Standard Motor Products, Inc. and its subsidiaries (referred to hereinafter in these notes to the consolidated financial statements as “we,” “us,” “our,” “SMP,” or the “Company”) is a leading manufacturer and distributor of premium replacement parts in the automotive aftermarket, and a custom-engineered solutions provider to vehicle and equipment manufacturers in diverse non-aftermarket end markets. Our automotive aftermarket is comprised of two segments, Vehicle Control and Temperature Control, while our Engineered Solutions segment offers a broad array of conventional and future-oriented technologies in markets for commercial and light vehicles, construction, agriculture, power sports, marine, hydraulics and lawn and garden. We sell our products primarily to retailers, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.
The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023. The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership, except in instances where the minority shareholder maintains substantive participating rights, in which case we follow the equity method of accounting. In instances where we have more than a 50% equity ownership and the minority shareholder does not maintain substantive participating rights, our consolidated financial statements include the accounts of the company on a consolidated basis with its net income and equity reported at amounts attributable to both our equity position and that of the noncontrolling interest. Investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence. All significant inter-company items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.
Reclassification
Certain prior period amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 2024 presentation.
Note 2. Summary of Significant Accounting Policies
The preparation of consolidated annual and quarterly financial statements in conformity with GAAP requires management 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 have made a number of estimates and assumptions in the preparation of these consolidated financial statements. We can give no assurance 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 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. Some of the more significant estimates include allowances for expected credit losses, cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and
other intangible assets, depreciation and amortization of long-lived assets, product liability exposures, asbestos, environmental and litigation matters, valuation of deferred tax assets, share based compensation and sales returns and other allowances.
There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023.
Recently Issued Accounting Pronouncements
Standards not yet adopted as of September 30, 2024
Standard
Description
Effective date
Effects on the financial statements or other significant matters
ASU 2023-07 will improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis.
ASU 2023-07 expands segment disclosures by requiring disclosure of (1) significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss; (2) the amount and description of the composition of other segment items to reconcile to segment profit and loss; and (3) the CODM’s title and position and how the CODM uses the reported segment measures to allocate resources. Additionally, ASU 2023-07 requires interim disclosures of all reportable segment profit or loss and assets previously required annually by Topic 280.
The ASU is effective for the fiscal years beginning after December 15, 2023, which for us is December 31, 2024, and all subsequent interim periods, with full retrospective application required to all prior periods presented. Early adoption is permitted.
The new standard will require expanding our segment disclosure to include additional segment level information. We are currently evaluating the full impact of adopting ASU 2023-07 on our consolidated financial statements, disclosures, processes and controls. On an ongoing basis, we will continue to assess the impact of the new standard through our planned date of adoption of December 31, 2024.
ASU 2023-09, Income Taxes (Topic 270): Improvements to Income Tax Disclosures
ASU 2023-09 will improve transparency and decision making usefulness of income tax disclosures.
ASU 2023-09 will expand the annual required effective income tax rate reconciliation disclosures to include (1) eight specific categories of rate reconciling items; (2) additional information for reconciling items that meet or exceed a quantitative threshold; and (3) expand the required disclosures to include reconciling percentages as well as reported amounts. Additionally, ASU 2023-09 will expand required annual disclosures of income taxes paid to include the disaggregation by federal, state and foreign jurisdictions.
The ASU is effective for annual reporting periods beginning after December 15, 2024, which for us is December 31, 2025, with prospective application. Early adoption and retrospective application are permitted.
The new standard will require expanding our annual income tax disclosures in our financial statements. We are currently evaluating the full impact of adopting ASU 2023-09 on our consolidated financial statements, disclosures, processes and controls. On an ongoing basis, we will continue to assess the impact of the new standard through our planned date of adoption of December 31, 2025.
We have reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on the Company’s consolidated financial statements.
In July 2024, we entered into an agreement to acquire all the outstanding shares of AX V Nissens III APS and its subsidiaries (“Nissens Automotive”), a leading European manufacturer and distributor of aftermarket engine cooling and air conditioning products with a growing array of vehicle control technologies, for €360 million (approximately $388 million) in cash, subject to adjustment at closing. We expect to fund the entire purchase price and related transaction costs with borrowings under our 2024 Credit Agreement. For additional information on our Credit Agreement see Note 9, “Credit Facilities and Long-Term Debt”. The transaction is expected to be completed by the end of 2024, subject to customary closing requirements.
Investment in Foshan GWO YNG SMP Vehicle Climate Control & Cooling Products Co. Ltd.
In April 2014, we formed Foshan GWO YNG SMP Vehicle Climate Control & Cooling Products Co. Ltd. (“Gwo Yng”), a 50/50 joint venture with Gwo Yng Enterprise Co., Ltd., a China-based manufacturer of air conditioner accumulators, filter driers, hose assemblies and switches. We acquired our 50% interest in the joint venture for approximately $14 million. In March 2018, we acquired an additional 15% equity interest in the joint venture for Chinese yuan renminbi 26,475,583 (approximately $4.2 million), thereby increasing our equity interest in the joint venture to 65%. While we increased our equity interest in the joint venture to 65%, the minority shareholder maintained substantive participating rights that allowed it to participate in certain significant financial and operating decisions that occur in the ordinary course of business. As a result, we continued to account for our investment in the joint venture under the equity method of accounting.
In July 2023, we acquired an additional 15% equity interest in the joint venture for Chinese yuan renminbi 27,378,290 (approximately $4 million), thereby increasing our equity interest in Gwo Yng to 80%. In connection with the transaction, we amended and restated the charter documents of Gwo Yng to remove all minority shareholder substantive participating rights, giving SMP control of Gwo Yng. As a result, as of the closing date of the transaction, Gwo Yng was accounted for as a business combination achieved in stages (“a step acquisition”). Accordingly, commencing on the closing of the transaction, we reported the results of Gwo Yng on a consolidated basis with the minority ownership interest reported as a noncontrolling interest.
The following table summarizes the allocation of the total step acquisition purchase consideration to the identifiable assets acquired and liabilities assumed based on their fair values (in thousands):
Total purchase consideration (a)
$
21,725
Assets acquired and liabilities assumed:
Cash and cash equivalents
$
6,779
Receivables
5,912
Inventory
5,945
Other current assets
528
Property, plant and equipment, net
2,924
Operating lease right-of-use assets
4,372
Intangible assets (b)
532
Goodwill
2,208
Long term investments and other assets
7,257
Current liabilities
(6,004)
Noncurrent operating lease liabilities
(3,455)
Subtotal
26,998
Fair value of acquired noncontrolling interest
(5,273)
Total purchase consideration allocated to net assets acquired
$
21,725
(a)Total purchase consideration is the sum of the fair value of the previously held equity investment interest in Gwo Yng of $17.7 million and the cash paid of $4 million for the acquisition of the additional 15% equity ownership interest.
(b)Intangible assets consists of customer relationships of $0.4 million and capitalized software of $0.1 million.
Intangible assets of $0.4 million consisting of customer relationships is amortized on a straight-line basis over the estimated useful life of 10 years. Goodwill of $2.2 million was allocated to the Temperature Control and Engineered Solutions segments in the amounts of $1.2 million and $1 million, respectively. The goodwill reflects relationships, business specific knowledge and the replacement cost of an assembled workforce associated with personal reputations
Note 4. Restructuring and Integration Expenses
Separation Program
During the second quarter of 2024 we offered a voluntary retirement incentive package of severance and other benefit enhancements to eligible employees in the United States and Canada as part of our commitment to optimizing our cost structure and providing professional development opportunities to our employees. The offer period ended on June 14, 2024. During the quarter, we expanded the program to include involuntary separations. Costs primarily comprise of compensation expense and enhanced medical benefits, and are charged to restructuring and integration expenses in our statement of operations as a one-time termination benefit. Voluntary retirement incentive costs are recognized when the employee accepted the offer or over their remaining period of service based on the agreed retirement date. The criteria to recognize involuntary separation costs were met during the quarter and costs were recorded either during the quarter or over the remaining service period for the affected employees. We anticipate that the program will be substantially complete by the end of 2027. Additional pre-tax restructuring costs related to the program are expected to be $1.3 million in the remainder of 2024, $0.6 million in 2025, and $0.1 million in 2026 for an aggregate cost of approximately $7.6 million.
Activity for the nine months ended September 30, 2024 related to the separation program workforce reduction consisted of the following (in thousands):
Exit activity liability at December 31, 2023
$
—
Restructuring and integration costs:
Amounts provided for during 2024 (a)
5,602
Stock-based compensation
150
Cash payments
(959)
Foreign currency exchange rate changes
1
Exit activity liability at September 30, 2024
$
4,794
(a)Restructuring and integration expenses incurred during the nine months ended September 30, 2024 consist of $2.7 million in our Vehicle Control segment, $0.6 million in our Temperature Control segment, $0.6 million in our Engineered Solutions segment and $1.7 million in our Other segment.
Cost Reduction Initiative
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. We anticipate that the Cost Reduction Initiative will be substantially completed by the end of 2024. Additional restructuring costs related to the initiative are expected to be immaterial.
Activity for the nine months ended September 30, 2024 related to the cost reduction initiative consisted of the following (in thousands):
Workforce Reduction
Other Exit Costs
Total
Exit activity liability at December 31, 2023
$
1,729
$
—
$
1,729
Restructuring and integration costs:
Amounts provided for during 2024 (a)
(45)
217
172
Cash payments
(1,315)
(217)
(1,532)
Foreign currency exchange rate changes
(22)
—
(22)
Exit activity liability at September 30, 2024
$
347
$
—
$
347
(a)Restructuring and integration expenses incurred during the nine months ended September 30, 2024 consist of $61 thousand in our Vehicle Control segment, $59 thousand in our Temperature Control segment and $52 thousand in our Engineered Solutions segment.
