Standard Motor Products, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dollar amounts below are in millions unless otherwise noted. SMP manufactures and distributes automotive aftermarket replacement parts and complementary specialized original-equipment parts. Its reportable segments are Engine Management and Temperature Control.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $359.4 | $342.1 | $682.2 | $618.6 |
| Gross profit / margin | $96.4 / 26.8% | $99.3 / 29.0% | $186.2 / 27.3% | $183.1 / 29.6% |
| Operating income / margin | $27.9 / 7.8% | $36.9 / 10.8% | $54.8 / 8.0% | $66.2 / 10.7% |
| Continuing-operations earnings attributable to SMP | $20.8 | $28.0 | $41.4 | $50.2 |
| Net earnings attributable to SMP | $19.1 | $27.1 | $38.6 | $48.1 |
| Diluted EPS attributable to SMP | $0.86 | $1.20 | $1.72 | $2.12 |
| Interest expense | $1.8 | $0.5 | $2.6 | $0.7 |
- Q2 sales increased 5.1%; six-month sales increased 10.3%. Temperature Control sales rose 7.5% in Q2 and 15.9% for the half; Engine Management rose 3.7% and 8.1%, respectively.
- Despite higher sales, operating income fell about 24% in Q2 and 17% for the first half. Margin compression reflected inflation in materials, labor and transportation, lower production-related fixed-cost absorption, higher customer returns and freight, and increased sales of acquired non-aftermarket products with lower gross margins.
- SG&A rose to $68.5 million in Q2 and $131.4 million for the half. Drivers included distribution costs, supply-chain-financing costs and expenses from acquisitions.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was negative $95.3 million, versus positive $23.2 million a year earlier. Working capital absorbed cash, including increases of $49.7 million in receivables and $87.7 million in inventories.
- Cash was $14.2 million at June 30, 2022, down from $21.8 million at year-end 2021. Capital expenditures were $13.2 million. Financing activities provided $101.7 million, including increased borrowings; the company also repurchased $25.6 million of stock and paid $11.8 million in dividends.
- Total debt was $267.5 million, compared with $128.4 million at year-end 2021. Current assets were $842.9 million and current liabilities were $410.2 million. Inventory, including unreturned customer inventory, totaled $572.8 million.
- In June, SMP refinanced its prior facility with a $500 million credit agreement: a $100 million term loan and a $400 million multicurrency revolver, maturing June 2027. Outstanding borrowings under the agreement were $264.5 million, in addition to approximately $3.0 million of Polish overdraft and other debt. The reported weighted-average borrowing rate was 3.5%, versus 1.4% at year-end 2021.
- A seven-year swap fixed the rate on $100 million of borrowings; the company reported approximately $167.5 million of variable-rate debt after the swap. A 100-basis-point adverse rate change was estimated to have an annualized negative impact of about $1.5 million on earnings or cash flows.
Changes, outlook and risks
- Acquisitions contributed $16.5 million of Q2 and $41.2 million of first-half sales. Excluding acquired sales, Engine Management sales declined year over year in both periods. Recent acquisitions support the company’s expansion into specialized and non-aftermarket markets.
- Management said core aftermarket demand remained strong. Temperature Control benefited from early-season heat, customer demand and inventory replenishment, but full-year results depend on summer weather and customer inventory levels. SMP expects continued margin pressure from inflation; it expects pricing and cost initiatives to mitigate, but not necessarily eliminate, the effect. No specific earnings or revenue guidance was provided.
- Management expected operating cash flow, cash and borrowing availability to cover liquidity needs for at least twelve months, subject to assumptions about supply-chain disruption, inflation, interest rates and business conditions.
- Supply-chain-financing arrangements remain important to receivables and liquidity. SMP sold $374.1 million of receivables during the first half and recorded $11.2 million of related expense, versus $5.7 million a year earlier. Termination of the arrangements or increased benchmark rates could adversely affect cash flow and results.
- Other risks cited include supply-chain delays, inflation, Russia’s invasion of Ukraine and related sanctions, customer and market demand, acquisition integration, product liability, environmental matters and foreign-currency exposure. SMP reported no significant operational impact from the war to date.
- Discontinued-operations losses were $1.7 million in Q2 and $2.8 million for the half, principally asbestos-related legal expenses. About 1,590 asbestos cases were outstanding; the recorded asbestos liability was $48.0 million. The company reported an actuarial estimate of $60.9–$100.2 million for undiscounted settlement payments and damages through 2065 in its 2021 study, excluding legal costs.
- The October 2021 $30 million repurchase authorization was completed after additional purchases through July 18, 2022. In July, the board authorized a further $30 million program. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether pricing, productivity and cost initiatives can offset persistent inflation and protect margins.
- Whether elevated inventories and receivables convert to cash, and whether the negative first-half operating cash flow reverses.
- Debt levels, borrowing costs, covenant headroom and availability under the new credit agreement as rates change.
- The durability of Temperature Control demand beyond the early-season heat and the contribution of acquired businesses to underlying growth and profitability.
- Future costs and potential changes in the asbestos liability, including legal costs and the next actuarial evaluation.
- The cost and continued availability of receivables-sale arrangements, and the company’s capital allocation across dividends, repurchases and investment.