Standard Motor Products, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless otherwise noted.
Business context
SMP manufactures and distributes automotive replacement parts, with complementary businesses serving specialized original-equipment and industrial markets. Its reportable segments are Engine Management and Temperature Control. The filing compares Q3 and the first nine months of 2022 with the corresponding 2021 periods.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $381.4 | $370.3 | $1,063.6 | $988.9 |
| Gross profit / margin | $106.8 / 28.0% | $105.2 / 28.4% | $293.0 / 27.5% | $288.3 / 29.1% |
| Operating income / margin | $33.6 / 8.8% | $38.5 / 10.4% | $88.4 / 8.3% | $104.8 / 10.6% |
| Continuing-operations earnings attributable to SMP | $23.1 | $29.2 | $64.5 | $79.3 |
| Net earnings attributable to SMP | $8.8 | $24.1 | $47.4 | $72.2 |
| Diluted EPS attributable to SMP | $0.40 | $1.07 | $2.14 | $3.18 |
- Q3 sales rose 3.0%; nine-month sales rose 7.6%. Q3 growth came from both segments, price increases and demand. For the nine-month period, the company said recent acquisitions contributed $44.6 million of incremental sales; excluding those acquisitions, Engine Management sales declined.
- Profitability weakened despite sales growth. Q3 gross margin declined 0.4 percentage points and operating margin declined 1.6 points year over year. For nine months, gross margin fell 1.6 points and operating margin fell 2.3 points.
- Cash used in operating activities was $75.5 million for the first nine months, versus $79.1 million provided in 2021. The company cited lower earnings and working-capital demands, including increases in receivables and inventories and a decrease in accounts payable. Capital expenditures were $19.5 million.
- At September 30, cash was $17.5 million; current assets were $829.7 million and current liabilities were $373.9 million. Inventory was $534.3 million, up from $468.8 million at year-end 2021.
- Total debt was $269.5 million, compared with $128.4 million at December 31, 2021. The June 2022 refinancing established a $500 million facility, comprising a $100 million term loan and a $400 million multicurrency revolver, maturing in 2027. The reported weighted-average borrowing rate was 4.4%, versus 1.4% at year-end 2021. A seven-year swap fixes the rate on $100 million of borrowings.
- Nine-month financing cash flow was $92.0 million, including increased borrowings, $29.7 million of share repurchases and $17.6 million of dividends. The 2022 quarterly dividend was increased to $0.27 per share from $0.25.
Material changes and unusual items
- Q3 net earnings were materially affected by a $14.3 million after-tax loss from discontinued operations, versus $5.1 million in Q3 2021. The nine-month discontinued-operations loss was $17.1 million, versus $7.1 million.
- The discontinued-operations charge reflects asbestos-related obligations. Following its 2022 actuarial study, SMP increased its recorded asbestos liability to $68.8 million and recorded an $18.5 million pretax provision. The study estimated undiscounted settlement and damages liabilities, excluding legal costs, of $68.8 million to $111.6 million through 2065; estimated future legal costs were $53.2 million to $105.7 million.
- Interest expense rose to $3.7 million in Q3 from $0.7 million, and to $6.3 million for nine months from $1.4 million, reflecting higher average debt and interest rates. SG&A also increased, including higher costs associated with receivables-sale financing arrangements.
- Q3 Engine Management gross margin fell to 26.2% from 27.0%, pressured by inflation in materials, labor and transportation and higher freight costs. Temperature Control margin increased to 28.8% from 28.4%, supported by seasonal volumes, mix and pricing. For nine months, margins declined in both segments.
- In October 2022, SMP acquired German distributor Kade Trading GmbH for approximately €1.9 million, net of closing adjustments, plus a potential €0.5 million earn-out. Kade had annual sales of approximately $6 million.
Outlook, risks and contingencies
Management said core aftermarket demand remained strong and expected inflationary trends and margin pressure to continue for some time. It cited pricing actions, cost-saving initiatives, supplier coordination, and higher inventory and safety stocks as mitigations, while noting there can be no assurance these will offset future cost or supply disruptions. Temperature Control’s full-year results were described as dependent on weather and customer inventory levels. SMP stated that cash, operating cash flow and available credit were expected to meet liquidity needs for at least 12 months, subject to assumptions about supply disruptions, inflation, interest rates and business conditions.
- Key stated risks include inflation that cannot be passed through, supply-chain disruption, higher financing costs, termination or worsening terms of receivables-sale arrangements, customer and program changes, competition, acquisition integration, and product, environmental and asbestos liabilities.
- SMP sold $610.4 million of receivables through supply-chain financing arrangements in the first nine months of 2022 and recorded $21.8 million of related charges in SG&A. The company warned that termination or increased benchmark rates could adversely affect liquidity, cash flow and results.
- Other litigation includes commercial, product-liability, employment and environmental matters; the company said outcomes are inherently uncertain. It reported approximately 1,550 outstanding asbestos cases for which it may be responsible and no insurance coverage for related indemnity and defense costs.
- Management reported effective disclosure controls and procedures at quarter-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether working-capital investment and inventory levels convert into stronger operating cash flow, and whether supply-chain financing remains available on acceptable terms.
- Whether pricing and cost initiatives offset inflation and freight costs sufficiently to stabilize segment and consolidated margins.
- Debt, borrowing costs, revolver availability and compliance with credit-agreement covenants as interest rates and cash needs change.
- Future asbestos actuarial estimates, claim counts, settlement costs and legal expenses, given the size and long duration of the disclosed exposure.
- Underlying sales trends excluding acquisition contributions, along with Temperature Control demand and customer inventory levels.