Restructuring and integration activities are included within “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet.
Note 5. Sale of Receivables
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 accounted for as a sale.
Pursuant to these agreements, we sold $285.4 million and $686.3 million of receivables during the three and nine months ended September 30, 2024, respectively, and $260.4 million and $643 million for the comparable periods in 2023. Receivables presented at financial institutions and not yet collected as of September 30, 2024 were approximately $1.8 million and remained in our accounts receivable balance as of that date. All receivables sold were reflected as a reduction of accounts receivable in the consolidated
balance sheet at the time of sale. A charge in the amount of $14.9 million and $38.3 million related to the sale of receivables was included in selling, general and administrative expense in our consolidated statements of operations for the three and nine months ended September 30, 2024, respectively, and $14.6 million and $36.1 million for the comparable periods in 2023.
To the extent that these arrangements are terminated, our financial condition, results of operations, cash flows and liquidity could be adversely affected by extended payment terms, or delays or failures in collecting trade accounts receivable. The utility of the supply chain financing arrangements also depends upon a benchmark reference rate for the purpose of determining the discount rate applicable to each arrangement. If the benchmark reference rate increases significantly, we may be negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.
Note 6. Inventories
Inventories, which are stated at the lower of cost (determined by means of the first-in, first-out method) and net realizable value, consist of the following, in thousands:
September 30, 2024
December 31, 2023
Finished goods
$
294,153
$
302,557
Work in process
18,406
18,503
Raw materials
190,456
186,015
Subtotal
503,015
507,075
Unreturned customer inventories
17,843
18,240
Total inventories
$
520,858
$
525,315
Note 7. Acquired Intangible Assets
Acquired identifiable intangible assets consist of the following, in thousands:
September 30, 2024
December 31, 2023
Customer relationships
$
159,934
$
159,641
Patents, developed technology and intellectual property
14,123
14,123
Trademarks and trade names
8,880
8,880
Non-compete agreements
3,308
3,295
Supply agreements
800
800
Leaseholds
160
160
Total acquired intangible assets
187,205
186,899
Less: Accumulated amortization (a)
(102,379)
(95,681)
Net acquired intangible assets
$
84,826
$
91,218
(a)Applies to all intangible assets, except for trademarks and trade names totaling $2.6 million, which have indefinite useful lives and, as such, are not being amortized.
Total amortization expense for acquired intangible assets was $2.1 million and $6.4 million for the three and nine months ended September 30, 2024, respectively, and $2.1 million and $6.4 million for the comparable periods in 2023. Based on the current estimated useful lives assigned to our intangible assets, amortization expense is estimated to be $2.1 million for the remainder of 2024, $8.5 million in 2025, $8.5 million in 2026, $8.5 million in 2027 and $54.6 million in the aggregate for the years 2028 through 2041.
We have operating and finance leases for our manufacturing facilities, warehouses, office space, automobiles, and certain equipment. Our leases have remaining lease terms of up to ten years, some of which may include one or more five-year renewal options. We have not included any of the renewal options in our operating lease payments as we concluded that it is not reasonably certain that we will exercise any of these renewal options. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease expense is recognized on a straight-line basis over the lease term. Finance leases are not material.
The following tables provide quantitative disclosures related to our operating leases and include all operating leases acquired from the date of acquisition (in thousands, except where otherwise indicated):
Balance Sheet Information
September 30, 2024
December 31, 2023
Assets
Operating lease right-of-use assets
$
96,039
$
100,065
Liabilities
Sundry payables and accrued expenses
$
16,848
$
17,139
Noncurrent operating lease liabilities
86,259
88,974
Total operating lease liabilities
$
103,107
$
106,113
Weighted Average Remaining Lease Term
7.9 Years
8.3 Years
Weighted Average Discount Rate
4.9
%
4.8
%
Three Months Ended September 30,
Nine Months Ended September 30,
Lease Expense
2024
2023
2024
2023
Lease expense
$
4,548
$
4,762
$
14,220
$
11,647
Variable and other lease expense (a)
1,545
1,354
2,953
2,637
Total lease costs
$
6,093
$
6,116
$
17,173
$
14,284
(a)Variable and other lease expense relate to non-lease components such as maintenance, property taxes, etc., and operating lease expense for leases with an initial term of 12 months or less which are not material.
Nine Months Ended September 30,
2024
2023
Supplemental Cash Flow Information
Cash paid for the amounts included in the measurement of lease liabilities
$
13,253
$
8,212
Right-of-use assets obtained in exchange for new lease obligations (a)
$
6,902
$
61,929
(a)Includes $4.7 million of right-of-use assets related to the lease modification and extension for our manufacturing facility in Bialystok, Poland during the nine months ended September 30, 2024 and $27.8 million of right-of-use assets related to the lease modification and extension for our distribution center and office in Lewisville, Texas; $26.1 million of right-of-use assets related to the new distribution center in Shawnee, Kansas; and $4.4 million of right-of-use assets obtained in Gwo Yng step-acquisition during the nine months ended September 30, 2023.
At September 30, 2024, we are obligated to make minimum lease payments through 2034, under operating leases, which are as follows:
2024
$
4,711
2025
17,058
2026
15,711
2027
14,417
2028
12,647
Thereafter
62,118
Total lease payments
$
126,662
Less: Interest
(23,555)
Present value of lease liabilities
$
103,107
Note 9. Credit Facilities and Long-Term Debt
Total debt outstanding is summarized as follows, in thousands:
September 30, 2024
December 31, 2023
Credit facility – term loan due 2027
$
—
$
92,500
Credit facility – revolver due 2027
—
63,500
Credit facility – revolver due 2029
140,000
—
Other
2,848
211
Total debt
$
142,848
$
156,211
Current maturities of debt
$
2,685
$
5,029
Long-term debt
140,163
151,182
Total debt
$
142,848
$
156,211
Term Loans and Revolving Credit Facilities
In May 2024 and July 2024, the Company amended it's then-existing Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders ("2022 Credit Agreement"), to transition from the Canadian Dollar Offered Rate (“CDOR”) to the Canadian Overnight Repo Rate Average (“CORRA”) for benchmark borrowings denominated in Canadian dollars and to provide for a new $125 million term loan and the use of funds available under the revolving credit facility to finance the acquisition of Nissens Automotive and related transaction costs. For additional information on our agreement to acquire Nissens Automotive see Note 3, “Business Acquisitions and Investments.”
In September 2024, the Company refinanced its existing 2022 Credit Agreement with a new five-year Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders (“2024 Credit Agreement”). The 2024 Credit Agreement matures on September 16, 2029 and provides for an approximately $750 million credit facility, comprised of a $430 million multi-currency revolving credit facility ("global tranche"); (ii) a $10 million multi-currency revolving credit facility, that will be available to one or more wholly-owned Danish subsidiaries of the Company ("Danish tranche"); (iii) a $200 million delayed draw term loan facility in U.S. dollars; and (iv) a 100 million euros delayed draw term loan facility. The revolving credit facility has a $25 million sublimit for the issuance of letters of credit, and a $30 million sublimit for the borrowing of swingline loans.
Borrowings under the 2024 Credit Agreement were used to repay all outstanding borrowings under the 2022 Credit Agreement and will be used for general corporate purposes of the Company and its subsidiaries, and to finance the Company’s acquisition of Nissens Automotive and related transaction
costs. The term loans amortize in quarterly installments of 1.25% in each of the first two years following the funding, 1.875% for the next two years, and 2.50% in each quarter thereafter. The Company may request up to two one-year extensions of the maturity date.
The Company may, subject to customary conditions, increase the global tranche or obtain incremental term loans in an aggregate amount not to exceed (x) the greater of (i) $168 million and (ii) 100% of consolidated EBITDA for the four fiscal quarters ended most recently before such date, plus (y) any voluntary prepayment of term loans, plus (z) any amount that, after giving effect to the increase, the pro forma First Lien Net Leverage Ratio (as defined in the 2024 Credit Agreement) does not exceed 2.75 to 1.00. The Company may also, subject to customary conditions, request to increase the Danish tranche by up to $5 million.
Borrowings bear interest at the applicable interest rate index selected by the Company based on the particular currency borrowed plus a credit spread adjustment depending on the index, and a margin ranging from 1.25% to 2.25% per annum based on the total net leverage ratio of the Company and its restricted subsidiaries. The Company may select interest periods of one, three or six months depending on the index. Interest is payable at the end of the selected interest period, but no less frequently than quarterly.
The Company may prepay the borrowings, in whole or in part, at any time without premium or penalty, subject to certain conditions.
The Company’s obligations under the 2024 Credit Agreement are guaranteed by its material domestic subsidiaries (each, a “Guarantor”), and secured by a first priority perfected security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions. The collateral security described above also secures certain banking services obligations and interest rate swaps and currency or other hedging obligations of the Company owing to any of the then existing lenders or any affiliates thereof.
Outstanding borrowings at September 30, 2024 under the credit agreements were $140 million and classified as long-term debt. Outstanding borrowings at December 31, 2023 were $156 million, consisting of current borrowings of $5 million and long-term debt of $151 million. Letters of credit outstanding under the credit agreements were $2.3 million at September 30, 2024 and December 31, 2023.
At September 30, 2024, the weighted average interest rate under the 2024 Credit Agreement was 5%, which consisted of $140 million in borrowings under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of borrowings. At December 31, 2023, the weighted average interest rate under the 2022 Credit Agreement was 5%, which consisted of $156 million in borrowings at 5% under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of borrowings. During the nine months ended September 30, 2024, our average daily alternative base rate loan balance was $0.8 million, compared to a balance of $0.1 million for the nine months ended September 30, 2023 and a balance of $0.1 million for the year ended December 31, 2023.
