Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 each of the fiscal years in the three-year period ended December 31, 2023.
December 31,
(In thousands, except per share data)
2023
2022
2021
Net sales
$
1,358,272
$
1,371,815
$
1,298,816
Gross profit
388,826
382,539
376,931
Gross profit %
28.6
%
27.9
%
29
%
Operating income
92,677
104,135
128,999
Operating income %
6.8
%
7.6
%
9.9
%
Earnings from continuing operations before income taxes
81,716
98,332
130,465
Provision for income taxes
18,368
25,206
31,044
Earnings from continuing operations
63,348
73,126
99,421
Loss from discontinued operations, net of income taxes
(28,996
)
(17,691
)
(8,467
)
Net earnings
34,352
55,435
90,954
Net earnings attributable to noncontrolling interest
204
84
68
Net earnings attributable to SMP
34,148
55,351
90,886
Per share data attributable to SMP – Diluted:
Earnings from continuing operations
$
2.85
$
3.30
$
4.39
Discontinued operations
(1.31
)
(0.80
)
(0.37
)
Net earnings per common share
$
1.54
$
2.50
$
4.02
Consolidated net sales for 2023 were $1,358.3 million, a decrease of $13.5 million, or 1% compared to net sales of $1,371.8 million in 2022; while consolidated net sales for 2022 increased $73 million, or 5.6%, compared to net sales of
$1,298.8 million in 2021. Consolidated 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.
Our net sales performance in 2023 reflects the impact of multiple factors including:
•
lower sales in our Vehicle Control operating segment reflecting the impact of lower sales to a customer that filed for bankruptcy in the first quarter, as well as the negative impact of lower customer pipeline orders and softer fourth
quarter sales,
•
lower sales in our Temperature Control operating segment reflecting the impact of a slow start to the season caused by a rainy spring and cool early summer temperatures across key markets. Although customer demand and net sales
increased significantly in the third quarter of 2023 as summer temperatures increased, the strong third quarter 2023 net sales were not enough to offset the slow start to the season, and
•
strong demand and new business wins in our Engineered Solutions operating segment with continued optimism about the long-term growth potential of the complementary markets served in this newly created segment.
28
Index
Gross margins as a percentage of net sales in 2023 was 28.6% as compared to 27.9% in 2022. The gross margin percentages in 2023 increased year-over-year in each of our Vehicle Control, Temperature Control and Engineered Solutions operating
segments. Overall, the gross margin increase as a percentage of sales in 2023 reflects the positive impact of increased pricing, improved operating performance, and the favorable customer sales mix in Engineered Solutions, which more than offset
ongoing inflationary increases in certain raw materials, labor and transportation costs, as well as the lower fixed cost absorption due to lower production levels than those achieved in 2022 as we worked down inventory levels, and the weakening
of the U.S. dollar on our international operations. 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.
Operating margin as a percentage of net sales in 2023 was 6.8% as compared to 7.6% in 2022. Included in our operating margin were selling, general and administrative expenses (“SG&A”) of $293.6 million, or 21.6% of net sales in 2023,
$276.6 million, or 20.2% of net sales in 2022, and $247.5 million, or 19.1% of net sales in 2021. The higher SG&A expenses in 2023 is principally due to the impact of (1) higher interest rate related costs of $14 million incurred in our
supply chain financing arrangements and (2) higher distribution costs, all of which more than offset the positive 2023 comparative impact of the $7 million charge recorded in 2022 to reduce our outstanding accounts receivable balance from a
customer that filed for bankruptcy in the first quarter of 2023 to our estimated recoverable amount. Excluding the impact of the incremental interest rate costs incurred in our supply chain financing arrangements, SG&A expenses in the year
ended December 31, 2023 were 20.6% of consolidated net sales, just 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 2024 and be fully operational 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.
29
Index
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.
