was $0.1 million, compared to a balance of $7.5 million for the nine months ended September 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 payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement also contains customary events of default. In October 2022, our Polish subsidiary, SMP Poland sp. 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. Dollars. Under the amended terms, the overdraft facility provides for borrowings of up to Zloty 30 million (approximately $6.9 million) if borrowings are solely in Zloty, or up to 85% of the Zloty 30 million limit (approximately $5.8 million) if borrowings are in Euros and/or U.S. Dollars. 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 September 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 institutions. We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements is less than the cost of servicing our receivables with existing debt. Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale. As such, these transactions are being accounted for as a sale. 43 Index Pursuant to these agreements, we sold $260.4 million and $643 million of receivables during the three months and nine months ended September 30, 2023, respectively, and $236.3 million and $610.4 million for the comparable periods in 2022. Receivables presented at financial institutions and not yet collected as of September 30, 2023 were approximately $12.6 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 $14.6 million and $36.1 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 nine months ended September 30, 2023, respectively, and $10.6 million and $21.8 million for the comparable periods in 2022. 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 receivables. 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. In July 2022, our Board of Directors authorized the purchase of up to $30 million of our common stock under a stock repurchase program. Stock will be purchased from time to time in the open market, or through private transactions, as market conditions warrant. To date, there have been no repurchases of our common stock under the program. Material Cash Commitments Material cash commitments as of September 30, 2023 consist of required cash payments to service our outstanding borrowings of $147.4 million under our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and the future minimum cash requirements of $129.7 million through 2034 under operating leases. All of our other cash commitments as of September 30, 2023 are not material. For additional information related to our material cash commitments, see 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, 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 uncertainty, and that there will be no material adverse developments in our business, liquidity or capital requirements. If material adverse developments were to occur in any of these areas, there can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our Credit Agreement in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs. In addition, if we default on any of our indebtedness, or breach any financial covenant in our Credit Agreement, our business could be adversely affected. 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 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 operations. 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. 44 Index 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 date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. We can give no assurances that actual results will not differ from those estimates. Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, 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. Recently Issued Accounting Pronouncements For a detailed discussion on recently issued accounting pronouncements and their impact on our consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements (unaudited).