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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212023
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____
Commission file number: 001-04743
| Standard Motor Products, Inc. | ||
| (Exact name of registrant as specified in its charter) |
| New York | 11-1362020 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
37-18 Northern Blvd., Long Island City, New York | 11101 |
| (Address of principal executive offices) | (Zip Code) |
| Registrant’s telephone number, including area code: | (718) 392-0200 |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $2.00 per share | SMP | New York Stock Exchange LLC |
| Securities registered pursuant to Section 12(g) of the Act: | None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☑ | Accelerated Filer ☐ | |
Non-Accelerated Filer ☐ | Smaller reporting company ☐ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting common stock based on the closing price on the New York Stock Exchange on June 30, 20212023 (the last business day of registrant’s most recently completed second fiscal quarter) of $43.35$37.52 per share held by non-affiliates of the registrant was $868,423,747.$737,570,524. For purposes of the foregoing calculation only, all directors and officers have been deemed to be affiliates, but the registrant disclaims that any of such are affiliates.
As of February 17, 2022,20, 2024, there were 21,962,76221,918,729 outstanding shares of the registrant’s common stock, par value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated herein by reference from the registrant’s definitive proxy statement relating to its annual meeting of stockholders to be held on May 19, 2022.
STANDARD MOTOR PRODUCTS, INC.
| PART I. | Page No. | |
Item 1. | 3 | |
Item 1A. | ||
Item 1B. | ||
Item 1C. | 24 | |
Item 2. | 25 | |
Item 3. | 26 | |
Item 4. | 26 | |
| PART II. | ||
Item 5. | 26 | |
Item 6. | ||
Item 7. | 28 | |
Item 7A. | 42 | |
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
Item 9C. | ||
| PART III. | ||
Item 10. | ||
Item 11. | ||
Item 12. | 91 | |
Item 13. | ||
Item 14. | ||
| PART IV. | ||
Item 15. | ||
Item 16. | ||
PART I
In this Annual Report on Form 10-K, “Standard Motor Products,” “we,” “us,” “our,” “SMP,” and the “Company” refer to Standard Motor Products, Inc. and its subsidiaries, unless the context requires otherwise. This Report, including the documents incorporated herein by reference, 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 automotive aftermarket heavy duty, industrial equipment and original equipment markets;and/or other end-markets that we supply; 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)liabilities); the effects of widespread public health crises, includingdisruptions in the coronavirus (COVID-19) pandemic; climate-related risks, such as physical risks and transitionsupply chain caused by geopolitical 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.
| ITEM 1. | BUSINESS |
Overview
We are a leading manufacturer and distributor of premium replacement parts utilized in the maintenance, repair and service of vehicles in the automotive aftermarket industry. In addition, we continueand a custom-engineered solutions provider to increase our supplier capabilities with a complementary focus on specialized originalvehicle and equipment parts for manufacturers across multiple industries such as agriculture, heavy duty, and construction equipment. We believe that our extensive design and engineering capabilities have afforded us opportunities to expand our product coverage in ourdiverse non-aftermarket end markets. Our automotive aftermarket business is comprised of two segments, Vehicle Controland enter newer specializedTemperature Control, while our Engineered Solutions Segment offers a broad array of conventional and future-oriented technologies in markets that require application-specific knowledge, such as those mentioned above.
commercial and light vehicles, construction, agriculture, power sports, marine, hydraulics and lawn and garden. 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 AmericanAmerica countries.
| (3) | Wire Sets & Other, which includes spark plug wire sets, coil on plug boots and accessories servicing vehicle’s ignition system. Certain product categories within this group are in |
Our Temperature Control Segment manufactures and distributes a full line also services our core automotive aftermarket customers through its offering of critical componentspremium replacement parts within the following major product groups:
| (1) | AC System Components, which includes compressors, air conditioning repair kits, connecting lines, heat exchangers, and expansion devices. |
| (2) | Other Thermal Components, which includes parts that provide engine, transmission, electric drive motor, and battery temperature management. |
We believe our Temperature Control Segment is poised to benefit from the broader adoption of more complex air conditioning systems that will provide passenger comfort regardless of the vehicle’s powertrain. For example, in addition to cabin comfort, powertrains such as electric vehicles will require cooling systems for the temperature control (air conditioningbatteries, electronics, motors and heating) systems, engine cooling systems,other applications.
The Engineered Solutions Segment services our vehicle and equipment manufacturing customers across diverse global end markets, including on-highway and off-highway applications such as commercial and light vehicles, construction, agriculture, power window accessoriessports, marine, hydraulics and windshield washer systemslawn and garden, through an offering of motor vehicles. Keycustom-engineered solutions within the following product categories withincategories:
| (1) | Thermal Management Products, which are designed to control the operating temperature of HVAC, battery and heat exchange systems, such as electrical compressors, fans, motors and pumps. |
| (2) | Sensors, covering applications in speed, position, temperature, pressure, level and particulate matter, among others. |
| (3) | Switches, covering applications in electrical performance, position, temperature, pressure, tilt and fluid levels, among others. |
| (4) | Power Distribution, covering applications in power switching, industrial solenoids, and voltage regulators. |
| (5) | Electrification & Electronics, which includes controller area network (CAN) devices, CAN bus wiring and splitting devices, and electronic controls, transmitters and components. |
| (6) | Injection & Fuel Delivery, covering an extensive array of applications in transportation, such as gasoline, diesel and alternative fuels, such as compressed natural gas, liquefied natural gas, liquefied petroleum gas, and hydrogen. |
| (7) | Ignition & Emissions, which includes wire, ignition coils and positive crankcase ventilation valves. |
| (8) | Clamping Devices, covering automotive and industrial applications. |
Our Business Strategy
Our Corporate Mission is to be a leading global supplier of parts and services to diverse end markets for the vehicles of yesterday, today and tomorrow, while leveraging our temperature control portfolio include: air conditioning compressors (newheritage of integrity and remanufactured), air conditioning repair kits, clutch assemblies, blower and radiator fan motors (brushless and brushed), filter dryers, evaporators, accumulators, actuators, hose assemblies, thermal expansion devices, heater valves, heater cores, A/C service tools and chemicals, fan assemblies, fan clutches, oil coolers, window lift motors, window regulators and assemblies, and windshield washer pumps.respect for all of our stakeholders.
We continuously looksell our products in the automotive aftermarket primarily to improve our cost position through strategic transactions with manufacturers in low cost regions. In 2014, we formed Foshan GWOYNG SMP Vehicle Climate Control & Cooling Products Co. Ltd., a China-based joint venture that manufactures light vehicleretailers and heavy duty air conditioning accumulators, filter driers, hose assemblies,warehouse distributors, who buy directly from us and switches; in 2017, we formed Foshan FGD SMP Automotive Compressor Co., Ltd., a China-based joint venture that manufactures light vehiclesell directly to jobber stores, professional technicians and heavy duty belt driven air conditioning compressors; and in 2019, we acquired a minority interest ownership position in Foshan Che Yijia New Energy Technology Co., Ltd., a China-based manufacturer of electric air conditioning compressors.to individual consumers who perform “do-it-yourself” repairs on their personal vehicles. We believe that these transactions will enhanceour value proposition is a key competitive advantage in maintaining our position as a basic low-cost manufacturerstrategic partner to our customers and a leadingleader in the automotive aftermarket.
In the automotive aftermarket, our mission is to be the best full-line, full-service supplier of temperature control partspremium Vehicle Control and allow an opportunity for growth in the China OE market, while providing key complementary manufacturing capabilities and synergy opportunities with our other manufacturing facilities. The synchronization and complimentary strategies between our operational and distribution facilities provides a more reliable supply of products, and supports our customers’ needs for consistent and reliable service levels.
Our Aftermarket Value Proposition
■ Premium Quality Products | ■ Premium Brands | ■ Full-Line Coverage | ■ Supply Chain Excellence |
■ Field Sales Support | ■ Marketing Support | ■ World-Class Training | ■ Basic Manufacturing |
Premium Quality Products.
We offer professional grade products intended to fit, form and function to standards that meet or exceed the original equipment (“OE”) product it replaces. Our products undergo rigorous product qualification, testing our products against exacting specifications and performance criteria. In some cases, we have successfully identified and implemented improvements in the durability of our products through the evaluation and analysis of OE product failures in the field.
Premium Brands.
We believe that our brands are an importanta key component of our value proposition, and serve to distinguish our premium engine management and temperature control products from those of our competitors. We market and distribute our aftermarket products under our own brands, such as:
  | ||
Temperature Control |   |
We also distribute our products to customers for resale under private labels and the following co-labels:
 Control |   |  |
Full-Line Coverage.
Our Customersproduct offering is designed to ensure our automotive aftermarket customers have the parts they need to maintain, service and repair the wide range of vehicles in operation. We offer a full line of critical components for most years, makes, models and engine sizes. Our product offering is a reflection of the vehicles in operation, the adoption rates of new vehicle technologies by original equipment manufacturers, the number of miles driven, and the failure rates of parts in service. We continuously look to expand our coverage through the addition of late-model applications in existing product categories as well as new product categories in response to evolving vehicle technologies, or that otherwise complement our existing offering and have potential for high growth.
We sellfocus on expanding our products primarily to:product coverage in advanced powertrain technologies, including start and stop technology, cylinder deactivation, variable valve timing, turbochargers, electronic throttle bodies, diesel exhaust emissions control, gasoline direct injection, active grill shutters; electrification, such as battery cooling fans, drive battery charging cables and adapters, and electric coolant pumps; and safety related categories, such as anti-lock brake, vehicle speed sensors, tire pressure monitoring, park assist sensors and advanced driver assistance components, including blind spot detection sensors, cruise control distance sensors, lane departure sensor cameras and park assist backup cameras.
In December 2023, we offered over 79,000 total stock keeping units (SKUs) to the automotive aftermarket. Approximately 2,600 of these SKUs were newly introduced in 2023, of which more than half were powertrain neutral vehicle technologies, such as cruise control distance sensors, park assist cameras and electronic parking brake actuators. |
Our three largest individual customers accountedVehicle Control offering includes more than seventy product categories for approximately 57% ofhybrid electric vehicles. We are committed to strategically expanding our consolidated net sales in 2021. During 2021, O’Reilly, NAPAproduct offerings for electric and AutoZone accounted for 26%, 17%, and 14% of our consolidated net sales, respectively. Net sales from each of these customers were reported in both our Engine Management and Temperature Control Segments.hybrid vehicles to service this important segment.
Product availability, including order turn-around time and fill rates, are critical measures of performance in the automotive aftermarket, and we partner with our suppliers and customers, to implement focused initiatives designed to achieve high levels of performance against these key metrics. For example, we manage forecasting responsibilities for our major retail customers, and provide twelve month projections to our suppliers to assist in their raw material and capacity planning to ensure continuity of supply.
In 2023, we announced plans to open a new distribution center in Shawnee, Kansas. The new facility,which is expected to have a phased opening beginning in 2024 and be fully operational in early 2025, will expand our total distribution network square footage to meet our growing demands in the automotive aftermarket, 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 Shawnee, Kansas distribution facility will also bring our Vehicle Control products geographically closer to our Midwest and West Coast customers, reducing transportation lead-time, and will ultimately provide disaster recovery capabilities for automotive aftermarket products across our divisions.
Field Sales Support.