Comparison of Results of Operations For Fiscal Years 2023 and 2022
Sales . Consolidated net sales for 2023 were $1,358.3 million, a decrease of $13.5 million, or 1%, compared to $1,371.8 million in the same
period of 2022, with the majority of our net sales to customers located in the United States. Consolidated 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 years ended December 31, 2023 and 2022 (in thousands):
Year Ended December 31,
2023
2022
Vehicle Control
Engine Management (Ignition, Emissions and Fuel Delivery)
$
450,180
$
454,571
Electrical and Safety
221,782
230,487
Wire Sets and Other
65,970
65,513
Total Vehicle Control
737,932
750,571
Temperature Control
AC System Components
237,756
245,484
Other Thermal Components
99,998
105,753
Total Temperature Control
337,754
351,237
Engineered Solutions
Commercial Vehicle
83,025
80,275
Construction/Agriculture
43,402
42,385
Light Vehicle
92,759
91,533
All Other
63,400
55,814
Total Engineered Solutions
282,586
270,007
Other
—
—
Total
$
1,358,272
$
1,371,815
Vehicle Control’s net sales for the year ended December 31, 2023 decreased $12.7 million, or 1.7%, to $737.9 million compared to $750.6 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 of lower customer pipeline orders in 2023 and softer fourth quarter sales.
30
Index
Temperature Control’s net sales for the year ended December 31, 2023 decreased $13.4 million, or 3.8%, to $337.8 million compared to $351.2 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 was not enough to offset the slow start to the season. Demand for our Temperature Control products may vary
significantly with summer weather conditions and customer inventory levels.
Engineered Solutions’ net sales for the year ended December 31, 2023 increased $12.6 million, or 4.7%, to $282.6 million compared to $270 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.
Gross Margins. Gross margins, as a percentage of consolidated net sales, increased to 28.6% for 2023, compared to 27.9% for 2022. The following table summarizes gross margins by
segment for the years ended December 31, 2023 and 2022, respectively (in thousands):
Year Ended
December 31,
Vehicle
Control
Temperature
Control
Engineered
Solutions
Other
Total
2023
Net sales
$
737,932
$
337,754
$
282,586
$
—
$
1,358,272
Gross margins
238,215
95,827
54,784
—
388,826
Gross margin percentage
32.3
%
28.4
%
19.4
%
—
28.6
%
2022
Net sales
$
750,571
$
351,237
$
270,007
$
—
$
1,371,815
Gross margins
232,267
98,913
51,359
—
382,539
Gross margin percentage
30.9
%
28.2
%
19
%
—
27.9
%
Compared to 2022, gross margins at Vehicle Control increased 1.4 percentage points from 30.9% to 32.3%. Gross margins at Temperature Control increased 0.2 percentage points from 28.2% to 28.4%, and gross margins at Engineered Solutions
increased 0.4 percentage points from 19% to 19.4%.
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 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 operating performance;
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”) increased to $293.6 million, or 21.6% of consolidated net sales in 2023, as
compared to $276.6 million, or 20.2% of consolidated net sales in 2022. The $17 million increase in SG&A expenses as compared to 2022 is principally due to the impact of (1) higher interest related costs of $14 million incurred in our supply
chain financing arrangements and (2) higher distribution cost, all of which more than offset the positive 2023 comparative impact of the $7 million charge recorded in 2022 to reduce our outstanding accounts receivable balance from one of our
customers that filed a petition for bankruptcy in January 2023 to our estimated recovery amount. Excluding the impact of the incremental interest rate costs incurred in our supply chain financing arrangements, SG&A expenses in 2023 were
20.6% of consolidated net sales, slightly higher than the percentage in the comparable prior year period.
31
Index
Restructuring and Integration Expenses. Restructuring and integration expenses were $2.6 million in 2023 compared to restructuring and integration expenses of $1.9 million in 2022.
Restructuring and integration expenses in 2023 consists of (1) the $2.5 million of costs incurred in our 2022 cost reduction initiative, and (2) the $0.1 million increase in environmental cleanup costs for ongoing remediation in connection with
the prior closure of our manufacturing operations at our Long Island City, New York location; while 2022 expenses consists of (1) costs of $1.5 million incurred in our 2022 cost reduction initiative, (2) relocation expenses of $0.2 million of
certain inventory, machinery, and equipment acquired in our 2021 soot sensor acquisition to our facilities in Independence, Kansas and Bialystok, Poland, and (3) the $0.2 million increase in environmental cleanup costs for ongoing remediation in
connection with the prior closure of our manufacturing operations at our Long Island City, New York location.
