Standard Motor Products, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. SMP manufactures and distributes automotive aftermarket replacement parts and provides engineered vehicle-control and thermal-management solutions. Effective January 1, 2023, it reorganized reporting into Vehicle Control, Temperature Control and Engineered Solutions; prior-period segment results were recast.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $328.0 million | $322.8 million | Up 1.6% |
| Gross profit / margin | $91.3 million / 27.8% | $89.8 million / 27.8% | Margin unchanged |
| Operating income / margin | $20.7 million / 6.3% | $26.9 million / 8.3% | Down $6.2 million |
| Continuing-operations earnings attributable to SMP | $12.7 million | $20.6 million | Down |
| Net earnings attributable to SMP | $11.9 million | $19.4 million | Down |
| Diluted EPS attributable to SMP | $0.54 | $0.87 | Down |
| Cash used in operating activities | $20.4 million | $104.0 million | Lower cash use |
| Capital expenditures | $4.4 million | $6.4 million | Lower |
Gross margin held at 27.8%. SG&A rose to $69.6 million from $62.9 million, including $5.5 million of higher interest-rate-related costs in supply-chain financing arrangements, as well as higher distribution and freight costs. Interest expense increased to $3.9 million from $0.8 million. The effective tax rate was 25.6%, versus 25.4%.
Segment sales were: Vehicle Control $184.6 million, up 4.1%; Temperature Control $72.4 million, down slightly; and Engineered Solutions $71.0 million, down 2.0%. Operating income was $17.4 million, $2.1 million and $5.6 million, respectively. Vehicle Control growth reflected demand for engine-management products and pricing; Engineered Solutions sales were affected by a customer’s production schedule.
Balance sheet and liquidity
- At March 31, 2023, cash was $24.2 million; current assets were $803.9 million and current liabilities were $321.4 million.
- Total debt was $273.1 million, up from $239.6 million at December 31, 2022. The weighted-average credit-facility rate was 5.6%, versus 5.2% at year-end. A $100 million interest-rate swap fixes the rate on that portion of borrowings.
- The $500 million credit facility comprises a $100 million term loan and a $400 million revolver, maturing June 2027. Management stated that operating cash flow, available cash and facility availability are expected to cover liquidity needs for at least 12 months.
- Operating cash flow remained negative, while financing provided $27.3 million, including increased credit-facility borrowings. Cash ended the quarter at $24.2 million.
- Inventory decreased $6.2 million during the quarter. Management anticipates further inventory reductions in 2023 as levels normalize.
- Quarterly dividend declared was $0.29 per share, up from $0.27. A $30 million repurchase authorization remained unused as of the filing.
Outlook, risks and unusual items
- Management described core aftermarket demand as strong and expected low-single-digit growth for the automotive aftermarket. It provided no specific consolidated revenue or earnings guidance in the supplied filing text.
- Temperature Control’s full-year results depend on summer weather and customer inventory levels. Management remained optimistic about Engineered Solutions’ longer-term growth prospects.
- Inflation in raw materials, labor and transportation, lower production and fixed-cost absorption, interest rates, supply-chain disruption, customer program changes, and macroeconomic and geopolitical uncertainty could pressure results. Management said pricing actions and cost initiatives should offset some inflationary pressure, but gave no assurance.
- A cost-reduction initiative relocates product lines from Kansas and Canada to Reynosa, Mexico. Q1 charges were $0.9 million; approximately $1.9 million of additional costs were expected, with completion anticipated by year-end 2023.
- SMP sold $170.9 million of receivables through supply-chain financing arrangements in Q1, versus $155.7 million a year earlier. Related charges included in SG&A were $9.0 million versus $3.5 million. Termination of these arrangements or higher benchmark rates could adversely affect costs, cash flow and liquidity.
- Discontinued operations recorded a $0.8 million after-tax loss, primarily reflecting asbestos-related legal expenses. About 1,485 asbestos cases were outstanding; the balance sheet included $60.8 million of accrued asbestos liabilities, and SMP has no insurance for related indemnity and defense costs. The latest actuarial study estimated undiscounted settlement payments and awards of $68.8 million to $111.6 million through 2065, excluding legal costs. Additional provisions may be required.
- Management cited other commercial, product-liability, employment and environmental proceedings, but did not believe their ultimate outcomes would materially adversely affect the company based on currently available information. The filing also identifies foreign-exchange and variable-rate borrowing exposures.
Key facts for investors to verify
- Whether pricing, cost actions and improved production absorption can protect margins as inflation and financing costs persist.
- Whether cash generation improves as inventory normalizes, and how much the business continues to rely on receivable sales and revolver borrowings.
- Changes in debt, borrowing rates, facility availability and covenant compliance.
- Temperature Control’s seasonal demand and inventory trends, and the timing of Engineered Solutions customer programs.
- Future asbestos actuarial estimates, claims and payments, including whether additional accruals are needed.
- Execution, remaining costs and expected benefits of the restructuring initiative.