We compete primarily on the basis of product quality, product availability, value-added services, product coverage, order turn‑around time, order fill rate, technical support and price. We believe we differentiate ourselves from our competitors primarily through:
technically-trained salesforce is a value‑added, knowledgeable sales force;
We support our customers with superior value-added services such as data-driven category management based on vehicles in operation, sophisticated parts catalogs, available online and through our mobile application, and technical support, including selection, assortment and application support for all of our products. We also grant our customers royalty-free licenses to use certain intellectual property rights to advertise, market and sell our products. The licenses primarily cover vehicle application data, which is used to identify the parts necessary to service any particular vehicle make, model, year and/or engine size, product information data, including product interchanges, part numbers, attributes, high resolution images and videos, dimensions, specifications and other technical descriptions of parts and components.
World-Class Training.
We generate demand for our products is through our technical training program, which offers training seminars to professional automotive technicians. Our training program is accredited by the National Institute for Automotive Service Excellence (ASE) Training Managers Council. Our seminars are taught by ASE certified instructors, in real time eitherand are available in-person or byand online through webinars online and feature more than 30 different topics. We also offer on-demand training webinars online on more thanseminars. Our seminars cover approximately 150 different topics.topics, offered in both English and Spanish. Through our training program, we typically teach approximately 60,000 technicians annually how to diagnose and repair vehicles equipped with complex systems related to our products, and we have approximately 16,000 technicians and 7,000 of our customers’ store employees and sales team members who are registered to participate in such sessions through our online platform.
Basic Manufacturing.
We are committed to expanding our design, engineering and manufacturing capabilities, and vertically integrating production processes to bring more manufacturing in-house. We engineer, tool and manufacture many of the products we offer for sale and the components used in their assembly. We believe this level of vertical integration, in combination with our manufacturing footprint in low cost regions, is a key competitive advantage in terms of the quality, cost and availability of our products.
| Examples of vertically integrated processes: | |
| ➢ plastic molding operations | ➢ automated electronics assembly |
| ➢ stamping and machining operations | ➢ design and fabrication of processing and test equipment |
➢ wire extrusion | ➢ teardown, diagnostics and rebuilding of remanufactured air conditioning compressors, diesel injectors and diesel pumps |
As of December 31, 2023, all of our principal manufacturing facilities maintained quality management systems that were ISO 9001 and/or TS 16949 certified, and ten of our principal manufacturing and distribution facilities maintained environmental management systems that were ISO 14001 certified.
Our manufacturing footprint is geographically diverse with a greater presence in North America and Europe compared to many of our peers. We leverage our footprint to improve our cost position by locating labor-intensive processes within our low-cost plants, and by investing in automation and undertaking continuous improvement and expansion initiatives in our domestic facilities.
Our Engineered Solutions Value Proposition
We seek to leverage our extensive portfolio of adaptable products and strategically positioned global network of resources to deliver custom-engineered solutions for vehicle control and thermal management categories to the diversified end markets we supply.
Our Engineered Solutions products are sold primarily to original equipment manufacturers and their tier suppliers, system integrators, and original equipment service part operations. Our customers use our products in serial production and as service and replacement parts.
We believe our global network of resources, including our engineering capabilities, advanced quality systems, manufacturing, distribution and technical sales expertise, combined with our customizable solutions for vehicle control and thermal management categories, is a key competitive advantage. Our focus on vehicle control and thermal management categories leverages the legacy and leadership position of our automotive aftermarket business to provide a platform for future growth in diverse non-aftermarket end markets. We drive growth in this segment by developing new customer relationships, cross-selling to existing customers, introducing new products to new and existing customers, and increasing content per unit. Our growth strategy is long-term, and we do not expect growth to be linear given the lengthy nature of design engineering and validation and the period of time between the awarding of new business and the start of production, often which occurs 1-2 years after business is awarded.
We believe our automotive aftermarket business benefits from our Engineered Solutions business through accelerated future product development; systems, processes and quality enhancements; the technical insights of its original equipment customers; its global footprint; and synergistic mergers and acquisitions.
We distribute our Engineered Solutions products under the following trade names:
Engineered Solutions |  |
Strategic Acquisitions
We selectively pursue strategic acquisitions that strengthen our position in the markets we supply or that diversify our business in target markets or geographies. Among other considerations, we seek acquisitions that align with our core competencies; enhance our existing design, engineering and manufacturing capabilities; and vertically integrate key technologies, products and processes.
For information on recent acquisitions and investments, see Note 2 “Business Acquisitions and Investments” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
Industry Trends
The automotive aftermarket is a mature industry that tends to be influenced by trends such as the number of vehicles on the road, the average age of vehicles on the road, and the total number of miles driven per year. Weather extremes like unseasonably hot or cool temperatures in the summer can also have an impact on automotive aftermarket product demand.
In the diverse non-aftermarket end markets we supply, such as commercial and light vehicles, construction, agriculture, power sports and others, other economic factors such as the level of new vehicle sales and production rates, which more recently have been impacted by disruptions in the global supply chain and labor, tend to have a more direct impact.
Our Customers
In the automotive aftermarket, our customers are many of the largest national and regional retailers and distributors, such as: Advance Auto Parts; Auto Value and Bumper to Bumper (Aftermarket Auto Parts Alliance); Automotive Distribution Network; AutoZone; Canadian Tire; Federated Auto Parts; Genuine Parts Company and National Automotive Parts Association; O’Reilly Auto Parts; The Automotive Parts Services Group or The Group; The National Pronto Association; and Uni-Select.
Engineered Solutions customers are many of the largest original equipment manufacturers and their tier suppliers, system integrators, and original equipment service part operations, such as: Bombardier; Carquest: Caterpillar; CNH; Daimler Truck; Eberspacher; Ford; General Motors; Harley-Davidson; IVECO; John Deere; Mobile Climate Control; Polaris; Scania; Volvo/Mack Truck; and Woodward.
Our three largest individual customers accounted for approximately 59% of our consolidated net sales in 2023. During 2023, O’Reilly Auto Parts, AutoZone and NAPA accounted for 29%, 16%, and 14% of our consolidated net sales, respectively.
Competition
Our business operates in highly competitive markets, and we face substantial competition in all of the markets that we supply.
In the automotive aftermarket, we compete primarily on the basis of product quality, availability (including order turn-around time and fill rate), coverage and price, and value-added services. Our primary competitors are full-line suppliers, short- or value-line suppliers, tier suppliers and service part operations of original equipment manufacturers, including car dealerships, and the direct import programs of certain retailers.
In our Engineered Solutions segment, we compete on the basis of product quality, price and availability (including order turn-around time and fill rate), technical expertise (including product design, development and innovation), and lean process improvements. Our primary competitors are global and regional tier suppliers of original equipment manufacturers.
We believe we differentiate ourselves from our competition through the execution of our value proposition, discussed further above. In addition, in the automotive aftermarket, we offer a variety of strategic customer discounts, allowances and incentives to increase customer purchasesthe sale of our products. For example, we offer cash discounts for paying invoices in accordance with the specified discounted terms of the invoice. We also offer rebates and discounts to customers as advertising and sales force allowances, and allowances for warranty and overstock returns are also provided. We believe theseThese discounts, allowances and incentives are a common practice throughoutin the automotive aftermarket, industry, and we intend to continue to offeroffering them in response to competitive pressures and to strategically support the growth in sales of all our products.
Seasonality
Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control Segment of our business. In addition to this seasonality, theThe demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories. Ordinarily, a warm summer, as we experienced in 2021, would increase the demand for our Temperature Control products, while a somewhat mild summer, as we experienced in 2019, may lessen such demand. While the COVID-19 pandemic caused large shifts in sales demand between quarters in 2020, our business returned to a more normalized pattern of seasonality and variability in demand of our Temperature Control products in 2021. As such, our working capital typically peaks near the end of the second quarter, as the inventory build-up of air conditioning products was converted to sales, and payments on the receivables associated with such sales were yet to be received. During this period, our working capital requirements were funded by borrowing from our revolving credit facility.
Working Capital and Inventory Management
We face inventory management issues in our automotive Aftermarket business as a result of overstock returns. We permit our automotive Aftermarket customers to return new, undamaged products to us within customer-specific limits (which are generally limited to a specified percentage of their annual purchases from us) in the event that they have overstocked their inventories. We accrue for overstock returns as a percentage of sales after giving consideration to recent returns history. In addition, as discussed further above under the heading “Seasonality”, the seasonality of our Temperature Control Segment requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns. We accrue for overstock returns as a percentage of sales after giving consideration to recent returns history.season.
Suppliers
We source materials through a global network of suppliers to ensure a consistent, high quality and low cost supply of materials and key components for our product lines. As a result of the breadth of our product offering, we are not dependent on any single raw material.
The principal raw materials purchased by us consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), steel magnets, laminations, tubes and shafts, stamped steel parts, stainless steel coils and rods, aluminum coils, fittings, rods, cast aluminum parts, lead, steel roller bearings, rubber molding compound, thermo‑set and thermo plastic molding powders, and chemicals.
Additionally, we use components and cores (used parts) in our remanufacturing processes for air conditioning compressors, diesel injectors, and diesel pumps. We believeobtain cores from exchanges with customers who return cores subsequent to purchasing remanufactured products, and from a network of core brokers who sell cores. In addition, we acquire certain materials by purchasing products that weare resold into the market, particularly by OEM sources and other domestic and foreign suppliers.
We expect to have also benefited froman adequate supply of primary raw materials and cores necessary to meet our geographically diversified manufacturing footprintneeds; however, there always are risks and our strategy to bring more product manufacturing in-house, especiallyuncertainties with respect to productthe supply of raw materials and components that could impact their availability in sufficient quantities and fill rates.at cost effective prices to meet our needs.
We support and Governance (ESG)seek continuous improvement in the pursuit of environmental, social and Human Capitalcorporate governance practices that embody our culture and what we believe it means to be a good corporate citizen.
Our Culture
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 increasedcontinued 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. sustainability issues.
Environmental Stewardship
We have made significant strides with respect to our sustainability initiatives, building awareness of the environmental impact of our operations, and challenging ourselves to reduce our impact by reducing our consumptionusage of energy and generation of waste, as well as enhancing our recycling efforts.
Human Capital
As of December 31, 2021,2023, we employed approximately 5,0005,200 people, with 2,0002,100 people in the United States and 3,0003,100 people in Mexico, Canada, Poland, the U.K., Germany, Hungary, China and Hong Kong and Taiwan.Kong. Of the 5,0005,200 people employed, approximately 2,7002,600 people are production employees. We operate primarily in non‑union facilities and have binding labor agreements with employees at other unionized facilities. We have approximately 8075 production employees in Edwardsville, Kansas, who will eventually migrate to our new Shawnee, KS facility, who are covered by a contract with The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) that expires in August 2022.2026. We also have approximately 1,5001,200 employees in Mexico who are covered under union agreements negotiated at various intervals. For clarification, the employee numbers described above exclude the employees of our joint venture operations.