During the fourth quarter of 2022, to further our ongoing efforts to improve operating efficiencies and reduce costs, we announced plans for a reduction in our sales force, and initiated plans to relocate certain product lines from our
Independence, Kansas manufacturing facility and from our St. Thomas, Canada manufacturing facility to our manufacturing facilities in Reynosa, Mexico. Total restructuring and integration expenses related to the initiative were $2.5 million and
$1.5 million 2023 and 2022, respectively. Expenses related to the initiative for the year ended December 31, 2023 consist of (1) expenses of approximately $0.7 million related to a further sales force reduction, (2) expenses of $1.3 million of
employee severance and bonuses related to our product line relocations, and (3) expenses of $0.5 million related to the relocation of machinery and equipment to our manufacturing facilities in Reynosa, Mexico. Expenses related to the initiative
for the year ended December 31, 2022 consist of (1) expenses of $0.9 million related to our sales force reduction, and (2) expenses of $0.6 million consisting of employee severance related to our product line relocations. 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 completed by the end of the second quarter of 2024.
Operating Income. Operating income was $92.7 million, or 6.8%, of consolidated net sales in 2023, compared to $104.1 million, or 7.6%, of consolidated net sales in 2022. The
year-over-year decrease in operating income of $11.4 million is the result of lower net sales, higher SG&A expenses, consisting primarily of higher interest rate related costs of $14 million incurred in our supply chain financing
arrangements, and higher restructuring and integration expenses offset, in part, by higher gross margins as a percentage of sales.
Other Non-Operating Income (Expense), Net. Other non-operating income, net was $2.3 million in 2023, compared to $4.8 million in 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 in 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 $13.3 million in 2023, compared to $10.6 million 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 2022, which more than offset the impact of lower average outstanding balances.
Income Tax Provision . The income tax provision for 2023 was $18.4 million at an effective tax rate of 22.5%, compared to $25.2 million at an
effective tax rate of 25.6% in 2022. The lower effective tax rate in 2023 compared to 2022 reflects the impact of lower state and local income taxes due to changes in state laws, rates and filing methodologies, changes in foreign and domestic
mix, and the effective rate impact of lower year-over-year pre-tax income.
32
Index
Loss From Discontinued Operations. Loss from discontinued operations, net of income tax, reflects information contained in the actuarial studies performed as of August 31, 2023 and
2022, as well as other information available and considered by us, and legal expenses and other costs associated with our asbestos-related liability. During the years ended December 31, 2023 and 2022, we recorded a net loss of $29 million and
$17.7 million from discontinued operations, respectively. The loss from discontinued operations for the year ended December 31, 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 2023 and 2022 actuarial studies; (2) legal and other miscellaneous expenses, before taxes, of $4.9 million and $5.4 million for 2023 and 2022, respectively, and (3) a $10.5 million pre-tax provision in 2023
related to a breach of contract legal proceeding. As discussed more fully in Note 23 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Item 8 of this Report, we are responsible for certain future liabilities
relating to alleged exposure to asbestos containing products.
Net Earnings Attributable to Noncontrolling Interest. Net earnings 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 were $204,000 and $84,000 during the years ended December 31, 2023 and 2022, respectively. For additional information on the Gwo Yng step acquisition, see Note 2, “Business Acquisitions and Investments,” in the notes to our consolidated
financial statements (unaudited).
Comparison of Results of Operations For Fiscal Years 2022 and 2021
Sales . Consolidated net sales for 2022 were $1,371.8 million, an increase of $73 million, or 5.6%, compared to $1,298.8 million in the same
period of 2022, with the majority of our net sales to customers located in the United States. Consolidated net sales increased across all of our operating segments, 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 years ended December 31, 2022 and 2021 (in thousands):
Year Ended December 31,
2022
2021
Vehicle Control
Engine Management (Ignition, Emissions and Fuel Delivery)
$
454,571
$
444,196
Electrical and Safety
230,487
224,520
Wire Sets and Other
65,513
68,715
Total Vehicle Control
750,571
737,431
Temperature Control
AC System Components
245,484
231,466
Other Thermal Components
105,753
92,614
Total Temperature Control
351,237
324,080
Engineered Solutions
Commercial Vehicle
80,275
76,066
Construction/Agriculture
42,385
33,220
Light Vehicle
91,533
86,440
All Other
55,814
41,579
Total Engineered Solutions
270,007
237,305
Other
—
—
Total
$
1,371,815
$
1,298,816
Vehicle Control’s net sales for the year ended December 31, 2022 increased $13.2 million, or 1.8%, to $750.6 million compared to $737.4 million in the same period of 2021. The increase in net sales in our Vehicle Control operating segment
reflects the impact of strong customer demand and price increases implemented in 2022, which were implemented to pass through inflationary increases in raw materials, distribution and labor costs.