The 2024 Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The 2024 Credit Agreement also contains customary events of default.
In November 2023, our Polish subsidiary, SMP Poland sp. z.o.o., further amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce. The overdraft facility, as amended, provides for borrowings under the facility in euros and U.S. dollars. Under the amended terms, the overdraft facility provides for borrowings of up to Polish zloty 30 million (approximately $7.5 million) if borrowings are solely in Polish zloty, or up to 85% of the Polish zloty 30 million limit (approximately $6.4 million) if borrowings are in euros and/or U.S. dollars. The overdraft facility had an original maturity date in March 2024, with automatic three-month renewals until June 2027, subject to cancellation by either party, at its sole discretion, at least 30 days prior to the commencement of the three-month renewal period. The facility automatically renewed in September 2024 to a December 2024 maturity date. Borrowings under the amended overdraft facility will bear interest at a rate equal to (1) the one month Warsaw Interbank Offered Rate (“WIBOR”) + 1.0% for borrowings in Polish zloty, (2) the one month Euro Interbank Offered Rate (“EURIBOR”) + 1.0% for borrowings in euros, and (3) the Mid-Point of the Fed Target Range + 1.25% for borrowings in U.S. dollars. Borrowings under the overdraft facility are guaranteed by Standard Motor Products, Inc., the ultimate parent company. There were $1.3 million in borrowings outstanding under the overdraft facility at September 30, 2024 and no borrowings outstanding at December 31, 2023.
Maturities of Debt
As of September 30, 2024, maturities of debt through 2029, assuming no prepayments, are as follows (in thousands):
Revolving Credit Facility
Polish Overdraft Facility and Other Debt
Total
Remainder of 2024
$
—
$
2,662
$
2,662
2025
—
34
34
2026
—
47
47
2027
—
105
105
2028
—
—
—
2029
140,000
—
140,000
Total
$
140,000
$
2,848
$
142,848
Less: current maturities
—
(2,685)
(2,685)
Long-term debt
$
140,000
$
163
$
140,163
Deferred Financing Costs
Deferred financing costs related to our term loans and revolving credit facilities were $5.1 million and $1.6 million as of September 30, 2024 and December 31, 2023, respectively. In connection with the July 2024 amendment to our 2022 Credit Agreement and the 2024 Credit Agreement, we deferred financing costs of $5.1 million that will be amortized over the term of the borrowings, and expensed $1.3 million of pre-existing unamortized financing costs to interest expense in our consolidated statement of operations. Amortization of deferred financing costs for term loan borrowings under our 2024 Credit Agreement will commence when the terms loans are drawn down. Deferred financing costs as of September 30, 2024, assuming no prepayments, are being amortized in the amounts of $0.1 million for the remainder of 2024, $0.5 million in 2025, $0.5 million in 2026, $0.5 million in 2027, $0.5 million in 2028 and $0.3 million in 2029.
Note 10. Accumulated Other Comprehensive Income Attributable to SMP
Changes in Accumulated Other Comprehensive Income by Component (in thousands)
Three Months Ended September 30, 2024
Foreign Currency Translation
Cash Flow Hedge
Postretirement Benefit Plans
Total
Balance at June 30, 2024
$
(13,850)
$
4,369
$
19
$
(9,462)
Other comprehensive income (loss) before reclassifications
2,443
(2,055)
(a)
—
388
Amounts reclassified from accumulated other comprehensive income
—
(497)
(3)
(500)
Other comprehensive income (loss), net of tax
2,443
(2,552)
(3)
(112)
Balance at September 30, 2024
$
(11,407)
$
1,817
$
16
$
(9,574)
Nine Months Ended September 30, 2024
Foreign Currency Translation
Cash Flow Hedge
Postretirement Benefit Plans
Total
Balance at December 31, 2023
$
(8,897)
$
2,899
$
24
$
(5,974)
Other comprehensive income (loss) before reclassifications
(2,510)
406
(a)
—
(2,104)
Amounts reclassified from accumulated other comprehensive income
—
(1,488)
(8)
(1,496)
Other comprehensive income (loss), net of tax
(2,510)
(1,082)
(8)
(3,600)
Balance at September 30, 2024
$
(11,407)
$
1,817
$
16
$
(9,574)
(a)Consists of the unrecognized loss relating to the change in fair value of the cash flow interest rate hedge of $3.5 million ($2.6 million, net of tax) and $1.5 million ($1.1 million, net of tax) in the three and nine months ended September 30, 2024, respectively, and cash settlement receipts of $0.7 million ($0.5 million, net of tax) and $2.0 million (1.5 million, net of tax) in the three and nine months ended September 30, 2024, respectively.
Reclassifications Out of Accumulated Other Comprehensive Income (in thousands)
Three Months Ended September 30, 2024
Nine Months Ended September 30, 2024
Derivative cash flow hedge gain (a)
$
(671)
$
(2,010)
Postretirement benefit plans unrecognized gain (b)
(5)
(14)
Total before income tax
(676)
(2,024)
Income tax expense
(176)
(528)
Total reclassifications attributable to SMP
$
(500)
$
(1,496)
(a)Unrecognized accumulated other comprehensive income (loss) related to the cash flow interest rate hedge is reclassified to earnings and reported as part of interest expense in our consolidated statements of operations when the interest payments on the underlying borrowings are recognized.
(b)Unrecognized accumulated other comprehensive income (loss) related to our postretirement benefit plans is reclassified to earnings and included in the computation of net periodic postretirement benefit costs, which are included in other non-operating income, net in our consolidated statements of operations (see Note 12, “Employee Benefits,” for additional information).
We account for our stock-based compensation plans in accordance with the provisions of FASB ASC 718, Stock Compensation, which requires that a company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized in the consolidated statement of operations over the period during which an employee is required to provide service in exchange for the award.
Restricted and Performance Stock Grants
We are authorized to issue, among other things, shares of restricted and performance-based stock to eligible employees and restricted stock to directors of up to 2,050,000 shares under the Amended and Restated 2016 Omnibus Incentive Plan (“Plan”). Shares issued under the Plan that are cancelled, forfeited or expire by their terms are eligible to be granted again under the Plan.
As part of the Plan, we currently grant shares of restricted stock to eligible employees and our independent directors and performance-based shares to eligible employees. We grant eligible employees two types of restricted stock (standard restricted shares and long-term retention restricted shares). Standard restricted shares granted to employees become fully vested no earlier than three years after the date of grant. Long-term retention restricted shares granted to selected executives vest at a 25% rate on or within approximately two months of an executive reaching the ages 60 and 63, and become fully vested on or within approximately two months of an executive reaching the age 65. Restricted shares granted to directors become fully vested upon the first anniversary of the date of grant.
Performance-based shares issued to eligible employees are subject to a three-year measuring period and the achievement of performance targets and, depending upon the achievement of such performance targets, they may become vested no earlier than three years after the date of grant. Each period we evaluate the probability of achieving the applicable targets, and we adjust our accrual accordingly. Restricted shares (other than long-term retention restricted shares) and performance shares issued to certain key executives and directors are subject to a one or two year holding period upon the lapse of the vesting period. Forfeitures on stock grants are estimated at 5% for employees and 0% for executives and directors based on our evaluation of historical and expected future turnover.
Our restricted and performance-based share activity was as follows for the nine months ended September 30, 2024:
Shares
Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2023
880,976
$
29.48
Granted
6,775
27.64
Vested
(44,121)
29.75
Forfeited
(32,050)
29.95
Balance at September 30, 2024
811,580
$
29.43
We recorded compensation expense related to restricted shares and performance-based shares of $4.1 million ($3.1 million, net of tax) and $4.9 million ($3.7 million, net of tax) for the nine months ended September 30, 2024 and 2023, respectively. The unrecognized compensation expense related to our restricted and performance-based shares was $8.6 million at September 30, 2024, and is expected to be recognized as they vest over a weighted average period of 3.4 years and 0.6 years for employees and directors, respectively.
We provide certain medical and dental care benefits to 13 former U.S. union employees. The postretirement medical and dental benefit obligation to the former union employees as of September 30, 2024, and the related net periodic benefit cost for the plan for the three and nine months ended September 30, 2024 and 2023 were not material.
We maintain a defined contribution Supplemental Executive Retirement Plan for key employees. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, we may at our discretion make contributions to the plan on behalf of the employees. In March 2024, we made company contributions to the plan of $0.5 million related to calendar year 2023.
We also have an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. In connection therewith, we maintain an employee benefits trust to which we contribute shares of treasury stock. We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under the plan. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with their fiduciary duties. During the nine months ended September 30, 2024, we contributed to the trust an additional 68,700 shares from our treasury and released 68,700 shares from the trust leaving 200 shares remaining in the trust as of September 30, 2024.
Note 13. Derivative Financial Instruments
We occasionally use derivative financial instruments, including interest rate swaps and forward foreign exchange contracts, to reduce our market risk for changes in interest rates on our variable rate borrowings and to manage foreign exchange rate risk on certain transactions. The interest rate swaps effectively convert a portion of our variable rate borrowings under our existing facilities to a fixed rate based upon determined notional amount. The forward foreign exchange contracts fix expected future cash flows in U.S. dollar terms. We do not enter into derivative financial instruments, for trading or speculative purposes.
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 2024 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.
The fair value of the interest rate swap agreement as of September 30, 2024 and December 31, 2023 was an asset of $2.5 million and $3.9 million, respectively, which has been deferred and recorded in accumulated other comprehensive income, net of income taxes, in our consolidated balance sheet. When the interest expense on the underlying borrowing is recognized, the deferred gain/loss in accumulated other comprehensive income is recorded in earnings as interest expense in the consolidated statements of operations. We perform quarterly hedge effectiveness assessments, and anticipate that the interest rate swap will be highly effective throughout its term.