Diversity, Equity, Inclusion, and Inclusion.Belonging. We believe thatstrive to hire, retain and advance a diverse workforce is critical to our success, andthat reflects the communities that we continue to focus on the hiring, retention and advancement of women and underrepresented populations.serve. Our recent efforts have been focused in three areas: inspiring innovation through an inclusive and diverse culture; expanding our efforts to recruit and hire world-class diverse talent; and identifying strategic partners to accelerate our inclusion and diversity programs. Over the last 5 years, approximately 50% of our hires and promotions have been women or racially diverse individuals. To further our commitment to diversity, in 2021, we established a Diversity, Equity and Inclusion steering committee to develop key structures within our organization to promote equality, inclusion and awareness among our employees.
Health, Safety and Wellness. The success of our business is fundamentally connected to the well-being of our people. Accordingly, weWe are committed to the health, safety and wellness of our employees. We provide our employeesstrive to eliminate workplace incidents, risks and their families with access to a variety of innovative, flexible and convenienthazards. Our health and wellness programs including benefits that provide protection and security so they can have peace of mind concerning events that may require time away from work, or that impact their financial well-being; that support theirour employees’ physical and mental health by providing tools and resources to help them improve or maintain their health statusencourage healthy behaviors and encourage engagementprovide peace of mind in healthy behaviors; andcircumstances that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
Compensation and Benefits. We provide competitive compensation and benefits programs that meet the needs of our employees. In addition to wages and salaries, these programs include annual cash bonuses, stock awards, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, fertility benefits, family care resources, tuition reimbursement, LGBTQ+ inclusive benefits, mental health resources and employee assistance programs.
Talent Development. We invest significant resources to develop the talent of our high potential employees. We deliver employee workshops and mentoring programs, numerous training opportunities, provide rotational assignment opportunities, have expanded our focus onoffer continuous learning and development, and implementedimplement methodologies to manage performance, provide feedback and develop talent.
Social Engagement and Community Service
We believe that building connections between our employees, their families and our communities creates a more meaningful, fulfilling and enjoyable workplace. Through our SMP Cares® initiative, we sponsor corporate giving and volunteering programs to encourage our employees to connect with our local communities and engage in the local causes that they are passionate about.
Governance
Our commitment to ESGsustainability is spearheaded by our Board of Directors. Specifically, our Nominating and Corporate Governance Committee established an ESGa sustainability steering committee among our executive officers including our Chief Executive Officer & President, Chief Legal Officer & Secretary, Chief Human Resources Officer, and Senior Vice President of North American Operations. This ESGsustainability steering committee is tasked with developing specific strategies to ensure that our company-wide operations adhere to our corporate governance values and advance our ESG objectives.sustainability objectives globally. The multidisciplinary approach of our steering committee allows it to leverage our expertise in operations, engineering, supply chain, human capital management, finance, legal and other fields to push our ESGsustainability initiatives ahead from all angles.
Continued Commitment
With each year, we intend to further our commitment to sustainability initiatives, improving our environmental stewardship, finding ways to give back to our communities, and enhancing the diversity and inclusion of our workforce while offering opportunities for development. Information on our sustainability initiatives can be found in our most current sustainability report and on our corporate website at ir.smpcorp.com under “Environmental & Social Responsibility” and at smpcares.smpcorp.com. Information in our sustainability report and on our corporate websites regarding our sustainability initiatives are referenced for general information only and are not incorporated by reference in this Report.
Available Information
We are a New York corporation founded in 1919. Our principal executive offices are located at 37‑18 Northern Boulevard, Long Island City, New York 11101, and our main telephone number at that location is (718) 392‑0200. Our Internet address is www.smpcorp.com. We provide a link to reports that we have filed with the SEC. However, for those persons that make a request in writing or by e-mail (financial@smpcorp.com), we will provide free of charge our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports and other information are also available, free of charge, at www.sec.gov.www.sec.gov.
| ITEM 1A. | RISK FACTORS |
You should carefully consider the risks described below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business and results of operations. If any of the stated risks actually occur, they could materially and adversely affect our business, financial condition or operating results.
Risks Related to Our Operations
We depend on a limited number of key customers, and the loss of any such customer, or a significant reduction in purchases by such customer, could have a material adverse effect on our business, financial condition and results of operations.
Our three largest individual customers accounted for approximately 57%59% of our consolidated net sales in 2021.2023. During 2021,2023, O’Reilly NAPAAuto Parts, AutoZone and AutoZoneNAPA accounted for 26%29%, 17%16% and 14% of our consolidated net sales, respectively. The loss of one or more of these customers or, a significant reduction in purchases of our products from any one of them such as the decision, announced in December 2020, of a large retail customer to pursue a private brand strategy for its engine management product line, could have a materially adverse impact on our business, financial condition and results of operations. In addition, any consolidation among our key customers may further increase our customer concentration risk.
Our industry is highly competitive, and our success depends on our ability to compete with suppliers of automotive products, some of which may have substantially greater financial, marketing and other resources than we do.
The automotive industry is highly competitive, and our success depends on our ability to compete with domestic and international suppliers of automotive products. In the Engine Management Segment,automotive aftermarket, we compete with: ACDelco, Aptiv Plc, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., LTD., Dorman Products, Inc.primarily with full-line suppliers, short- or value-line suppliers, tier suppliers and several privately-owned companies primarily importing products from Asia.service part operations of original equipment manufacturers, including car dealerships, and the direct import programs of certain retailers. In the Temperature Control Segment,diverse non-aftermarket end markets we supply, we compete with: ACDelco, MAHLE GmbH, Denso Corporation, Motorcraft, Sanden International (U.S.A.), Inc., Continental AG, Dorman Products, Inc.,primarily with global and several privately-owned companies. In addition, automobile manufacturers supply manyregional tier suppliers of the replacement parts we sell.original equipment manufacturers. Some of our competitors may have larger customer bases and significantly greater financial, technical and marketing resources than we do. These factors may allow our competitors to:
respond more quickly than we can to new or emerging technologies and changes in customer requirements by devoting greater resources than we can to the development, promotion and sale of automotive products and services;
engage in more extensive research and development;
sell products at a lower price than we do;
undertake more extensive marketing campaigns; and
make more attractive offers to existing and potential customers and strategic partners.
We cannot assure you that our competitors will not develop products or services that are equal or superior to our products or that achieve greater market acceptance than our products or that in the future other companies involved in the automotive industry will not expand their operations into product lines produced and sold by us. We also cannot assure you that additional entrants will not enter the automotive industry or that companies in the industry will not consolidate. Any such competitive pressures could cause us to lose market share or could result in significant price decreases and could have a material adverse effect upon our business, financial condition and results of operations.
There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure.
There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure. This is the result of a number of industry trends, including the impact of offshore suppliers in the marketplace (particularly in China) which do not have the same infrastructure costs as we do, the consolidated purchasing power of large customers, and actions taken by some of our competitors in an effort to ‘‘win over’’ new business. We have in the past reduced prices to remain competitive and may have to do so again in the future. Price reductions have impacted our sales and profit margins and may do so in the future. Our future profitability will depend in part upon our ability to respond to changes in product and distribution channel mix, to continue to improve our manufacturing efficiencies, to generate cost reductions, including reductions in the cost of components purchased from outside suppliers, to maintain a cost structure that will enable us to offer competitive prices, and to pass through higher distribution, raw materials and labor costs to our customers. Our inability to maintain a competitive cost structure could have a material adverse effect on our business, financial condition and results of operations.
Our business is seasonal and is subject to substantial quarterly fluctuations, which impact our quarterly performance and working capital requirements.
Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our temperature control products is typically the highest, specifically in the Temperature Control Segment of our business.highest.
Climate-related physical risks, such as changes to weather patterns and conditions may also impact the pattern of seasonality and variability in demand for our Temperature Control products discussed above, which may impact our quarterly performance and working capital requirements.
We may incur material losses and significant costs as a result of warranty-related returns by our customers in excess of anticipated amounts.
Our products are required to meet rigorous standards imposed by our customers and our industry. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship, failureand conformance to meet industry published specifications and/or the result of installation error.agreed upon specifications. In the event that there are material deficiencies or defects in the design and manufacture of our products and/or installation error,fail to conform to these warranties, the affected products may be subject to warranty returns and/or product recalls. Although we maintain a comprehensive quality control program, we cannot give any assurance that our products will not suffer from defects or other deficiencies or that we will not experience material warranty returns or product recalls in the future.
We accrue for warranty returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for warranty returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. We have in the past incurred, and may in the future incur, material losses and significant costs as a result of our customers returning products to us for warranty-related issues in excess of anticipated amounts. Deficiencies or defects in our products in the future may result in warranty returns and product recalls in excess of anticipated amounts and may have a material adverse effect on our business, financial condition and results of operations.
Our profitability may be materially adversely affected as a result of overstock inventory related returns by our customers in excess of anticipated amounts.
We accrue for overstock returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for overstock returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. To the extent that overstocked returns are materially in excess of our projections, our business, financial condition and results of operations may be materially adversely affected.
We may be materially adversely affected by asbestos claims arising from products sold by our former brake business, as well as by other product liability claims.
In 1986, we acquired a brake business, which we subsequently sold in March 1998. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed after September 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 2001, and the amounts paid for settlements, awards of asbestos-related damages, and defense of such claims. We do not have insurance coverage for the indemnity and defense costs associated with the claims we face.
At December 31, 2021, 1,5542023, 1,390 cases were outstanding for which we may be responsible for any related liabilities. Since inception in September 2001 through December 31, 2021,2023, the amounts paid for settled claims and awards of asbestos-related damages, including interest, were approximately $53.8$74.6 million. A substantial increase in the number of new claims, or increased settlement payments, or awards of asbestos-related damages, could have a material adverse effect on our business, financial condition and results of operations.
In accordance with our policy to perform an annual actuarial evaluation in the third quarter of each year, an actuarial study was performed as of August 31, 2021.2023. Based upon the results of the August 31, 20212023 actuarial study, and all other available information to us, we increased our asbestos liability to the low end of the range, and recorded an incremental pre-tax provision of $5.3$23.8 million in earnings (loss) from discontinued operations in the accompanying statement of operations. The results of the August 31, 20212023 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs, and any potential recovery from insurance carriers, ranging from $60.9$84 million to $100.2$135.3 million for the period through 2065. Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the August 31, 20212023 study, to range from $49.4$53.1 million to $99.3$105.2 million for the period through 2065.
Given the uncertainties associated with projecting asbestos-related matters into the future and other factors outside our control, we cannot give any assurance that significant increases in the number of claims filed against us will not occur, that awards of asbestos-related damages or settlement awards will not exceed the amount we have in reserve, or that additional provisions will not be required. Management will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional reserves and provisions may be necessary. We plan on performing an annual actuarial analysis 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.
In addition to asbestos-related claims, our product sales entail the risk of involvement in other product liability actions. We maintain product liability insurance coverage, but we cannot give any assurance that current or future policy limits will be sufficient to cover all possible liabilities. Further, we can give no assurance that adequate product liability insurance will continue to be available to us in the future or that such insurance may be maintained at a reasonable cost to us. In the event of a successful product liability claim against us, a lack or insufficiency of insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to achieve the benefits that we expect from our cost savings initiatives.
