Standard Motor Products, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The company manufactures and distributes automotive replacement parts, with Engine Management and Temperature Control segments and complementary heavy-duty, industrial-equipment and original-equipment markets. This unaudited report covers the three months ended March 31, 2021, compared with Q1 2020. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $276.6 million | $254.3 million |
| Gross profit / margin | $83.8 million / 30.3% | $70.4 million / 27.7% |
| Operating income | $29.3 million | $14.3 million |
| Continuing-operations earnings | $22.2 million | $9.6 million |
| Net earnings | $21.0 million | $8.6 million |
| Diluted EPS | $0.92 | $0.38 |
| Cash used in operating activities | $11.4 million | $32.8 million |
Sales grew 8.7%. Gross margin rose 2.6 percentage points, and operating income more than doubled. Management attributed margin improvement primarily to higher production volumes and absorption, with some benefit from sales to a large retailer that shifted to private label. SG&A declined to $54.5 million, or 19.7% of sales, from $55.9 million, or 22.0%.
- Segments: Engine Management sales were $212.0 million, up 5.4%, with operating income of $31.1 million versus $21.4 million. Temperature Control sales were $62.5 million, up 21.4%; operating income was $3.6 million versus a $0.3 million loss. Segment sales growth reflected strong customer demand and, for Temperature Control, pre-season orders.
- Cash flow and investment: Investing activities used $7.0 million, including $5.0 million of capital expenditures and $2.1 million for an acquisition. Financing activities provided $16.1 million, including $31.0 million of net revolving-credit borrowings, offset partly by $11.1 million of share repurchases and $5.6 million of dividends.
- Balance sheet and debt: At March 31, cash was $17.1 million, total current assets $617.0 million, and current liabilities $313.4 million. Total debt was $42.6 million, compared with $10.2 million at year-end 2020; most was current revolving-credit borrowing. The company reported $206.3 million of additional borrowing availability under its revolving facility.
Material changes and notable items
- Inventory increased to $390.9 million from $345.5 million at year-end, as the company replenished stock following strong sales and built seasonal Temperature Control inventory. The inventory build contributed to negative operating cash flow despite higher earnings.
- The company sold $191.4 million of customer receivables through supply-chain financing arrangements in Q1, versus $150.2 million a year earlier. Related charges were $2.7 million. Termination of these arrangements or higher financing costs could adversely affect liquidity and cash flow.
- In March, the company acquired Stoneridge’s Ohio soot-sensor product lines for $2.1 million; reported Q1 sales from the acquisition were $0.8 million. It expects to acquire the Estonia product-line assets for approximately $0.8 million at a future date. Management estimated annual revenue from the acquired business at approximately $12–14 million.
- Discontinued operations recorded a $1.2 million after-tax loss, principally for asbestos-related legal expenses. The balance sheet included $54.6 million of accrued asbestos liabilities. Approximately 1,590 cases were outstanding; the company has no insurance coverage for related indemnity and defense costs.
Outlook, risks and contingencies
The filing provides no specific full-year earnings or sales guidance. Management said Q1 demand was more in line with pre-pandemic years, while Temperature Control pre-season orders remained strong into Q2. Results will depend in part on summer weather and customer inventory levels; the business is seasonal, with sales typically strongest in Q2 and Q3. Management expects higher labor, raw-material and transportation costs to offset some benefits of higher production. It also said tariff effects had been limited and did not anticipate a significant future impact, while noting it cannot assure full recovery of tariff costs through pricing.
Management believes operating cash flow, available cash and revolver availability should meet liquidity needs for at least 12 months, subject to assumptions including continued management of inventory, costs, pandemic effects and the large retailer’s private-label transition. Key risks include customer concentration and program changes, supply-chain-financing availability and rates, inflation and freight costs, COVID-19 and supply disruptions, seasonal demand, and asbestos, product-liability, environmental and other litigation. The company said additional asbestos provisions cannot be ruled out. It was not subject to the revolving-credit facility’s fixed-charge coverage covenant at quarter-end. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether demand and pre-season orders persist, and how summer weather and customer inventory affect Temperature Control sales.
- Whether the private-label transition at the large retail customer reduces Engine Management sales or changes margins beyond Q1.
- Inventory conversion, working-capital needs, operating cash flow and revolver borrowings through the seasonal peak.
- Continued access and cost of receivables-sale arrangements, including exposure to rate changes and potential termination.
- Integration and relocation costs, completion of the Estonia asset acquisition, and realization of the acquired business’s estimated revenue.
- Asbestos claim developments, future actuarial estimates, cash settlements and legal costs.