Standard Motor Products, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions of dollars, except per-share data. The company manufactures and distributes automotive replacement parts, primarily through Engine Management and Temperature Control segments.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $247.9 | $305.2 | $502.2 | $588.9 |
| Gross profit | $64.4 | $88.9 | $134.8 | $166.9 |
| Gross margin | 26.0% | 29.1% | 26.8% | 28.3% |
| Operating income | $16.0 | $27.7 | $30.3 | $45.7 |
| Continuing-operations earnings | $11.8 | $20.6 | $21.5 | $33.7 |
| Net earnings | $11.0 | $19.4 | $19.6 | $31.6 |
| Diluted EPS | $0.48 | $0.85 | $0.86 | $1.38 |
- Q2 sales fell 18.8% year over year; first-half sales fell 14.7%. Both segments declined. Q2 Engine Management sales were $173.2 million (down 20.6%) and Temperature Control sales were $72.4 million (down 14.2%).
- Lower sales and production reduced factory-cost absorption and margins; unfavorable product and customer mix also weighed on Engine Management. Lower SG&A partly offset the profit decline. Q2 SG&A was $48.3 million versus $60.5 million a year earlier.
- First-half operating cash flow was negative $0.9 million, compared with negative $19.5 million in 2019. Cash used in investing was $9.0 million, primarily capital expenditures; cash provided by financing was $21.8 million.
- At June 30, cash was $22.5 million; current assets were $589.9 million and current liabilities were $337.6 million. Total debt was $91.2 million, including $85.0 million of revolving-credit borrowings and about $6.0 million under the Polish overdraft facility. Revolver availability was $146.4 million. Operating lease liabilities totaled $33.7 million.
Material changes and management commentary
- COVID-19 materially disrupted demand: April brought a significant decline, followed by a rebound in May and June. Management said business entering Q3 was improving to pre-pandemic levels and customer point-of-sale sales exceeded comparable 2019 levels, but cautioned that recovery might not continue.
- The company temporarily reduced production at several facilities, including temporary closures in Mexico and Canada; those facilities had reopened by the filing. Cost actions included reduced discretionary spending and temporary executive and director compensation cuts.
- In April, the board suspended quarterly cash dividends and share repurchases until further notice. The company borrowed $75 million as a precautionary measure in April and repaid that additional borrowing in June. First-half cash dividends paid were $5.6 million and share repurchases were $8.7 million.
- Management expects cash from operations, cash on hand, and available revolver borrowings to cover liquidity needs for at least 12 months, assuming it can manage pandemic effects and no material adverse developments occur. No specific earnings or sales guidance was provided.
- Receivable-sale programs remain a meaningful liquidity tool: $297.9 million of receivables were sold in the first half, with $5.9 million of related expense. Termination, collection delays, or higher financing costs could adversely affect liquidity and results.
Risks, contingencies, and unusual items
- COVID-19 remains a major uncertainty, including possible renewed restrictions, weaker demand, workforce disruption, supply-chain interruption, and further production or cost actions. The filing says pandemic-related uncertainty may materially affect estimates and results.
- Asbestos claims relate to a discontinued brake business. About 1,600 cases were outstanding; the balance sheet included $47.7 million of accrued asbestos liabilities. The 2019 actuarial study estimated undiscounted settlement liabilities of $52.0 million to $90.6 million through 2064, excluding legal costs. The company is appealing a $7.6 million compensatory-damages finding and reported $3.4 million of first-half operating cash outflows for discontinued operations, including settlements and legal costs.
- Other commercial, product-liability, employment, and environmental proceedings were disclosed; management did not believe their ultimate outcome would materially affect the company, but noted that estimates and outcomes remain uncertain.
- The company’s revolving facility is secured by substantially all of its assets. A fixed-charge coverage covenant applies if borrowing availability falls below specified thresholds; the company said it was not subject to that covenant at June 30.
Key facts for investors to verify
- Whether the sales rebound described for May and June continued, and whether customer demand and seasonal Temperature Control sales remained resilient.
- Whether gross margins recovered as production volumes improved, and how cost reductions affected operating expenses.
- Operating cash conversion, working-capital movements, revolver usage and availability, and continued access to receivable-sale arrangements.
- Whether dividend and repurchase suspensions remain in effect and how management balances liquidity with capital returns.
- Developments in asbestos claims, the annual actuarial reassessment, and the appeal of the $7.6 million judgment.