STANDARD MOTOR PRODUCTS, INC. This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements in this Report are indicated by words such
as "anticipates," "expects," "believes," "intends," "plans," "estimates,"
"projects," "strategies" and similar expressions. These statements represent our
expectations based on current information and assumptions and are inherently
subject to risks and uncertainties. Our actual results could differ materially
from those which are anticipated or projected as a result of certain risks and
uncertainties, including, but not limited to, changes or loss in business
relationships with our major customers and in the timing, size and continuation
of our customers' programs; changes in our supply chain financing arrangements,
such as changes in terms, termination of contracts and/or the impact of rising
interest rates; the ability of our customers to achieve their projected sales;
competitive product and pricing pressures; increases in production or material
costs, including procurement costs resulting from higher tariffs, and
inflationary cost increases in raw materials, labor and transportation, that
cannot be recouped in product pricing; the performance of the aftermarket,
non-aftermarket, industrial equipment and original equipment markets; changes in
the product mix and distribution channel mix; economic and market conditions;
successful integration of acquired businesses; our ability to achieve benefits
from our cost savings initiatives; product liability and environmental matters
(including, without limitation, those related to asbestos-related contingent
liabilities and remediation costs at certain properties); the effects of a
widespread public health crisis, including the coronavirus (COVID-19) pandemic;
the effects of disruptions in the supply chain;
Overview
With over 100 years in business, we are a leader in the industries we serve and
a trusted partner for all of our stakeholders. We manufacture and distribute
premium replacement parts for our customers in the automotive aftermarket, while
providing customized solutions for vehicle control and thermal management
products in diversified end markets represented by our Engineered Solutions
segment. We are a global manufacturer with over 6,000 employees (inclusive of
temporary and joint venture employees) across nearly 39 manufacturing,
distribution and engineering facilities and offices located in
Beginning on
Engineered Solutions is a new operating segment created by carving out all non-aftermarket business from our prior Engine Management and Temperature Control operating segments, which will now solely reflect parts sales to aftermarket channels. Our Engineered Solutions segment supplies custom-engineered solutions to vehicle and equipment manufacturers in highly diversified global end-markets such as commercial and light vehicles, construction, agriculture, power sports and marine, and is expected to provide a platform for growth. Segment offerings include product categories from both of our legacy operating segments, and offer a broad array of conventional and future-oriented technologies, including those that are specific to vehicle electrification as well as those that are powertrain-neutral.
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Vehicle Control is the new name for our Engine Management operating segment. It includes our core aftermarket business after carving out of all non-aftermarket business to our Engineered Solutions operating segment. The Vehicle Control segment includes sales from three new major product groups - (1) Ignition, Emissions & Fuel Delivery, which includes the traditional internal combustion engine (ICE) dependent categories; (2) Electrical & Safety, which includes powertrain neutral vehicle technologies such as electrical switches/relays, safety related products such as anti-lock brake and vehicle speed sensors, tire pressure monitoring, park assist sensors, and advanced driver assistance components; and (3) Wire Sets & Other, which includes spark plug wire sets and other related products, and are product categories we have noted to be in secular decline based upon product life cycle.
Our Temperature Control operating segment remains substantially unchanged, as only a small portion of its business moved to Engineered Solutions, and this legacy aftermarket business segment is poised to benefit from the broader adoption of air conditioning and other thermal systems. Those systems will provide passenger comfort regardless of the vehicles' powertrain, and are being developed to cool batteries and other products used on electric vehicles. Segment offerings include sales from thermal products in the aftermarket business under two major product groups - (1) AC System Components, which includes compressors, connecting lines, heat exchangers, and expansion devices; and (2) Other Thermal Components, which includes parts that provide engine, transmission, electric drive motor, and battery temperature management.
The reorganization of our operating segments provides clarity regarding the unique dynamics and margin profiles of the markets served by each segment, better aligns with our strategic focus on diversification, and provides greater transparency into how we are positioned to capture growth opportunities of the future.
