Standard Motor Products, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless noted otherwise, amounts are in millions of dollars. The company manufactures and distributes replacement parts for motor vehicles, primarily through its Engine Management and Temperature Control segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $343.6 | $307.7 | $845.9 | $896.7 |
| Gross profit / margin | $107.7 / 31.4% | $92.1 / 29.9% | $242.5 / 28.7% | $259.0 / 28.9% |
| Operating income | $48.0 | $31.3 | $78.3 | $77.0 |
| Continuing-operations earnings | $36.2 | $22.7 | $57.7 | $56.3 |
| Net earnings | $28.6 | $14.8 | $48.2 | $46.4 |
| Diluted EPS | $1.26 | $0.65 | $2.12 | $2.03 |
Q3 sales rose 11.7% year over year: Engine Management sales increased 6.3% to $229.6 million, while Temperature Control sales increased 25% to $110.4 million. For the first nine months, sales fell 5.7%; Engine Management declined 6.7% and Temperature Control declined 3.1%. Management attributed the nine-month decrease mainly to pandemic-related weakness in Q2 and, in part, nonrecurring prior-year customer orders. Q3 gross-margin improvement reflected higher production volumes and favorable mix; nine-month gross margin was slightly lower.
Q3 SG&A was $59.5 million, down $0.4 million; nine-month SG&A declined $16.8 million to $163.7 million, reflecting lower selling and marketing costs and cost reductions. Interest expense declined to $0.5 million for Q3 and $2.1 million year to date. The nine-month effective tax rate was 24.9%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $78.6 million, versus $43.1 million in 2019. Cash flow included a $104.0 million increase in receivables, partly offset by a $53.3 million inventory reduction and increased accrued payables.
- Investing cash outflow was $13.2 million, principally capital expenditures. Financing cash outflow was $59.1 million, including $44.0 million of net revolving-credit repayments, $8.7 million of share repurchases and $5.6 million of dividends paid.
- At September 30, cash was $16.8 million; current assets were $596.3 million and current liabilities $303.8 million. Total debt was $12.1 million, down from $57.0 million at December 31, 2019. Stockholders’ equity was $544.9 million.
- The company reported $238.4 million of additional borrowing availability under its $250 million revolving facility, which matures in December 2023. It was not subject to the facility’s fixed-charge coverage covenant at quarter-end. The Polish overdraft facility, with approximately $3.5 million drawn, was due to expire in December 2020; management anticipated renewal.
- The company sold $511.1 million of receivables under supply-chain financing arrangements during the first nine months, recording $9.4 million of related charges. It warned that termination of these arrangements or higher discount rates could adversely affect liquidity, results and cash flow.
Outlook, risks and unusual items
- Management said business recovered to pre-COVID-19 levels in Q3, with customer point-of-sale sales exceeding 2019 comparisons. It expects demand to normalize toward its longer-range forecast of low-single-digit growth; no specific earnings or revenue guidance was provided. Temperature Control demand remains sensitive to summer weather and customer inventories.
- COVID-19 caused a sharp Q2 demand decline and production adjustments. The company continued operating as an essential business, but cautioned that the pandemic, renewed restrictions, economic weakness and supply-chain disruption could materially affect future results.
- In response to the pandemic, the company reduced discretionary spending and temporarily suspended dividends and repurchases. Repurchases were reinstated in September; in October, the board reinstated a $0.25 quarterly dividend, payable December 1, 2020. Management said available cash, operating cash flow and borrowing capacity should meet needs for at least twelve months, subject to assumptions including demand and cost management.
- Asbestos liabilities are a significant contingency associated with a previously sold brake business and are reported in discontinued operations. The company recorded an $8.7 million pretax provision in Q3; the nine-month after-tax discontinued-operations loss was $9.5 million. An August 2020 actuarial study estimated undiscounted settlement liability of $58.1–$99.3 million through 2065, excluding legal costs; estimated future legal costs were $51.9–$89.5 million. Approximately 1,540 cases were outstanding, and the company reported no insurance coverage for related indemnity and defense costs. It is appealing a $7.6 million compensatory-damages finding in a California case.
- Other notable items: the accrued product-warranty liability was $28.6 million, versus $20.6 million a year earlier; environmental cleanup costs at a former Long Island City facility contributed to restructuring expense. The company reported that disclosure controls were effective and that no material internal-control changes occurred during the quarter.
Important facts for investors to verify
- Whether Q3 sales strength persists as customer restocking and unusually warm weather effects normalize.
- Whether receivables, customer returns, rebates and inventory movements continue to support operating cash flow and liquidity.
- Renewal of the Polish overdraft facility and continued availability and economics of receivables-financing arrangements.
- Future asbestos claims, actuarial estimates, legal costs and the outcome of the California appeal.
- Execution of the reinstated dividend and buyback plans alongside the company’s stated liquidity assumptions and ongoing COVID-19 risks.