During the quarter, we entered into three forward foreign exchange contracts with a combined notional amount of 100 million euros that can be settled at the contract rate at any time in the two months prior to the final maturity date of November 29, 2024. The forward foreign exchange contracts economically hedge 100 million euros of the 360 million euros purchase price for the acquisition of Nissens Automotive. The fair value of the forward foreign exchange contracts as of September 30, 2024 was an unrealized gain of $1 million, which is recorded in prepaid expenses and other current assets in our consolidated balance sheet. The change in fair value of $1 million gain during the quarter was recorded in selling, general and administrative expenses in the consolidated statement of operations.
We follow a three-level fair value hierarchy that prioritizes the inputs to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect assumptions that market participants would use in pricing an asset or liability.
The following is a summary of the estimated fair values, carrying amounts, and classification under the fair value hierarchy of our financial instruments at September 30, 2024 and December 31, 2023 (in thousands):
September 30, 2024
December 31, 2023
Fair Value Hierarchy Level
Fair Value
Carrying Amount
Fair Value
Carrying Amount
Cash and cash equivalents (a)
1, 2
$
26,348
$
26,348
$
32,526
$
32,526
Deferred compensation
1
26,855
26,855
23,893
23,893
Short term borrowings
2
2,685
2,685
5,029
5,029
Long-term debt
2
140,163
140,163
151,182
151,182
Cash flow hedge interest rate swap
2
2,462
2,462
3,939
3,939
Short-term investments
2
7,050
7,050
—
—
Long-term investments
2
598
598
7,468
7,468
Forward foreign exchange contracts
2
995
995
—
—
(a)As of September 30, 2024 cash and cash equivalents consist solely of cash of $26.3 million, which is classified as Level 1 under the fair value hierarchy. As of December 31, 2023 cash and cash equivalents consist of cash of $29.5 million and cash equivalents of $3 million, which are classified as Level 1 and Level 2, respectively, under the fair value hierarchy.
Cash equivalents consist of certificates of deposit with original maturities of three months, or less. These securities are accounted for as held-to-maturity and recorded at amortized cost, which approximates their fair values. The fair value of the underlying assets held by the deferred compensation plan are based on the quoted market prices of the underlying funds which are held by registered investment companies. The carrying value of our variable rate short-term borrowings and long-term debt under our credit facilities approximates fair value as the variable interest rates in the facilities reflect current market rates. The fair value of our cash flow interest rate swap agreement is obtained from an independent third party, is based upon market quotes, and represents the net amount required to terminate the interest rate swap, taking into consideration market rates and counterparty credit risk. The fair value of our forward foreign exchange contracts is based on observable market transactions of spot and forward rates. Short-term and long-term investments consist of certificates of deposit with original maturities occurring within the next twelve months or in excess of twelve months, respectively. These certificates of deposit are securities accounted
for as held-to-maturity and recorded at amortized cost, which approximates their fair values at September 30, 2024.
The following are reconciliations of the net earnings attributable to SMP and the shares used in calculating basic and dilutive net earnings per common share attributable to SMP (in thousands, except per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Net earnings (loss) attributable to SMP
Continuing operations
$
26,581
$
24,859
$
54,424
$
55,915
Discontinued operations
(22,771)
(18,200)
(24,727)
(28,201)
Net earnings attributable to SMP
$
3,810
$
6,659
$
29,697
$
27,714
Basic net earnings (loss) per common share attributable to SMP
Continuing operations
$
1.22
$
1.14
$
2.50
$
2.58
Discontinued operations
$
(1.04)
$
(0.83)
$
(1.14)
$
(1.30)
Diluted net earnings (loss) per common share attributable to SMP
Continuing operations
$
1.20
$
1.12
$
2.45
$
2.52
Discontinued operations
$
(1.03)
$
(0.82)
$
(1.11)
$
(1.27)
Weighted average common shares outstanding, basic
21,716
21,727
21,802
21,676
Dilutive effect of restricted stock and performance-based stock
438
527
423
522
Weighted average common shares outstanding, diluted
22,154
22,254
22,225
22,198
The shares listed below were not included in the computation of diluted net earnings per common share attributable to SMP because to do so would have been anti-dilutive for the periods presented or because they were excluded under the treasury method (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Restricted and performance-based shares
250
242
274
273
Note 16. Industry Segments
Our business is organized into three operating segments, Vehicle Control, Temperature Control and Engineered Solutions, each of which focuses on a specific line of business. Our automotive aftermarket business is comprised of two operating segments, Vehicle Control and Temperature Control, while our Engineered Solutions operating segment offers a broad array of conventional and future-oriented technologies.
The following tables show our net sales and operating income for each reportable operating segment (in thousands):
(a)There are no intersegment sales among our Vehicle Control, Temperature Control and Engineered Solutions operating segments.
For the disaggregation of our net sales from contracts with customers by major product group and geographic area within each of our operating segments, see Note 17, “Net Sales.”
Note 17. Net Sales
Disaggregation of Net Sales
We disaggregate our net sales from contracts with customers by major product group and geographic area within each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our net sales are affected by economic factors.
Major Product Group
The Vehicle Control operating segment generates its revenues from core automotive aftermarket sales of ignition, emissions, and fuel delivery, electrical and safety, and wire sets and other product categories. The Temperature Controloperating segment generates its revenue from core automotive aftermarket sales of air conditioning system components and other thermal products. The Engineered Solutions operating segment generates revenues from custom-engineered products to vehicle and equipment manufacturers in highly diversified global end-markets such as commercial and light vehicles, construction, agriculture, power sports and marine.
The following table summarizes consolidated net sales by major product group within each operating segment for the three and nine months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Vehicle Control
Engine Management (Ignition, Emissions and Fuel Delivery)
$
121,432
$
113,188
$
353,046
$
342,860
Electrical and Safety
63,237
62,049
172,772
166,720
Wire Sets and Other
16,208
15,700
49,324
49,723
Total Vehicle Control
200,877
190,937
575,142
559,303
Temperature Control
AC System Components
95,698
94,385
245,628
217,913
Other Thermal Components
30,287
29,258
76,446
75,210
Total Temperature Control
125,985
123,643
322,074
293,123
Engineered Solutions
Commercial Vehicle
22,625
18,701
69,016
59,158
Construction/Agriculture
8,082
9,974
27,631
32,804
Light Vehicle
24,287
24,123
70,776
71,123
All Other
17,409
19,035
55,858
52,005
Total Engineered Solutions
72,403
71,833
223,281
215,090
Other
—
—
—
—
Total
$
399,265
$
386,413
$
1,120,497
$
1,067,516
Geographic Area
We sell our line of products primarily in the United States, with additional sales in Canada, Mexico, Europe, Asia and Latin America. Sales are attributed to countries based upon the location of the customer. Our sales are substantially denominated in U.S. dollars.
The following tables provide disaggregation of net sales information by geographic area within each operating segment for the three and nine months ended September 30, 2024 and 2023 (in thousands):
In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying statement of operations. 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 on or 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. At September 30, 2024, approximately 1,302 cases were outstanding for which we may be responsible for any related liabilities. Since inception in September 2001 through September 30, 2024, the amounts paid for settled claims and awards of asbestos-related damages, including interest, were approximately $86.4 million. We do not have insurance coverage for the indemnity and defense costs associated with the claims we face.
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 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.
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, 2024. The results of the August 31, 2024 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs, ranging from $99.6 million to $210.8 million for the period through 2065. The change from the prior year study, which was as of August 31, 2023, was a $15.6 million increase for the low end of the range and a $75.5 million increase for the high end of the range. The increase in the estimated undiscounted liability from the prior year study at both the low end and high end of the range reflects our actual experience, our historical data and certain assumptions with respect to events that may occur in the future.
Based upon the results of the August 31, 2024 actuarial study, in September 2024 we increased our asbestos liability to $99.6 million, the low end of the range, and recorded an incremental pre-tax provision of $29.3 million in loss from discontinued operations in the accompanying consolidated statement of operations. Future legal costs, which are expensed as incurred and reported in loss from discontinued operations in the accompanying consolidated statement of operations, are estimated, according to the August 31, 2024 study, to range from $49.8 million to $115.9 million for the period through 2065. Total operating cash outflows related to discontinued operations, which include settlements, awards of asbestos-related damages and legal costs, net of taxes, were $10.3 million and $8.7 million for the nine months ended September 30, 2024 and 2023, respectively.
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. 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.
Other Litigation
We are currently involved in various other legal claims and legal proceedings (some of which may involve substantial amounts), including claims related to commercial disputes, product liability, employment, and environmental. Although these legal claims and legal proceedings are subject to inherent uncertainties, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the ultimate outcome of these matters will not, either individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. We may at any time determine that settling any of these matters is in our best interests, which settlement may include substantial payments. Although we cannot currently predict the specific amount of any liability that may ultimately arise with respect to any of these matters, we will record provisions when the liability is considered probable and reasonably estimable. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. As additional information becomes available, we reassess our potential liability related to these matters. Such revisions of the potential liabilities could have a material adverse effect on our business, financial condition or results of operations.
We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time of the product depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and included in accrued customer returns.
The following table provides the changes in our product warranties (in thousands):
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties. Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, changes or loss in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our supply chain financing arrangements, such as changes in terms, termination of contracts and/or the impact of rising interest rates; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs, including procurement costs resulting from higher tariffs, and inflationary cost increases in raw materials, labor and transportation, that cannot be recouped in product pricing; the performance of the automotive aftermarket 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 matters (including, without limitation, those related to asbestos-related contingent liabilities); the effects of disruptions in the supply 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. The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report.