33
Index
Temperature Control’s net sales for the year ended December 31, 2022 increased $27.1 million, or 8.4%, to $351.2 million compared to $324.1 million in the same period of 2021. The increase in net sales in our Temperature Control segment
reflects the impact of continued strong customer demand, with the elevated demand we saw in 2021 holding firm, fueled by record heat across the country in 2022 and the replenishment of customer inventory levels after very warm summer conditions
in 2021, and the impact of price increases, which were implemented to pass through inflationary increases in raw materials, distribution and labor costs. Demand for our Temperature Control products may vary significantly with summer weather
conditions and customer inventory levels.
Engineered Solutions’ net sales for the year ended December 31, 2022 increased $32.7 million, or 13.8%, to $270 million compared to $237.3 million in the same period of 2021. The increase in net sales in our Engineered Solutions operating
segment reflects the impact of the positive contribution of incremental sales from our soot sensor, Trombetta and Stabil acquisitions of $44.6 million. Compared to the year ended December 31, 2021, excluding the incremental net sales from the
acquisitions, Engineered Solutions net sales decreased $11.9 million, or 5%.
Gross Margins. Gross margins, as a percentage of consolidated net sales, decreased to 27.9% for 2022, compared to 29% for 2021. The following table summarizes gross margins by
segment for the years ended December 31, 2022 and 2021, respectively (in thousands):
Year Ended
December 31,
Vehicle
Control
Temperature
Control
Engineered
Solutions
Other
Total
2022
Net sales
$
750,571
$
351,237
$
270,007
$
—
$
1,371,815
Gross margins
232,267
98,913
51,359
—
382,539
Gross margin percentage
30.9
%
28.2
%
19
%
—
27.9
%
2021
Net sales
$
737,431
$
324,080
$
237,305
$
—
$
1,298,816
Gross margins
238,790
91,738
46,403
—
376,931
Gross margin percentage
32.4
%
28.3
%
19.6
%
—
29
%
Compared to 2021, gross margins at Vehicle Control decreased 1.5 percentage points from 32.4% to 30.9%, gross margins at Temperature Control decreased 0.1 percentage points from 28.3% to 28.2%, and gross margins at Engineered Solutions
decreased 1.6 percentage points from 19.6% to 19%.
The gross margin percentage decrease in Vehicle Control compared to the prior year reflects the impact of lower fixed cost absorption due to lower and more normalized production, inflationary cost increases in raw materials, labor and
transportation, which were somewhat offset by increased pricing, and higher freight and related expenses resulting from higher inventory levels. The slight gross margin percentage decrease in Temperature Control compared to the prior year
reflects the impact of inflationary cost increases in raw materials, labor and transportation, and higher freight and related expenses resulting from higher inventory levels, which were offset by seasonal volume, customer mix and increased
pricing. The gross margin percentage decrease in Engineered Solutions compared to the prior year reflects the impact of inflationary cost increases in raw materials, labor and transportation. While we anticipate continued margin pressures
across all of our segments resulting from inflationary cost increases, we believe that our annual cost initiatives, and our ability to pass through higher prices to our customers, will help to offset the impact of the inflationary increases on
our margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) increased to $276.6 million, or 20.2% of consolidated net sales in 2022, as
compared to $247.5 million, or 19.1% of consolidated net sales in 2021. The $29.1 million increase in SG&A expenses as compared to 2021 is principally due to the impact of (1) higher interest related costs of $20.6 million incurred in our
supply chain financing arrangements, (2) the impact of the $7 million charge recorded in 2022 to reduce our outstanding accounts receivable balance from one of our customers that filed a petition for bankruptcy in January 2023 to our estimated
recovery amount, (3) incremental expenses of $7.2 million from our soot sensor, Trombetta and Stabil acquisitions, including amortization of intangible assets acquired, and (4) inflationary cost increases resulting in higher distribution and
freight costs. SG&A expenses in 2022 were favorably impacted by the higher mix of non-aftermarket parts sales from recent acquisitions, which have a different profile than our aftermarket business with lower SG&A expenses as a percentage
of sales.