The following table summarizes the reorganization of our operating segments, and provides a comparison of our operating segments during 2022 and in 2023:
Operating Segments as of 2022 Operating Segments in 2023
Engine Management: Vehicle Control (Aftermarket):
Engine Management (Ignition,
Ignition, Emissions, Fuel & Safety Emissions & Fuel Delivery)
Wire and Cable Electrical & Safety
Wire Sets & Other
Temperature Control: Temperature Control (Aftermarket):
Compressors AC System Components
Other Climate Control Parts Other Thermal Components
Engineered Solutions (non-Aftermarket):
Commercial Vehicle
Light Vehicle
Construction & Agriculture
All Other
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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
Three Months Ended
March 31,
(In thousands, except per share data) 2023 2022
Net sales $ 328,028 $ 322,831
Gross profit 91,267 89,840
Gross profit % 27.8 % 27.8 %
Operating income 20,746 26,915
Operating income % 6.3 % 8.3 %Earnings from continuing operations before income taxes 17,109 27,559 Provision for income taxes
4,372 7,005
Earnings from continuing operations 12,737 20,554
Loss from discontinued operations, net of income taxes (780 ) (1,116 )
Net earnings 11,957 19,438
Net earnings (loss) attributable to noncontrolling interest 39 (8 )
Net earnings attributable to SMP 11,918 19,446
Per share data attributable to SMP - Diluted:
Earnings from continuing operations $ 0.57 $ 0.91
Discontinued operations (0.03 ) (0.04 )
Net earnings per common share $ 0.54 $ 0.87 Consolidated net sales for the three months ended
The increase in net sales in our Vehicle Control operating segment reflects the continued strength in the demand of our Engine Management (Ignition, Emissions and Fuel Delivery) aftermarket product line and the impact of increased pricing. The increase in net sales in the Vehicle Control segment in the first quarter of 2023 is in line with our expected growth rate of low single digits in the automotive aftermarket.
Net sales in both our Temperature Control and Engineered Solutions operating segments declined slightly when compared to the comparable period in the prior year. Temperature Control's net sales for the first quarter of 2023 reflect the impact of the timing of pre-season customer orders in 2023, and are in line with the strong pre-season customer orders of the first quarter of 2022 when sales were up 30% and customers replenished their prior year inventory levels. Overall, full year results at Temperature Control will be dependent upon summer weather conditions and customer inventory levels. Engineered Solutions' net sales decreased slightly year-over-year due to a change in one customer's production schedule however, we continue to be optimistic about the long-term growth potential of the complementary markets served in our newly created Engineered Solutions operating segment.
Gross margins as a percentage of net sales were flat at 27.8% in both the first quarter of 2023 and 2022. Gross margins in the first three months of 2023 reflect the positive impact of higher net sales and increased pricing, which were offset by lower fixed cost absorption due to lower production levels than those achieved in the same period in 2022, as we continued to work down our inventory levels, and continued inflationary cost increases in certain raw materials, labor and transportation expense. While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost initiatives coupled with our ability to pass through higher prices to our customers should help to offset much of this impact to our margins.
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Operating margin as a percentage of net sales for the three months ended
Overall, our core automotive aftermarket business remains strong, and we continue to be optimistic about the long term growth potential of the complementary markets we serve in our newly created Engineered Solutions operating segment.
Impact of
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 increasing inventory levels to minimize the obvious 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.
Environmental, Social, & Governance ("ESG")
Our Company was founded in 1919 on the values of integrity, common decency and respect for others. These values continue to this day and are embodied in our Code of Ethics, which has been adopted by the Board of Directors of the Company to serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business. These values also serve as the foundation for our increased focus on many important environmental, social and governance issues, such as environmental stewardship and our efforts to identify and implement practices that reduce our environmental impact while achieving our business goals; our attention to diversity, equity and inclusion, employee development, retention, and health and safety; and our community engagement initiatives, to name a few.
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We have made significant strides with respect to our ESG initiatives, building awareness of the environmental impact of our operations, and challenging ourselves to reduce our impact by reducing our usage of energy and water, reducing our generation of waste, increasing our recycling efforts and reducing our greenhouse gas emissions ("GHG"), with the ambition of achieving net-zero GHG emissions by 2050. With each year, we intend to further our commitment to improving our environmental stewardship and finding ways to give back to our communities. Additional information on our ESG initiatives can be found on our corporate website at ir.smpcorp.com under "Environmental & Social Responsibility" (including our most recent sustainability report) and at smpcares.smpcorp.com. Information on our corporate websites regarding our ESG initiatives are referenced for general information only and are not incorporated by reference in this Report.
Interim Results of Operations
Comparison of the Three Months Ended
Sales. Consolidated net sales for the three months ended
The following table summarizes consolidated net sales by segment and by major product group within each segment for the three months endedMarch 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Vehicle Control Engine Management (Ignition, Emissions and Fuel Delivery)$ 116,083 $ 109,149 Electrical and Safety 51,804 52,257 Wire Sets and Other 16,690 15,858 Total Vehicle Control 184,577 177,264 Temperature Control AC System Components 45,752 47,374 Other Thermal Components 26,654 25,684 Total Temperature Control 72,406 73,058 Engineered Solutions Commercial Vehicle 19,857 21,451 Construction/Agriculture 12,795 10,984 Light Vehicle 22,966 26,075 All Other 15,427 13,999 Total Engineered Solutions 71,045 72,509 Other - - Total$ 328,028 $ 322,831
Vehicle Control's net sales for the three months ended
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Temperature Control's net sales for the three months ended
Engineered Solutions' net sales for the three months ended
Gross Margins. Gross margins, as a percentage of consolidated net sales, were
flat at 27.8% in both the first quarter of 2023 and 2022. The following table
summarizes gross margins by segment for the three months ended
Three Months Ended Vehicle Temperature Engineered
March 31, Control Control Solutions Other Total
2023
Net sales $ 184,577 $ 72,406 $ 71,045 $ - $ 328,028
Gross margins 58,472 19,155 13,640 - 91,267
Gross margin percentage 31.7 % 26.5 % 19.2 % - 27.8 %
2022
Net sales $ 177,264 $ 73,058 $ 72,509 $ - $ 322,831
Gross margins 55,424 19,488 14,928 - 89,840
Gross margin percentage 31.3 % 26.7 % 20.6 % - 27.8 %
Compared to the first three months of 2022, gross margins at Vehicle Control increased 0.4 percentage points from 31.3% to 31.7%. Gross margins at Temperature Control decreased 0.2 percentage points from 26.7% to 26.5%, and gross margins at Engineered Solutions decreased 1.4 percentage points from 20.6% to 19.2%. Engineered Solutions gross margin as a percentage of sales is lower than that achieved in our Vehicle Control and Temperature Control aftermarket segments due to the different business profile with lower gross margins but comparable operating margins.
Gross margins in the first three months of 2023 reflect the positive impact of higher net sales and increased pricing, which were offset by lower fixed cost absorption due to lower production levels than those achieved in the same period in 2022, as we continued to work down our inventory levels, and continued inflationary cost increases in certain raw materials, labor and transportation expense. While we anticipate continued margin pressure resulting from inflationary headwinds, we believe that our annual cost initiatives coupled with our ability to pass through higher prices to our customers should help to offset much of this impact to our margins.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased to
Restructuring and Integration Expenses. Restructuring and integration expenses
were
Operating Income. Operating income was
Other Non-Operating Income (Expense), Net. Other non-operating income, net was
Interest Expense. Interest expense increased to
Income Tax Provision. The income tax provision in the first quarter of 2023 was
Loss from Discontinued Operations. During the first quarter of 2023 and 2022,
the loss from discontinued operations, net of tax was
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Net Earnings (Loss) Attributable to Noncontrolling Interest. Net earnings
(loss) attributable to noncontrolling interest relates to our 70% ownership in a
joint venture in
Restructuring and Integration Programs
For a detailed discussion on the restructuring and integration costs, see Note 4, "Restructuring and Integration Expenses," of the notes to our consolidated financial statements (unaudited).
Liquidity and Capital Resources
Operating Activities. During the first three months of 2023, cash used in
operating activities was
Net earnings during the first quarter of 2023 were
Investing Activities. Cash used in investing activities was
Financing Activities. Cash provided by financing activities was
During the first three months of 2022, (1) we increased borrowings under our
revolving credit facility by
Dividends of
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Liquidity.
Our primary cash requirements include working capital, capital expenditures, regular quarterly dividends, stock repurchases, principal and interest payments on indebtedness and acquisitions. Our primary sources of funds are ongoing net cash flows from operating activities and availability under our Credit Agreement (as detailed below).
In
Borrowings under the Credit Agreement were used to repay all outstanding
borrowings under the 2015 Credit Agreement, and pay certain fees and expenses
incurred in connection with the Credit Agreement, with future borrowings used
for other general corporate purposes of the Company and its subsidiaries. The
term loan amortizes in quarterly installments of 1.25% in each of the first four
years, and quarterly installments of 2.5% in the fifth year of the Credit
Agreement. The revolving facility has a
The Company may, upon the agreement of one or more then existing lenders or of
additional financial institutions not currently party to the Credit Agreement,
increase the revolving facility commitments or obtain incremental term loans by
an aggregate amount not to exceed (x) the greater of (i)
Term loan and revolver facility borrowings in
The Company's obligations under the Credit Agreement are guaranteed by its
material domestic subsidiaries (each, a "Guarantor"), and secured by a first
priority perfected security interest in substantially all of the existing and
future personal property of the Company and each Guarantor, subject to certain
exceptions. The collateral security described above also secures certain
banking services obligations and interest rate swaps and currency or other
hedging obligations of the Company owing to any of the then existing lenders or
any affiliates thereof. Concurrently with the Company's entry into the Credit
Agreement, the Company also entered into a seven year interest rate swap
agreement with
Outstanding borrowings at
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At
The Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement also contains customary events of default.
In
In order to reduce our accounts receivable balances and improve our cash flow, we are party to several supply chain financing arrangements, in which we may sell certain of our customers' trade accounts receivable to such customers' financial institutions. We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements is less than the cost of servicing our receivables with existing debt. Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale. As such, these transactions are being accounted for as a sale.
Pursuant to these agreements, we sold
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.
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In
Material Cash Commitments
Material cash commitments as of
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,
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
Critical Accounting Policies and Estimates
We have identified the accounting policies and estimates surrounding the
"Valuation of Long-Lived and Intangible Assets and
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,
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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).
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