Overview
We are a leading manufacturer and distributor of premium replacement parts in the automotive aftermarket and a custom-engineered solutions provider to vehicle and equipment manufacturers in diverse non-aftermarket end markets. Our business is organized into three operating segments. Our automotive aftermarket business is comprised of two segments, Vehicle Control and Temperature Control, while our Engineered Solutions Segment offers a broad array of conventional and future-oriented technologies. We sell our products primarily to retailers, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin America countries.
Our Vehicle Control operating segment services our core automotive aftermarket customers, deriving its sales from three major product groups:– (1) Ignition, Emissions & Fuel Delivery, which includes the traditional internal combustion engine (ICE) dependent categories; (2) Electrical & Safety, which includes powertrain neutral vehicle technologies such as electrical switches/relays, safety related products such as anti-lock brake and vehicle speed sensors, tire pressure monitoring, park assist sensors, and advanced driver assistance components; and (3) Wire Sets & Other, which includes spark plug wire sets and other related products, and are product categories we have noted to be in secular decline based upon product life cycle.
Our Temperature Control operating segment services our core automotive aftermarket customers with thermal products, and is poised to benefit from the broader adoption of air conditioning and other thermal systems. These systems will provide passenger comfort regardless of the vehicles’ powertrain, and are being developed to cool batteries and other products used on electric vehicles. Segment offerings include sales from thermal products in the aftermarket business under two major product groups:– (1) AC System Components, which includes compressors, connecting lines, heat exchangers, and expansion devices; and
(2) Other Thermal Components, which includes parts that provide engine, transmission, electric drive motor, and battery temperature management.
Our Engineered Solutions operating segment supplies custom-engineered solutions to vehicle and equipment manufacturers in highly diversified global end-markets such as commercial and light vehicles, construction, agriculture, power sports and marine. Segment offerings include product categories that offer a broad array of conventional and future-oriented technologies, including those that are specific to vehicle electrification as well as those that are powertrain-neutral.
Overview of Financial Performance
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during the three months ended September 30, 2024 and 2023.
Three Months Ended September 30,
(In thousands, except per share data)
2024
2023
Net sales
$
399,265
$
386,413
Gross profit
121,366
114,760
Gross profit %
30.4
%
29.7
%
Operating income
37,139
34,806
Operating income %
9.3
%
9.0
%
Earnings from continuing operations before income taxes
36,123
32,917
Provision for income taxes
9,267
7,995
Earnings from continuing operations
26,856
24,922
Loss from discontinued operations, net of income taxes
(22,771)
(18,200)
Net earnings
4,085
6,722
Net earnings attributable to noncontrolling interest
275
63
Net earnings attributable to SMP
3,810
6,659
Per share data attributable to SMP – Diluted:
Earnings from continuing operations
$
1.20
$
1.12
Discontinued operations
(1.03)
(0.82)
Net earnings per common share
$
0.17
$
0.30
Consolidated net sales for the three months ended September 30, 2024 were $399.3 million, an increase of $12.9 million, or 3.3%, compared to net sales of $386.4 million in the same period in 2023. Net sales increased in all our operating segments, when compared to the same period in the prior year.
The increase in net sales in the three months ended September 30, 2024 when compared to the same period in the prior year reflects the impact of multiple factors including:
•stable demand in the automotive aftermarket business across our major product groups,
•warmer year-over-year weather conditions increasing demand for our Temperature Control products, and
•strong customer demand in our Engineered Solutions operating segment with growth coming from business wins as well as successful cross-selling efforts.
Gross margins as a percentage of net sales increased to 30.4% in the third quarter of 2024 compared to 29.7% in the third quarter of 2023. The gross margin percentage in our Temperature Control and Vehicle Control segments increased year-over-year, while the gross margin percentage decreased in our Engineered Solutions segment. While all segments benefited from favorable manufacturing cost absorption due to higher production levels, the gross margin percentage increase in our Vehicle Control segment also reflects the impact of increased pricing and saving initiatives, despite lingering inflationary
increases in material and labor costs. The gross margin percentage increase in our Temperature Control segment also results from the impact of higher sales volumes, customer mix and the impact of cost control measures. The Engineered Solutions’ gross margin percentage also continued to be negatively impacted by inflationary cost increases. While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost savings initiatives should help to offset this impact to our gross margins.
Operating margin as a percentage of net sales for the three months ended September 30, 2024 increased to 9.3% as compared to 9.0% for the same period in 2023. Included in our operating margin were selling, general and administrative expenses of $81.2 million, or 20.3% of net sales for the three months ended September 30, 2024 compared to $79.8 million, or 20.6% of net sales, for the same period in 2023. The $1.4 million increase in selling, general and administrative expenses in the third quarter of 2024 as compared to the third quarter of 2023 is principally due to (1) increased rent and incremental expenses of approximately $1.1 million as we transition away from our Edwardsville, Kansas distribution center to our new distribution facility in Shawnee, Kansas, (2) higher distribution and freight costs of $0.5 million related to higher sales, and (3) higher interest related costs of $0.3 million incurred in our supply chain financing arrangements, (4) partially offset by $1.0 million of derivative gains from forward foreign exchange contracts executed during the third quarter to economically hedge the purchase price on the pending Nissens Automotive acquisition.
Overall, our core automotive aftermarket business remains stable, and we continue to be optimistic about the long-term growth potential of the complementary markets served in our Engineered Solutions operating segment.
New Distribution Facility in Shawnee, Kansas
In May 2023, we signed a lease for a new distribution facility in Shawnee, Kansas with a lease commencement date of July 1, 2023. The new facility will expand our total distribution network square footage to meet our growing demands in the automotive aftermarket industry. The new 575,000 square foot facility will replace our current 363,000 square foot facility in Edwardsville, Kansas, and integrate state-of-the-art technologies to deliver improved logistics capabilities, operational efficiencies, as well as enhanced employee, customer and supplier experiences. The new facility is located just five miles away from our Edwardsville facility, enabling us to retain our existing workforce avoiding the additional costs of hiring and training. The facility will have a phased opening that began in 2024 and will be fully operational in early 2025. We will incur additional costs in 2024 and 2025 during the phase-in period while we operate the two facilities.
Separation Program
During the second quarter of 2024, as part of our commitment to optimize our cost structure and provide professional development opportunities to our employees, we offered a voluntary retirement incentive package of severance and other benefit enhancements to eligible employees in the United States and Canada. The offer period ended on June 14, 2024. During the third quarter of 2024, we expanded the program to include involuntary separations. We recorded expenses of $5.6 million in the third quarter of 2024, with additional expenses to be recorded of approximately $1.3 million in the remainder of 2024, $0.6 million in 2025, and $0.1 million in 2026 for an aggregate cost of approximately $7.6 million. It is anticipated that the overall separation program will reduce operating expenses for the remainder of 2024. Expenses incurred pursuant to the program are recorded in restructuring and integration expenses in our statement of operations.
We continue to look for opportunities to reduce our operating cost structure to remain competitive while continuing to grow our business.
Impact of Global Supply Chain Disruption and Inflation
Disruptions in the global economy have impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. In response to the global supply chain volatility and inflationary cost increases, we have taken, and continue to take, several actions to mitigate the impact by working closely with our suppliers and customers to minimize any potential adverse impacts on our business, including implementing cost savings initiatives and the pass through of higher costs to our customers in the form of price increases, and maintaining inventory at levels to minimize potential disruptions from out-of-stock raw materials and components to ensure higher fill rates with our customers. We believe that we have also benefited from our geographically diversified manufacturing footprint and our strategy to bring more product manufacturing in-house, especially with respect to product availability and fill rates. We expect these inflationary trends to continue for some time, and while we believe that we will be able to somewhat offset the impact, there can be no assurances that unforeseen future events in the global supply chain affecting the availability of materials and components, and/or increasing commodity pricing, will not have an adverse effect on our business, financial condition and results of operations.
Sustainability
Our Company was founded in 1919 on the values of integrity, common decency and respect for others. These values 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 continued focus on many important sustainability issues.
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 usage of energy and water, reducing our generation of waste, increasing our recycling efforts and reducing our Scope 1 and Scope 2 greenhouse gas emissions. Additionally, we believe our product offering contributes to a greener car parc through several key product categories that are critical components in automotive systems designed to improve fuel economy and reduce harmful emissions, such as fuel injectors, exhaust gas recirculation valves, sensors and tubes, and evaporative emission control system components. We also bring to market alternative energy products, which utilize cleaner burning fuels or are designed for electric or hybrid electric vehicles, and we remanufacture key categories within our product portfolio, such as air conditioning compressors, diesel injectors and diesel pumps, through processes that save energy and reduce waste.
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 “Sustainability” 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.
Comparison of the Three Months Ended September 30, 2024 to the Three Months Ended September 30, 2023
Sales. Consolidated net sales for the three months ended September 30, 2024 were $399.3 million, an increase of $12.9 million, or 3.3%, compared to $386.4 million in the same period of 2023, with the majority of our net sales to customers located in the United States. Net sales increased in all 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 three months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended September 30,
2024
2023
Vehicle Control
Engine Management (Ignition, Emissions and Fuel Delivery)
$
121,432
$
113,188
Electrical and Safety
63,237
62,049
Wire Sets and Other
16,208
15,700
Total Vehicle Control
200,877
190,937
Temperature Control
AC System Components
95,698
94,385
Other Thermal Components
30,287
29,258
Total Temperature Control
125,985
123,643
Engineered Solutions
Commercial Vehicle
22,625
18,701
Construction/Agriculture
8,082
9,974
Light Vehicle
24,287
24,123
All Other
17,409
19,035
Total Engineered Solutions
72,403
71,833
Other
—
—
Total
$
399,265
$
386,413
Vehicle Control’s net sales for the three months ended September 30, 2024 increased $9.9 million, or 5.2%, to $200.9 million compared to $190.9 million in the same period of 2023. Demand in the Vehicle Control aftermarket segment remains relatively stable across our major product groups.
