Standard Motor Products, Inc. — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. SMP manufactures and distributes automotive aftermarket replacement parts and specialized original-equipment products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $322.8 | $276.6; up 16.7% |
| Gross profit / margin | $89.8 / 27.8% | $83.8 / 30.3% |
| Operating income / margin | $26.9 / 8.3% | $29.3 / 10.6% |
| Continuing-operations earnings | $20.6; diluted EPS $0.91 | $22.2; diluted EPS $0.97 |
| Net earnings attributable to SMP | $19.4; diluted EPS $0.87 | $21.0; diluted EPS $0.92 |
| Operating cash flow | $(104.0) | $(11.4) |
| Capital expenditures | $6.4 | $5.0 |
| Cash and cash equivalents | $20.0 at March 31 | $21.8 at December 31, 2021 |
| Total debt | $248.7 at March 31 | $128.4 at December 31, 2021 |
| Dividend declared per share | $0.27 | $0.25 |
Cash used in operations largely reflected working-capital investment, including increases of $44.7 million in accounts receivable and $67.7 million in inventories. Financing activities provided $108.3 million, including $120.2 million of net revolving-credit borrowings. Inventory was $556.6 million including unreturned customer inventory, up from $491.0 million at year-end. The filing reports current assets of $819.4 million and current liabilities of $578.1 million.
Material changes and business drivers
- Sales rose in both segments. Engine Management sales were $239.3 million, up 12.8%; Temperature Control sales were $81.3 million, up 30.1%.
- Recent acquisitions contributed $24.7 million of incremental Engine Management sales in Q1: $16.6 million from Trombetta, $5.8 million from Stabil, and $2.3 million from the soot-sensor business. Excluding acquisition contributions, Engine Management sales increased 1.2%.
- Management attributed growth to acquisition contributions, customer demand and inventory replenishment, marketplace initiatives and customer wins, and pricing intended to recover inflationary costs. Temperature Control benefited from strong pre-season orders; full-year results depend partly on summer weather and customer inventories.
- Gross margin fell 2.5 percentage points. Management cited lower production and fixed-cost absorption versus the prior-year period, inflation in materials, labor and freight, and a greater mix of heavy-duty acquisition sales with lower gross margins. Pricing partly offset cost pressures.
- SG&A rose $8.4 million to $62.9 million, principally due to higher sales-related and freight costs, supply-chain-financing costs, and $3.6 million of acquisition-related expenses. Operating income declined $2.4 million despite higher sales.
- Interest expense increased to $0.8 million from $0.2 million, reflecting higher average borrowing and slightly higher average rates. The effective tax rate was 25.4%, broadly unchanged from 25.5%.
Liquidity, debt and capital allocation
In March, SMP increased its secured revolving-credit commitment from $250 million to $300 million and replaced LIBOR references with Term SOFR. The facility matures December 10, 2023. At quarter-end, revolving borrowings were $245.5 million, other debt was $3.2 million, and stated additional borrowing availability was $52 million. The weighted-average facility rate was 1.8%. All reported debt was classified as current. SMP was not subject to the facility’s fixed-charge coverage covenant at March 31.
Management expects operating cash flow, cash and facility availability to meet liquidity needs for at least the next 12 months, subject to assumptions including managing supply disruptions and inflation and avoiding material adverse developments. The company paid $5.9 million in dividends and repurchased $6.5 million of shares during Q1. Its quarterly dividend increased to $0.27 per share. A $30 million repurchase authorization had $22.8 million remaining at March 31; SMP repurchased a further $4.1 million through April 29.
Outlook, risks and unusual items
- No numerical full-year revenue or earnings guidance is provided. Management expects inflationary margin pressure to continue, while cost initiatives and pricing are expected to offset some of the impact.
- Risks include supply-chain disruption, inflation in materials, labor and transportation, customer concentration and demand changes, acquisition integration, competition and pricing, tariffs, and effects of Russia’s invasion of Ukraine and China lockdowns. SMP reported no facilities or operations in Russia or Ukraine and no significant war-related disruption to date, but noted potential future effects.
- Supply-chain financing arrangements included $155.7 million of receivables sold in Q1, with a $3.5 million associated SG&A charge. Termination or higher benchmark-related costs could adversely affect liquidity, cash flow and results.
- Asbestos exposure remains a material contingency: 1,584 cases were outstanding at March 31, and SMP reported $51.9 million of accrued asbestos liabilities. The latest cited actuarial study estimated undiscounted settlement payments and awards of $60.9 million to $100.2 million through 2065, excluding legal costs; future provisions may be required. Q1 discontinued-operations loss was $1.1 million, primarily reflecting asbestos-related legal expenses.
- Other legal matters include commercial, product-liability, employment and environmental claims; management did not expect their ultimate outcome to have a material adverse effect, but outcomes remain uncertain. Q1 restructuring and integration expense was $41,000; approximately $150,000 of additional soot-sensor relocation costs was expected, with relocation targeted for completion by the end of Q2 2022.
- Management reported disclosure controls and procedures were effective at quarter-end. Integration and evaluation of controls at acquired businesses remained in progress.
Important facts for investors to verify
- Whether pricing and cost initiatives can offset continuing inflation and restore gross margins.
- Whether working-capital investment, particularly elevated inventory and receivables, converts into operating cash flow.
- Facility availability, borrowing costs and refinancing needs ahead of the December 2023 maturity, including sensitivity to higher interest rates.
- Acquisition performance and integration, including the contribution and margin profile of Trombetta, Stabil and the soot-sensor business.
- Developments in asbestos claims, the next actuarial review and any additional provision or cash requirements.
- Temperature Control demand after Q1’s pre-season orders, including summer weather and customer inventory trends.