Standard Motor Products, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar figures are in millions unless otherwise stated. SMP manufactures and distributes engine-management and temperature-control parts, primarily for the automotive aftermarket, with growing original-equipment, heavy-duty and industrial-market exposure.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $370.3 | $343.6 | $988.9 | $845.9 |
| Gross profit / margin | $105.2 / 28.4% | $107.7 / 31.4% | $288.3 / 29.1% | $242.5 / 28.7% |
| Operating income / margin | $38.5 / 10.4% | $48.0 / 14.0% | $104.8 / 10.6% | $78.3 / 9.3% |
| Continuing-operations earnings attributable to SMP | $29.2 | $36.2 | $79.3 | $57.7 |
| Net earnings attributable to SMP, including discontinued operations | $24.1 | $28.6 | $72.2 | $48.2 |
| Diluted EPS, including discontinued operations | $1.07 | $1.26 | $3.18 | $2.12 |
| Operating cash flow | Not separately provided | Not separately provided | $79.1 | $78.6 |
- Q3 sales grew 7.8%, but operating income fell about 19.7% and diluted EPS declined 15.1%. Lower gross margin and higher SG&A more than offset sales growth.
- Nine-month sales increased 16.9% and operating income increased 33.9%; reported diluted EPS rose from $2.12 to $3.18. Comparisons include the pandemic-related weakness in first-half 2020.
- At September 30, cash was $33.1; current assets were $710.9 and current liabilities $478.4. Inventories, including unreturned customer inventory, totaled $438.0, up from $365.1 at year-end 2020.
- Total debt was $131.9, including $128.9 drawn on the revolving credit facility, versus $10.2 at December 31, 2020. The company reported $118.4 of additional revolver availability; weighted-average revolver interest rate was 1.4%. Borrowings were classified as current.
- Nine-month investing cash outflow was $144.0, including $124.7 for acquisitions and $19.4 of capital expenditures. Financing cash inflow was $79.1, including $118.9 of net revolver borrowings, offset in part by $26.5 of share repurchases and $16.7 of dividends. Ending cash was $33.1.
Material changes and management commentary
- Q3 sales rose in both segments: Engine Management increased 7.7% and Temperature Control 7.9%. Temperature Control benefited from warm summer weather and customer inventory replenishment. Nine-month segment sales increased 14.7% and 23.0%, respectively.
- Acquisitions expanded Engine Management’s OE exposure: Trombetta (May; $111.7 purchase price), Stabil (September; €13.7 million, approximately $16.3 million), and selected soot-sensor product lines. These acquisitions contributed $30.0 of nine-month sales; Q3 contribution was $20.5. Purchase-price allocations were preliminary.
- Q3 gross margin declined to 28.4% from 31.4%, notably reflecting lower fixed-cost absorption, inflation in materials, labor and freight, and a greater mix of heavy-duty OE sales. Management expected continued cost pressure and said cost initiatives and customer price increases, beginning in Q4 2021, would help offset it. Nine-month gross margin increased modestly, to 29.1% from 28.7%.
- Management described demand as strong and seasonality as closer to pre-2020 patterns. It expected operating cash flow, cash and revolver availability to meet liquidity needs for at least twelve months, subject to assumptions including effective cost, inventory and production management and no material adverse developments. No specific earnings or revenue guidance was provided.
- In October 2021, the board authorized a new share-repurchase program of up to $30.0, following completion of the prior $20.0 program. The quarterly dividend was $0.25 per share.
Risks, contingencies and unusual items
- Asbestos claims relate to a discontinued brake business. Approximately 1,585 cases were outstanding. An August 2021 actuarial study estimated undiscounted settlement payments and awards of $60.9–$100.2 through 2065, excluding legal costs and insurance recoveries. SMP recorded a $5.3 pretax provision in Q3; legal costs were estimated at $49.4–$99.3 through 2065. The balance sheet reports accrued asbestos liabilities of $57.5; the filing text does not clearly reconcile this amount with the actuarial estimate.
- Supply-chain disruption, longer lead times, inflation, freight costs, COVID-19 and the Delta variant, customer concentration, and the loss of a large retailer’s branded business are material risks. Supply-chain financing arrangements also expose liquidity and costs to possible termination, payment delays and interest-rate changes.
- The company sold $626.9 of receivables through supply-chain financing arrangements in the first nine months and recorded related charges of $8.7 in SG&A. A hypothetical 100-basis-point unfavorable change in the relevant margin rate was estimated to affect earnings or cash flows by approximately $6.3 for the nine-month period.
- The revolver is secured by substantially all company assets and matures in December 2023. A fixed-charge coverage covenant applies if borrowing availability falls below specified thresholds; SMP reported it was not subject to that covenant at quarter-end. The Polish overdraft facility, with approximately $2.9 borrowed, was due to expire in December 2021.
- Other litigation includes commercial, product-liability, employment and environmental matters. Management did not believe their ultimate outcomes would materially adversely affect the company, but acknowledged uncertainty. The filing reported effective disclosure controls and no material quarter-to-quarter change in internal control over financial reporting; integration and evaluation of acquired companies’ controls were ongoing.
Important facts for investors to verify
- Whether Q3 margin pressure persists and whether announced price increases and cost savings offset inflation, freight and labor costs.
- Acquisition integration, realized returns, preliminary purchase accounting, and the contribution and margin profile of acquired OE businesses.
- Inventory growth and working-capital conversion, including reliance on receivables sales and availability under the asset-based revolver.
- Asbestos liability measurement and cash costs, including the relationship between the actuarial estimate, recorded balance and future legal expenses.
- Post-quarter execution and funding of the new $30.0 repurchase authorization, and renewal or replacement of the Polish overdraft facility.