34
Index
Restructuring and Integration Expenses. Restructuring and integration expenses were $1.9 million in 2022 compared to restructuring and integration expenses of $0.4 million in 2021.
Restructuring and integration expenses incurred in 2022 of $1.9 million related to (1) severance costs of $0.9 million in connection with a reduction in our sales force, (2) expenses of $0.6 million consisting of employee severance costs related
to our product line relocations from our Independence, Kansas manufacturing facility and from our St. Thomas, Canada manufacturing facility to our manufacturing facilities in Reynosa, Mexico, (3) relocation expenses of $0.2 million of certain
inventory, machinery, and equipment acquired in our 2021 soot sensor acquisition to our facilities in Independence, Kansas and Bialystok, Poland, and (4) the $0.2 million increase in environmental cleanup costs for ongoing monitoring and
remediation in connection with the prior closure of our manufacturing operations at our Long Island City, New York location.
Restructuring and integration expenses incurred in 2021 of $0.4 million related to the relocation of certain inventory, machinery, and equipment acquired in our 2021 soot sensor acquisition to our facilities in Independence, Kansas and
Bialystok, Poland. The soot sensor product line relocation has been completed.
Operating Income. Operating income was $104.1 million, or 7.6%, of consolidated net sales in 2022, compared to $129 million, or 9.9%, of consolidated net sales in 2021. The
year-over-year decrease in operating income of $24.9 million is the result of higher SG&A expenses driven primarily by the increased interest rate costs incurred in our supply chain financing arrangements, and to a lesser extent by the impact
of lower gross margins as a percentage of consolidated net sales and higher restructuring and integration costs offset, in part, by higher consolidated net sales.
Other Non-Operating Income (Expense), Net. Other non-operating income, net was $4.8 million in 2022, compared to $3.5 million in 2021. The year-over-year increase in other
non-operating income, net results primarily from the favorable impact of changes in foreign currency exchange rates, and to a lesser extent the increase in year-over-year equity income from our joint ventures.
Interest Expense. Interest expense increased to $10.6 million in 2022, compared to $2 million in 2021. The year-over-year increase in interest expense reflects the impact of higher
average outstanding borrowings in 2022 when compared to 2021, and the impact of higher year-over-year average interest rates on our credit facilities.
Income Tax Provision . The income tax provision for 2022 was $25.2 million at an effective tax rate of 25.6%, compared to $31 million at an
effective tax rate of 23.8% in 2021. The higher effective tax rate in 2022 compared to 2021 results primarily from the income tax provision impact related to the exercise of restricted stock.
Loss From Discontinued Operations. Loss from discontinued operations, net of income tax, reflects information contained in the actuarial studies performed as of August 31, 2022 and
2021, as well as other information available and considered by us, and legal expenses and other costs associated with our asbestos-related liability. During the years ended December 31, 2022 and 2021, we recorded a net loss of $17.7 million and
$8.5 million from discontinued operations, respectively. The loss from discontinued operations for the year ended December 31, 2022 and 2021 includes an $18.5 million and $5.3 million pre-tax provision, respectively, to increase our indemnity
liability in line with the 2022 and 2021 actuarial studies; and legal expenses and other miscellaneous expenses, before taxes, of $5.4 million and $6.1 million for 2022 and 2021, respectively. As discussed more fully in Note 23 “Commitments and
Contingencies” of the Notes to Consolidated Financial Statements in Item 8 of this Report, we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
35
Index
Net Earnings Attributable to Noncontrolling Interest. In May 2021, we acquired the Trombetta business for $111.7 million. As part of the acquisition, we acquired a 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 $84,000 and $68,000 during the years ended December 31, 2022 and 2021, respectively,
represents 30% of the net earnings of Trombetta Asia, Ltd.