We expect to realize the continued benefit of discretionary cost reduction measures, implemented in 2020, in response to the COVID-19 pandemic, and carried over into 2021, along with the continued cost savings anticipated from several ongoing and/or recently completed restructuring and integration initiatives. Due to factors outside our control, such as the adoption or modification of domestic and foreign laws, regulations or policies, we may not be able to achieve the level of benefits that we expect to realize in these initiatives, or we may not be able to realize these benefits within the time frames we currently expect. Our ability to achieve any anticipated cost savings could be affected by a number of factors such as changes in the amount, timing and character of charges related to such initiatives, or a substantial delay in the completion of such initiatives. Failure to achieve the benefits of our cost saving initiatives could have a material adverse effect on us. Our cost savings is also predicated upon maintaining our sales levels.
Severe weather, natural disasters and other disruptions could adversely impact our operations at our manufacturing and distribution facilities.
Severe weather conditions and natural disasters, such as hurricanes, tornados, earthquakes and floods, could damage our properties and effect our operations, particularly our major manufacturing and distribution operations at foreign facilities in Canada, China, Mexico, Poland, Germany and Hungary and at our domestic facilities in Florida, Indiana, Kansas, South Carolina, Texas, Virginia, and Wisconsin. In February 2021, our operations in Texas were disrupted due to a severe winter storm that resulted in power grid failure, blackouts and the tragic loss of life across the State of Texas. Moreover, global climate change may cause these natural disasters to occur more frequently and/or with more intense effects, which could prevent us from, or cause delays in our ability to, manufacture and deliver products to our customers, and/or cause us to incur additional costs.
In addition, our business and operations could be materially adversely affected in the event of other serious disruptions at these facilities due to fire, electrical blackouts, power losses, telecommunications failures, wars, terrorist attack or similar events. Any of these occurrences could impair our ability to adequately manufacture or supply our customers due to all or a significant portion of our equipment or inventory being damaged. WeIf our existing manufacturing or distribution facilities become incapable of producing and supplying products for any reason, we may not be able to effectively shift the manufacture or delivery of products tosatisfy our customers if one or more ofcustomers’ requirements and we may lose revenue and incur significant costs and expenses that may not be recoverable through our manufacturing or distribution facilities are significantly disrupted.business interruption insurance.
Disruptions in the supply of raw materials, manufactured components, or equipment could materially and adversely affect our operations and cause us to incur significant cost increases.
We source various types of raw materials, finished goods, equipment, and component parts from suppliers as part of a global supply chain, and we may be materially and adversely affected by the failure of those suppliers to perform as expected. Although we have had an adequate supply of purchased supplier raw materials, finished goods, equipment and component parts, disruptions in the global economy in 2020 and the lingering impacts into 2021 have impeded global supply chains, resulting in longer lead times and delays in procuring component parts and raw materials, and 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 initiating cost savings initiatives and the pass through of higher costs to our customers, which began in the fourth quarter of 2021.customers. 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 assurancescannot assure that unforeseen future events in the global supply chain affecting the availability of materials and components, and/or increasing commodity pricing, will not have a material adverse effect on our business, financial condition and results of operations.
Additionally, supplier non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. Our suppliers’ ability to supply products to us is also subject to a number of risks, including the availability and cost of raw materials, the destruction of their facilities, work stoppages, cyber attacks oncybersecurity incidents affecting their information technology systems or other limitations on their business operations, which could be caused by any number of factors, such as labor disruptions, financial distress, severe weather conditions and natural disasters, social unrest, economic and political instability, and public health crises, including the occurrence of a contagious disease or illness, such as the COVID-19 pandemic, war, terrorism or other catastrophic events. In addition, our failure to promptly pay, or order sufficient quantities of inventory from our suppliers may increase the cost of products we purchase or may lead to suppliers refusing to sell products to us at all. Our efforts to protect against and to minimize these risks may not always be effective.
Our operationsOperations could be adversely affected by interruptions or breaches in the security of our computer and information technology systems.
We rely on information technology systems throughout our organization to conduct day-to-day business operations, including the management of our supply chain and our purchasing, receiving and distribution functions. We also routinely use our information technology systems to send, receive, store, access and use sensitive data relating to our Company and its employees, customers, suppliers, and business partners, including intellectual property, proprietary business information, and other sensitive materials. Additionally, we rely on our information technology systems to enable many of our employees to work remotely as a result of newmore recent policies and practices enacted by us in response to the COVID-19 pandemic.us.
17
Despite security measures designed to prevent and mitigate the risk of cyber attacks,cybersecurity incidents, our information technology systems, and the systems of our customers, suppliers and business partners, may continue to be vulnerable to computer viruses,such incidents, including interruptions, outages, data breaches, phishing attacks, by hackers, orransomware attacks, unauthorized access, caused by employee errorattempts to hack into our network, and computer viruses. Moreover, the technologies and techniques used to carry out cyber-attacks are continuously evolving, making it difficult to detect these changes or malfeasance. The exploitationimplement adequate measures in time to prevent or mitigate the impact of any such vulnerability could unexpectedly compromisean attack. Due to the foregoing, though we have not experienced a material cybersecurity incident in 2023, we cannot guarantee that there will be no future cybersecurity incident that causes a material adverse effect on our information security,systems, or the securitythat of our customers, suppliers and other business partners. Furthermore, because
In the techniques used to carry out cyber attacks change frequently and in many instances are not recognized until after they are used against a target, we may be unable to anticipate these changes or implement adequate preventative measures. Ifevent that our information technology systems, or the systems of our customers, suppliers or business partners, are subject to cyber attacks, such as those involving significant or extensive system interruptions, sabotage, computer viruses or unauthorized access,incidents, we could experience disruptionserrors, interruptions, delays, and/or the cessation of services in key portions of our information systems. If critical information systems fail or otherwise become unavailable, our ability to process orders, maintain proper inventory levels, collect accounts receivable and disburse funds could be adversely affected. The foregoing matters could also cause significant damage to our business operations andreputation, affect our relationships with our business partners, lead to claims against us, and/or subject us to fines or other penalties assessed by governmental authorities. Additionally, we may be required to incur substantial remediation costs whichto remediate the damage caused by these disruptions or protect us against future cybersecurity incidents. Depending on the nature and magnitude of these events, they could have a material and adverse effect on our business, financial condition or results of operations.
The transition risks associated with global climate change may cause us to incur significant costs.
In addition to the physical risks described above, global climate change has brought about certain risks associated with the anticipated transition to a lower-carbon economy, such as regulatory changes affecting vehicle emissions and fuel efficiency requirements, technological changes in vehicle architectures, changes in consumer demand, carbon taxes, greenhouse gas emissions tracking, and regulation of greenhouse gas emissions from certain sources. Any regulatory changes aimed to reduce or eliminate greenhouse gas emissions may require us to incur increased operating costs, such as to purchase and operate emissions control systems or other such technologies to comply with applicable regulations or reporting requirements. These regulations,, as well as shifts in consumer demand due to public awareness and concern of climate change, could affect the timing and scope of their proliferation and may also adversely impact our sales of products designed for the internal combustion engines. As we monitor the rapid developments in this area,, we may be required to adjust our business strategy to address the various transition risks posed by climate change.
Failure to maintain the value of our brands could have an adverse effect on our reputation, cause us to incur significant costs and negatively impact our business.
Our brands are an importanta key component of our value proposition, and serve to distinguish our premium engine management and temperature control products from those of our competitors. WeIn our automotive aftermarket business, we believe that our success depends, in part, on maintaining and enhancing the value of our brands and executing our brand strategies, which are designed to drive end-user demand for our products and make us a valued business partner to our aftermarket customers through the support of their marketing initiatives. A decline in the reputation of our brands as a result of events, such as deficiencies or defects in the design or manufacture of our products, or from legal proceedings, product recalls or warranty claims resulting from such deficiencies or defects, may harm our reputation as a manufacturer and distributor of premium automotive parts, reduce demand for our products and adversely affect our business.
Our revenue and results of operations may suffer upon the bankruptcy, insolvency or other credit failure of a significant customer.
Most of our customers buy products from us on credit. We extend credit to customers and offer extended payment terms based upon competitive conditions in the marketplace and our assessment and analysis of creditworthiness. General economic conditions, competition and other factors may adversely affect the solvency or creditworthiness of our customers. Higher interest rates, inflationary cost increases in raw materials, labor and transportation and a general worsening of economic conditions have put financial pressure on many of our customers and may threaten certain customers’ ability to maintain liquidity sufficient to repay their obligations to us as they become due. The bankruptcy, insolvency or other credit failure of any customer that has a substantial amount owed to us could have a material adverse effect on our operating revenue and results of operations. We recorded a $7 million pre-tax charge 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 recovery amount.
In our Engineered Solutions business, our supply agreements with our customers are generally requirements contracts, and a decline in the production requirements of any of our significant customers could adversely impact our revenues and profitability.
In our Engineered Solutions business, our customers generally agree to purchase their requirements for specific products, and we receive volume forecasts of their requirements, but not long-term firm volume commitments. Furthermore, our customers typically reserve the right to change, delay or cancel their orders for products, and we have limited recourse in such events. Changes, delays or cancellations by a significant customer or by a number of customers could adversely impact our results of operations by reducing the volumes of products we manufacture and sell, by causing a delay in the recovery of expenditures for raw materials and component parts procured to satisfy such orders, or by reducing our asset utilization, resulting in lower profitability.
We also make key decisions based on our estimates of our customers’ requirements, including in planning our production schedules, raw material and component part purchases, personnel needs and other resource requirements. Changes in demand for our customers’ products would likely reduce our customers’ requirements and adversely impact our ability to accurately estimate their requirements in the future. Any significant decrease or delay in customer orders could have a material adverse effect on our business, financial condition and results of operations.
Our inability to attract or retain key employees may have an adverse effect on our business, financial condition and results of operations.
Our success is dependent upon our ability to attract, retain and motivate certain key employees, including our management and our skilled workforce of engineers, technically-trained salesforce employees and other qualified personnel. Many of our key employees have many years of experience with our Company and would be difficult to replace without allotment of a significant amount of time for knowledge transfer. Furthermore, although we believe our facilities are in labor markets with ready access to adequate numbers of skilled and unskilled workers, we compete with other businesses to fill many of our hourly positions in our distribution facilities, which historically have had high turnover rates, which can lead to increased training and retention costs, particularly in a competitive and shrinking labor market. We cannot be certain that we will be able to continue to attract or retain our key employees, which could cause us to fail to execute our value proposition, fail to achieve operational efficiencies, and incur increased labor costs, which could have an adverse effect our business, financial condition and results of operations.
Risks Related to Liquidity
We are exposed to risks related to our receivables supply chain financing arrangements.
We are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable without recourse to such customers’ financial institutions. 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 on the sale of the underlying trade accounts receivable. 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. Depending upon the level of sales of receivables pursuant these agreements, a hypothetical, instantaneous and unfavorable change of 100 basis points in the reference rate may have an approximate $8.3 million negative impact on our earnings or cash flows.
We have a senior secured revolving credit facility of $250 million (with an additional $50 million accordion feature)Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders, which we refer to throughout this Report as ourlenders. The Credit Agreement provides for a $500 million credit facility comprised of a $100 million term loan facility and a $400 million multi-currency revolving credit facility.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. As of December 31, 2021,2023, our total outstanding indebtedness was $128.4$156.2 million, including outstanding borrowings under the Credit Agreement of which amount $125.3$156 million, consisting of outstanding indebtednesscurrent borrowings of $5 million and approximately $122.1 millionlong-term borrowings of availability was attributable$151 million.