Temperature Control’s net sales for the three months ended September 30, 2024 increased $2.3 million, or 1.9%, to $126 million compared to $123.6 million in the same period of 2023. Temperature Control’s net sales for the third quarter of 2024 reflects continued strong customer orders due to warmer seasonal weather compared to the same period in 2023. Overall, full year results at Temperature Control will be dependent upon ongoing weather conditions and customer inventory levels.
Engineered Solutions’ net sales for the three months ended September 30, 2024 increased $0.6 million, or 0.8%, to $72.4 million compared to $71.8 million in the same period of 2023. Overall, net sales in our Engineered Solutions operating segment showed year-over-year improvement driven by business wins as well as successful cross-selling efforts.
Gross Margins.Gross margins, as a percentage of consolidated net sales, increased to 30.4% in the third quarter of 2024, compared to 29.7% in the third quarter of 2023. The following table summarizes gross margins by segment for the three months ended September 30, 2024 and 2023, respectively (in thousands):
Three Months Ended
September 30,
Vehicle Control
Temperature Control
Engineered Solutions
Other
Total
2024
Net sales
$
200,877
$
125,985
$
72,403
$
—
$
399,265
Gross margins
65,652
42,323
13,391
—
121,366
Gross margin percentage
32.7
%
33.6
%
18.5
%
—
30.4
%
2023
Net sales
$
190,937
$
123,643
$
71,833
$
—
$
386,413
Gross margins
60,865
37,785
16,110
—
114,760
Gross margin percentage
31.9
%
30.6
%
22.4
%
—
29.7
%
Compared to the third quarter of 2023, gross margin percentage at Vehicle Control and Temperature Control increased 0.8 percentage points from 31.9% to 32.7%, and 3.0 percentage points from 30.6% to 33.6%, respectively. Gross margin percentage at Engineered Solutions decreased 3.9 percentage points from 22.4% to 18.5%.
While all segments benefited from favorable manufacturing cost absorption due to higher production levels, the gross margin percentage increase in our Vehicle Control operating segment also reflects the impact of increased pricing and saving initiatives, despite lingering inflationary increases in material and labor costs. The gross margin percentage increase in our Temperature Control operating segment also results from the impact of higher sales volumes, customer mix and the impact of cost control measures. Gross margins as a percentage of net sales in our Engineered Solutions operating segment decreased in the third quarter of 2024 when compared to the comparable period in 2023 driven primarily by inflationary cost increases. While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost savings initiatives should help to offset much of this impact to our gross margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $81.2 million, or 20.3% of consolidated net sales, in the third quarter of 2024, as compared to $79.8 million, or 20.6% of consolidated net sales, in the third quarter of 2023. The $1.4 million increase in selling, general and administrative expenses in the third quarter of 2024 as compared to the third quarter of 2023 is principally due to (1) increased rent and incremental expenses of approximately $1.1 million as we transition away from our Edwardsville, Kansas distribution center to our new distribution facility in Shawnee, Kansas, (2) higher distribution and freight costs of $0.5 million related to higher sales, and (3) higher interest related costs of $0.3 million incurred in our supply chain financing arrangements, (4) partially offset by $1.0 million of derivative gains from forward foreign exchange contracts executed during the third quarter to economically hedge the purchase price on the pending Nissens Automotive acquisition.
Restructuring and Integration Expenses. Restructuring and integration expenses were $3.0 million for the three months ended September 30, 2024 compared to $0.2 million in the same period of 2023. Restructuring and integration expenses incurred in the third quarter of 2024 relate primarily to the Separation Program announced in the second quarter of 2024 and expanded to encompass involuntary separations in the third quarter of 2024 as part of our commitment to optimizing our cost structure and providing professional development opportunities to our employees. Expenses in the third quarter of 2024 of approximately $3.0 million related to the program consists of severance and other benefit enhancements.
Restructuring and integration expenses of $0.2 million in the third quarter of 2023 relate to the Cost Reduction Initiative announced in the fourth quarter of 2023. We anticipate that the Cost Reduction Initiative will be substantially completed by the end of 2024.
Operating Income. Operating income was $37.1 million, or 9.3% of consolidated net sales, in the third quarter of 2024, compared to $34.8 million, or 9% of consolidated net sales, in the third quarter of 2023. The year-over-year increase in operating income of $2.3 million is primarily the result of higher net sales and gross margin percentage, offset, in part, by higher restructuring and integration expenses, and selling, general and administrative expenses.
Other Non-Operating Income, Net. Other non-operating income, net was $2.1 million in the third quarter of 2024, compared to $1.7 million in the third quarter of 2023. The year-over-year increase in other non-operating income, net primarily results from the favorable impact of changes in foreign currency exchange rates.
Interest Expense. Interest expense decreased to $3.1 million in the third quarter of 2024, compared to $3.6 million in the third quarter of 2023. The year-over-year decrease in interest expense reflects the impact of lower average outstanding borrowings in the third quarter of 2024 when compared to the third quarter of 2023, partially offset by the write off of $1.3 million of unamortized financing costs related to the refinancing of our 2022 Credit Agreement.
Income Tax Provision. The income tax provision in the third quarter of 2024 was $9.3 million at an effective tax rate of 25.7% compared to $8 million at an effective tax rate of 24.3% for the same period in 2023. The increase in the effective tax rate is primarily due to higher earnings and taxes in foreign jurisdictions and taxes withheld on cash repatriated from foreign jurisdictions.
Loss from Discontinued Operations. Loss from discontinued operations, net of income taxes, during the third quarter of 2024 and 2023 of $22.8 million and $18.2 million, respectively, reflects information contained in the actuarial studies performed as of August 31, 2024 and 2023, other information available and considered by us, and legal expenses associated with our asbestos related liability. The loss from discontinued operations for the third quarter of 2024 and 2023 primarily consists of a $29.3 million and $23.8 million pre-tax provision, respectively, to increase our indemnity liability in line with the August 31, 2024 and 2023 actuarial studies; As discussed more fully in Note 18, “Commitments and Contingencies” in the notes to our consolidated financial statements (unaudited), we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
Net Earnings Attributable to Noncontrolling Interest. Net earnings 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 $0.3 million and $0.1 million during the three months ended September 30, 2024 and 2023, respectively.
Comparison of the Nine Months Ended September 30, 2024 to the Nine Months Ended September 30, 2023
Sales. Consolidated net sales for the nine months ended September 30, 2024 were $1,120.5 million, an increase of $53.0 million, or 4.7%, compared to $1,067.5 million in the same period of 2023, with the majority of our net sales to customers in the United States. Net sales increased in all 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 nine months ended September 30, 2024 and 2023 (in thousands):
Nine Months Ended September 30,
2024
2023
Vehicle Control
Engine Management (Ignition, Emissions and Fuel Delivery)
$
353,046
$
342,860
Electrical and Safety
172,772
166,720
Wire Sets and Other
49,324
49,723
Total Vehicle Control
575,142
559,303
Temperature Control
AC System Components
245,628
217,913
Other Thermal Components
76,446
75,210
Total Temperature Control
322,074
293,123
Engineered Solutions
Commercial Vehicle
69,016
59,158
Construction/Agriculture
27,631
32,804
Light Vehicle
70,776
71,123
All Other
55,858
52,005
Total Engineered Solutions
223,281
215,090
Other
—
—
Total
$
1,120,497
$
1,067,516
Vehicle Control’s net sales for the nine months ended September 30, 2024 increased $15.8 million, or 2.8%, to $575.1 million compared to $559.3 million in the same period of 2023. Demand in the Vehicle Control aftermarket segment remains relatively stable across our major product groups.
Temperature Control’s net sales for the nine months ended September 30, 2024 increased $29.0 million, or 9.9%, to $322.1 million compared to $293.1 million in the same period of 2023. Temperature Control’s net sales for the first nine months of 2024 reflect the impact of warmer seasonal weather conditions driving customer orders in 2024 as compared to the first nine months of 2023. Overall, full year results at Temperature Control will be dependent upon ongoing weather conditions and customer inventory levels.
Engineered Solutions’ net sales for the nine months ended September 30, 2024 increased $8.2 million, or 3.8%, to $223.3 million compared to $215.1 million in the same period of 2023. Overall, net sales in our Engineered Solutions operating segment showed a year-over-year improvement driven by business wins as well as successful cross-selling efforts.
Gross Margins. Gross margins, as a percentage of consolidated net sales, of 28.8% in the first nine months of 2024 remained flat compared to the same period in 2023. The following table summarizes gross margins by segment for the nine months ended September 30, 2024 and 2023, respectively (in thousands):
Nine Months Ended
September 30,
Vehicle Control
Temperature Control
Engineered Solutions
Other
Total
2024
Net sales
$
575,142
$
322,074
$
223,281
$
—
$
1,120,497
Gross margins
184,520
98,621
39,194
—
322,335
Gross margin percentage
32.1
%
30.6
%
17.6
%
—
28.8
%
2023
Net sales
$
559,303
$
293,123
$
215,090
$
—
$
1,067,516
Gross margins
179,446
83,452
44,398
—
307,296
Gross margin percentage
32.1
%
28.5
%
20.6
%
—
28.8
%
Compared to the first nine months of 2023, gross margin percentage at Vehicle Control remained flat at 32.1%, gross margin percentage at Temperature Control increased 2.1 percentage points from 28.5% to 30.6%, and gross margin percentage at Engineered Solutions decreased 3 percentage points from 20.6% to 17.6%.