Restructuring and Integration Programs
For a detailed discussion on the restructuring and integration costs, see Note 3, “Restructuring and Integration Expense,” of the Notes Consolidated Financial Statements in Item 8 of this Report.
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.
December 31,
(In thousands)
2023
2022
Operating cash flows
$
144,260
$
(27,533
)
Total debt
$
156,211
$
239,620
Cash and cash equivalents
32,526
21,150
Net debt
$
123,685
$
218,470
Remaining borrowing capacity
$
334,180
$
255,631
Total liquidity
366,706
276,781
Operating Activities. During 2023, cash provided by operating activities was $144.3 million compared to cash used in operating activities of $27.5 million in 2022. The increase in
cash provided by operating activities resulted primarily from the larger year-over-year decrease 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, no change in prepaid expenses and other current assets compared to an increase in prepaid expenses and other current assets in the prior year, and the smaller year-over-year decrease
in sundry payables and accrued expenses offset, in part, by the decrease in net earnings.
Net earnings during 2023 were $34.4 million compared to $55.4 million in 2022. During 2023, (1) the decrease in accounts receivable was $8 million compared to the year-over-year decrease in accounts receivable of $6.9 million in 2022; (2) the
decrease in inventories was $29.5 million compared to the year-over-year increase in inventories of $67.5 million in 2022; (3) the increase in accounts payable was $19.6 million compared to the year-over-year decrease in accounts payable of $48.6
million in 2022; (4) there was no change in prepaid expenses and other current assets compared to the year-over-year increase in prepaid expenses and other current assets of $5.5 million in 2022; and (5) the decrease in sundry payables and
accrued expenses was $4.3 million compared to the year-over-year decrease in sundry payables and accrued expenses of $29.1 million in 2022. During 2023, we generated operating cash flow of $144.3 million 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. Now that global supply chains have stabilized, allowing us to lower
working capital in 2023, we expect cash flows from operations will return to historical levels in 2024.
Investing Activities . Cash used in investing activities was $25.7 million in 2023 compared to $27.8 million in 2022. Investing activities
during 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 $28.6
million offset, in part, by cash acquired of $6.8 million in the Gwo Yng step acquisition.
36
Index
Investing activities during 2022 consisted of (1) the cash payment of $1.7 million for our acquisition of 100% of the capital stock of Kade Trading GmbH, a German company, (“Kade”) , net of $1 million of cash acquired and the $0.5 million
earn-out; (2) the payment of $0.2 million for our 3.55% increase in equity ownership in Foshan Che Yijia New Energy Technology Co., Ltd., (“CYJ”), a China-based joint venture that manufactures automotive electric air conditioning compressors; and
(3) capital expenditures of $26 million.
Financing Activities . Cash used in financing activities was $109.6 million in 2023 compared to cash provided by financing activities of $55.5
million in 2022. During 2023, we (1) reduced our borrowings under our Credit Agreement by $83.5 million; and (2) paid dividends of $25.2 million and $0.7 million to shareholders of our noncontrolling interests, respectively. 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. Borrowings under the new credit facility were used to repay all outstanding borrowings under the then existing revolving credit facility, and certain fees and expenses incurred in connection with the refinancing.
Cash provided by financing activities was $55.5 million in 2022. During 2022, we (1) increased our borrowings under our revolving credit facilities by $114.2 million; (2) reduced our borrowings under lease obligations and our Polish overdraft
facility by $2.9 million; (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 $23.4
million. Cash provided by borrowings under our credit facilities were used to fund our operating activities, investing activities, reduce our borrowings under lease obligations and our Polish overdraft facility, pay debt issuance costs in
connection with the refinancing, purchase shares of our common stock and pay dividends.
Dividends of $25.2 million and $23.4 million were paid in 2023 and 2022, respectively. Quarterly dividends were paid at a rate of $0.29 in 2023 and $0.27 in 2022.
Comparison of Liquidity and Capital Resources For Fiscal Years 2022 and 2021
For a detailed discussion of our Liquidity and Capital Resources comparison of fiscal year 2022 to fiscal year 2021, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2022.
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, we 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 existing Credit Agreement, dated as of October 28, 2015, among the Company, SMP Motor Products Ltd. and Trumpet Holdings, Inc., as borrowers, JPMorgan
Chase Bank, N.A., as administrative agent and lender, and the other lenders named therein (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.
