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Published: 2022-10-31 00:00:00 ET

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number: 001-04743

Standard Motor Products, Inc.

(Exact name of registrant as specified in its charter)

New York		11-1362020
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

37-18 Northern Blvd., Long Island City, New York		11101
(Address of principal executive offices)		(Zip Code)

(718) 392-0200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $2.00 per share	SMP	New York Stock Exchange LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large Accelerated Filer ☑	Accelerated Filer ☐
	Non-Accelerated Filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

As of the close of business on October 27, 2022, there were 21,570,097 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION

		Page No.
Item 1.	Consolidated Financial Statements:

	Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2022 and 2021	3

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended September 30, 2022 and 2021	4

	Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	5

	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021	6

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months and Nine Months Ended September 30, 2022 and 2021	7

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	46

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 6.	Exhibits	48

Signatures		49

Index

PART I - FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except share and per share data)	2022			2021			2022			2021
	(Unaudited)						(Unaudited)
Net sales	$	381,373		$	370,310		$	1,063,616		$	988,939
Cost of sales		274,589			265,105			770,641			700,678
Gross profit		106,784			105,205			292,975			288,261
Selling, general and administrative expenses		73,199			66,509			204,551			183,316
Restructuring and integration expenses		—			166			44			166
Other income, net		30			8			43			8
Operating income		33,615			38,538			88,423			104,787
Other non-operating income, net		1,513			780			4,889			2,247
Interest expense		3,656			652			6,282			1,356
Earnings from continuing operations before taxes		31,472			38,666			87,030			105,678
Provision for income taxes		8,280			9,481			22,407			26,315
Earnings from continuing operations		23,192			29,185			64,623			79,363
Loss from discontinued operations, net of income taxes		(14,294	)		(5,122	)		(17,076	)		(7,139	)
Net earnings		8,898			24,063			47,547			72,224
Net earnings attributable to noncontrolling interest		52			13			129			32
Net earnings attributable to SMP (a)	$	8,846		$	24,050		$	47,418		$	72,192

Net earnings attributable to SMP
Earnings from continuing operations	$	23,140		$	29,172		$	64,494		$	79,331
Discontinued operations		(14,294	)		(5,122	)		(17,076	)		(7,139	)
Total	$	8,846		$	24,050		$	47,418		$	72,192

Per share data attributable to SMP
Net earnings per common share – Basic:
Earnings from continuing operations	$	1.08		$	1.32		$	2.97		$	3.57
Discontinued operations		(0.67	)		(0.23	)		(0.79	)		(0.32	)
Net earnings per common share – Basic	$	0.41		$	1.09		$	2.18		$	3.25

Net earnings per common share – Diluted:
Earnings from continuing operations	$	1.06		$	1.29		$	2.91		$	3.50
Discontinued operations		(0.66	)		(0.22	)		(0.77	)		(0.32	)
Net earnings per common share – Diluted	$	0.40		$	1.07		$	2.14		$	3.18

Dividend declared per share	$	0.27		$	0.25		$	0.81		$	0.75

Average number of common shares		21,427,393			22,090,195			21,719,281			22,201,398
Average number of common shares and dilutive common shares		21,847,602			22,543,781			22,153,348			22,678,114

(a) Throughout this Form 10-Q, “SMP” refers to Standard Motor Products, Inc. and subsidiaries.

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2022			2021			2022			2021
	(Unaudited)						(Unaudited)

Net earnings	$	8,898		$	24,063		$	47,547		$	72,224
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(8,279	)		(2,466	)		(15,445	)		(1,905	)
Derivative instruments		4,199			—			4,304			—
Pension and postretirement plans		(2	)		(4	)		(11	)		(13	)
Total other comprehensive income, net of tax		(4,082	)		(2,470	)		(11,152	)		(1,918	)
Total Comprehensive income		4,816			21,593			36,395			70,306
Comprehensive income (loss) attributable to noncontrolling interest, net of tax:
Net earnings		52			13			129			32
Foreign currency translation adjustments		(115	)		20			(176	)		(2	)
Comprehensive income (loss) attributable to noncontrolling interest, net of tax		(63	)		33			(47	)		30
Comprehensive income attributable to SMP	$	4,879		$	21,560		$	36,442		$	70,276

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)	September 30, 2022			December 31, 2021
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	17,525		$	21,755
Accounts receivable, less allowances for discounts and expected credit losses of $5,900 and $6,170 for 2022 and 2021, respectively		230,442			180,604
Inventories		534,310			468,755
Unreturned customer inventories		21,485			22,268
Prepaid expenses and other current assets		25,911			17,823
Total current assets		829,673			711,205

Property, plant and equipment, net of accumulated depreciation of $234,062 and $227,788 for 2022 and 2021, respectively		104,199			102,786
Operating lease right-of-use assets		47,168			40,469
Goodwill		130,727			131,652
Other intangibles, net		99,756			106,234
Deferred income taxes		34,484			36,126
Investments in unconsolidated affiliates		42,648			44,087
Other assets		30,071			25,402
Total assets	$	1,318,726		$	1,197,961

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of revolving credit facility	$	52,100		$	125,298
Current portion of term loan and other debt		6,036			3,117
Accounts payable		103,894			137,167
Sundry payables and accrued expenses		54,215			57,182
Accrued customer returns		53,857			42,412
Accrued core liability		23,845			23,663
Accrued rebates		42,378			42,472
Payroll and commissions		37,539			45,058
Total current liabilities		373,864			476,369

Long-term debt		211,400			21
Noncurrent operating lease liabilities		38,618			31,206
Other accrued liabilities		20,637			25,040
Accrued asbestos liabilities		63,820			52,698
Total liabilities		708,339			585,334

Commitments and contingencies

Stockholders’ equity:
Common stock – par value $2.00 per share:
Authorized – 30,000,000 shares; issued 23,936,036 shares		47,872			47,872
Capital in excess of par value		104,411			105,377
Retained earnings		562,135			532,319
Accumulated other comprehensive income		(19,145	)		(8,169	)
Treasury stock – at cost (2,366,339 shares and 1,911,792 shares in 2022 and 2021, respectively)		(95,886	)		(75,819	)
Total SMP stockholders’ equity		599,387			601,580
Noncontrolling interest		11,000			11,047
Total stockholders’ equity		610,387			612,627
Total liabilities and stockholders’ equity	$	1,318,726		$	1,197,961

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)	Nine Months Ended September 30,
	2022			2021
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	47,547		$	72,224
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		20,895			20,160
Amortization of deferred financing cost		294			171
Increase (decrease) to allowance for expected credit losses		(561	)		381
Increase (decrease) to inventory reserves		4,354			(443	)
Equity income from joint ventures		(3,553	)		(2,419	)
Employee stock ownership plan allocation		1,722			1,885
Stock-based compensation		6,327			7,189
Decrease in deferred income taxes		245			1
Loss on discontinued operations, net of tax		17,076			7,139
Change in assets and liabilities:
(Increase) in accounts receivable		(51,887	)		(15,343	)
(Increase) in inventories		(75,300	)		(52,742	)
(Increase) decrease in prepaid expenses and other current assets		(6,270	)		2,324
Increase (decrease) in accounts payable		(31,844	)		24,228
Increase in sundry payables and accrued expenses		3,807			18,905
Net change in other assets and liabilities		(8,327	)		(4,522	)
Net cash provided by (used in) operating activities		(75,475	)		79,138

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and investments in businesses		—			(124,663	)
Capital expenditures		(19,499	)		(19,406	)
Other investing activities		12			29
Net cash used in investing activities		(19,487	)		(144,040	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the term loan		100,000			—
Repayments of the term loan		(1,250	)		—
Net borrowings under revolving credit facilities		44,452			118,938
Net borrowings (repayments) of other debt and capital lease obligations		(1,745	)		2,916
Purchase of treasury stock		(29,656	)		(26,518	)
Payments of debt issuance costs		(2,128	)		—
Increase (decrease) in overdraft balances		(54	)		455
Dividends paid		(17,602	)		(16,678	)
Net cash provided by financing activities		92,017			79,113
Effect of exchange rate changes on cash		(1,285	)		(555	)
Net increase (decrease) in cash and cash equivalents		(4,230	)		13,656
CASH AND CASH EQUIVALENTS at beginning of period		21,755			19,488
CASH AND CASH EQUIVALENTS at end of period	$	17,525		$	33,144

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	5,828		$	1,094
Income taxes	$	21,837		$	18,361

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2022

(Unaudited)

(In thousands)	Common Stock		Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total SMP			Non- Controlling Interest			Total
Balance at June 30, 2022	$	47,872	$	109,117		$	559,069		$	(15,178	)	$	(99,294	)	$	601,586		$	11,063		$	612,649
Net earnings		—		—			8,846			—			—			8,846			52			8,898
Other comprehensive income, net of tax		—		—			—			(3,967	)		—			(3,967	)		(115	)		(4,082	)
Cash dividends paid		—		—			(5,780	)		—			—			(5,780	)		—			(5,780	)
Purchase of treasury stock		—		—			—			—			(3,160	)		(3,160	)		—			(3,160	)
Stock-based compensation		—		(4,706	)		—			—			6,568			1,862			—			1,862
Balance at September 30, 2022	$	47,872	$	104,411		$	562,135		$	(19,145	)	$	(95,886	)	$	599,387		$	11,000		$	610,387

Three Months Ended September 30, 2021

(Unaudited)

(In thousands)	Common Stock		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total SMP			Non- Controlling Interest		Total
Balance at June 30, 2021	$	47,872	$	107,062	$	500,620		$	(5,102	)	$	(66,836	)	$	583,616		$	11,501	$	595,117
Net earnings		—		—		24,050			—			—			24,050			13		24,063
Other comprehensive income, net of tax		—		—		—			(2,490	)		—			(2,490	)		20		(2,470	)
Cash dividends paid		—		—		(5,544	)		—			—			(5,544	)		—		(5,544	)
Purchase of treasury stock		—		—		—			—			(15,422	)		(15,422	)		—		(15,422	)
Stock-based compensation		—		2,513		—			—			295			2,808			—		2,808
Balance at September 30, 2021	$	47,872	$	109,575	$	519,126		$	(7,592	)	$	(81,963	)	$	587,018		$	11,534	$	598,552

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2022

(Unaudited)