Borrowings under our Credit Agreement bear interest, at the Company’s election, at a rate per annum equal to this revolving credit facility. 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%. 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 significant increase in our indebtedness could:
increase our borrowing costs;
limit our ability to obtain additional financing or borrow additional funds;
require that a substantial portion of our cash flow from operations be used to pay principal and interest in our indebtedness, instead of funding working capital, capital expenditures, acquisitions, dividends, stock repurchases, or other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
increase our vulnerability to general adverse economic and industry conditions.
In addition, we have granted the lendersCompany’s obligations under our revolving credit facilitythe 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 ourthe 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.
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, including accounts receivable, inventorydividends and certain fixed assets,other payments in respect of equity interests, acquisitions, investments, loans and thoseguarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement also contains customary events of certain of our subsidiaries. We have also pledged shares of stock in our subsidiaries to those lenders.default. If we were default on any of these covenants, or on any of our indebtedness, if interest rates were to significantly increase, or the financial institution that is a party to our interest rate swap agreement were to default, or if we are unable to obtain necessary liquidity, our business could be adversely affected.
We may not be able to generate the significant amount of cash needed to satisfy our obligations or maintain sufficient liquidity through borrowing capacities.
Our ability either to make payments on or to refinance our indebtedness, or to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future. Our ability to generate cash is in part subject to:
general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control;
the ability of our customers to pay timely the amounts we have billed; and
our ability to sell receivables under supply chain financing arrangements.
The foregoing factors could result in reduced cash flow, which could have a material adverse effect on us. When cash generated by earnings is not sufficient for the Company’s liquidity needs, the Company seeks external financing. Our access to funding sources in amounts adequate to finance our activities on terms that are beneficial to us could be impaired by factors that affect us specifically or the economy generally. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing costs could increase. A significant downgrade in the company’s credit ratings could increase its borrowing costs and limit access to capital.
Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility, inclusive of the utilization of the $50 million accordion feature in the facility,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 the COVID-19 pandemic, disruptions in theglobal supply chain that maychains, which have resulted in longer lead to a further increasetimes and delays in inventories to support our customers,procuring component parts and raw materials, and significant inflationary cost increases in certain raw materials, labor and transportation, and that there will be no material adverse developments in our business, liquidity or capital requirements. Because borrowings under the revolving credit facility are secured by substantially all of our assets, including accounts receivable, the loss of business of one or more of our key customers or, a significant reduction in purchases of our products from any one of them, could adversely impact availability under our revolving credit facility. If we are unable to fund our operations through earnings or external financing, we will be forced to adopt an alternative strategy that may include actions such as:
deferring, reducing or eliminating future cash dividends;
reducing or delaying capital expenditures or restructuring activities;
reducing or delaying research and development efforts;
selling assets;
deferring or refraining from pursuing certain strategic initiatives and acquisitions;
refinancing our indebtedness; and
seeking additional funding.
We cannot assure you that, if material adverse developments in our business, liquidity or capital requirements should occur, our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our revolving credit facilityCredit 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 revolving credit facility,Credit Agreement, our business could be adversely affected.
We conduct our manufacturing and distribution operations on a worldwide basis and are subject to risks associated with doing business outside the United States.
We have manufacturing and distribution facilities in many countries, including Canada, Mexico, Poland, Germany and Hungary, as well as a joint-venturejoint-ventures in China. Increasing our manufacturing footprint in low cost regions is an important element of our strategy. There are a number of risks associated with doing business internationally, including: (a) exposure to local economic and political conditions; (b) social unrest such as risks of terrorism or other hostilities; (c) currency exchange rate fluctuations and currency controls; (d) the effect of potential changes in U.S. trade policy and international trade agreements; and (e) the potential for shortages of trained labor.
In particular, historically there has been social unrest in Hong Kong and Mexico and any recurrence, or increased violence in or around our facilities in such countries could be disruptive to our business operations at such facilities, or present risks to our employees who may be directly affected by the violence and may result in a decision by them to relocate from the area, or make it difficult for us to recruit or retain talented employees at such facilities.
Furthermore, changes in U.S. trade policy, particularly as it relates to China, have resulted in the assessment of increased tariffs on goods that we import into the United States, and have caused uncertainty about the future of free trade generally. We benefit from free trade agreements, such as the U.S.-Mexico-Canada Agreement (USMCA). The repeal or modification of the USMCA or further increases to tariffs on goods imported into the United States could increase our costs to source materials, component parts and finished goods from other countries. The likelihood of such occurrences and their potential effect on us is unpredictable and may vary from country to country. Any such occurrences could be harmful to our business and our financial results.
We may incur liabilities under government regulations and environmental laws, which may have a material adverse effect on our business, financial condition and results of operations.
Domestic and foreign political developments and government laws and regulations directly affect automotive consumer products in the United States and abroad. In the United States, these laws and regulations include standards relating to vehicle safety, fuel economy and emissions, among others. Furthermore, increased public awareness and concern regarding climate change may result in new laws and regulations designed to reduce or mitigate the effects of greenhouse gas emissions or otherwise effect the transition to a lower-carbon economy. The modification of existing laws, regulations or policies, or the adoption of new laws, regulations or policies could have a material adverse effect on our business, financial condition and results of operations.
Our operations and properties are subject to a wide variety of increasingly complex and stringent federal, state, local and international laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of materials, substances and wastes, the remediation of contaminated soil and groundwater and the health and safety of employees. Such environmental laws, including but not limited to those under the Comprehensive Environmental Response Compensation & Liability Act, may impose joint and several liability and may apply to conditions at properties presently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors have been sent or otherwise come to be located.
The nature of our operations exposes us to the risk of claims with respect to such matters, and we can give no assurance that violations of such laws have not occurred or will not occur or that material costs or liabilities will not be incurred in connection with such claims. We are currently monitoring our environmental remediation efforts at one of our facilities and our reserve balance related to the environmental clean-up at this facility is $1.5$1.4 million at December 31, 2021.2023. The environmental testing and any remediation costs at such facility may be covered by several insurance policies, although we can give no assurance that our insurance will cover any environmental remediation claims. We also maintain insurance to cover our existing U.S. and Canadian facilities. We can give no assurance that the future cost of compliance with existing environmental laws and the liability for known environmental claims pursuant to such environmental laws will not give rise to additional significant expenditures or liabilities that would be material to us. In addition, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, state or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations.
Our future performance may be materially adversely affected by changes in technologies and improvements in the quality of new vehicle parts.
If we do not respond appropriately to changes in automotive technologies, such as the adoption of new technologies and systems to make traditional, ICEinternal-combustion-engine vehicles more efficient, or the adoption of electric or hybrid electric vehicle architectures, we could experience less demand for our products thereby causing a decline in our results of operations or deterioration in our business and financial condition, and we may have a material adverse effect on our long-term performance.
In addition, the size of the automobile replacement parts marketautomotive aftermarket depends, in part, upon the growth in number of vehicles on the road, increase in average vehicle age, change in total miles driven per year, new or modified environmental and vehicle safety regulations, including fuel economy and emissions reduction standards, increase in pricing of new cars and new car quality and related warranties. The automobile replacement parts marketautomotive aftermarket has been negatively impacted by the fact that the quality of more recent automotive vehicles and their component parts (and related warranties) has improved, thereby lengthening the repair cycle. Generally, if parts last longer, there will be less demand for our aftermarket products and the average useful life of automobileautomotive parts has been steadily increasing in recent years due to innovations in products and technology. In addition, the introduction by original equipment manufacturers of increased warranty and maintenance initiatives has the potential to decrease the demand for our aftermarket products. When proper maintenance and repair procedures are followed, newer air conditioning (A/C) systems in particular are less prone to leak resulting in fewer A/C system repairs. These factors could have a material adverse effect on our business, financial condition and results of operations.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 1C. | CYBERSECURITY |
Cybersecurity Risk Management and Strategy
We maintain an enterprise-wide approach to risk management through which we identify, manage and mitigate significant risks, including those related to our information systems. Our cybersecurity risk management program, which applies to our global operations, focuses on our people, processes and technology, and is designed to secure our information systems by preventing, detecting and responding to current and emerging cybersecurity threats.
Our employees are a key element of our cybersecurity risk management program. All of our employees are required to adhere to our cybersecurity practices, and undertake routine training to raise awareness and reinforce safe practices. Our training program includes bi-annual online training courses, group tabletop exercises, phishing and malicious email simulations, and information security bulletins. We also maintain policies that govern, and provide specific guidance to employees regarding how they may use our information systems.
Another key element of our cybersecurity risk management program is our use of processes and technologies to create information security safeguards and controls, and target specific users or business needs. Our processes and technologies include firewalls, email security software and encryption, endpoint detection and response, access controls, backup and recovery procedures, system patches and updates, vulnerability scanning, penetration testing by third party vendors, incident response procedures, and internal and external audits of our information systems.
Through these internal and external assessments, we continuously identify areas for remediation and opportunities to improve the security of our information systems, including by evaluating our program against industry standards and best practices, such as the Cybersecurity Framework established by the National Institute of Standards and Technology (NIST) and the CIS Critical Security Controls established by the Center for Internet Security. We also track key performance indicators that we believe are indicative of the effectiveness of our cybersecurity risk management program.
For additional information related to cybersecurity risks that could have a material and adverse effect on our business, financial condition or results of operations, see “Our operations could be adversely affected by interruptions or breaches in the security of our computer and information systems” in Item 1A of this Report.
Cybersecurity Governance
The Audit Committee of our Board of Directors oversees the adequacy and effectiveness of our internal controls, policies and procedures regarding cybersecurity, information security and data protection, and compliance with applicable laws and regulations concerning privacy. Our Chief Information Officer (“CIO”), in turn, is responsible for managing the Company’s cybersecurity risk management program and incident response procedures. On a quarterly basis, and more frequently as circumstances warrant, our CIO briefs the Audit Committee on our cybersecurity risks, our strategies for preventing, detecting, responding to and mitigating such risks, including the effectiveness of our incident response procedures, and our information security controls. Our CIO has extensive knowledge and expertise regarding our information systems and security, having served in a variety of senior information technology positions across our organization for more than thirty years, and as an executive officer of the Company since 2006.
Additionally, our CIO leads an incident response team (“IRT”), charged with the on-going management of our cybersecurity program. This team is responsible for the prevention, mitigation, detection and remediation of cybersecurity risks and incidents affecting our operations pursuant to our incident response procedures. The IRT is composed of information security professionals, who collectively bring decades of relevant information security and cybersecurity experience to their roles. In the event that a cybersecurity incident is detected, the IRT performs a multi-factor, risk-based assessment to determine the appropriate level of response. Depending upon the results of the assessment, including the nature and magnitude of the event, our incident response procedures provide for oversight and management of an incident by the IRT, under the direction of the CIO, or, in the event of escalation, under the direction of the executive officers of the Company, with reporting to and oversight by the Audit Committee.
| ITEM 2. | PROPERTIES |
We maintain our executive offices in Long Island City, New York. The table below describes our principal facilities as of December 31, 2021.2023.