While all segments benefited from favorable manufacturing cost absorption due to higher production levels, the gross margin percentage in our Vehicle Control operating segment also reflects the impact of the lingering inflationary increases in material and labor costs, which offset the positive impact of pricing and saving initiatives. The gross margin percentage increase in our Temperature Control operating segment also reflects the impact of higher sales volumes, customer mix and the impact of cost control measures. Gross margins as a percentage of net sales in our Engineered Solutions operating segment decreased in the third quarter of 2024 when compared to the comparable period in 2023 driven primarily by unfavorable customer sales mix and inflationary cost increases. While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost savings initiatives should help to offset much of this impact to our gross margin.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $239.8 million, or 21.4% of consolidated net sales, in the first nine months of 2024, as compared to $223.3 million, or 20.9% of consolidated net sales in the first nine months of 2023. The $16.6 million increase in selling, general and administrative expenses as compared to the first nine months of 2023 is principally due to (1) higher distribution and freight costs of $5.9 million related to higher sales, (2) increased rent and incremental expenses of approximately $3.5 million as we transition away from our Edwardsville, Kansas distribution center to our new distribution facility in Shawnee, Kansas, (3) $3.9 million higher general and administrative largely driven by higher accrued employee bonuses, (4) $2.4 million of due diligence, legal and other professional fees related to our planned acquisition of Nissens Automotive, and (5) higher interest related costs of $2.2 million incurred in our supply chain financing arrangements, (6) partially offset by $1.0 million of derivative gains from forward foreign exchange contracts executed during the third quarter to economically hedge the purchase price on the pending Nissens Automotive acquisition.
Restructuring and Integration Expenses. Restructuring and integration expenses were $5.8 million in the nine months ended September 30, 2024 compared to $1.4 million in the comparable period of 2023. Restructuring and integration expenses incurred in the first nine months of 2024 relate primarily to the Separation Program announced in the second quarter of 2024 and expanded to encompass involuntary separations in the third quarter of 2024 as part of our commitment to optimizing our cost structure and provide professional development opportunities to our employees. Expenses in the first nine months of 2024 of approximately $5.6 million related to the program consists of severance and other benefit enhancements.
Restructuring and integration expenses of $1.4 million in the nine months ended September 30, 2023 relate to the Cost Reduction Initiative announced in the fourth quarter of 2023. We anticipate that the Cost Reduction Initiative will be substantially completed by the end of 2024.
Operating Income. Operating income was $76.7 million, or 6.8% of consolidated net sales, in the nine months ended September 30, 2024, compared to $82.7 million, or 7.7% of consolidated net sales, in the nine months ended September 30, 2023. The year-over-year decrease in operating income of $6.0 million is primarily the result of higher selling, general and administrative expenses, and higher restructuring and integration expenses, offset, in part, by the impact of higher net sales.
Other Non-Operating Income, Net. Other non-operating income, net was $5.1 million in the nine months of 2024, compared to $2.8 million for the same period in 2023. The year-over-year increase in other non-operating income, net results from the increase in year-over-year equity income from our joint ventures and the favorable impact of changes in foreign currency exchange rates. Equity income from our joint ventures increased irrespective of the year-over-year decline in the equity income of Gwo Yng, reflecting the impact of our acquisition of an additional 15% equity interest in Gwo Yng in July 2023. Commencing on the date of our equity interest increase, the financial results of Gwo Yng were no longer accounted for under the equity method of accounting. Instead, Gwo Yng’s financial results are reported on a consolidated basis. As such, other non-operating income, net includes equity income of Gwo Yng of $0.7 million in the first nine months of 2023.
Interest Expense. Interest expense decreased to $8.0 million in the nine months of 2024, compared to $10.8 million for the same period in 2023. The year-over-year decrease in interest expense reflects the impact of lower average outstanding borrowings during the nine months ended September 30, 2024 when compared to the comparable period of 2023, partially offset by the write off of $1.3 million of unamortized financing costs related to the refinancing of our 2022 Credit Agreement.
Income Tax Provision. The income tax provision for the nine months ended September 30, 2024 was $18.7 million at an effective tax rate of 25.3%, compared to $18.7 million at an effective tax rate of 25% for the same period in 2023. The effective tax rate was essentially flat year-over-year.
Loss from Discontinued Operations. Loss from discontinued operations, net of income taxes, during the nine months ended September 30, 2024 and 2023 of $24.7 million and $28.2 million, respectively, reflects information contained in the actuarial studies performed as of August 31, 2024 and 2023, other information available and considered by us, and legal expenses associated with our asbestos related liability. The loss from discontinued operations for the nine months ended September 30, 2024 and 2023 primarily consists of a $29.3 million and $23.8 million pre-tax provision, respectively, to increase our indemnity liability in line with the August 31, 2024 and 2023 actuarial studies; As discussed more fully in Note 18, “Commitments and Contingencies” in the notes to our consolidated financial statements (unaudited), we are responsible for certain future liabilities relating to alleged exposure to asbestos containing products.
Net Earnings Attributable to Noncontrolling Interest. Net earnings 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 $0.8 million and $0.2 million during the nine months ended September 30, 2024 and 2023, respectively.
For a detailed discussion on the restructuring and integration costs, see Note 4, “Restructuring and Integration Expenses,” of the notes to our consolidated financial statements (unaudited).
Liquidity and Capital Resources
Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions. The following table summarizes our primary sources of funds including ongoing net cash flows from operating activities and availability under our Credit Agreement.
September 30,
December 31,
(In thousands)
2024
2023
2023
Operating cash flows
$
78,200
$
132,893
$
144,260
Total debt
$
142,848
$
147,596
$
156,211
Cash
26,348
28,485
32,526
Net debt
$
116,500
$
119,111
$
123,685
Remaining borrowing capacity (a)
$
287,680
$
343,981
$
334,180
Total liquidity
314,028
372,466
366,706
(a) $311.6 million of delayed draw term loan facilities will become available to fund the acquisition of Nissens Automotive at closing
Operating Activities. During the first nine months of 2024, cash provided by operating activities was $78.2 million compared to $132.9 million in the same period of 2023.
The decrease in cash provided by operating activities resulted primarily from the lower year-over-year decrease in inventory of $2.9 million compared to $54.3 million in the same period of 2023, the larger increase in accounts receivable of $59.0 million compared to $38.9 million in the same period of 2023 due to higher net sales, and the lower year-over-year increase in accounts payable of $4.5 million compared to $15.9 million in the same period of 2023, partially offset by a larger increase in sundry receivables and accrued expenses of $45.5 million compared to $12.3 million in the same period of 2023.
During the year ended December 31, 2023, we generated significant operating cash flow by reducing our inventory to more normalized levels while actively managing our accounts receivable and accounts payable. We continue to actively manage our working capital to maximize our operating cash flow.
Investing Activities. Cash used in investing activities was $34.1 million in the first nine months of 2024, compared to $15.1 million in the same period of 2023. Investing activities during the first nine months of 2024 and 2023 primarily consisted of capital expenditures of $34.1 million and $18.0 million, respectively. The year-over-year increase in capital expenditures primarily relates to the implementation of upgraded automation equipment, racking and other equipment, as we invest in the start-up of our new distribution facility in Shawnee, Kansas.
Financing Activities. Cash used in financing activities was $47.7 million in the first nine months of 2024 as compared to $111 million in the same period of 2023. During the first nine months of 2024, we (1) decreased our borrowings by $13.4 million, (2) paid dividends to SMP shareholders of $19.0 million, (3) made cash payments for the repurchase of shares of our common stock of $10.4 million, and (4) paid expenses related to the refinancing of our credit agreement of $4.2 million. Cash provided by our operating activities in the nine months ended September 30, 2024 was used to reduce our borrowings and fund our investing activities, pay dividends, and repurchase shares of our common stock.
During the first nine months of 2023, we (1) reduced our borrowings under our 2022 Credit Agreement by $92.1 million; and (2) paid dividends to SMP shareholders of $18.8 million. Cash provided by our operating activities in the nine months ended September 30, 2023 was used to reduce our borrowings under our 2022 Credit Agreement, fund our investing activities and pay dividends.
Quarterly dividends to SMP shareholders were paid at a rate of $0.87 in 2024 and $0.87 in 2023.
Liquidity.
Our primary sources of funds are ongoing net cash flows from operating activities and availability under our 2024 Credit Agreement (as detailed below).
In May 2024 and July 2024, the Company amended it's then-existing Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders ("2022 Credit Agreement"), to transition from the Canadian Dollar Offered Rate (“CDOR”) to the Canadian Overnight Repo Rate Average (“CORRA”) for benchmark borrowings denominated in Canadian dollars and to provide for a new $125 million term loan and the use of funds available under the revolving credit facility to finance the acquisition of Nissens Automotive and related transaction costs. For additional information on our agreement to acquire Nissens Automotive see Note 3, “Business Acquisitions and Investments.”
In September 2024, the Company refinanced its existing 2022 Credit Agreement with a new five-year Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders (“2024 Credit Agreement”). The 2024 Credit Agreement matures on September 16, 2029 and provides for an approximately $750 million credit facility, comprised of a $430 million multi-currency revolving credit facility ("global tranche"); (ii) a $10 million multi-currency revolving credit facility, that will be available to one or more wholly-owned Danish subsidiaries of the Company ("Danish tranche"); (iii) a $200 million delayed draw term loan facility in U.S. dollars; and (iv) a 100 million euros delayed draw term loan facility. The revolving credit facility has a $25 million sublimit for the issuance of letters of credit, and a $30 million sublimit for the borrowing of swingline loans.