(In thousands)	Common Stock		Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total SMP			Non- Controlling Interest			Total
Balance at December 31, 2021	$	47,872	$	105,377		$	532,319		$	(8,169	)	$	(75,819	)	$	601,580		$	11,047		$	612,627
Net earnings		—		—			47,418			—			—			47,418			129			47,547
Other comprehensive income, net of tax		—		—			—			(10,976	)		—			(10,976	)		(176	)		(11,152	)
Cash dividends paid		—		—			(17,602	)		—			—			(17,602	)		—			(17,602	)
Purchase of treasury stock		—		—			—			—			(29,656	)		(29,656	)		—			(29,656	)
Stock-based compensation		—		(1,335	)		—			—			7,662			6,327			—			6,327
Employee Stock Ownership Plan		—		369			—			—			1,927			2,296			—			2,296
Balance at September 30, 2022	$	47,872	$	104,411		$	562,135		$	(19,145	)	$	(95,886	)	$	599,387		$	11,000		$	610,387

Nine Months Ended September 30, 2021

(Unaudited)

(In thousands)	Common Stock		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total SMP			Non- Controlling Interest			Total
Balance at December 31, 2020	$	47,872	$	105,084	$	463,612		$	(5,676	)	$	(60,656	)	$	550,236		$	—		$	550,236
Noncontrolling interest acquired		—		—		—			—			—			—			11,504			11,504
Net earnings		—		—		72,192			—			—			72,192			32			72,224
Other comprehensive income, net of tax		—		—		—			(1,916	)		—			(1,916	)		(2	)		(1,918	)
Cash dividends paid		—		—		(16,678	)		—			—			(16,678	)		—			(16,678	)
Purchase of treasury stock		—		—		—			—			(26,518	)		(26,518	)		—			(26,518	)
Stock-based compensation		—		4,357		—			—			2,832			7,189			—			7,189
Employee Stock Ownership Plan		—		134		—			—			2,379			2,513			—			2,513
Balance at September 30, 2021	$	47,872	$	109,575	$	519,126		$	(7,592	)	$	(81,963	)	$	587,018		$	11,534		$	598,552

See accompanying notes to consolidated financial statements (unaudited).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

Standard Motor Products, Inc. and 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 utilized in the maintenance, repair and service of vehicles in the automotive aftermarket industry along with a complementary focus on specialized equipment parts for manufacturers across multiple industries around the world.

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, 2021. 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 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 generally accepted accounting principles 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 2022 presentation.

Note 2. Summary of Significant Accounting Policies

The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles 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 the COVID-19 pandemic, Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S. and other governments, future increases in interest rates, 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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Derivative Instruments and Hedging Activities

We occasionally use derivative financial instruments to reduce our market risk for changes in interest rates on our variable rate borrowings. Derivative financial instruments are recorded at fair value in other current and long-term assets, and other current and long-term liabilities in the consolidated balance sheets. For derivative financial instruments that have been formally designated as cash flow interest rate hedges (“interest rate swap agreements”), provided that the hedging instrument is highly effective, the entire change in the fair value of the derivative will be deferred and recorded in accumulated other comprehensive income (“AOCI”) in the consolidated balance sheets. When the underlying hedged transaction is realized (i.e., when the interest payments on the underlying borrowing are recognized in the consolidated statements of operations), the gain/loss included in AOCI is recorded in earnings and reflected on the same line as the gain/loss on the hedged item attributable to the hedged risk (i.e., interest expense). At the inception of each transaction, we formally document the hedge relationship, including the identification of the hedge instrument, the related hedged items, the effectiveness of the hedge, as well as its risk management objectives and strategies.

Other than the addition of the foregoing accounting policy, “Derivative Instruments and Hedging Activities,” 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, 2021.

Recently Issued Accounting Pronouncements

Standards that are not yet adopted as of September 30, 2022

The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted as of September 30, 2022, and that could have an impact on our financial statements:

Standard	Description	Date of adoption / Effective date	Effects on the financial statements or other significant matters

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	This standard is intended to provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The new standard is applicable to contracts that reference LIBOR, or another reference rate, expected to be discontinued due to reference rate reform.	Effective March 12, 2020 through December 31, 2022	The new standard may be applied as of the beginning of an interim period that includes March 12, 2020 through December 31, 2022. As certain of our contracts reference LIBOR, including our supply chain financing arrangements, we are currently reviewing the optional guidance in the standard to determine its impact upon the discontinuance of LIBOR. At this time, we do not believe that the new guidance, nor the discontinuance of LIBOR, will have a material impact on our consolidated financial statements and related disclosures.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 3. Business Acquisitions and Investments

2021 Business Acquisitions

Acquisition of Capital Stock of Stabil Operative Group GmbH (“Stabil”)

In September 2021, we acquired 100% of the capital stock of Stabil Operative Group GmbH, a German company (“Stabil”), for Euros 13.7 million, or $16.3 million. Stabil is a manufacturer and distributor of a variety of components, including electronic sensors, control units, and clamping devices to the European Original Equipment (“OE”) market, serving both commercial and light vehicle applications. The acquired Stabil business was paid for with cash funded by borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A., as agent, and is headquartered on the outskirts of Stuttgart, Germany with facilities in Germany and Hungary. The acquisition, reported as part of our Engine Management Segment, aligns with our strategy of expansion beyond our core aftermarket business into complementary areas, and gives us exposure to a diversified group of blue chip European commercial and light vehicle OE customers.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values (in thousands):

Purchase price				$	16,290
Assets acquired and liabilities assumed:
Receivables	$	2,852
Inventory		5,126
Other current assets (1)		1,628
Property, plant and equipment, net		1,810
Operating lease right-of-use assets		4,971
Intangible assets		5,471
Goodwill		4,827
Current liabilities		(4,190	)
Noncurrent operating lease liabilities		(4,454	)
Deferred income taxes		(1,751	)
Net assets acquired				$	16,290

(1)

The other current assets balance includes $0.9 million of cash acquired.

Intangible assets acquired of $5.5 million consist of customer relationships that will be amortized on a straight-line basis over the estimated useful life of 20 years. Goodwill of $4.8 million was allocated to the Engine Management Segment. The goodwill reflects relationships, business specific knowledge and the replacement cost of an assembled workforce associated with personal reputations. The intangible assets and goodwill are not deductible for tax purposes.

Incremental revenues from the acquired Stabil business included in our consolidated statement of operations for the three months and nine months ended September 30, 2022 were $3.3 million and $14.9 million, respectively.

Acquisition of Capital Stock of Trumpet Holdings, Inc. (“Trombetta”)

In May 2021, we acquired 100% of the capital stock of Trumpet Holdings, Inc., a Delaware corporation, (more commonly known as “Trombetta”), for $111.7 million. Trombetta is a leading provider of power switching and power management products to Original Equipment (“OE”) customers in various markets. The acquired Trombetta business was paid for in cash funded by borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A., as agent, and has manufacturing facilities in Milwaukee, Wisconsin, Sheboygan Falls, Wisconsin, Tijuana, Mexico, as well as a 70% ownership in a joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”). The acquisition, to be reported as part of our Engine Management Segment, aligns with our strategy of expansion into non-aftermarket parts.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values (in thousands):

Purchase price				$	111,711
Assets acquired and liabilities assumed:
Receivables	$	9,173
Inventory		12,460
Other current assets (1)		5,193
Property, plant and equipment, net		4,939
Operating lease right-of-use assets		3,847
Intangible assets		54,700
Goodwill		49,250
Current liabilities		(5,072	)
Noncurrent operating lease liabilities		(3,065	)
Deferred income taxes		(8,210	)
Subtotal					123,215
Fair value of acquired noncontrolling interest					(11,504	)
Net assets acquired				$	111,711

(1)

The other current assets balance includes $4.6 million of cash acquired.

Intangible assets acquired of $54.7 million consist of customer relationships of $39.4 million that will be amortized on a straight-line basis over the estimated useful life of 20 years; developed technology of $13.4 million that will be amortized on a straight-line basis over the estimated useful life of 15 years; and a trade name of $1.9 million that will be amortized on a straight-line basis over the estimated useful life of 10 years. Goodwill of $49.3 million was allocated to the Engine Management Segment. The goodwill reflects relationships, business specific knowledge and the replacement cost of an assembled workforce associated with personal reputations. The intangible assets and goodwill are not deductible for tax purposes.

Incremental revenues from the acquired Trombetta business were $27.4 million for the six months ended June 30, 2022 ($16.6 million and $10.8 million in the first quarter and second quarter of 2022, respectively) and were included in our consolidated statement of operations for the nine months ended September 30, 2022.

Acquisition of Particulate Matter Sensor Business of Stoneridge, Inc. (“Soot Sensor”)

In March 2021 and November 2021, we finalized the acquisitions of certain Soot Sensor product lines from Stoneridge, Inc. for $2.9 million. The acquired product lines were paid for with cash funded by borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A. The assets acquired include inventory, machinery, and equipment and certain intangible assets.

The product lines acquired are used to manufacture sensors used in the exhaust and emission systems of diesel engines. The acquired product lines were located in Stoneridge’s facilities in Lexington, Ohio and Tallinn, Estonia. We did not acquire these facilities, nor any of Stoneridge’s employees, and have substantially completed the relocation of the acquired inventory, machinery and equipment related to the product lines to our engine management plants in Independence, Kansas and Bialystok, Poland. The acquisition, reported as part of our Engine Management Segment, aligns with our strategy of expansion into non-aftermarket parts. Customer relationships acquired include Volvo, CNHi and Hino.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values (in thousands):

Purchase Price			$	2,924
Assets acquired and liabilities assumed:
Inventory	$	1,032
Machinery and equipment, net		1,137
Intangible assets		755
Net assets acquired			$	2,924

Intangible assets acquired of approximately $0.8 million consist of customer relationships that will be amortized on a straight-line basis over the estimated useful life of 10 years.

Incremental revenues from the acquired Soot Sensor business included in our consolidated statement of operations for the nine months ended September 30, 2022 were $2.3 million, all of which relates to the first quarter of 2022.

Note 4. Restructuring and Integration Expenses

The aggregated liabilities included in “sundry payables and accrued expenses” and “other accrued liabilities” in the consolidated balance sheet relating to the restructuring and integration activities as of December 31, 2021 and September 30, 2022 and for the nine months ended September 30, 2022, consisted of the following (in thousands):

	Workforce Reduction			Other Exit Costs			Total
Exit activity liability at December 31, 2021	$	79		$	—		$	79
Restructuring and integration costs:
Amounts provided for during 2022		—			44			44
Cash payments		(16	)		(44	)		(60	)
Reclassification		(63	)		—			(63	)
Exit activity liability at September 30, 2022	$	—		$	—		$	—

Integration Costs

Particulate Matter Sensor (“Soot Sensor”) Product Line Relocation

In connection with our acquisitions in March 2021 and November 2021 of certain soot sensor product lines from Stoneridge, Inc., we incurred certain integration expenses in connection with the relocation of certain inventory, machinery, and equipment to our existing facilities in Independence, Kansas and Bialystok, Poland. Integration expenses recognized and cash payments made of $44,000, during the nine months ended September 30, 2022, related to these relocation activities in our Engine Management segment. The soot sensor product line relocation has been substantially completed.