Location | State or Country | Principal Business Activity | Approx. Square Feet | Owned or Expiration Date of Lease | State or Country | Principal Business Activity | Approx. Square Feet | Owned or Expiration Date of Lease¹ | ||||||||
| Engine Management | Vehicle Control | |||||||||||||||
| Bialystok | Poland | Manufacturing | 154,800 | 2027 | ||||||||||||
| Disputanta | VA | Distribution | 411,000 | Owned | ||||||||||||
| Edwardsville | KS | Distribution | 363,500 | Owned | ||||||||||||
Ft. Lauderdale | FL | Distribution | 23,300 | Owned | FL | Distribution | 23,300 | Owned | ||||||||
Ft. Lauderdale | FL | Distribution | 30,000 | Owned | FL | Distribution | 30,000 | Owned | ||||||||
Mishawaka | IN | Manufacturing | 153,100 | Owned | ||||||||||||
Edwardsville | KS | Distribution | 363,500 | Owned | ||||||||||||
Independence | KS | Manufacturing | 337,400 | Owned | ||||||||||||
Greenville2 | SC | Manufacturing | 184,500 | Owned | ||||||||||||
Independence2 | KS | Manufacturing | 337,400 | Owned | ||||||||||||
Long Island City | NY | Administration | 75,800 | 2023 | NY | Administration | 75,800 | 2033 | ||||||||
Greenville | SC | Manufacturing | 184,500 | Owned | ||||||||||||
Disputanta | VA | Distribution | 411,000 | Owned | ||||||||||||
| McAllen | TX | Distribution | 120,300 | 2027 | ||||||||||||
Mishawaka2 | IN | Manufacturing | 153,100 | Owned | ||||||||||||
Reynosa2 | Mexico | Manufacturing | 175,000 | 2025 | ||||||||||||
Reynosa2 | Mexico | Manufacturing | 153,000 | 2031 | ||||||||||||
Shawnee3 | KS | Distribution | 574,700 | 2033 | ||||||||||||
| Temperature Control | ||||||||||||||||
| Foshan City | China | Manufacturing | 361,500 | 2028 | ||||||||||||
| Lewisville | TX | Administration and Distribution | 415,000 | 2034 | ||||||||||||
Reynosa2 | Mexico | Manufacturing | 82,000 | 2026 | ||||||||||||
Reynosa2 | Mexico | Manufacturing | 117,500 | 2026 | ||||||||||||
Reynosa | Mexico | Manufacturing | 175,000 | 2025 | Mexico | Manufacturing | 111,800 | 2024 | ||||||||
Reynosa | Mexico | Manufacturing | 153,000 | 2023 | ||||||||||||
Bialystok | Poland | Manufacturing | 142,400 | 2027 | ||||||||||||
Sheboygan Falls | WI | Manufacturing | 22,000 | 2025 | ||||||||||||
Milwaukee | WI | Manufacturing | 84,000 | 2028 | ||||||||||||
Tijuana | Mexico | Manufacturing | 37,500 | 2023 | ||||||||||||
| St. Thomas | Canada | Manufacturing | 42,500 | Owned | ||||||||||||
| Engineered Solutions | ||||||||||||||||
Kirchheim-Teck | Germany | Distribution | 27,500 | 2031 | Germany | Distribution | 27,500 | 2031 | ||||||||
Pécel | Hungary | Manufacturing | 52,400 | 2031 | Hungary | Manufacturing | 59,500 | Owned | ||||||||
| Milwaukee | WI | Manufacturing | 84,000 | 2028 | ||||||||||||
| Sheboygan Falls | WI | Manufacturing | 22,500 | 2025 | ||||||||||||
| Tijuana | Mexico | Distribution | 13,800 | 2026 | ||||||||||||
| Tijuana | Mexico | Manufacturing | 30,400 | 2026 | ||||||||||||
Wuxi | China | Manufacturing | 27,600 | 2023 | China | Manufacturing | 27,600 | 2029 | ||||||||
| Temperature Control | ||||||||||||||||
Lewisville | TX | Administration and Distribution | 415,000 | 2024 | ||||||||||||
St. Thomas | Canada | Manufacturing | 40,000 | Owned | ||||||||||||
Reynosa | Mexico | Manufacturing | 82,000 | 2026 | ||||||||||||
Reynosa | Mexico | Manufacturing | 117,500 | 2026 | ||||||||||||
Reynosa | Mexico | Manufacturing | 111,800 | 2024 | ||||||||||||
| Other | ||||||||||||||||
| Other | ||||||||||||||||
Mississauga | Canada | Administration and Distribution | 82,400 | 2023 | Canada | Administration and Distribution | 82,400 | 2028 | ||||||||
Irving | TX | Training Center | 13,400 | 2027 | TX | Training Center | 13,400 | 2027 | ||||||||
1 It is our intention to extend the leases that are set to expire in 2024.
2 These facilities are also utilized by the Engineered Solutions operating segment.
3 This facility is expected to have a phased opening beginning in 2024 and be fully operational in early 2025, and once operational, it will also be utilized by the Temperature Control and Engineered Solutions operating segments.
| ITEM 3. | LEGAL PROCEEDINGS |
The information required by this Item is incorporated herein by reference to the information set forth in Item 8, “Financial Statements and Supplementary Data” of this Report under the captionscaption “Asbestos” and “Other Litigation” appearing in Note 21,23, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock trades publicly on the New York Stock Exchange (“NYSE”) under the trading symbol “SMP.” The last reported sale price of our common stock on the NYSE on February 17, 202220, 2024 was $47.63$40.23 per share. As of February 17, 2022,20, 2024, there were 507497 holders of record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our Board of Directors (the “Board”) and depend on our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our Board. Our revolving credit facilityCredit Agreement permits dividends and distributions by us provided specific conditions are met. For information related to our revolving credit facility,Credit Agreement, see Note 11, “Credit Facilities and Long-Term Debt,” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
There have been no unregistered offerings of our common stock during the fourth quarter of 2021.2023.
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs (2) | ||||||||||||
| October 1-31, 2021 | — | $ | — | — | $ | — | ||||||||||
| November 1-30, 2021 | 6,000 | 49.04 | 6,000 | 29,705,754 | ||||||||||||
| December 1-31, 2021 | 1,000 | 47.69 | 1,000 | 29,656,062 | ||||||||||||
| Total | 7,000 | $ | 49.13 | 7,000 | $ | 29,656,062 | ||||||||||
Stock Performance Graph
The following graph compares the five year cumulative total return on the Company’s Common Stock to the total returns on the Standard & Poor’s 500 Stock Index and the S&P 1500 Auto Parts & Equipment Index, which is a combination of automotive parts and equipment companies within the S&P 400, the S&P 500 and the S&P 600. The graph shows the change in value of a $100 investment in the Company’s Common Stock and each of the above indices on December 31, 20162018 and the reinvestment of all dividends. The comparisons in this table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company’s Common Stock or the referenced indices.
SMP | S&P 500 | S&P 1500 Auto Parts & Equipment Index | SMP | S&P 500 | S&P 1500 Auto Parts & Equipment Index | ||||||||||||
| 2016 | 100 | 100 | 100 | ||||||||||||||
| 2017 | 86 | 122 | 132 | ||||||||||||||
| 2018 | 94 | 116 | 90 | 100 | 100 | 100 | |||||||||||
| 2019 | 105 | 153 | 121 | 112 | 131 | 133 | |||||||||||
| 2020 | 81 | 181 | 148 | 86 | 156 | 164 | |||||||||||
| 2021 | 107 | 233 | 182 | 114 | 200 | 201 | |||||||||||
2022 | 78 | 164 | 136 | ||||||||||||||
2023 | 92 | 207 | 145 | ||||||||||||||
* Source: S&P Capital IQ
| 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, 2021.2023.
| December 31, | December 31, | |||||||||||||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | 2019 | 2023 | 2022 | 2021 | ||||||||||||||||||
| Net sales | $ | 1,298,816 | $ | 1,128,588 | $ | 1,137,913 | $ | 1,358,272 | $ | 1,371,815 | $ | 1,298,816 | ||||||||||||
| Gross profit | 376,931 | 336,655 | 331,800 | 388,826 | 382,539 | 376,931 | ||||||||||||||||||
| Gross profit % | 29 | % | 29.8 | % | 29.2 | % | 28.6 | % | 27.9 | % | 29 | % | ||||||||||||
| Operating income | 128,999 | 108,895 | 94,495 | 92,677 | 104,135 | 128,999 | ||||||||||||||||||
| Operating income % | 9.9 | % | 9.6 | % | 8.3 | % | 6.8 | % | 7.6 | % | 9.9 | % | ||||||||||||
| Earnings from continuing operations before income taxes | 130,465 | 107,379 | 91,796 | 81,716 | 98,332 | 130,465 | ||||||||||||||||||
| Provision for income taxes | 31,044 | 26,962 | 22,745 | 18,368 | 25,206 | 31,044 | ||||||||||||||||||
| Earnings from continuing operations | 99,421 | 80,417 | 69,051 | 63,348 | 73,126 | 99,421 | ||||||||||||||||||
| Loss from discontinued operations, net of income taxes | (8,467 | ) | (23,024 | ) | (11,134 | ) | (28,996 | ) | (17,691 | ) | (8,467 | ) | ||||||||||||
| Net earnings | 90,954 | 57,393 | 57,917 | 34,352 | 55,435 | 90,954 | ||||||||||||||||||
Net earnings attributable to noncontrolling interest | 68 | — | — | 204 | 84 | 68 | ||||||||||||||||||
| Net earnings attributable to SMP | 90,886 | 57,393 | 57,917 | 34,148 | 55,351 | 90,886 | ||||||||||||||||||
| Per share data attributable to SMP – Diluted: | ||||||||||||||||||||||||
| Earnings from continuing operations | $ | 4.39 | $ | 3.52 | $ | 3.03 | $ | 2.85 | $ | 3.30 | $ | 4.39 | ||||||||||||
| Discontinued operations | (0.37 | ) | (1.01 | ) | (0.49 | ) | (1.31 | ) | (0.80 | ) | (0.37 | ) | ||||||||||||
| Net earnings per common share | $ | 4.02 | $ | 2.51 | $ | 2.54 | $ | 1.54 | $ | 2.50 | $ | 4.02 | ||||||||||||
Our net sales performance in 2023 reflects the favorable impact of multiple factors including:
first quarter, as well as the phase-in of new business wins,
lower sales in our Temperature Control operating segment reflecting the impact of lost revenue relateda slow start to the decisionseason 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 a large retail customer2023 as summer temperatures increased, the strong third quarter 2023 net sales were not enough to pursue a private brand strategy in December 2020.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.
Gross marginmargins as a percentage of net sales in 20212023 was 29%28.6% as compared to 29.8%27.9% in 20202022. The gross margin percentages in 2023 increased year-over-year in each of our Vehicle Control, Temperature Control and 29.2%Engineered Solutions operating segments. Overall, the gross margin increase as a percentage of sales in 2019. Gross margins2023 reflects the positive impact of increased pricing, improved operating performance, and the favorable customer sales mix in the first half of 2021 were favorably impacted by greater fixed cost absorption due to higher production volumesEngineered Solutions, which more than offset ongoing inflationary increases in certain raw materials, labor and transportation costs, as we increased inventories to meetwell as the strong customer demand. The strong gross margins achieved in the first half of 2021 were offset by some compression in the second half of 2021 caused by several factors including lower fixed cost absorption due to lower production levels than those achieved in the second half of 2020, inflationary cost increases in certain raw materials, labor and elevated transportation expense,2022 as we worked down inventory levels, and the higher mixweakening of heavy duty parts sales fromthe U.S. dollar on our recent acquisitions, which have a different margin profile than our aftermarket business with lower gross margins but comparable operating margin.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 20212023 was 9.9%6.8% as compared to 9.6%7.6% in 2020 and 8.3% in 2019. Our operating margins in 2021 were favorably impacted by higher net sales.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, $224.7 million, or 19.9% of net sales in 2020, and $234.7 million, or 20.6% of net sales in 2019.2021. The higher SG&A expenses in 2021 resulted2023 is principally from elevated distribution costs associated with higher sales volumes as well asdue to the impact of increased freight(1) higher interest rate related costs of $14 million incurred in our supply chain financing arrangements and (2) higher employee compensationdistribution costs, andall 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 from our soot sensor, Trombetta and Stabil acquisitions. We anticipate that our future operating margins will be in line with the operating margins achievedyear ended December 31, 2023 were 20.6% of consolidated net sales, just slightly higher than the percentage in 2021 and 2020.the comparable prior year period.