37
Index
The Company may, upon the agreement of one or more of 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.
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 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. 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 December 31, 2023 under the Credit Agreement were $156 million, consisting of current borrowings of $5 million and long-term debt of $151 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 $2.3 million and $2.4 million at December 31, 2023 and 2022, respectively.
At December 31, 2023, the weighted average interest rate under our Credit Agreement was 5%, which consisted of $156 million in borrowings at 5% 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 year ended December 31, 2023, our average daily alternative base rate loan balance was $0.1 million, compared to 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.
38
Index
In November 2023, our Polish subsidiary, SMP Poland sp. z.o.o., further amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce. The overdraft facility, as amended, provides 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 $7.6 million) if borrowings are solely in Zloty, or up to 85% of the Zloty 30 million limit
(approximately $6.5 million) if borrowings are in Euros and/or U.S. Dollars. The overdraft facility has a maturity date in March 2024, 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”) + 1.0% for
borrowings in Polish Zloty, (2) the one month Euro Interbank Offered Rate (“EURIBOR”) + 1.0% for borrowings in Euros, and (3) the Mid-Point of the Fed Target Range + 1.25% 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 December 31, 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.
Pursuant to these agreements, we sold $830.8 million and $813.7 million of receivables for the years ended December 31, 2023 and 2022, respectively. Receivables presented at financial institutions and not yet collected as of December 31, 2023
were $4.5 million and remained in our 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 $46 million, $32 million and $11.5 million related to the sale of receivables is included in selling, general and administrative expenses in our
consolidated statements of operations for the years ended December 31, 2023, 2022 and 2021, 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, 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 January 2023, one of our customers filed a petition for bankruptcy. In connection with the bankruptcy filing, we evaluated our potential risk and exposure as related to our outstanding accounts receivable balance from the customer as of
December 31, 2022, and estimated our anticipated recovery. As a result of our evaluation, we recorded a $7 million pre-tax charge during the year ended December 31, 2022 to reduce our accounts receivable balance to our estimated recovery. The
$7 million pre-tax charge was included in selling, general and administrative expenses in our consolidated statement of operations. The bankruptcy court proceedings have continued into 2023. Although the courts have named us a “critical
supplier,” the funds allocated to us have not yet been determined and, as such, we have not recorded an adjustment to the $7 million pre-tax charge previously recorded.
In March 2020, our Board of Directors authorized the purchase of up to $20 million of our common stock under a stock repurchase program. Stock repurchases under this program during the year ended December 31, 2021 were 150,273 shares of our
common stock at a total cost of $6.5 million thereby completing the 2020 Board of Directors authorization.
In February 2021, our Board of Directors authorized the purchase of up to an additional $20 million of our common stock under a stock repurchase program. Stock repurchases under this program during the year ended December 31, 2021 were
464,992 shares of our common stock at a total cost of $20 million, thereby completing the February 2021 Board of Directors authorization.
In October 2021, our Board of Directors authorized the purchase of up to an additional $30 million of our common stock under a stock repurchase program. Stock repurchases under this program, during the year ended December 31, 2021 and 2022
were 7,000 and 692,067 shares of our common stock, respectively, at a total cost of $0.3 million and $29.7 million, respectively, thereby completing the October 2021 Board of Directors authorization.
39
Index
In July 2022, our Board of Directors authorized the purchase of up to an additional $30 million of our common stock under a new stock repurchase program. Stock will be purchased under the program 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 December 31, 2023 consist of required cash payments to service our outstanding borrowings of $156 million under our Credit Agreement with JPMorgan Chase Bank, N.A., as agent and the future minimum cash
requirements of $131.7 million through 2034 under operating leases. All of our other cash commitments as of December 31, 2023 are not material. For additional information related to our material cash commitments, see Note 7, “Leases,” and Note
11, “Credit Facilities and Long-Term Debt,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
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 by geo-political risks, 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 this Report.
Critical Accounting Policies and Estimates
We have identified the two accounting policies and estimates below 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. For a detailed discussion
on the application of these and other accounting policies, see Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
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 caused by
geo-political risks, 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.
