Standard Motor Products, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparison is with Q1 2019. The company manufactures and distributes replacement automotive parts, primarily through Engine Management and Temperature Control segments.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $254.3 million | $283.8 million | Down 10.4% |
| Gross profit / gross margin | $70.4 million / 27.7% | $78.0 million / 27.5% | Gross profit down $7.6 million; margin up 0.2 percentage points |
| Operating income | $14.3 million | $18.0 million | Down $3.6 million |
| Continuing-operations earnings | $9.6 million | $13.1 million | Down $3.5 million |
| Net earnings | $8.6 million | $12.2 million | Down $3.6 million |
| Diluted EPS | $0.38 | $0.53 | Down $0.15 |
| Cash used in operating activities | $32.8 million | $26.7 million | Use increased $6.1 million |
- Engine Management sales fell 5.7% to $201.1 million; Temperature Control sales fell 25.4% to $51.4 million. Temperature Control compressor sales were down 36.4%.
- SG&A was $55.9 million, or 22.0% of sales, versus $60.0 million, or 21.1%. Lower receivables-financing costs and lower selling and distribution costs were partly offset by Pollak acquisition-related costs.
- Cash and cash equivalents were $13.3 million at March 31, versus $10.4 million at year-end. Current assets were $584.7 million and current liabilities $348.2 million.
- Total debt was $109.7 million, including $105.0 million drawn on the revolving credit facility; debt was $57.0 million at December 31, 2019. The facility had $141.8 million of borrowing availability at quarter-end. The company was not subject to its fixed-charge coverage covenant at March 31.
- Investing activities used $4.4 million, primarily for capital expenditures. Financing activities provided $40.0 million, including $52.5 million of net revolving-credit borrowings; the company also repurchased $8.7 million of stock and paid $5.6 million in dividends.
Material changes and management commentary
- Management attributed lower sales partly to nonrecurring large customer orders in Q1 2019, weaker Temperature Control pre-season orders and elevated customer inventories after a mild 2019 summer. COVID-19 weakened demand in the second half of March.
- Management said Q1 results were not materially affected by COVID-19, but the impact on Q2 and later periods could be significant and could not then be reasonably estimated.
- In April, incoming orders were down 30%–40% and customer point-of-sale sales down 20%–30%. Production was reduced at several facilities; Mexican facilities temporarily suspended under government restrictions had reopened at reduced levels.
- On April 15, the company borrowed an additional $75 million as a precaution, bringing revolving-facility borrowings to $191.3 million and remaining availability to $47.2 million, excluding the $50 million accordion feature.
- In response to COVID-19, the company temporarily cut senior executive base salaries by 25%, other executive salaries by 10%, and non-employee director retainers by 25%; it suspended dividends and stock repurchases until further notice. No quantified full-year guidance was provided. Management expected available cash, operating cash flow and facility borrowings to meet liquidity needs for at least 12 months, subject to assumptions about the pandemic, demand, costs and access to credit.
- The company sold $150.2 million of receivables through supply-chain financing arrangements in Q1, versus $171.1 million a year earlier. Termination of these arrangements or higher financing costs could harm liquidity and cash flow.
Risks, contingencies and unusual items
- Discontinued operations recorded a $1.0 million after-tax loss, primarily for asbestos-related legal costs. The company reported approximately 1,585 outstanding asbestos cases and no insurance coverage for related indemnity and defense costs. Its August 2019 actuarial study estimated undiscounted settlement and damage liabilities of $52.0 million–$90.6 million through 2064; the company recorded a $48.952 million asbestos liability on the March 31 balance sheet. A $7.6 million California judgment was under appeal.
- Other litigation includes commercial, product-liability, employment and environmental matters. Management did not expect the matters, based on current information, to have a material adverse effect, but outcomes remain uncertain.
- Q1 included $0.2 million of restructuring and integration costs tied to residual Pollak relocation activity; initiatives were substantially completed. A $0.5 million net non-operating expense compared with $0.6 million of income a year earlier, reflecting lower joint-venture income and unfavorable foreign exchange.
- COVID-19 risks include further customer-demand declines, facility interruptions, supply-chain disruption, worker absences and additional cost or cash-preservation measures. The company also cited seasonality, customer returns, variable-rate debt, foreign currency exposure and possible tariff costs.
- Management reported disclosure controls and procedures were effective at quarter-end and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the April demand declines persisted or worsened, and how they affected subsequent sales, margins and production.
- Liquidity after the additional $75 million borrowing, including available facility capacity, covenant thresholds and working-capital needs.
- Whether the company resumed dividends or buybacks, and whether further cost reductions or capital-spending changes were implemented.
- Developments in asbestos claims, the recorded liability and the appeal of the $7.6 million judgment.
- The sustainability of receivables-sale financing and its cost, availability and effect on cash conversion.