Overall, our financial results in 2021 were extremely strong. We posting record net sales and earnings from continuing operations and achieving substantial new business wins with existing customers. Our core automotive aftermarket business remains strong, and we have made major strides into newcontinue to be optimistic about the long-term growth potential of the complementary markets with upside potential.served in our Engineered Solutions operating segment.
Impact of Russia’s Invasion of the Ukraine
Russia’s invasion of the Ukraine, and heavy duty vehicles, construction and agricultural equipment, power sports,the resultant sanctions imposed by the U.S. and other sub-segments. In additiongovernments, 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 expanding beyond our core automotive aftermarket business, it also provided geographic expansion ascustomers in Russia, which we now have meaningful footprints to grow salessubsequently discontinued, and have not experienced additional significant disruptions in Europethe supply chain, the inherent risks and Asia.
Impact of Global Supply Chain Disruption and Inflation
Disruptions in the global economy in 2020 and the lingering impacts into 2021 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 which began in the fourth quarterform of 2021.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 a materialan adverse effect on our business, financial condition and results of operations.
Comparison of Results of Operations For Fiscal Years 20212023 and 20202022
Sales. Consolidated net sales for 20212023 were $1,298.8$1,358.3 million, an increasea decrease of $170.2$13.5 million, or 15.1%1%, compared to $1,128.6$1,371.8 million in the same period of 2020. Consolidated net sales increased in both our Engine Management and Temperature Control Segments,2022, with the majority of our net sales to customers located in the United States.
Consolidated net sales decreased in 2020 were adversely impacted in the first half of 2020 by the COVID-19 pandemic,our Vehicle Control and were followed by strongTemperature Control operating segments, while net sales in our Engineered Solutions operating segment increased when compared to the second half of 2020, as our business improved to pre-COVID-19 levels with our customers’ POS sales exceeding their comparable levelsperiod in the prior periods.year.
The following table summarizes consolidated net sales by segment and by major product group within each segment for the years ended December 31, 20212023 and 20202022 (in thousands):
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Engine Management: | ||||||||
| Ignition, Emission Control, Fuel & Safety Related System Products | $ | 786,514 | $ | 691,722 | ||||
| Wire and Cable | 151,422 | 143,963 | ||||||
Total Engine Management | 937,936 | 835,685 | ||||||
| Temperature Control: | ||||||||
| Compressors | 206,697 | 163,071 | ||||||
| Other Climate Control Parts | 141,726 | 118,883 | ||||||
Total Temperature Control | 348,423 | 281,954 | ||||||
| All Other | 12,457 | 10,949 | ||||||
Total | $ | 1,298,816 | $ | 1,128,588 | ||||
| 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 | ||||
Temperature Control’s increase in net sales for the year ended December 31, 2021, when2023 decreased $13.4 million, or 3.8%, to $337.8 million compared to $351.2 million in the same period in 2020,of 2022. The lower year-over-year Temperature Control net sales reflects the impact of continueda 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 customer demand stemming from the impact of very warm summer weather conditions and the replenishment of customer inventory levels, along with the favorable year-over-year impact of having lowerthird quarter 2023 net sales, inwhich was not enough to offset the first part of 2020 dueslow start to the general weakness in the economy caused by the COVID-19 pandemic.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.
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.
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.
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, compared to 29.8% for 2020.2021. The following table summarizes gross margins by segment for the years ended December 31, 20212022 and 2020,2021, respectively (in thousands):
Year Ended December 31, | Engine Management | Temperature Control | Other | Total | ||||||||||||
| 2021 | ||||||||||||||||
| Net sales (a) | $ | 937,936 | $ | 348,423 | $ | 12,457 | $ | 1,298,816 | ||||||||
| Gross margins | 266,961 | 95,138 | 14,832 | 376,931 | ||||||||||||
| Gross margin percentage | 28.5 | % | 27.3 | % | — | % | 29 | % | ||||||||
| 2020 | ||||||||||||||||
| Net sales (a) | $ | 835,685 | $ | 281,954 | $ | 10,949 | $ | 1,128,588 | ||||||||
| Gross margins | 251,747 | 75,161 | 9,747 | 336,655 | ||||||||||||
| Gross margin percentage | 30.1 | % | 26.7 | % | — | % | 29.8 | % | ||||||||
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 2020,2021, gross margins at Engine ManagementVehicle 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 30.1%19.6% to 28.5%, while gross margins at Temperature Control increased 0.6 percentage points from 26.7% to 27.3%19%.
The gross margin percentage decrease in Engine ManagementVehicle Control compared to the prior year reflects the impact of the lower gross margins achieved in the second half of 2021 compared to the second half of 2020, resulting from lower fixed cost absorption due to lower and more normalized production, levels than those achieved in the second half of 2020, inflationary cost increases in raw materials, labor and transportation, which began in the second quarter of 2021,were somewhat offset by increased pricing, and a higher mix of heavy duty OE salesfreight and related expenses resulting from recent acquisitions, which has a different margin profile than our aftermarket business with lower gross margins but comparable operating margins. Engine Management gross margins in the first half of 2021 were favorably impacted by higher year-over-year absorption due to higher production volumes to build inventory levels, and the impact of year-over-year production variances carried over from the prior year.
levels. The slight gross margin percentage increasedecrease in Temperature Control compared to the prior year reflects the favorable impact of higher year-over-year absorption due to higher production volumes, as well as overall higher sales volume, which more than offset the unfavorable impact in the second half of 2021 of inflationary cost increases in certainraw 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 at both Engine Management and Temperature Controlacross 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, as compared to $224.7 million, or 19.9% of consolidated net sales in 2020.2021. The $22.8$29.1 million increase in SG&A expenses as compared to 20202021 is principally due to (1) higher distribution costs associated with higher sales volumes and the impact of an increase(1) higher interest related costs of $20.6 million incurred in freight costs,our supply chain financing arrangements, (2) higher employee compensation costs, and (3) 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 $7.8$7.2 million from our soot sensor, Trombetta and Stabil acquisitions, including amortization of intangible assets acquired. Theacquired, 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 year-over-year SG&A expenseexpenses as a percentage of consolidated net sales reflects the impact of discretionary cost reduction measures implemented in 2020 and carried over into 2021, and higher year-over-year sales volumes.sales.
Restructuring and Integration Expenses. Restructuring and integration expenses were $0.4$1.9 million in 20212022 compared to restructuring and integration expenses of $0.5$0.4 million in 2020.2021. Restructuring and integration expenses incurred in 2021 relate2022 of $1.9 million related to the relocation(1) severance costs of $0.9 million in connection with a reduction in our Engine Management Segmentsales 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 March 2021 soot sensor acquisition; while restructuringacquisition to our facilities in Independence, Kansas and integration expenses incurred in 2020 relate to (1)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,location.
Restructuring and (2) costsintegration expenses incurred in 2021 of $0.4 million related to the residual relocation activitiesof certain inventory, machinery, and equipment acquired in our Engine Management segment2021 soot sensor acquisition to our facilities in connection with our integration of the Pollak business of Stoneridge, Inc., acquired in April 2019.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, compared to $108.9 million, or 9.6%, of consolidated net sales in 2020.2021. The year-over-year increasedecrease in operating income of $20.1$24.9 million is the result of higher SG&A expenses driven primarily by the impact of higher consolidated net salesincreased interest rate costs incurred in our supply chain financing arrangements, and the impact of the impairment charge in 2020 related to the BWD trademark, which more than offseta lesser extent by the impact of lower gross margins as a percentage of consolidated net sales and higher SG&A expenses. Operating income of 9.9% ofrestructuring and integration costs offset, in part, by higher consolidated net sales achieved in 2021 is in line historical operating margin percentages achieved.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, compared to $0.8 million in 2020.2021. 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 and the favorable impact of changes in foreign currency exchange rates. During the first quarter of 2020, our joint ventures in China experienced temporary shutdowns due to the impact of the COVID-19 pandemic, resulting in significantly lower equity income. In March 2020, the joint ventures reopened and resumed manufacturing and distribution.ventures.
Interest Expense. Interest expense decreasedincreased to $10.6 million in 2022, compared to $2 million in 2021, compared to $2.3 million in 2020.2021. The year-over-year decreaseincrease in interest expense reflects the impact of lowerhigher average outstanding borrowings in 2022 when compared to 2021, and the impact of higher year-over-year average interest rates on our revolving credit facility, which more than offset the impact of slightly higher average outstanding borrowings in 2021 when compared to 2020.facilities.
Income Tax Provision. The income tax provision for 20212022 was $25.2 million at an effective tax rate of 25.6%, compared to $31 million at an effective tax rate of 23.8%, compared to $27 million at an effective tax rate of 25.1% in 2020.2021. The lowerhigher effective tax rate in 20212022 compared to 20202021 results primarily from the increased year-over-year income tax benefit fromprovision impact related to the exercise of restricted stock, and changes in the mix of U.S. and foreign income.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, 20212022 and 2020, and in December 2020 to reflect events that occurred in the fourth quarter of 2020,2021, 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, 20212022 and 2020,2021, we recorded a net loss of $8.5$17.7 million and $23$8.5 million from discontinued operations, respectively. The loss from discontinued operations for the year ended December 31, 2022 and 2021 and 2020 includes a $5.3an $18.5 million and $25.7$5.3 million pre-tax provision, respectively, to increase our indemnity liability in line with the 20212022 and 20202021 actuarial studies; and legal expenses and other miscellaneous expenses, before taxes, of $5.4 million and $6.1 million for 2022 and $5.4 million for 2021, and 2020, respectively. As discussed more fully in Note 2123 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in the notes to our consolidated financial statements,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. 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 yearyears ended December 31, 2022 and 2021, respectively, represents 30% of the net earnings of Trombetta Asia, Ltd. from the date of acquisition through December 31, 2021.
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 2021,2023, cash provided by operating activities was $85.6$144.3 million compared to $97.9cash used in operating activities of $27.5 million in 2020.2022. The decreaseincrease in cash provided by operating activities resulted primarily from the increaselarger year-over-year decrease in accounts receivable, the decrease in inventories compared to the decreasean increase in inventories in the prior year, the smaller year-over-year increase in sundry payables and accruedaccounts payable compared to a decrease in accounts payable in the prior year, no change in prepaid expenses and the larger year-over-yearother current assets compared to an increase in prepaid expenses and other current assets partially offset by the increase in net earnings, the decrease in accounts receivable compared to the increase in accounts receivable in the prior year, and the largersmaller year-over-year increasedecrease in accounts payable.sundry payables and accrued expenses offset, in part, by the decrease in net earnings.