Borrowings under the 2024 Credit Agreement were used to repay all outstanding borrowings under the 2022 Credit Agreement and will be used for general corporate purposes of the Company and its subsidiaries, and to finance the Company’s acquisition of Nissens Automotive and related transaction costs. The term loans amortize in quarterly installments of 1.25% in each of the first two years following the funding, 1.875% for the next two years, and 2.50% in each quarter thereafter. The Company may request up to two one-year extensions of the maturity date.
The Company may, subject to customary conditions, increase the global tranche or obtain incremental term loans in an aggregate amount not to exceed (x) the greater of (i) $168 million and (ii) 100% of consolidated EBITDA for the four fiscal quarters ended most recently before such date, plus (y) any voluntary prepayment of term loans, plus (z) any amount that, after giving effect to the increase, the pro forma First Lien Net Leverage Ratio (as defined in the 2024 Credit Agreement) does not exceed 2.75 to 1.00. The Company may also, subject to customary conditions, request to increase the Danish tranche by up to $5 million.
Borrowings bear interest at the applicable interest rate index selected by the Company based on the particular currency borrowed plus a credit spread adjustment depending on the index, and a margin ranging from 1.25% to 2.25% per annum based on the total net leverage ratio of the Company and its restricted subsidiaries. The Company may select interest periods of one, three or six months depending on the index. Interest is payable at the end of the selected interest period, but no less frequently than quarterly.
The Company may prepay the borrowings, in whole or in part, at any time without premium or penalty, subject to certain conditions.
The Company’s obligations under the 2024 Credit Agreement are guaranteed by its material domestic subsidiaries (each, a “Guarantor”), and secured by a first priority perfected security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions. The collateral security described above also secures certain banking services obligations and interest rate swaps and currency or other hedging obligations of the Company owing to any of the then existing lenders or any affiliates thereof.
Outstanding borrowings at September 30, 2024 under the credit agreements were $140 million of long-term debt and at December 31, 2023 were $156 million, consisting of current borrowings of $5 million and long-term debt of $151 million. Letters of credit outstanding under the credit agreements were $2.3 million at September 30, 2024 and December 31, 2023.
At September 30, 2024, the weighted average interest rate under the 2024 Credit Agreement was 5.0%, which consisted of $140 million in borrowings under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of borrowings. At December 31, 2023, the weighted average interest rate under the 2022 Credit Agreement was 5%, which consisted of $156 million in borrowings at 5% under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of borrowings. During the nine months ended September 30, 2024, our average daily alternative base rate loan balance was $1 million, compared to a balance of $0.1 million for the nine months ended September 30, 2023 and a balance of $0.1 million for the year ended December 31, 2023.
The 2024 Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The 2024 Credit Agreement also contains customary events of default.
In November 2023, our Polish subsidiary, SMP Poland sp. z.o.o., further amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce. The overdraft facility, as amended, provides for borrowings under the facility in euros and U.S. dollars. Under the amended terms, the overdraft facility provides for borrowings of up to Polish zloty 30 million (approximately $7.5 million) if borrowings are solely in Polish zloty, or up to 85% of the Polish zloty 30 million limit (approximately $6.4 million) if borrowings are in euros and/or U.S. dollars. The overdraft facility had an original maturity date in March 2024, with automatic three-month renewals until June 2027, subject to cancellation by either party, at its sole discretion, at least 30 days prior to the commencement of the three-month renewal period. The facility automatically renewed in September 2024 to a December 2024 maturity date. Borrowings under the amended overdraft facility will bear interest at a rate equal to (1) the one month Warsaw Interbank Offered Rate (“WIBOR”) + 1.0% for borrowings in Polish zloty, (2) the one month Euro Interbank Offered Rate (“EURIBOR”) + 1.0% for borrowings in euros, and (3) the Mid-Point of the Fed Target Range + 1.25% for borrowings in U.S. dollars. Borrowings under the overdraft facility are guaranteed by Standard Motor Products, Inc., the ultimate parent company. There were $1.3 million in borrowings outstanding under the overdraft facility at September 30, 2024 no borrowings outstanding at December 31, 2023.
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 accounted for as a sale.
Pursuant to these agreements, we sold $285.4 million and $686.3 million of receivables during the three and nine months ended September 30, 2024, respectively, and $260.4 million and $643 million for the comparable periods in 2023. Receivables presented at financial institutions and not yet collected as of September 30, 2024 were approximately $1.8 million and remained in our accounts receivable balance as of that date. All receivables sold were reflected as a reduction of accounts receivable in the consolidated balance sheet at the time of sale. A charge in the amount of $14.9 million and $38.3 million related to the sale of receivables was included in selling, general and administrative expense in our consolidated statements of operations for the three and nine months ended September 30, 2024, respectively, and $14.6 million and $36.1 million for the comparable periods in 2023.
To the extent that these arrangements are terminated, our financial condition, results of operations, cash flows and liquidity could be adversely affected by extended payment terms, or delays or failures in collecting trade accounts receivable. The utility of the supply chain financing arrangements also depends upon a benchmark reference rate for the purpose of determining the discount rate applicable to each arrangement. If the benchmark reference rate increases significantly, we may be negatively impacted as we may not be able to pass these added costs on to our customers, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.
In July 2022, our Board of Directors authorized the purchase of up to $30 million of our common stock under a stock repurchase program. Stock will be purchased from time to time in the open market, or through private transactions, as market conditions warrant. Under this program, there were no repurchases of common stock during the three months ended September 30, 2024. In the nine months ended September 30, 2024, we repurchased 321,229 shares of our common stock at a total cost of $10.4 million. As of September 30, 2024, there was approximately $19.6 million available for future stock purchases under the program. From the end of the third quarter through October 28, 2024, there have been no additional repurchases of our common stock under the program.
Material Cash Commitments
Material cash commitments as of September 30, 2024 consist of required cash payments to service our outstanding borrowings of $140 million under our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, the future minimum cash requirements of $126.7 million through 2034 under operating leases, and expected future cash payments relating to our restructuring activities of $7.1 million with approximately $3.3 million paid in the remainder of 2024, approximately $3.2 million in 2025 and approximately $0.6 million thereafter. All of our other known cash commitments as of September 30, 2024 are not material. For additional information related to our material cash commitments, see Note 4, “Restructuring and Integration Expenses”, Note 8, “Leases,” and Note 9, “Credit Facilities and Long-Term Debt,” in the notes to our consolidated financial statements (unaudited).
We anticipate that our cash flow from operations, available cash, and available borrowings under our Credit Agreement will be adequate to meet our future liquidity needs for at least the next twelve months. Significant assumptions underlie this belief, including, among other things, that we will be able to mitigate the future impact, if any, of disruptions in the supply chain caused by geo-political risks, future increases in interest rates, and significant inflationary cost increases in raw materials, labor and transportation that we are unable to pass through our customers, macroeconomic uncertainty, and that there will be no material adverse developments in our business, liquidity or capital requirements. If material adverse developments were to occur in any of these areas, there can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our Credit Agreement in amounts sufficient to enable us to pay the principal and interest on our indebtedness, or to fund our other liquidity needs. In addition, if we default on any of our indebtedness, or breach any financial covenant in our Credit Agreement, our business could be adversely affected.
For further information regarding the risks in our business, refer to Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023.
We have identified the accounting policies and estimates surrounding the “Valuation of Long-Lived and Intangible Assets and Goodwill,” and “Asbestos Litigation” as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies and estimates on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies and estimates affect our reported and expected financial results. There have been no material changes to these and other accounting policies and estimates from the information provided in Note 1 of the Notes to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2023.
You should be aware that preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. We can give no assurances that actual results will not differ from those estimates. Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of the disruptions in the supply chain caused by geo-political risks, future increases in interest rates, inflation, macroeconomic uncertainty, and other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.
Recently Issued Accounting Pronouncements
For a detailed discussion on recently issued accounting pronouncements and their impact on our consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements (unaudited).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosure 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.
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 September 30, 2024 and December 31, 2023, 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. To reduce our potential exposure to exchange rate risk due to our planned acquisition of Nissens Automotive in euros, we executed $100 million of forward foreign exchange contracts that mature in November 2024.
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 to changes in interest rates on our variable rate borrowings, and to manage a portion of our exposure to changes in interest rates, we occasionally enter into interest rate swap agreements.
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 2024 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.
As of September 30, 2024, we had approximately $140 million of outstanding borrowings under our 2024 Credit Agreement, of which approximately $40 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. Based upon our current level of borrowings under our facilities and our excess cash, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have an approximate $0.1 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 three and nine months ended September 30, 2024, we sold $285.4 million and $686.3 million of receivables, respectively. 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 $2.9 million and $6.9 million negative impact on our earnings or cash flows during the three and nine months ended September 30, 2024, respectively. The charge related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations.
Other than the aforementioned, there have been no significant changes to the information presented in Item 7A (Market Risk) of our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.
(b)Changes in Internal Control Over Financial Reporting.
During the quarter ended September 30, 2024, we have not made any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting. We review, document and test our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control – Integrated Framework. We may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts may lead to various changes in our internal control over financial reporting.
The information required by this Item is incorporated herein by reference to the information set forth in Item 1, “Consolidated Financial Statements” of this Report under the caption “Asbestos” appearing in Note 18, “Commitments and Contingencies,” of the notes to our consolidated financial statements (unaudited).
Credit Agreement, dated as of September 16, 2024, among Standard Motor Products, Inc., the Foreign Subsidiary Borrowers party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Joint Book Runner and Joint Lead Arranger, Bank of America, N.A., as Syndication Agent, Citizens Bank, N.A., as Documentation Agent and Joint Lead Arranger, BofA Securities, Inc., as Joint Book Runner and Joint Lead Arranger, and the Lenders party thereto.
Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and Exchange Commission.
101.INS**
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
**In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to the Original Filing shall be deemed to be “furnished” and not “filed.”
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.