Restructuring Costs

Plant Rationalization Programs

The 2016 Plant Rationalization Program, which included the shutdown and sale of our Grapevine, Texas facility, and the 2017 Orlando Plant Rationalization Program, which included the shutdown our Orlando, Florida facility, have been substantially completed. Cash payments made of $16,000 during the nine months ended September 30, 2022 consists of severance payments to former employees terminated in connection with these programs. There is no remaining aggregate liability as of September 30, 2022.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

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 being accounted for as a sale.

Pursuant to these agreements, we sold $236.3 million and $610.4 million of receivables during the three months and nine months ended September 30, 2022, respectively, and $232.5 million and $626.9 million for the comparable periods in 2021. Receivables presented at financial institutions and not yet collected as of September 30, 2022 and December 31, 2021 were approximately $9.8 million and $1.3 million, respectively, and remained in our accounts receivable balance for those periods. 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 $10.6 million and $21.8 million related to the sale of receivables was included in selling, general and administrative expense in our consolidated statements of operations for the three months and nine months ended September 30, 2022, respectively, and $3 million and $8.7 million for the comparable periods in 2021.

To the extent that these arrangements are terminated, our financial condition, results of operations, cash flows and liquidity could be adversely affected by extended payment terms, delays or failures in collecting trade accounts receivables. The utility of the supply chain financing arrangements also depends upon the LIBOR rate, or an alternative benchmark reference rate, as it is a component of the discount rate applicable to each arrangement. If the LIBOR rate, or alternative 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:

	September 30, 2022		December 31, 2021
	(In thousands)
Finished goods	$	326,434	$	296,739
Work in process		13,342		16,010
Raw materials		194,534		156,006
Subtotal		534,310		468,755
Unreturned customer inventories		21,485		22,268
Total inventories	$	555,795	$	491,023

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 7. Acquired Intangible Assets

Acquired identifiable intangible assets consist of the following:

	September 30, 2022			December 31, 2021
	(In thousands)
Customer relationships	$	155,932		$	157,020
Patents, developed technology and intellectual property		14,123			14,123
Trademarks and trade names		8,880			8,880
Non-compete agreements		3,280			3,280
Supply agreements		800			800
Leaseholds		160			160
Total acquired intangible assets		183,175			184,263
Less accumulated amortization (1)		(85,005	)		(78,932	)
Net acquired intangible assets	$	98,170		$	105,331

(1)

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 months and nine months ended September 30, 2022, respectively, and $2.4 million and $6.5 million for the comparable periods in 2021. Based on the current estimated useful lives assigned to our intangible assets, amortization expense is estimated to be $2.2 million for the remainder of 2022, $8.3 million in 2023, $8.3 million in 2024, $8.3 million in 2025 and $68.5 million in the aggregate for the years 2026 through 2041.

Note 8. Leases

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 eleven 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 includes all operating leases acquired from the date of acquisition (in thousands):

Balance Sheet Information	September 30, 2022			December 31, 2021
Assets
Operating lease right-of-use assets	$	47,168		$	40,469

Liabilities
Sundry payables and accrued expenses	$	9,983		$	10,544
Noncurrent operating lease liabilities		38,618			31,206
Total operating lease liabilities	$	48,601		$	41,750

Weighted Average Remaining Lease Term
Operating leases	7.3 Years			5.3 Years

Weighted Average Discount Rate
Operating leases		3.5	%		3	%

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Expense and Cash Flow Information	Three Months Ended September 30,
	2022		2021
Lease Expense
Operating lease expense (a)	$	2,817	$	2,547

	Nine Months Ended September 30,
	2022		2021
Lease Expense
Operating lease expense (a)	$	8,358	$	7,324

Supplemental Cash Flow Information
Cash paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	8,188	$	7,271
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases (b)	$	26,206	$	19,215

(a)

Excludes expenses of approximately $0.8 million and $1.9 million for the three and nine months ended September 30, 2022, respectively, and approximately $0.3 million and $1.2 million for the comparable periods in 2021, respectively, related 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 is not material.

(b)

Includes $21.6 million of right-of-use assets related to the lease modification and extension for our executive offices in Long Island City, New York during the nine months ended September 30, 2022 and $8.8 million of right-of use assets obtained in business acquisitions during the nine months ended September 30, 2021.

Minimum Lease Payments

At September 30, 2022, we are obligated to make minimum lease payments through 2033, under operating leases, which are as follows (in thousands):

2022	$	2,953
2023		9,949
2024		8,615
2025		6,024
2026		5,153
Thereafter		24,138
Total lease payments	$	56,832
Less: Interest		(8,231	)
Present value of lease liabilities	$	48,601

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 9. Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

	September 30, 2022		December 31, 2021
	(In thousands)
Credit facility – term loan due 2027	$	98,750	$	—
Credit facility – revolver due 2027		169,750		—
Senior secured facility – revolver due 2023		—		125,298
Other (1)		1,036		3,138
Total debt	$	269,536	$	128,436

Current maturities of debt	$	58,136	$	128,415
Long-term debt		211,400		21
Total debt	$	269,536	$	128,436

(1)

Other includes borrowings under our Polish overdraft facility of Zloty 4.9 million (approximately $1 million) and Zloty 12.3 million (approximately $3 million) as of September 30, 2022 and December 31, 2021, respectively.

Term Loan and Revolving Credit Facilities

In March 2022, the Company and its wholly owned subsidiaries, SMP Motor Products Ltd. and Trumpet Holdings, Inc., entered into an amendment to our existing Credit Agreement, dated as of October 28, 2015, as amended (the “2015 Credit Agreement”), with JP Morgan Chase Bank, N.A., as agent, and a syndicate of lenders for our senior secured revolving credit facility. The amendment provided for the drawdown of an additional $50 million from the agreement’s accordion feature to increase the line of credit under the revolving credit facility from $250 million to $300 million, and updated the benchmark provisions to replace LIBOR with Term SOFR as the reference rate.

In June 2022, the Company entered into a new Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders (the “Credit Agreement”). The Credit Agreement provides for a $500 million credit facility comprised of a $100 million term loan facility (the “term loan”) and a $400 million multi-currency revolving credit facility available in U.S. Dollars, Euros, Sterling, Swiss Francs, Canadian Dollars and other currencies as agreed to by the administrative agent and the lenders (the “revolving facility”). The Credit Agreement replaces and refinances the 2015 Credit Agreement.

Borrowings under the Credit Agreement were used to repay all outstanding borrowings under the 2015 Credit Agreement, and pay certain fees and expenses incurred in connection with the Credit Agreement, with future borrowings used for other general corporate purposes of the Company and its subsidiaries. The term loan amortizes in quarterly installments of 1.25% in each of the first four years, and quarterly installments of 2.5% in the fifth year of the Credit Agreement. The revolving facility has a $25 million sub-limit for the issuance of letters of credit and a $25 million sub-limit for the borrowing of swingline loans. The maturity date is June 1, 2027. The Company may request up to two one-year extensions of the maturity date.

The Company may, upon the agreement of one or more then existing lenders or of additional financial institutions not currently party to the Credit Agreement, increase the revolving facility commitments or obtain incremental term loans by an aggregate amount not to exceed (x) the greater of (i) $168 million or (ii) 100% of consolidated EBITDA (as defined in the Credit Agreement) for the four fiscal quarters ended most recently before such date, plus (y) the amount of any voluntary prepayment of term loans, plus (z) an unlimited amount so long as, immediately after giving effect thereto, the pro forma First Lien Net Leverage Ratio (as defined in the Credit Agreement) does not exceed 2.5 to 1.0.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Term loan and revolver facility borrowings in U.S. Dollars bear interest, at the Company’s election, at a rate per annum equal to Term SOFR plus 0.10% plus an applicable margin, or an alternate base rate plus an applicable margin, where the alternate base rate is the greater of the prime rate, the federal funds effective rate plus 0.50%, and one-month Term SOFR plus 0.10% plus 1.00%. Term loan borrowings are being made at one-month Term SOFR. The applicable margin for the term benchmark borrowings ranges from 1.0% to 2.0%, and the applicable margin for alternate base rate borrowings ranges from 0% to 1.0%, in each case, based on the total net leverage ratio of the Company and its restricted subsidiaries. The Company may select interest periods of one, three or six months for Term SOFR borrowings. Interest is payable at the end of the selected interest period, but no less frequently than quarterly.

The Company’s obligations under the Credit Agreement are guaranteed by its material domestic subsidiaries (each, a “Guarantor”), and secured by a first priority perfected security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions. The collateral security described above also secures certain banking services obligations and interest rate swaps and currency or other hedging obligations of the Company owing to any of the then existing lenders or any affiliates thereof. Concurrently with the Company’s entry into the Credit Agreement, the Company also entered into a seven year interest rate swap agreement with Wells Fargo Bank, N.A., Co-Syndication Agent and lender under the Credit Agreement, on $100 million of borrowings under the Credit Agreement. The interest rate swap agreement matures in May 2029.

Outstanding borrowings at September 30, 2022 under the Credit Agreement were $268.5 million, consisting of current borrowings of $57.1 million and long-term debt of $211.4 million; while outstanding borrowings at December 31, 2021 under the 2015 Credit Agreement were $125.3 million, consisting of current borrowings. Letters of credit outstanding under the Credit Agreement were $2.4 million at September 30, 2022, and $2.6 million under the 2015 Credit Agreement at December 31, 2021. Borrowings at December 31, 2021 under the 2015 Credit Agreement have been classified as current liabilities based upon accounting rules and certain provisions in the agreement.

At September 30, 2022, the weighted average interest rate under our Credit Agreement was 4.4%, which consisted of $268 million in borrowings at 4.4% under Term SOFR, adjusted for the impact of the interest rate swap agreement on $100 million of borrowings, and an alternative base rate borrowing of $0.5 million at 6.8%. At December 31, 2021, the weighted average interest rate on our 2015 Credit Agreement was 1.4%, which consisted of $125 million in direct borrowings at 1.4% and alternative base rate loan of $0.3 million at 3.5%. During the nine months ended September 30, 2022, our average daily alternative base rate loan balance was $7.5 million, compared to a balance of $1 million for the nine months ended September 30, 2021 and a balance of $1.1 million for the year ended December 31, 2021.

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.

Polish Overdraft Facility

In February 2022, our Polish subsidiary, SMP Poland sp. z.o.o., amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce, formerly HSBC France (Spolka Akcyjna) Oddzial w Polsce. The amended overdraft facility provides for borrowings of up to Zloty 30 million (approximately $6.1 million). Availability under the amended facility commenced in March 2022, with automatic three-month renewals until 2027 subject to cancellation by either party, at its sole discretion, at least 30 days prior to the commencement of the three-month renewal period. Borrowings under the overdraft facility will bear interest at a rate equal to WIBOR + 1.5% and are guaranteed by Standard Motor Products, Inc., the ultimate parent company. At September 30, 2022 and December 31, 2021, borrowings under the overdraft facility were Zloty 4.9 million (approximately $1 million) and Zloty 12.3 million (approximately $3 million), respectively.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Maturities of Debt

As of September 30, 2022, maturities of debt through 2027, assuming no prepayments, are as follows (in thousands):

	Revolving Credit Facility			Term Loan Facility			Polish Overdraft Facility and Other Debt			Total
Remainder of 2022	$	—		$	1,250		$	1,036		$	2,286
2023		—			5,000			—			5,000
2024		—			5,000			—			5,000
2025		—			5,000			—			5,000
2026		—			7,500			—			7,500
2027		169,750			75,000			—			244,750
Total	$	169,750		$	98,750		$	1,036		$	269,536
Less: current maturities		(52,100	)		(5,000	)		(1,036	)		(58,136	)
Long-term debt	$	117,650		$	93,750		$	—		$	211,400

Deferred Financing Costs

We have deferred financing costs of approximately $2.2 million and $0.4 million as of September 30, 2022 and December 31, 2021, respectively. Deferred financing costs are related to our term loan and revolving credit facilities. In connection with the amendment to the 2015 Credit Agreement entered into in March 2022 and the Credit Agreement entered into in June 2022 with JPMorgan Chase Bank, N.A., as agent, we incurred and capitalized approximately $0.2 million, and $1.9 million, respectively, of deferred financing costs related to bank, legal, and other professional fees which are being amortized, along with certain preexisting deferred financing costs, through June 2027, the term of the Credit Agreement. In addition, upon entering into the Credit Agreement, we wrote-off $40,000 of unamortized deferred financing costs associated with the 2015 Credit Agreement. Unamortized deferred financing costs written-off in June 2022 were recorded in other non-operating income (expense), net in our consolidated statement of operations.

Deferred financing costs as of September 30, 2022, assuming no prepayments, are being amortized as follows:

(In thousands)
Remainder of 2022	$	127
2023		491
2024		478
2025		470
2026		464
2027		190
Total amortization	$	2,220

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 10. Accumulated Other Comprehensive Income

Changes in Accumulated Other Comprehensive Income by Component (in thousands)

	Three Months Ended September 30, 2022
	Foreign Currency Translation			Unrecognized Postretirement Benefit Costs (Credit)			Unrealized derivative gains (losses)			Total
Balance at June 30, 2022 attributable to SMP	$	(15,326	)	$	43		$	105		$	(15,178	)
Other comprehensive income before reclassifications		(8,164	)		—			4,095	⁽¹⁾		(4,069	)
Amounts reclassified from accumulated other comprehensive income		—			(2	)		104			102
Other comprehensive income, net		(8,164	)		(2	)		4,199			(3,967	)
Balance at September 30, 2022 attributable to SMP	$	(23,490	)	$	41		$	4,304		$	(19,145	)

	Nine Months Ended September 30, 2022
	Foreign Currency Translation			Unrecognized Postretirement Benefit Costs (Credit)			Unrealized derivative gains (losses)			Total
Balance at December 31, 2021 attributable to SMP	$	(8,221	)	$	52		$	—		$	(8,169	)
Other comprehensive income before reclassifications		(15,269	)		—			4,099	⁽¹⁾		(11,170	)
Amounts reclassified from accumulated other comprehensive income		—			(11	)		205			194
Other comprehensive income, net		(15,269	)		(11	)		4,304			(10,976	)
Balance at September 30, 2022 attributable to SMP	$	(23,490	)	$	41		$	4,304		$	(19,145	)

(1)

Consists of the unrecognized gain relating to the change in fair value of the cash flow interest rate hedge of $5.7 million ($4.2 million, net of tax) and $5.8 million ($4.3 million, net of tax) in the three months and nine months ended September 30, 2022, respectively, and net of cash settlements payments of $0.1 million ($0.1 million, net of tax) and $0.3 million ($0.2 million, net of tax) in the three months and nine months ended September 30, 2022, respectively.

Reclassifications Out of Accumulated Other Comprehensive Income (in thousands)

	Three Months Ended			Nine Months Ended
Details About Accumulated Other Comprehensive Income Components	September 30, 2022			September 30, 2022
Derivative cash flow hedge:
Unrecognized gain (loss) (1)	$	141		$	277
Postretirement Benefit Plans:
Unrecognized gain (loss) (2)		(5	)		(18	)
Total before income tax		136			259
Income tax expense		34			65
Total reclassifications attributable to SMP	$	102		$	194

(1)

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.

(2)

Unrecognized accumulated other comprehensive income (loss) related to our post retirement 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).

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 11. Stock-Based Compensation Plans

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, 2022:

	Shares			Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2021		807,019		$	34.92
Granted		246,125			28.44
Vested		(174,742	)		42.21
Performance Shares Target Adjustment		25,317			42.21
Forfeited		(6,825	)		41.92
Balance at September 30, 2022		896,894		$	31.86

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

We recorded compensation expense related to restricted shares and performance-based shares of $5.7 million ($4.2 million, net of tax) and $6.8 million ($5.1 million, net of tax) for the nine months ended September 30, 2022 and 2021, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $16.6 million at September 30, 2022, and is expected to be recognized as they vest over a weighted average period of 4.55 years and 0.56 years for employees and directors, respectively.

Note 12. Employee Benefits

We provide certain medical and dental care benefits to 14 former U.S. union employees. The postretirement medical and dental benefit obligation to the former union employees as of September 30, 2022, and the related net periodic benefit cost for the plan for the three and nine months ended September 30, 2022 and 2021 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 2022, we made company contributions to the plan of $0.8 million related to calendar year 2021.

We also have an Employee Stock Ownership Plan 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, 2022, we contributed to the trust an additional 48,200 shares from our treasury and released 48,200 shares from the trust leaving 200 shares remaining in the trust as of September 30, 2022.

Note 13. Derivative Financial Instruments

Interest Rate Swap Agreements

We occasionally use derivative financial instruments to reduce our market risk for changes in interest rates on our variable rate borrowings. The principal financial instruments used for cash flow hedging purposes are interest rate swap agreements. 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. We do not enter into interest rate swap agreements, or other 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 Credit Agreement. Under the terms of the swap agreement, we will receive monthly variable interest payments based on one month Term SOFR and will pay interest based upon a fixed rate of 2.683% per annum, adjusted upward for the credit spread adjustment in the Credit Agreement of 0.10% and the loan margin in the Credit Agreement of 1.50% at September 30, 2022.

The fair value of the interest rate swap agreement as of September 30, 2022 was an asset of $5.8 million, 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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 14. Fair Value Measurements

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, 2022 and December 31, 2021 (in thousands):

		September 30, 2022				December 31, 2021
	Fair Value Hierarchy	Fair Value		Carrying Amount		Fair Value		Carrying Amount

Cash and cash equivalents	LEVEL 1	$	17,525	$	17,525	$	21,755	$	21,755
Deferred compensation	LEVEL 1		19,386		19,386		23,623		23,623
Short term borrowings	LEVEL 1		58,136		58,136		128,415		128,415
Long-term debt	LEVEL 1		211,400		211,400		21		21
Cash flow interest rate swap	LEVEL 2		5,816		5,816		—		—

The carrying value of cash and cash equivalents approximates fair value due to the short maturity of those investments. 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 obtained from two independent third parties, 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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 15. Earnings Per Share

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,
	2022			2021			2022			2021
Net Earnings Attributable to SMP -
Earnings from continuing operations	$	23,140		$	29,172		$	64,494		$	79,331
Loss from discontinued operations		(14,294	)		(5,122	)		(17,076	)		(7,139	)
Net earnings attributable to SMP	$	8,846		$	24,050		$	47,418		$	72,192

Basic Net Earnings Per Common Share Attributable to SMP -
Earnings from continuing operations per common share	$	1.08		$	1.32		$	2.97		$	3.57
Loss from discontinued operations per common share		(0.67	)		(0.23	)		(0.79	)		(0.32	)
Net earnings per common share attributable to SMP	$	0.41		$	1.09		$	2.18		$	3.25

Weighted average common shares outstanding		21,427			22,090			21,719			22,201

Diluted Net Earnings Per Common Share Attributable to SMP -
Earnings from continuing operations per common share	$	1.06		$	1.29		$	2.91		$	3.50
Loss from discontinued operations per common share		(0.66	)		(0.22	)		(0.77	)		(0.32	)
Net earnings per common share attributable to SMP	$	0.40		$	1.07		$	2.14		$	3.18

Weighted average common shares outstanding		21,427			22,090			21,719			22,201
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock and performance-based stock		421			454			434			477
Weighted average common shares outstanding – Diluted		21,848			22,544			22,153			22,678

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,
	2022		2021		2022		2021
Restricted and performance-based shares		299		291		281		277

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 16. Industry Segments

We have two major reportable operating segments, each of which focuses on a specific line of automotive parts in the automotive aftermarket with a complementary focus on the non-aftermarket, industrial equipment and original equipment service markets. Our Engine Management Segment manufactures and remanufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicle systems. Our Temperature Control Segment manufactures and remanufactures air conditioning compressors, air conditioning and heating parts, engine cooling system parts, power window accessories and windshield washer system parts.

The following tables show our net sales, intersegment revenue and operating income for each reportable segment (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net Sales (a)
Engine Management	$	251,741		$	247,151		$	732,871		$	692,385
Temperature Control		122,991			119,075			318,744			288,019
All Other		6,641			4,084			12,001			8,535
Consolidated	$	381,373		$	370,310		$	1,063,616		$	988,939

Intersegment Revenue (a)
Engine Management	$	6,034		$	7,278		$	16,830		$	17,822
Temperature Control		1,654			2,254			7,701			7,226
All Other		(7,688	)		(9,532	)		(24,531	)		(25,048	)
Consolidated	$	—		$	—		$	—		$	—

Operating Income
Engine Management	$	23,293		$	27,854		$	71,109		$	89,352
Temperature Control		14,252			16,695			31,735			33,516
All Other		(3,930	)		(6,011	)		(14,421	)		(18,081	)
Consolidated	$	33,615		$	38,538		$	88,423		$	104,787

(a)

Segment net sales include intersegment sales in our Engine Management and Temperature Control segments.

For the disaggregation of our net sales from contracts with customers by geographic area, major product group and major sales channels for each of our segments, see Note 17, “Net Sales.”

Note 17. Net Sales

Disaggregation of Net Sales

We disaggregate our net sales from contracts with customers by geographic area, major product group, and major sales channels for 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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

The following tables provide disaggregation of net sales information for the three months and nine months ended September 30, 2022 and 2021 (in thousands):

Three months ended September 30, 2022 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	222,110	$	118,228	$	—	$	340,338
Canada		9,129		4,440		6,641		20,210
Europe		9,375		32		—		9,407
Mexico		7,263		114		—		7,377
Asia		2,463		25		—		2,488
Other foreign		1,401		152		—		1,553
Total	$	251,741	$	122,991	$	6,641	$	381,373
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	215,021	$	—	$	3,550	$	218,571
Wire and cable		36,720		—		97		36,817
Compressors		—		78,211		1,747		79,958
Other climate control parts		—		44,780		1,247		46,027
Total	$	251,741	$	122,991	$	6,641	$	381,373
Major Sales Channel:
Aftermarket	$	184,430	$	113,407	$	6,641	$	304,478
OE/OES		59,908		8,799		—		68,707
Export		7,403		785		—		8,188
Total	$	251,741	$	122,991	$	6,641	$	381,373

Three months ended September 30, 2021 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	210,639	$	114,059	$	—	$	324,698
Canada		9,731		4,566		4,084		18,381
Europe		6,900		114		—		7,014
Mexico		6,381		100		—		6,481
Asia		12,269		35		—		12,304
Other foreign		1,231		201		—		1,432
Total	$	247,151	$	119,075	$	4,084	$	370,310

Major Product Group:
Ignition, emission control, fuel and safety related system products	$	208,443	$	—	$	2,249		$	210,692
Wire and cable		38,708		—		(42	)		38,666
Compressors		—		75,080		1,184			76,264
Other climate control parts		—		43,995		693			44,688
Total	$	247,151	$	119,075	$	4,084		$	370,310
Major Sales Channel:
Aftermarket	$	175,881	$	110,393	$	4,084		$	290,358
OE/OES		64,343		8,200		—			72,543
Export		6,927		482		—			7,409
Total	$	247,151	$	119,075	$	4,084		$	370,310

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Nine months ended September 30, 2022 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	638,377	$	301,831	$	—	$	940,208
Canada		23,526		15,629		12,001		51,156
Europe		27,460		146		—		27,606
Mexico		22,270		303		—		22,573
Asia		16,589		217		—		16,806
Other foreign		4,649		618		—		5,267
Total	$	732,871	$	318,744	$	12,001	$	1,063,616
Major Product Group:
Ignition, emission control, fuel and safety related system products	$	618,198	$	—	$	8,257	$	626,455
Wire and cable		114,673		—		66		114,739
Compressors		—		193,551		1,939		195,490
Other climate control parts		—		125,193		1,739		126,932
Total	$	732,871	$	318,744	$	12,001	$	1,063,616
Major Sales Channel:
Aftermarket	$	522,916	$	289,338	$	12,001	$	824,255
OE/OES		186,449		27,387		—		213,836
Export		23,506		2,019		—		25,525
Total	$	732,871	$	318,744	$	12,001	$	1,063,616

Nine months ended September 30, 2021 (a)	Engine Management		Temperature Control		Other (b)		Total
Geographic Area:
United States	$	594,014	$	274,035	$	—	$	868,049
Canada		25,738		12,524		8,535		46,797
Europe		17,301		331		—		17,632
Mexico		18,988		281		—		19,269
Asia		31,351		179		—		31,530
Other foreign		4,993		669		—		5,662
Total	$	692,385	$	288,019	$	8,535	$	988,939

Major Product Group:
Ignition, emission control, fuel and safety related system products	$	574,595	$	—	$	5,750		$	580,345
Wire and cable		117,790		—		(177	)		117,613
Compressors		—		178,031		1,588			179,619
Other climate control parts		—		109,988		1,374			111,362
Total	$	692,385	$	288,019	$	8,535		$	988,939
Major Sales Channel:
Aftermarket	$	513,190	$	263,841	$	8,535		$	785,566
OE/OES		159,164		22,684		—			181,848
Export		20,031		1,494		—			21,525
Total	$	692,385	$	288,019	$	8,535		$	988,939

(a)

Segment net sales include intersegment sales in our Engine Management and Temperature Control segments.

(b)

Other consists of the elimination of intersegment sales from our Engine Management and Temperature Control segments as well as sales from our Canadian business unit that do not meet the criteria of a reportable operating segment. Intersegment wire and cable sales for the three and nine months ended September 30, 2021 exceeded third party sales from our Canadian business unit.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

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.

Major Product Group

The Engine Management segment of the Company principally generates revenue from the sale of automotive engine parts in the automotive aftermarket including ignition, emission control, fuel and safety related system products, and wire and cable parts. The Temperature Control segment of the Company principally generates revenue from the sale of automotive temperature control systems parts in the automotive aftermarket including air conditioning compressors and other climate control parts.

Major Sales Channel

In the aftermarket channel, we sell our products to warehouse distributors and retailers. Our customers buy directly from us and sell directly to jobber stores, professional technicians and to “do-it-yourselfers” who perform automotive repairs on their personal vehicles. In the Specialized Original Equipment (“OE”) and Original Equipment Service (“OES”) channel, we sell our products to original equipment manufacturers who redistribute our products within their distribution network, independent dealerships and service dealer technicians. Lastly, in the Export channel, our domestic entities sell to customers outside the United States.

Note 18. Commitments and Contingencies

Asbestos

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, 2022, approximately 1,550 cases were outstanding for which we may be responsible for any related liabilities. Since inception in September 2001 through September 30, 2022, the amounts paid for settled claims and awards of asbestos-related damages, including interest, were approximately $64 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 currently pending claims; (4) an analysis of our settlements and awards of asbestos-related damages to date; and (5) an analysis of closed claims with pay ratios and lag patterns in order to develop average future settlement values. Based on the information contained in the actuarial study and all other available information considered by us, we have concluded that no amount within the range of settlement payments and awards of asbestos-related damages was more likely than any other and, therefore, in assessing our asbestos liability we compare the low end of the range to our recorded liability to determine if an adjustment is required.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

In accordance with our policy to perform an annual actuarial evaluation in the third quarter of each year, an updated actuarial study was performed as of August 31, 2022. The results of the August 31, 2022 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs, ranging from $68.8 million to $111.6 million for the period through 2065. The change from the prior year study, which was in August 31,2021, was a $7.9 million increase for the low end of the range, and an $11.4 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 the high end of the range reflects our actual experience, our historical data, recent settlements and certain assumptions with respect to events that may occur in the future.

Based upon the results of the August 31, 2022 actuarial study, in September 2022, we increased our asbestos liability to $68.8 million, the low end of the range, and recorded an incremental pre-tax provision of $18.5 million in earnings (loss) from discontinued operations in the accompanying statement of operations. Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the August 31, 2022 study, to range from $53.2 million to $105.7 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 $11 million and $6.7 million for the nine months ended September 30, 2022 and 2021, 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.

Index

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Warranties

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. As of September 30, 2022 and 2021, we have accrued $30 million and $18.9 million, respectively, for estimated product warranty claims included in accrued customer returns. The accrued product warranty costs are based primarily on historical experience of actual warranty claims.

The following table provides the changes in our product warranties (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Balance, beginning of period	$	23,766		$	18,213		$	17,463		$	17,663
Liabilities accrued for current year sales		35,450			27,381			88,371			72,720
Settlements of warranty claims		(29,235	)		(26,730	)		(75,853	)		(71,519	)
Balance, end of period	$	29,981		$	18,864		$	29,981		$	18,864

Note 19. Subsequent Event

In October 2022, we acquired 100% of the capital stock of Kade Trading GmbH (“Kade”) headquartered in Glinde, Germany for Euros 1.9 million (approximately $1.9 million), net of closing balance sheet adjustments, plus a Euros 0.5 million (approximately $0.5 million) earn-out based upon Kade’s performance in 2024 and 2025. Kade is a supplier across Europe of mobile temperature control components to commercial vehicle, passenger car and specialty equipment markets and has been a distributor of SMP products including electric compressors, hose assemblies and receiver dryers, with annual sales of approximately $6 million. The acquired Kade business, to be reported as part of our Temperature Control segment, was paid for with cash funded by borrowings under our Credit Agreement with JP Morgan Chase Bank, N.A., as agent.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. These statements represent our expectations based on current information and assumptions and are inherently subject to risks and uncertainties. Our actual results could differ materially from those which are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, changes or loss in business relationships with our major customers and in the timing, size and continuation of our customers’ programs; changes in our supply chain financing arrangements, such as changes in terms, termination of contracts and/or the impact of rising interest rates; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs, including procurement costs resulting from higher tariffs, and inflationary cost increases in raw materials, labor and transportation, that cannot be recouped in product pricing; the performance of the aftermarket, non-aftermarket, industrial equipment and original equipment markets; changes in the product mix and distribution channel mix; economic and market conditions; successful integration of acquired businesses; our ability to achieve benefits from our cost savings initiatives; product liability and environmental matters (including, without limitation, those related to asbestos-related contingent liabilities and remediation costs at certain properties); the effects of a widespread public health crisis, including the coronavirus (COVID-19) pandemic; the effects of disruptions in the supply chain caused by the COVID-19 pandemic, Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S. and other governments; climate-related risks, such as physical and transition risks; as well as other risks and uncertainties, such as those described under Risk Factors, Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the Company with the SEC. Forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, historical information should not be considered as an indicator of future performance. The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this Report.

Overview

We are a leading manufacturer and distributor of premium replacement parts utilized in the maintenance, repair and service of vehicles in the automotive aftermarket industry. In addition, we continue to increase our supplier capabilities with a complementary focus on specialized original equipment parts for manufacturers across multiple industries such as agriculture, heavy duty, and construction equipment. We believe that our extensive design and engineering capabilities have afforded us opportunities to expand our product coverage in our aftermarket business and enter newer specialized markets that require application-specific knowledge, such as those mentioned above.

We are organized into two operating segments. Each segment is focused on different product categories and with providing our customers with full-line coverage of its products, a full suite of complementary services that are tailored to our customers’ business needs, and with driving end-user demand for our products. We sell our products primarily to automotive aftermarket retailers, program distribution groups, warehouse distributors, original equipment manufacturers and original equipment service part operations in the United States, Canada, Europe, Asia, Mexico and other Latin American countries.

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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 September 30, 2022 and 2021.

	Three Months Ended September 30,
(In thousands, except per share data)	2022			2021

Net sales	$	381,373		$	370,310
Gross profit		106,784			105,205
Gross profit %		28	%		28.4	%
Operating income		33,615			38,538
Operating income %		8.8	%		10.4	%
Earnings from continuing operations before income taxes		31,472			38,666
Provision for income taxes		8,280			9,481
Earnings from continuing operations		23,192			29,185
Loss from discontinued operations, net of income taxes		(14,294	)		(5,122	)
Net earnings		8,898			24,063
Net earnings (loss) attributable to noncontrolling interest		52			13
Net earnings attributable to SMP		8,846			24,050
Per share data attributable to SMP – Diluted:
Earnings from continuing operations	$	1.06		$	1.29
Discontinued operations		(0.66	)		(0.22	)
Net earnings per common share	$	0.40		$	1.07

Consolidated net sales for the three months ended September 30, 2022 were $381.4 million, an increase of $11.1 million, or 3% compared to net sales of $370.3 million in the same period in 2021. Net sales increased in both our Engine Management and Temperature Control segments against strong net sales in the comparable period of 2021.

Engine Management net sales were favorably impacted by continued strong customer demand and price increases implemented in 2022, while Temperature Control segment’s strength in net sales reflects the impact of price increases, the continued strong customer demand fueled by healthy customer POS sales, and record heat across the country.

Gross margin as a percentage of net sales for the three months ended September 30, 2022 was 28% as compared to 28.4% for the comparable period in 2021. Compared to the third quarter of 2021, gross margins at Engine Management decreased 0.8 percentage points from 27% to 26.2%, while gross margins at Temperature Control increased 0.4 percentage points from 28.4% to 28.8%.

Engine Management’s gross margins were negatively impacted by inflationary cost increases in certain raw materials, labor and transportation expense, which were somewhat offset by increased pricing, and some higher freight expense resulting from higher inventory balances. The gross margin percentage increase at Temperature Control reflects the impact of seasonal volumes, customer mix and increased pricing, which more than offset the impact of inflationary cost increases in raw materials, labor and transportation and higher freight and related expenses from higher inventory levels.

Operating margin as a percentage of net sales for the three months ended September 30, 2022 was 8.8% as compared to 10.4% for the comparable period in 2021. Included in our operating margin were selling, general and administrative expenses (“SG&A”) of $73.2 million, or 19.2% of net sales for the three months ended September 30, 2022 compared to $66.5 million, or 18% of net sales, for the same period in 2021. The higher SG&A expenses in 2022 resulted principally from higher interest rate related costs incurred in our supply chain financing arrangements.

Overall, our core automotive aftermarket business demand remains strong, and we continue to make major strides into new complementary markets with upside potential.

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New $500 Million Credit Facility

In June 2022, we entered into a new Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders (the “Credit Agreement”). The Credit Agreement provides for a $500 million credit facility comprised of a $100 million term loan facility (the “term loan”) and a $400 million multi-currency revolving credit facility (the “revolving facility”). Concurrently with our entry into the Credit Agreement, we also entered into a seven year interest rate swap agreement with Wells Fargo Bank, N.A., Co-Syndication Agent and lender under the Credit Agreement on $100 million of borrowings under the Credit Agreement to manage exposure to interest rate changes. The interest rate swap agreement matures in May 2029.

Borrowings under the Credit Agreement were used to repay all outstanding borrowings under the existing 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 Credit Agreement matures on June 1, 2027. The Company may request up to two one-year extensions of the maturity date.

Impact of Russia’s Invasion of the Ukraine

Russia’s invasion of the Ukraine, and the resultant sanctions imposed by the U.S. and other governments, have created risks, uncertainties and disruptions impacting business continuity, liquidity and asset values not only in the Ukraine and Russia, but in markets worldwide. Significant price increases have occurred in gas and energy markets, as well as in other commodities. Although we have no facilities or business operations in either the Ukraine or Russia, have historically had only minor sales to customers in Russia, which we have subsequently discontinued, and have not experienced additional significant disruptions in the supply chain, the inherent risks and uncertainties surrounding the invasion are being closely monitored. We have manufacturing and distribution facilities in Bialystok, Poland and Pecel, Hungary. Our facility in Bialystok, Poland does not use natural gas in its production process, or for heating, and, as such, is not impacted by Russia’s decision to halt the export of all natural gas to Poland and Bulgaria. While we have not been impacted by the war to date, there can be no assurances that any escalation of the invasion will not have an adverse impact on our business, financial condition and results of operations.

Impact of Global Supply Chain Disruption and Inflation

Disruptions in the global economy have impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. In response to the global supply chain volatility and inflationary cost increases, we have taken, and continue to take, several actions to mitigate the impact by working closely with our suppliers and customers to minimize any potential adverse impacts on our business, including implementing cost savings initiatives and the pass through of higher costs to our customers in the form of price increases, and 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.

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Environmental, Social, & Governance (“ESG”)

Our Company was founded in 1919 on the values of integrity, common decency and respect for others. These values continue to this day and are embodied in our Code of Ethics, which has been adopted by the Board of Directors of the Company to serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business. These values also serve as the foundation for our increased focus on many important environmental, social and governance issues, such as environmental stewardship and our efforts to identify and implement practices that reduce our environmental impact while achieving our business goals; our attention to diversity, equity and inclusion, employee development, retention, and health and safety; and our community engagement initiatives, to name a few.

We have made significant strides with respect to our ESG initiatives, building awareness of the environmental impact of our operations, and challenging ourselves to reduce our impact by reducing our usage of energy and water, reducing our generation of waste, increasing our recycling efforts and reducing our greenhouse gas emissions (“GHG”), with the ambition of achieving net-zero 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. Information on our ESG initiatives can be found on our corporate website at ir.smpcorp.com under “Environmental & Social Responsibility” 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.

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Interim Results of Operations

Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021

Sales. Consolidated net sales for the three months ended September 30, 2022 were $381.4 million, an increase of $11.1 million, or 3%, compared to $370.3 million in the same period of 2021, with the majority of our net sales to customers located in the United States. Consolidated net sales increased in both our Engine Management and Temperature Control Segments.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the three months ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,
	2022		2021
Engine Management:
Ignition, Emission Control, Fuel and Safety Related System Products	$	215,021	$	208,443
Wire and Cable		36,720		38,708
Total Engine Management		251,741		247,151

Temperature Control:
Compressors		78,211		75,080
Other Climate Control Parts		44,780		43,995
Total Temperature Control		122,991		119,075

All Other		6,641		4,084

Total	$	381,373	$	370,310

Engine Management’s net sales increased $4.6 million, or 1.9%, to $251.7 million for the three months ended September 30, 2022. Net sales in ignition, emission control, fuel and safety related system products for the three months ended September 30, 2022 were $215 million, an increase of $6.6 million, or 3.2%, compared to $208.4 million in the same period of 2021. Net sales in the wire and cable product group for the three months ended September 30, 2022 were $36.7 million, a decrease of $2 million, or 5.1%, compared to $38.7 million in the three months ended September 30, 2021. Engine Management’s increase in net sales for the third quarter of 2022 compared to the same period in 2021 reflects the impact of strong customer demand and price increases implemented in 2022, which were implemented to pass through inflationary increases in raw materials, distribution and labor costs.

Temperature Control’s net sales increased $3.9 million, or 3.3%, to $123 million for the three months ended September 30, 2022. Net sales in the compressors product group for the three months ended September 30, 2022 were $78.2 million, an increase of $3.1 million, or 4.2%, compared to $75.1 million in the same period of 2021. Net sales in the other climate control parts product group for the three months ended September 30, 2022 were $44.8 million, an increase of $0.8 million, or 1.8%, compared to $44 million in the three months ended September 30, 2021. Temperature Control’s increase in net sales for the third quarter of 2022 compared to the same period in 2021 reflects the impact of continued strong customer demand, fueled by record heat across the country in 2022, and the impact of price increases, which were implemented to pass through inflationary increases in raw materials, distribution and labor costs. Full year results will be dependent upon ongoing weather conditions and customer inventory levels.

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Gross Margins. Gross margins, as a percentage of consolidated net sales, decreased to 28% in the third quarter of 2022, compared to 28.4% in the third quarter of 2021. The following table summarizes gross margins by segment for the three months ended September 30, 2022 and 2021, respectively (in thousands):

Three Months Ended September 30,	Engine Management			Temperature Control			Other		Total
2022
Net sales	$	251,741		$	122,991		$	6,641	$	381,373
Gross margins		66,026			35,415			5,343		106,784
Gross margin percentage		26.2	%		28.8	%		—		28	%

2021
Net sales	$	247,151		$	119,075		$	4,084	$	370,310
Gross margins		66,714			33,815			4,676		105,205
Gross margin percentage		27	%		28.4	%		—		28.4	%

Compared to the third quarter of 2021, gross margins at Engine Management decreased 0.8 percentage points from 27% to 26.2%, while gross margins at Temperature Control increased 0.4 percentage points from 28.4% to 28.8%. The gross margin percentage decrease in Engine Management compared to the prior year primarily reflects the impact of inflationary cost increases in raw materials, labor and transportation, which were somewhat offset by increased pricing, and higher freight and related expenses resulting from higher inventory levels; while the gross margin percentage increase in Temperature Control reflects the positive impact seasonal volumes, customer mix and increased pricing, which more than offset the impact of inflationary cost increases in raw materials, labor and transportation and higher freight and related expenses resulting from higher inventory levels. While we anticipate continued margin pressures at both Engine Management and Temperature Control resulting from inflationary cost increases, we believe that our annual cost initiatives, and our ability to pass through higher prices to our customers, will help to mitigate the impact of the inflationary increases on our margins.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) were $73.2 million, or 19.2% of consolidated net sales, in the third quarter of 2022, as compared to $66.5 million, or 18% of consolidated net sales, in the third quarter of 2021. The $6.7 million increase in SG&A expenses as compared to the third quarter of 2021 is principally due to higher interest rate related costs incurred in our supply chain financing arrangements.

Restructuring and Integration Expenses. Restructuring and integration expenses of $166,000 in third quarter of 2021 related to the relocation, in our Engine Management Segment, of certain inventory, machinery, and equipment, acquired in our March 2021 soot sensor acquisition, to our facilities in Independence, Kansas and Bialystok, Poland. The soot sensor product line relocation has been substantially completed.

Operating Income. Operating income was $33.6 million, or 8.8% of consolidated net sales, in the third quarter of 2022, compared to $38.5 million, or 10.4% of consolidated net sales, in the third quarter of 2021. The year-over-year decrease in operating income of $4.9 million is primarily the result of higher SG&A expenses driven by the increased interest rate costs incurred in our supply chain financing arrangements, and to a lesser extent by the impact of lower gross margins as a percentage of consolidated net sales offset, in part, by marginally higher consolidated net sales.

Other Non-Operating Income (Expense), Net. Other non-operating income, net was $1.5 million in the third quarter of 2022, compared to $0.8 million in the third quarter of 2021. The year-over-year increase in other non-operating income, net results the favorable impact of changes in foreign currency exchange rates.

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Interest Expense. Interest expense increased to $3.7 million in the third quarter of 2022, compared to $0.7 million in the third quarter of 2021. The year-over-year increase in interest expense reflects the impact of higher average outstanding borrowings in the third quarter of 2022 when compared to the third quarter of 2021, and higher year-over-year average interest rates on our credit facilities.

Income Tax Provision. The income tax provision in the third quarter of 2022 was $8.3 million at an effective tax rate of 26.3% compared to $9.5 million at an effective tax rate of 24.5% for the same period in 2021. The higher effective tax rate in the third quarter of 2022 compared to the comparable period in 2021 results primarily from the income tax provision impact related to the exercise of restricted stock.

Loss from Discontinued Operations. Loss from discontinued operations, net of income tax, during the third quarter of 2022 and 2021, reflects information contained in the actuarial studies performed as of August 31, 2022 and 2021, other information available and considered by us, and legal expenses associated with our asbestos related liability. During the third quarter of 2022 and 2021, the loss from discontinued operations, net of tax was $14.3 million and $5.1 million, respectively. The loss from discontinued operations for the third quarter of 2022 and 2021 includes an $18.5 million and a $5.3 million pre-tax provision, respectively, to increase our indemnity liability in line with the August 31, 2022 and 2021 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. In May 2021, we acquired the Trombetta business for $111.7 million. As part of the acquisition, we acquired a 70% ownership in a joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”). Net earnings attributable to the noncontrolling interest of $52,000 and $13,000 during the three months ended September 30, 2022 and 2021, respectively, represents 30% of the net earnings of Trombetta Asia, Ltd.

Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

Sales. Consolidated net sales for the nine months ended September 30, 2022 were $1,063.6 million, an increase of $74.7 million, or 7.6%, compared to $988.9 million in the same period of 2021, with the majority of our net sales to customers in the United States. Consolidated net sales increased in both our Engine Management and Temperature Control Segments.

The following table summarizes consolidated net sales by segment and by major product group within each segment for the nine months ended September 30, 2022 and 2021 (in thousands):

	Nine Months Ended September 30,
	2022		2021
Engine Management:
Ignition, Emission Control, Fuel and Safety Related System Products	$	618,198	$	574,595
Wire and Cable		114,673		117,790
Total Engine Management		732,871		692,385

Temperature Control:
Compressors		193,551		178,031
Other Climate Control Parts		125,193		109,988
Total Temperature Control		318,744		288,019

All Other		12,001		8,535

Total	$	1,063,616	$	988,939

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Engine Management’s net sales increased $40.5 million, or 5.8%, to $732.9 million for the first nine months of 2022. Net sales in ignition, emission control, fuel and safety related system products for the nine months ended September 30, 2022 were $618.2 million, an increase of $43.6 million, or 7.6%, compared to $574.6 million in the same period of 2021. Net sales in the wire and cable product group for the nine months ended September 30, 2022 were $114.7 million, a decrease of $3.1 million, or 2.6%, compared to $117.8 million in the nine months ended September 30, 2021. Engine Management’s increase in net sales for the first nine months of 2022 compared to the same period in 2021 reflects the impact of the positive contribution of incremental sales from our soot sensor, Trombetta and Stabil acquisitions, strong customer demand and price increases implemented in 2022, which were implemented to pass through inflationary increases in raw materials, distribution and labor costs.

Incremental net sales from our soot sensor, Trombetta and Stabil acquisitions of $44.6 million were included in the net sales of the ignition, emission control, fuel and safety related system products group for the nine months ended September 30, 2022. Compared to the nine months ended September 30, 2021, excluding the incremental net sales from the acquisitions, net sales in the ignition, emission control, fuel and safety related product group were essentially flat and Engine Management net sales decreased $4.1 million.

Temperature Control’s net sales increased $30.7 million, or 10.7%, to $318.7 million for the first nine months of 2022. Net sales in the compressors product group for the nine months ended September 30, 2022 were $193.6 million, an increase of $15.6 million, or 8.7%, compared to $178 million in the same period of 2021. Net sales in the other climate control parts product group for the nine months ended September 30, 2022 were $125.2 million, an increase of $15.2 million, or 13.8%, compared to $110 million in the nine months ended September 30, 2021. Temperature Control’s increase in net sales for the nine months ended September 30, 2022 compared to the same period in 2021 reflects the impact of continued strong customer demand, fueled by record heat across the country in 2022 and the replenishment of customer inventory levels after very warm summer conditions in 2021, and the impact of price increases, which were implemented to pass through inflationary increases in raw materials, distribution and labor costs. Full year results will be dependent upon ongoing weather conditions and customer inventory levels.

Gross Margins. Gross margins, as a percentage of consolidated net sales, decreased to 27.5% in the first nine months of 2022, compared to 29.1% during the same period in 2021. The following table summarizes gross margins by segment for the nine months ended September 30, 2022 and 2021, respectively (in thousands):

Nine Months Ended September 30,	Engine Management			Temperature Control			Other		Total
2022
Net sales	$	732,871		$	318,744		$	12,001	$	1,063,616
Gross margins		193,855			85,965			13,155		292,975
Gross margin percentage		26.5	%		27	%		—		27.5	%

2021
Net sales	$	692,385		$	288,019		$	8,535	$	988,939
Gross margins		199,231			78,468			10,562		288,261
Gross margin percentage		28.8	%		27.2	%		—		29.1	%

Compared to the first nine months of 2021, gross margins at Engine Management decreased 2.3 percentage points from 28.8% to 26.5%, while gross margins at Temperature Control decreased 0.2 percentage points from 27.2% to 27%. The gross margin percentage decrease in Engine Management compared to the prior year reflects the impact of lower fixed cost absorption due to lower and more normalized production, inflationary cost increases in raw materials, labor and transportation, which were somewhat offset by increased pricing, the higher mix of non-aftermarket parts sales from recent acquisitions, which have a different profile than our aftermarket business with lower gross margins but comparable operating margin, and higher freight and related expenses resulting from higher inventory levels. The gross margin percentage decrease in Temperature Control reflects the impact of inflationary cost increases in raw materials, labor and transportation, and higher freight and related expenses resulting from higher inventory levels, which were somewhat offset by seasonal volume, customer mix and increased pricing. While we anticipate continued margin pressures at both Engine Management and Temperature Control resulting from inflationary cost increases, we believe that our annual cost initiatives, and our ability to pass through higher prices to our customers, will help to mitigate the impact of the inflationary increases on our margins.

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Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) were $204.6 million, or 19.2% of consolidated net sales, in the first nine months of 2022, as compared to $183.3 million, or 18.5% of consolidated net sales in the first nine months of 2021. The $21.3 million increase in SG&A expenses as compared to the first nine months of 2021 is principally due to (1) higher interest rate related costs incurred in our supply chain financing arrangements, (2) the impact of incremental expenses of $7.2 million from our soot sensor, Trombetta and Stabil acquisitions, including amortization of intangible assets acquired, and (3) the impact of inflationary cost increases resulting in higher distribution and freight costs. SG&A expenses in the first nine months of 2022 were favorably impacted by the higher mix of non-aftermarket parts sales from recent acquisitions, which have a different profile than our aftermarket business with lower SG&A expenses as a percentage of sales.

Restructuring and Integration Expenses. Restructuring and integration expenses were $44,000 in nine months ended September 30, 2022 compared to restructuring and integration expenses of $166,000 in the same period of 2021. Restructuring and integration expenses incurred in both the nine months ended September 30, 2022 and 2021 related to the relocation, in our Engine Management Segment, of certain inventory, machinery, and equipment, acquired in our March 2021 soot sensor acquisition, to our facilities in Independence, Kansas and Bialystok, Poland. The soot sensor product line relocation has been substantially completed.

Operating Income. Operating income was $88.4 million, or 8.3% of consolidated net sales, in the nine months ended September 30, 2022, compared to $104.8 million, or 10.6% of consolidated net sales, in the nine months ended September 30, 2021. The year-over-year decrease in operating income of $16.4 million is primarily the result of higher SG&A expenses driven by the increased interest rate costs incurred in our supply chain financing arrangements, and to a lesser extent by the impact of lower gross margins as a percentage of consolidated net sales offset, in part, by higher consolidated net sales.

Other Non-Operating Income (Expense), Net. Other non-operating income, net was $4.9 million in the first nine months of 2022, compared to $2.2 million in the first nine months of 2021. The year-over-year increase in other non-operating income, net results primarily from the increase in year-over-year equity income from our joint ventures and the favorable impact of changes in foreign currency exchange rates.

Interest Expense. Interest expense increased to $6.3 million in the first nine months of 2022, compared to $1.4 million for the same period in 2021. The year-over-year increase in interest expense reflects the impact of higher average outstanding borrowings in the first nine months of 2022 when compared to first nine months of 2021, and higher year-over-year average interest rates on our credit facilities.

Income Tax Provision. The income tax provision for the nine months ended September 30, 2022 was $22.4 million at an effective tax rate of 25.7%, compared to $26.3 million at an effective tax rate of 24.9% for the same period in 2021. The higher effective tax rate in the nine months ended September 30, 2022 compared to the comparable period in 2021 results primarily from the income tax provision impact related to the exercise of restricted stock.

Loss from Discontinued Operations. Loss from discontinued operations, net of income tax, during the nine months ended September 30, 2022 and 2021, reflects information contained in the actuarial studies performed as of August 31, 2022 and 2021, other information available and considered by us, and legal expenses associated with our asbestos related liability. During the first nine months of 2022 and 2021, the loss from discontinued operations, net of tax was $17.1 million and $7.1 million, respectively. The loss from discontinued operations for the nine months ended September 30, 2022 and 2021 includes an $18.5 million and a $5.3 million pre-tax provision, respectively, to increase our indemnity liability in line with the August 31, 2022 and 2021 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.

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Net Earnings Attributable to Noncontrolling Interest. In May 2021, we acquired the Trombetta business for $111.7 million. As part of the acquisition, we acquired a 70% ownership in a joint venture in Hong Kong, with operations in Shanghai and Wuxi, China (“Trombetta Asia, Ltd.”). Net earnings attributable to the noncontrolling interest of $129,000 and $32,000 during the nine months ended September 30, 2022 and 2021, respectively, represents 30% of the net earnings of Trombetta Asia, Ltd.