Net earnings during 20212023 were $91$34.4 million compared to $57.4$55.4 million in 2020.2022. During 20212023, (1) the decrease in accounts receivable was $28.5$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 accounts receivableinventories of $71.9$67.5 million in 2020; (2)2022; (3) the increase in inventoriesaccounts payable was $107.6$19.6 million compared to the year-over-year decrease in inventories of $18 million in 2020; (3) the increase in accounts payable was $33 million compared to the year-over-year increase in accounts payable of $7.4$48.6 million in 2020;2022; (4) the increasethere was no change in prepaid expenses and other current assets was $0.8 million compared to the year-over-year increase in prepaid expenses and other current assets of $0.4$5.5 million in 2020;2022; and (5) the increasedecrease in sundry payables and accrued expenses was $13.4$4.3 million compared to the year-over-year increasedecrease in sundry payables and accrued expenses of $40.7$29.1 million in 2020. The decrease in2022. 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 during 2021 reflects the impact of $50 million of receivables presented to financial institutions at December 31, 2020, pursuant to our supply chain financing arrangements, that were collected in 2021; while the increase in inventories during 2021 reflects actions taken to meet continued strong customer demand, to replenish stock levels, which were depleted after record sales in the last half of 2020, and to serve as a hedge against the global disruptions in the supply chain.accounts payable. We will continue to actively 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 $151.2$25.7 million in 20212023 compared to $17.8$27.8 million in 2020.2022. Investing activities during 20212023 consisted of (1) the payment of $15.4$4 million netfor our acquisition of $0.9an 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 ofoffset, in part, by cash acquired of $6.8 million in the Gwo Yng step acquisition.
Investing activities during 2022 consisted of (1) the cash payment of $1.7 million for our acquisition of 100% of the capital stock of Stabil Operative GroupKade Trading GmbH, a German company, (“Stabil”Kade”); , net of $1 million of cash acquired and the $0.5 million earn-out; (2) the payment of $107.1 million, net of $4.6 million of cash acquired, for our acquisition of 100% of the capital stock of Trumpet Holdings, Inc., a Delaware corporation, (“Trombetta”); (3) the payment of $2.9$0.2 million for our acquisition of certain assets of the soot sensor product lines from Stoneridge, Inc.;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 (4)(3) capital expenditures of $25.9 million. Investing activities in 2020 consisted of capital expenditures of $17.8$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 $69$55.5 million in 2021 compared to cash used in financing activities of $71.5 million in 2020.2022. During 2021,2022, we (1) increased our borrowings under our revolving credit facilityfacilities by $115.3 million; (2) increased our borrowings under lease obligations and our Polish overdraft facility by $3 million; (3) made cash payments for the repurchase of shares of our common stock of $26.8 million; and (4) paid dividends of $22.2 million. Cash provided by operating activities, along with borrowings under our revolving credit agreement, lease obligations and Polish overdraft facility were used to fund our investing activities, purchase shares of our common stock and pay dividends.
Dividends of $22.2$25.2 million and $11.2$23.4 million were paid in 20212023 and 2020,2022, respectively. In January 2020, our BoardQuarterly dividends were paid at a rate of Directors voted to increase our quarterly dividend from $0.23 per share$0.29 in 2019 to $0.25 per share in 2020. In April 2020, in response to the impact of the COVID-19 pandemic on our business, our Board of Directors approved to temporarily suspend our quarterly cash dividend payments2023 and stock repurchases. In September 2020, our Board of Directors approved to reinstate our stock repurchase program; and in October 2020, our Board of Directors approved the reinstatement of our quarterly cash dividend of $0.25 per share. In February 2021, our Board of Directors voted to maintain our quarterly dividend at $0.25 per share in 2021; and in February 2022, our Board of Directors voted to increase our quarterly dividend from $0.25 per share in 2021 to $0.27 per share in 2022.
Comparison of Liquidity and Capital Resources For Fiscal Years 20202022 and 20192021
For a detailed discussion of our Liquidity and Capital Resources comparison of fiscal year 20202022 to fiscal year 2019,2021, 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, 2020.
2022.Liquidity
Borrowings under the amended credit agreement are secured by substantiallyCredit Agreement were used to repay all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries. Availability under the amended credit agreement is based on a formula of eligible accounts receivable, eligible drafts presented to the banks under our supply chain financing arrangements and eligible inventory. After taking into account outstanding borrowings under the amended2015 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 agreement, there was an additional $122.1and a $25 million availablesub-limit for usthe borrowing of swingline loans. The maturity date is June 1, 2027. The Company may request up to borrow pursuant totwo one-year extensions of the formula at December 31, 2021. maturity date.
The loss of businessCompany may, upon the agreement of one or more of our key customersthen 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 significant reductionrate 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 purchaseseach case, based on the total net leverage ratio of our products fromthe 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 one of them, could adversely impact availabilitythe 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 our revolving credit facility.the Credit Agreement, on $100 million of borrowings under the Credit Agreement. The interest rate swap agreement matures in May 2029.
Outstanding borrowings under the credit agreement, which are classified as current liabilities, were $125.3 million and $10 million at December 31, 20212023 under the Credit Agreement were $156 million, consisting of current borrowings of $5 million and 2020, respectively;long-term debt of $151 million; while lettersoutstanding 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 agreementCredit Agreement were $2.6$2.3 million and $2.8$2.4 million at December 31, 20212023 and 2020,2022, respectively. Borrowings under the credit agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.
At December 31, 2021,2023, the weighted average interest rate onunder our amended credit agreementCredit Agreement was 1.4%5%, which consisted of $125$156 million in direct borrowings at 1.4%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 loanborrowing of $0.3$2.5 million at 3.5%8%. AtDuring the year ended December 31, 2020, the weighted average interest rate on2023, our amended credit agreement was 1.4%, which consisted of $10 million in direct borrowings. Our average daily alternative base rate loan balance was $1.1$0.1 million, and $1.5compared to a balance of $5.6 million during 2021 and 2020, respectively.for the year ended December 31, 2022.
In February 2022,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, formerly HSBC France (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 $8$7.6 million). Availability under if borrowings are solely in Zloty, or up to 85% of the amendedZloty 30 million limit (approximately $6.5 million) if borrowings are in Euros and/or U.S. Dollars. The overdraft facility commenceshas a maturity date in March 2022 and ends in June 2022,2024, 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 WIBOR(1) the one month Warsaw Interbank Offered Rate (“WIBOR”) + 1.5%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. At December 31, 2021 and 2020,There were no borrowings outstanding under the overdraft facility were Zloty 12.3 million (approximately $3 million)at both December 31, 2023 and Zloty 0.4 million (approximately $0.1 million), respectively.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 $818.8$830.8 million and $695.1$813.7 million of receivables for the years ended December 31, 20212023 and 2020, respectively, which was2022, 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. Receivables presented at financial institutions and not yet collected as of December 31, 2021 and December 31, 2020 were approximately $1.3 million and $50 million, respectively, and remained in our accounts receivable balance for those periods. A charge in the amount of $11.5$46 million, $12.2$32 million and $22$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, 2021, 20202023, 2022 and 2019,2021, 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 LIBOR rate, as it is a componentpurpose of determining the discount rate applicable to each arrangement. If the LIBORbenchmark 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 yearsyear ended December 31, 2021 and 2020, were 150,273 and 323,867 shares of our common stock respectively, at a total cost of $6.5 million and $13.5 million, respectively, 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.
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 programsprogram from time to time, in the open market or through private transactions, as market conditions warrant. StockTo date, there have been no repurchases under this program, during the year ended December 31, 2021, were 7,000 shares of our common stock at a total cost of $0.3 million. As of December 31, 2021, there was approximately $29.7 million available for future stock purchases under the program. During the period from January 1, 2022 through February 17, 2022, we have repurchased an additional 64,482 shares of our common stock at a total cost of $3.1 million, thereby reducing the availability under the program to $26.6 million.
Material Cash Commitments
Material cash commitments as of December 31, 20212023 consist of required cash payments to service our outstanding borrowings of $125.3$156 million under our amended revolving credit agreementCredit Agreement with JPMorgan Chase Bank, N.A., as agent and the future minimum cash requirements of $44.9$131.7 million through 20312034 under operating leases. All of our other cash commitments as of December 31, 20212023 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 revolving credit facility, inclusive of the utilization of the $50 million accordion feature in the facility,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 the COVID-19 pandemic, disruptions in the supply chain that may lead to a further increasecaused by geo-political risks, future increases in inventories to support our customers,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 revolving credit facilityCredit 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 revolving credit facility,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 notesNotes to our consolidated financial statements.Consolidated Financial Statements in Item 8 of this Report.
You should be aware that preparation of our consolidated annual and quarterly 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 COVID-19 pandemic,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.
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.
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 21,23, “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.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than one of our subsidiary’s functional currency. Similarly, we are exposed to market risk as the result of changes in interest rates, which may affect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. As of December 31, 2021, we did not have any derivative financial instruments.
Exchange Rate Risk
We have exchange rate exposure, primarily, with respect to the Canadian Dollar, the Euro, the British Pound, the Polish Zloty, the Hungarian Forint, the Mexican Peso, the Taiwan Dollar, the Chinese Yuan Renminbi and the Hong Kong Dollar. As of December 31, 2021,2023 and December 31, 2022, our monetary assets and liabilities which are subject to this exposure are immaterial, therefore, the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the incremental effect of such a change on our foreign currency denominated revenues.
Interest Rate Risk
We manage our exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in our debt portfolio. To reduce our market risk for changes in interest rates on our variable rate borrowings, and to manage a portion of our exposure to changes in interest rate changes,rates, we have in the past enteredoccasionally enter into interest rate swap agreements. We
In June 2022, we entered into a seven year interest rate swap agreement with a notional amount of $100 million that is to mature in May 2029. The interest rate swap agreement has been designated as a cash flow hedge of interest payments on $100 million of borrowings under our Credit Agreement. Under the terms of the swap agreement, we will receive monthly variable interest payments based on one month Term SOFR and will pay interest based upon a fixed rate of 2.683% per annum, adjusted upward for the credit spread adjustment in the Credit Agreement of 0.10% and the loan margin in the Credit Agreement of 1.25% at December 31, 2023.
As of December 31, 2023, we had approximately $156 million of outstanding borrowings under our Credit Agreement, of which approximately $56 million bears interest at variable rates of interest and $100 million bears interest at fixed rates, after consideration of the interest rate swap agreement entered into in June 2022. Additionally, we invest our excess cash in highly liquid short-term investments. Substantially all of our debt is variable rate debt as of December 31, 2021 and 2020. Based upon our current level of borrowings under our revolving credit facility and our Polish overdraft facility,Credit Agreement and our excess cash, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate wouldmay have an immaterialapproximate $0.2 million annualized negative impact on our earnings or cash flows.
In addition, 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. During the year ended December 31, 2021,2023, we sold $818.8$830.8 million of receivables. Depending upon the level of sales of receivables pursuant these agreements, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the margin rate may have an approximate $8.2$8.3 million negative impact on our earnings or cash flows. The charge related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations.