Standard Motor Products, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results. SMP manufactures and distributes automotive aftermarket parts and custom-engineered vehicle control and thermal products. Beginning in 2023, it reports three segments: Vehicle Control, Temperature Control and Engineered Solutions. All amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $353.1 | $359.4 | $681.1 | $682.2 |
| Gross profit | $101.3 | $96.4 | $192.5 | $186.2 |
| Gross margin | 28.7% | 26.8% | 28.3% | 27.3% |
| Operating income | $27.2 | $27.9 | $47.9 | $54.8 |
| Continuing-operations earnings | $18.4 | $20.9 | $31.1 | $41.4 |
| Net earnings attributable to SMP | $9.1 | $19.1 | $21.1 | $38.6 |
| Diluted EPS | $0.41 | $0.86 | $0.95 | $1.72 |
For the first half, operating cash flow was $39.4 million, versus cash used of $95.3 million in 2022. Capital expenditures were $9.5 million; cash used in financing was $29.1 million, including $16.5 million of net debt reduction and $12.5 million in dividends. Cash increased to $23.0 million from $21.2 million at year-end 2022.
At June 30, total debt was $223.2 million, down from $239.6 million at December 31, 2022; net debt was $200.2 million. The weighted-average credit-facility rate was 5.6%. Reported liquidity was $292.7 million, comprising $23.0 million cash and $269.6 million of remaining borrowing capacity. Current assets were $787.9 million and current liabilities $348.5 million. Inventory, including unreturned customer inventory, was $518.9 million, down from $548.4 million at year-end.
Material changes and segment performance
- Q2 sales fell 1.8% year over year; first-half sales were nearly flat. Q2 gross margin improved, but operating income declined slightly. Higher gross margin did not prevent lower first-half operating income, as higher SG&A and weaker Temperature Control results weighed on earnings.
- Q2 Vehicle Control sales declined 1.1% to $183.8 million; segment operating income rose to $19.3 million. Management cited lower sales to a customer that filed for bankruptcy.
- Q2 Temperature Control sales fell 8.1% to $97.1 million and operating income fell to $5.8 million. Management attributed softer orders partly to rainy spring and early-summer weather and a strong prior-year comparison.
- Q2 Engineered Solutions sales rose 6.2% to $72.2 million and operating income increased to $6.2 million, supported by pricing and new business wins. First-half segment sales rose 2.0% to $143.3 million.
- Q2 consolidated gross margin increased to 28.7%, while operating margin was 7.7% versus 7.8%. For the first half, gross margin rose to 28.3% and operating margin decreased to 7.0% from 8.0%.
Outlook, risks and unusual items
- Management expressed optimism for the balance of 2023, citing sales opportunities, Engineered Solutions growth prospects, cost-saving initiatives and a focus on cash generation. It expects further inventory reductions and significant operating cash flow for the rest of 2023. No specific full-year revenue or earnings guidance is provided.
- Higher rates materially increased costs: management identified $4.8 million of additional supply-chain-financing interest-related costs in Q2 and $10.3 million in the first half. SG&A also included receivable-sale charges of $12.4 million for Q2 and $21.5 million for the first half, versus $7.7 million and $11.2 million in the comparable 2022 periods.
- Discontinued operations recorded an $11 million pre-tax provision after a May 2023 court ruling in a breach-of-contract case related to the former brake business. The court was expected to finalize judgment by the end of Q3 2023. Discontinued-operations losses were $9.2 million in Q2 and $10.0 million in the first half, net of tax.
- The former brake business also carries asbestos exposure: approximately 1,465 cases were outstanding at June 30. The recorded asbestos liability was $59.6 million; the latest cited actuarial study estimated undiscounted settlement payments and awards of $68.8 million–$111.6 million through 2065, excluding estimated future legal costs of $53.2 million–$105.7 million. SMP has no insurance coverage for these indemnity and defense costs, and says future provisions may be required.
- A cost-reduction program is relocating product lines from Kansas and Canada to Reynosa, Mexico. SMP incurred $1.2 million of related costs in the first half, expects approximately $1.6 million more, and anticipates completion by year-end 2023.
- Risks highlighted include inflation and supply-chain disruption, interest-rate and receivable-financing costs or availability, customer and program concentration, weather and customer inventory levels, competitive pricing, geopolitical developments, and asbestos, product-liability and other legal matters. Management believes available cash, operating cash flow and credit availability should cover needs for at least 12 months, subject to these assumptions.
Important facts for investors to verify
- Whether Temperature Control sales recover as weather and customer ordering patterns normalize, and how inventory levels affect the remainder of 2023.
- The financial and cash-flow impact of receivable-sale financing, including its elevated charges and the risk if arrangements or benchmark rates change.
- Final judgment and payment timing for the $11 million contract case, and developments in the asbestos actuarial estimate, claims and legal costs.
- Progress and realized savings from the relocation initiative, including the expected additional $1.6 million restructuring cost.
- Debt, borrowing capacity, interest-rate exposure and compliance with credit-agreement covenants; the filing estimates a 100-basis-point rate increase could have about a $1 million annualized adverse impact on earnings or cash flow, apart from receivable-financing exposure.