Standard Motor Products, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. SMP manufactures and distributes automotive aftermarket replacement parts and custom-engineered vehicle and thermal-management products. In 2023, it reorganized reporting into Vehicle Control, Temperature Control and Engineered Solutions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $386.4m | $381.4m | $1,067.5m | $1,063.6m |
| Gross profit (margin) | $114.8m (29.7%) | $106.8m (28.0%) | $307.3m (28.8%) | $293.0m (27.5%) |
| Operating income (margin) | $34.8m (9.0%) | $33.6m (8.8%) | $82.7m (7.7%) | $88.4m (8.3%) |
| Continuing-operations earnings attributable to SMP | $24.9m | $23.1m | $55.9m | $64.5m |
| Net earnings attributable to SMP | $6.7m | $8.8m | $27.7m | $47.4m |
| Diluted EPS attributable to SMP | $0.30 | $0.40 | $1.25 | $2.14 |
| Operating cash flow | Not separately stated | Not separately stated | $132.9m | $(75.5)m |
Q3 revenue increased 1.3%; nine-month revenue was nearly flat. Q3 gross margin improved 1.7 percentage points, while nine-month gross margin improved 1.3 points. SG&A rose to $79.8m in Q3 and $223.3m year to date, including higher receivables-financing costs of $4.0m and $14.3m, respectively. Nine-month operating income fell 6.4%, principally reflecting higher SG&A and restructuring costs.
Segments and operating trends
- Q3: Vehicle Control sales fell 3.4% to $190.9m, attributed to lower sales to a bankrupt customer and the absence of prior-year pipeline orders. Temperature Control sales rose 5.3% to $123.6m as demand rebounded with warmer summer weather. Engineered Solutions sales increased 8.4% to $71.8m on strong demand and new business wins.
- Nine months: Vehicle Control sales were $559.3m versus $560.7m; Temperature Control was $293.1m versus $296.1m; Engineered Solutions increased 4.0% to $215.1m. Segment results reflect distinct demand and margin trends; prior-period segment information was reclassified to the new structure.
- Management cited pricing, operating performance, Temperature Control volume and Engineered Solutions mix as drivers of improved gross margins, partly offset by inflation and lower production absorption. It expects cost savings and pricing actions to offset much, but not necessarily all, of ongoing cost pressure.
Cash, debt and liquidity
- Cash was $28.5m at September 30, 2023, compared with $21.2m at year-end 2022. Current assets were $762.4m and current liabilities $373.3m.
- Total debt was $147.6m, down from $239.6m at year-end; net debt was $119.1m. The credit agreement matures in 2027. The reported weighted-average borrowing rate was 5.2%; a $100m interest-rate swap hedges part of the variable-rate exposure.
- Remaining borrowing capacity was $344.0m and reported total liquidity was $372.5m. Management expects operating cash flow, cash and available credit to meet needs for at least the next 12 months, subject to stated business and market assumptions.
- Nine-month operating cash flow was $132.9m, versus cash used of $75.5m a year earlier, aided by inventory reduction and working-capital movements. Investing used $15.1m, including $18.0m of capital expenditures, partly offset by $6.8m of cash acquired. Financing used $111.0m, including $92.1m of net debt reduction and $18.8m of dividends.
- Receivables-financing arrangements generated sales of $643.0m of receivables in the first nine months; related charges were $36.1m. Management warns that termination of these arrangements or higher benchmark rates could adversely affect costs, cash flow and liquidity.
Outlook, material items and risks
- No specific revenue or earnings guidance is provided. Management expressed optimism about Engineered Solutions’ longer-term growth, while noting Temperature Control results depend on weather and customer inventory levels. A cost-reduction program shifting product lines to Reynosa, Mexico is expected to be substantially complete by year-end 2023; about $0.5m of additional costs were expected.
- Discontinued operations reduced net earnings by $18.2m in Q3 and $28.2m year to date. The 2023 results include a $23.8m pretax increase to the asbestos liability and a $10.5m pretax provision for a former-brake-business contract settlement; the settlement was paid in early October.
- The asbestos liability was increased to $84.0m, the low end of an actuarial estimate of $84.0m–$135.3m in undiscounted settlement payments through 2065, excluding estimated future legal costs of $53.1m–$105.2m. Approximately 1,430 cases were outstanding. The company has no insurance for related indemnity and defense costs and says additional provisions may be required.
- Other risks include inflation and supply-chain disruption, interest and receivables-financing costs, customer concentration or program changes, customer demand and weather, competition and pricing, acquisition integration, foreign exchange, geopolitical developments, and litigation, product liability and environmental matters. The filing reports disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the asbestos estimate, future legal costs and claims experience require further provisions or materially change cash outflows.
- Whether receivables-financing costs remain elevated and whether those facilities continue to be available on acceptable terms.
- Whether inventory normalization, working-capital management and debt reduction can be sustained without impairing service levels or margins.
- Whether Engineered Solutions growth and Temperature Control demand persist, and whether Vehicle Control customer and order losses continue.
- Progress and realized savings from the restructuring initiative, and the costs and timing of the new Shawnee, Kansas distribution facility, whose phased opening is planned to begin in early 2025.