Standard Motor Products, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
SMP manufactures and distributes automotive engine-management and temperature-control parts, with additional exposure to heavy-duty, industrial-equipment and original-equipment markets. Its reportable segments are Engine Management and Temperature Control. The company noted that sales are seasonal, typically strongest in the second and third quarters.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $342.1 | $247.9 | $618.6 | $502.2 |
| Gross profit | $99.3 | $64.4 | $183.1 | $134.8 |
| Gross margin | 29.0% | 26.0% | 29.6% | 26.8% |
| Operating income | $36.9 | $16.0 | $66.2 | $30.3 |
| Net earnings attributable to SMP | $27.1 | $11.0 | $48.1 | $19.6 |
| Diluted EPS, including discontinued operations | $1.20 | $0.48 | $2.12 | $0.86 |
Q2 sales increased 38% year over year; first-half sales increased 23.2%. Q2 sales by segment were $233.2 million for Engine Management and $106.5 million for Temperature Control. For the first half, those segments recorded $445.2 million and $168.9 million, respectively. The filing attributes growth to strong demand, customer initiatives and new business, acquisitions, and comparison with pandemic-affected 2020 results.
First-half cash provided by operating activities was $23.2 million, versus cash used of $0.9 million in 2020. Cash used in investing was $121.0 million, including acquisition spending and $11.7 million of capital expenditures. Cash provided by financing was $105.7 million. Cash and equivalents ended the period at $27.5 million.
At June 30, current assets were $680.7 million and current liabilities were $447.1 million. Current revolving-credit borrowings were $135.0 million, compared with $10.0 million at year-end 2020; total debt was $137.5 million. The company reported $112.3 million of additional borrowing availability under its credit-facility borrowing formula. Total stockholders’ equity was $595.1 million.
Material changes and notable items
- Gross margin improved year over year in both segments, principally due to higher sales and production volumes and improved manufacturing absorption. SG&A increased in dollars but declined as a share of sales, to 18.2% in Q2 and 18.9% for the first half.
- In May, SMP acquired Trombetta for $111.7 million, funded with revolving-credit borrowings. The acquisition added $5.7 million in reported revenue through June 30. SMP also acquired certain Stoneridge soot-sensor product-line assets; the acquired businesses contributed $9.5 million of first-half sales in total.
- Inventory rose to $404.9 million from $345.5 million at December 31, 2020, reflecting replenishment after strong prior-period sales and preparation for the seasonal selling period.
- The company reported a $2.0 million first-half loss from discontinued operations, primarily related to asbestos legal expenses. It reported $54.0 million of accrued asbestos liabilities and approximately 1,610 outstanding cases for which it may be responsible.
- Cash dividends paid in the first half were $11.1 million; the declared dividend was $0.25 per share in Q2. SMP also repurchased $11.1 million of shares in the first half.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management said full-year Temperature Control results depend on summer weather and customer inventory levels. It expects inflationary pressures in raw materials, labor and transportation to continue for some time; cost-saving efforts and customer price increases are intended to offset some of the effect, but may not fully do so.
Management described demand as strong and first-half sales as returning to a more normalized seasonal pattern. It continued to monitor COVID-19, including the Delta variant, and potential effects on demand, employee safety and supply chains. Global supply-chain disruption, longer lead times and inflation may adversely affect results. Other identified risks include losing or reducing business with major customers, the large retailer’s private-brand strategy, customer returns, acquisition integration, variable-rate debt and supply-chain receivables financing. Termination or increased cost of receivables-sale arrangements could harm cash flow and liquidity.
Management expects operating cash flow, available cash and the revolving facility to meet liquidity needs for at least twelve months, subject to assumptions including demand, cost control and absence of material adverse developments. Asbestos liabilities and other litigation remain contingent risks; management stated that additional asbestos provisions cannot be ruled out. The company was not subject to its revolving-credit fixed-charge coverage covenant at June 30, 2021.
Key facts for investors to verify
- How much reported sales and earnings growth reflects recovery from the unusually weak Q2 2020 comparison versus underlying demand, acquisitions and other factors.
- Whether higher inventory converts into sales and cash receipts without elevated customer returns or obsolescence.
- The pace of inflation, freight and supply-chain cost changes, and the extent to which SMP can recover them through pricing and cost savings.
- Post-acquisition performance and integration of Trombetta and the soot-sensor product lines, including final purchase-price allocation adjustments.
- Revolving-credit utilization, borrowing availability, refinancing and interest-rate exposure, and continued availability and cost of receivables-sale arrangements.
- Updates to asbestos claims, actuarial estimates, accrued liabilities and related cash payments.