Restructuring and Integration Programs

All of our restructuring and integration programs have been substantially completed. 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 nine months of 2022, cash used in operating activities was $75.5 million compared to cash provided by operating activities of $79.1 million in the same period of 2021. The increase in cash used in operating activities resulted primarily from the decrease in net earnings, the larger year-over-year increase in accounts receivable, the larger year-over-year increase in inventories, the decrease in accounts payable compared to a year-over-year increase in accounts payable, increase in prepaid expenses and other current assets compared to a year-over-year decrease in prepaid expenses and other current assets, a smaller year-over-year increase in sundry payables and accrued expenses.

Net earnings during the first nine months of 2022 were $47.5 million compared to $72.2 million in the first nine months of 2021. During the first nine months of 2022, (1) the increase in accounts receivable was $51.9 million compared to the year-over-year increase in accounts receivable of $15.3 million in 2021; (2) the increase in inventories was $75.3 million compared to the year-over-year increase in inventories of $52.7 million in 2021; (3) the decrease in accounts payable was $31.8 million compared to the year-over-year increase in accounts payable of $24.2 million in 2021; (4) the increase in prepaid expenses and other current assets was $6.3 million compared to the year-over-year decrease in prepaid expenses and other current assets of $2.3 million in 2021; and (5) the increase in sundry payables and accrued expenses was $3.8 million compared to the year-over-year increase in sundry payables and accrued expenses of $18.9 million in 2021. The increase in inventories during the first nine months of 2022 reflects actions taken to meet ongoing customer demand, the impact of materials inflation, and higher safety stocks of raw materials given the volatility in the supply chain; while the year-over-year comparative increase in receivables during the first nine months of 2022 reflects the impact of $50 million of receivables presented at financial institutions pursuant to our supply chain financing arrangements on December 31, 2020 sold in the first quarter of 2021. We continue to actively manage our working capital to maximize our operating cash flow.

Investing Activities. Cash used in investing activities was $19.5 million in the first nine months of 2022, compared to $144 million in the same period of 2021. Investing activities during the first nine months of 2022 consisted of capital expenditures of $19.5 million; while investing activities during the first nine months of 2021 consisted of (1) the payment of $15.4 million, net of $0.9 million of cash acquired, for our acquisition of 100% of the capital stock of Stabil Operative Group GmbH, a German company, (“Stabil”); (2) the payment of $107.1 million, net of $4.6 million of cash acquired, for our acquisition of 100% of the capital stock of Trumpet Holdings, Inc., a Delaware corporation, (“Trombetta”); (3) the payment of $2.1 million for our acquisition of certain assets of the soot sensor product lines from Stoneridge, Inc.; and (4) capital expenditures of $19.4 million.

Financing Activities. Cash provided by financing activities was $92 million in the first nine months of 2022 as compared to $79.1 million in the same period of 2021. In June 2022, we entered into a new credit agreement with JPMorgan Chase Bank, N.A., as agent. The new credit agreement provides for a $500 million credit facility comprised of a $100 million term loan facility and a $400 million revolving credit facility. Borrowings under the new credit facility were used to repay all outstanding borrowings under the then existing revolving credit facility, and certain fees and expenses incurred in connection with the refinancing.

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During the first nine months of 2022, we (1) increased our borrowings under our credit facilities by $141.5 million; (2) made cash payments of $2.1 million for debt issuance costs in connection with our refinancing; (3) made cash payments for the repurchase of shares of our common stock of $29.7 million; and (4) paid dividends of $17.6 million. Cash provided by borrowings under our credit facilities were used to fund our operating activities, investing activities, payment of debt issuance costs, purchase shares of our common stock and pay dividends.

During the first nine months of 2021, we (1) increased our borrowings under our revolving credit facility by $118.9 million; (2) increased our borrowings under lease obligations and our Polish overdraft facility by $2.9 million; (3) made cash payments for the repurchase of shares of our common stock of $26.5 million; and (4) paid dividends of $16.7 million. Cash provided by operating activities, along with borrowings under our revolving credit agreement, lease obligations and Polish overdraft facility were used to fund our investing activities, purchase shares of our common stock and pay dividends.

Dividends of $17.6 million and $16.7 million were paid in 2022 and 2021, respectively. In February 2022, our Board of Directors voted to increase our quarterly dividend from $0.25 per share in 2021 to $0.27 per share in 2022.

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 June 2022, Standard Motor Products, Inc. (the “Company”) entered into a new Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders (the “Credit Agreement”). The Credit Agreement provides for a $500 million credit facility comprised of a $100 million term loan facility (the “term loan”) and a $400 million multi-currency revolving credit facility available in U.S. Dollars, Euros, Sterling, Swiss Francs, Canadian Dollars and other currencies as agreed to by the administrative agent and the lenders (the “revolving facility”). The Credit Agreement replaces and refinances the existing Credit Agreement, dated as of October 28, 2015, among the Company, SMP Motor Products Ltd. and Trumpet Holdings, Inc., as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and lender, and the other lenders named therein (the “2015 Credit Agreement”).

The Company may, upon the agreement of one or more of then existing lenders or of additional financial institutions not currently party to the Credit Agreement, increase the revolving facility commitments or obtain incremental term loans by an aggregate amount not to exceed (x) the greater of (i) $168 million or (ii) 100% of consolidated EBITDA (as defined in the Credit Agreement) for the four fiscal quarters ended most recently before such date, plus (y) the amount of any voluntary prepayment of term loans, plus (z) an unlimited amount so long as, immediately after giving effect thereto, the pro forma First Lien Net Leverage Ratio (as defined in the Credit Agreement) does not exceed 2.5 to 1.0.

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In February 2022, our Polish subsidiary, SMP Poland sp. z.o.o., amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce, formerly HSBC France (Spolka Akcyjna) Oddzial w Polsce. The amended overdraft facility provides for borrowings of up to Zloty 30 million (approximately $6.1 million). Availability under the amended facility commenced in March 2022, with automatic three-month renewals until June 2027, subject to cancellation by either party, at its sole discretion, at least 30 days prior to the commencement of the three-month renewal period. Borrowings under the overdraft facility will bear interest at a rate equal to WIBOR + 1.5% and are guaranteed by Standard Motor Products, Inc., the ultimate parent company. At September 30, 2022 and December 31, 2021, borrowings under the overdraft facility were Zloty 4.9 million (approximately $1 million) and Zloty 12.3 million (approximately $3 million), respectively.

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.

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In October 2021, our Board of Directors authorized the purchase of up to $30 million of our common stock under a stock repurchase program. Stock repurchases under this program, during the year ended December 31, 2022 were 7,000 shares at a total cost of $0.3 million, and during the three and nine months ended September 30, 2022 were 70,182 shares and 692,067 shares of our common stock, respectively, at a total cost of $3.2 million and $29.7 million, respectively, thereby completing the October 2021 Board of Directors authorization.

In July 2022, our Board of Directors authorized the purchase of up to an additional $30 million of our common stock under a new stock repurchase program. Stock will be purchased from time to time in the open market, or through private transactions, as market conditions warrant. To date, there have been no repurchases of our common stock under the program.

Material Cash Commitments

Material cash commitments as of September 30, 2022 consist of required cash payments to service our outstanding borrowings of $268.5 million under our Credit Agreement with JPMorgan Chase Bank, N.A., as agent, and the future minimum cash requirements of $56.8 million through 2033 under operating leases. All of our other cash commitments as of September 30, 2022 are not material. For additional information related to our material cash commitments, see Note 8, “Leases,” and Note 9, “Credit Facilities and Long-Term Debt,” in the notes to our consolidated financial statements (unaudited).

We anticipate that our cash flow from operations, available cash, and available borrowings under our Credit Agreement will be adequate to meet our future liquidity needs for at least the next twelve months. Significant assumptions underlie this belief, including, among other things, that we will be able to mitigate the future impact, if any, of disruptions in the supply chain caused by the COVID-19 pandemic, Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S. and other governments, future increases in interest rates, and significant inflationary cost increases in raw materials, labor and transportation that we are unable to pass through to our customers, 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, 2021.

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Critical Accounting Policies

We have identified the accounting policies and estimates surrounding the “Valuation of Long-Lived and Intangible Assets and Goodwill,” and “Asbestos Litigation” as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies and estimates on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies and estimates affect our reported and expected financial results. Other than the addition of the “Derivative Instruments and Hedging Activities” accounting policy described in Note 2, “Summary of Significant Accounting Policies,” in the notes to our consolidated financial statements (unaudited), which has not been identified as a critical accounting policy, there have been no other material changes made to our 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, 2021.

You should be aware that preparation of our consolidated quarterly financial statements in this Report 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 disruptions in the supply chain caused by the COVID-19 pandemic, Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S. and other governments, 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).

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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, 2022 and December 31, 2021, our monetary assets and liabilities which are subject to this exposure are immaterial, therefore, the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the incremental effect of such a change on our foreign currency denominated revenues.

Interest Rate Risk

We manage our exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in our debt portfolio. To reduce our market risk for changes in interest rates on our variable rate borrowings, and to manage a portion of our exposure to changes in interest rates, we occasionally enter into interest rate swap agreements.

As of September 30, 2022, we had approximately $269.5 million of outstanding borrowings under our credit facilities, of which approximately $169.5 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 $1.5 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 months and nine months ended September 30, 2022, we sold $236.3 million and $610.4 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 $2.4 million and $6.1 million negative impact on our earnings or cash flows during the three months and nine months ended September 30, 2022, respectively. The charge related to the sale of receivables is included in selling, general and administrative expenses in our consolidated statements of operations.

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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, 2021.

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, 2022, 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.

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PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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 captions “Asbestos” and “Other Litigation” appearing in Note 18, “Commitments and Contingencies,” of the notes to our consolidated financial statements (unaudited).

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information relating to the Company’s purchases of its common stock for the third quarter of 2022:

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs (2)

July 1 – 31, 2022		70,182	$	45.03		70,182	$	30,000,000
August 1 – 31, 2022		—		—		—		30,000,000
September 1 – 30, 2022		—		—		—		30,000,000
Total		70,182	$	45.03		70,182	$	30,000,000

(1)

All shares were purchased through the publicly announced stock repurchase programs in open-market transactions.

(2)

In July 2022, our Board of Directors authorized the purchase of up to an additional $30 million of our common stock under a new stock repurchase program. To date, there have been no repurchases of our common stock under the program.

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ITEM 6.

EXHIBITS

Exhibit

Number

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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).
101.SCH**	Inline XBRL Taxonomy Extension Schema Document.
101.CAL**	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB**	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF**	Inline XBRL Taxonomy Extension Definition Linkbase Document.
104	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.”

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SIGNATURES

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.

	STANDARD MOTOR PRODUCTS, INC.
	(Registrant)

Date: October 31, 2022	/s/ Nathan R. Iles
	Nathan R. Iles
	Chief Financial Officer
	(Principal Financial and
	Accounting Officer)