Valuation of Long‑Lived and Intangible Assets and Goodwill
At acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consist of customer relationships, trademarks and trade names, patents, developed technology and intellectual property, and non-compete
agreements. Intangible assets acquired through business combinations are subject to potential adjustments within the measurement period, which is up to one year from the acquisition date. Valuing intangible assets requires the use of
significant estimates and assumptions. As related to valuing customer relationships, significant estimates and assumptions used include but are not limited to: (1) forecasted revenues attributable to existing customers; (2) forecasted earnings
before interest and taxes (“EBIT”) margins; (3) customer attrition rates; and (4) the discount rate. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and
certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful
lives. We believe that the fair value of acquired identifiable net assets, including intangible assets, are based upon reasonable estimates and assumptions.
40
Index
We assess the impairment of long‑lived assets, identifiable intangibles assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. With respect to goodwill and identifiable
intangible assets having indefinite lives, we test for impairment on an annual basis or in interim periods if an event occurs or circumstances change that may indicate the fair value is below its carrying amount. Factors we consider important,
which could trigger an impairment review, include the following: (a) significant underperformance relative to expected historical or projected future operating results; (b) significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and (c) significant negative industry or economic trends. We review the fair values using the discounted cash flows method and market multiples.
When performing our evaluation of goodwill for impairment, if we conclude qualitatively that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then a quantitative impairment test would
not be required. If we are unable to reach this conclusion, then we would perform a goodwill quantitative impairment test. In performing the quantitative test, the fair value of the reporting unit is compared to its carrying amount. A charge
for impairment is recognized by the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
Identifiable intangible assets having indefinite lives are reviewed for impairment on an annual basis using a methodology similar with that used to evaluate goodwill. Intangible assets having definite lives and other long-lived assets are
reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing for impairment, we compare the
carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets fair value and their carrying value.
There are inherent assumptions and estimates used in developing future cash flows requiring our judgment in applying these assumptions and estimates to the analysis of identifiable intangibles and long‑lived asset impairment including
projecting revenues, interest rates, tax rates and the cost of capital. Many of the factors used in assessing fair value are outside our control and it is reasonably likely that assumptions and estimates will change in future periods. These
changes can result in future impairments. In the event our planning assumptions were modified resulting in impairment to our assets, we would be required to include an expense in our statement of operations, which could materially impact our
business, financial condition and results of operations.
Asbestos Litigation
In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study of the asbestos related liabilities performed by an independent actuarial firm, our settlement amounts
and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of such claims. As is our accounting policy, we consider the advice of actuarial consultants with experience in assessing
asbestos-related liabilities to estimate our potential claim liability; and perform an actuarial evaluation in the third quarter of each year and whenever events or changes in circumstances indicate that additional provisions may be necessary.
The methodology used to project asbestos-related liabilities and costs in our actuarial study considered: (1) historical data available from publicly available studies; (2) an analysis of our recent claims history to estimate likely filing rates
into the future; (3) an analysis of our currently pending claims; (4) an analysis of our settlements and awards of asbestos-related damages to date; and (5) an analysis of closed claims with pay ratios and lag patterns in order to develop average
future settlement values. Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments and awards of asbestos-related
damages was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required. Future legal costs are expensed as incurred and
reported in earnings (loss) from discontinued operations in the accompanying statement of operations.
41
Index
We plan to perform an annual actuarial evaluation during the third quarter of each year for the foreseeable future and whenever events or changes in circumstances indicate that additional provisions may be necessary. Given the uncertainties
associated with projecting such matters into the future and other factors outside our control, we can give no assurance that additional provisions will not be required. We will continue to monitor events and changes in circumstances surrounding
these potential liabilities in determining whether to perform additional actuarial evaluations and whether additional provisions may be necessary, which will reported in earnings (loss) from discontinued operations in the accompanying statement
of operations. At the present time, however, we do not believe that any additional provisions would be reasonably likely to have a material adverse effect on our liquidity or consolidated financial position. See Note 23, “Commitments and
Contingencies,” of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.
Recently Issued Accounting Pronouncements
For a detailed discussion on recently issued accounting pronouncements and their impact on our consolidated financial statements, see Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in
Item 8 of this Report.