Standard Motor Products, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company manufactures and distributes automotive replacement parts, principally through its Engine Management and Temperature Control segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $307.7m | $296.6m | $896.7m | $845.1m |
| Gross profit / margin | $92.1m / 29.9% | $87.3m / 29.4% | $259.0m / 28.9% | $241.2m / 28.5% |
| Operating income | $31.3m | $27.2m | $77.0m | $62.8m |
| Continuing-operations earnings | $22.7m | $19.3m | $56.3m | $44.7m |
| Net earnings | $14.8m | $15.7m | $46.4m | $39.7m |
| Diluted EPS | $0.65 | $0.69 | $2.03 | $1.73 |
Q3 sales grew 3.7%; nine-month sales grew 6.1%. Higher operating income reflected increased sales and gross margin, partly offset by higher SG&A year to date. Q3 net earnings fell despite higher continuing-operations earnings, primarily because the discontinued-operations loss increased to $7.9m from $3.5m. That loss was $9.9m for the first nine months, versus $5.0m a year earlier.
- Q3 segments: Engine Management sales rose 9.3% to $216.0m, with a 30.7% margin versus 28.9%. Temperature Control sales fell 8.1% to $88.3m, with a 26.0% margin versus 27.6%.
- Nine-month segments: Engine Management sales rose 7.8% to $647.2m, with a 29.3% margin versus 28.6%. Temperature Control sales rose 2.1% to $241.6m, with a 25.5% margin versus 25.8%.
- Q3 diluted EPS from continuing operations was $1.00, versus $0.84; nine-month diluted EPS from continuing operations was $2.47, versus $1.95.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $43.1m, down from $67.6m. The filing attributes the decline chiefly to working-capital movements, including a $24.1m decrease in accounts payable, compared with a $5.2m increase in the prior-year period.
- Investing cash use was $51.0m, including $38.4m for the Pollak acquisition, $5.1m for a minority investment in Chinese electric-vehicle compressor maker CYJ, and $12.3m of capital expenditures. Financing provided $9.6m, including $34.5m of net revolving-credit borrowings.
- Cash was $13.3m at September 30, 2019. Total debt was $83.6m, up from $49.2m at December 31, 2018; revolving-credit borrowings were $78.2m. The company reported $168.6m of additional borrowing availability under its $250m revolving facility. It was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
- The company reported that operating cash flow, available cash and borrowing capacity should meet liquidity needs for at least the next 12 months, subject to no material adverse developments.
- Dividends paid were $15.4m year to date; the declared dividend increased to $0.23 per share from $0.21. The company also repurchased $10.7m of stock, completing the 2018 repurchase authorization.
- Operating lease liabilities were $35.1m at quarter-end. Adoption of the new lease standard in January recognized lease assets and liabilities without a material impact on operations or cash flows.
Material changes and management commentary
- The April 2019 Pollak business acquisition cost $38.4m after final purchase-price adjustments and contributed $20m of sales through September 30. Management expected full integration within 12 months and substantially completed relocation by year-end 2019; expected integration costs were approximately $1.8m, of which $1.5m had been recognized through September.
- Management said Engine Management’s growth reflected Pollak sales, customer pipeline orders, pricing and low-single-digit organic growth. Excluding Pollak, it expected Engine Management sales to be flat or down in Q4 as sales moved closer to customer point-of-sale trends.
- Temperature Control’s Q3 decline reflected normalized customer ordering compared with unusually strong 2018 orders; Q4 demand was expected to depend on weather and customer inventory levels. Repair kits also shifted reported sales mix from other climate-control parts to compressors.
- Tariffs increased costs. Management said pricing actions had passed tariff costs to customers and did not anticipate a significant future impact, but acknowledged it could not assure that all added costs would be recovered. Tariffs passed through without markup pressured Temperature Control margins.
- Receivables factoring remained an important cash-management tool: $560.6m of receivables were sold in the first nine months, incurring $17.7m of charges. The filing warns that termination or disruption of these arrangements could adversely affect cash flows and results.
Risks, contingencies and unusual items
- Asbestos: An August 2019 actuarial study estimated undiscounted settlement payments and damages of $52.0m–$90.6m through 2064, excluding legal costs and potential insurance recoveries. The company recorded a $9.7m pre-tax provision in Q3 and had approximately 1,500 outstanding cases. It reported no insurance coverage for indemnity or defense costs. Estimated future legal costs were $50.6m–$85.2m through 2064.
- The company is appealing a 2018 California asbestos verdict for $7.6m; interest accrues at 10% annually during the appeal. Management said further provisions could be required, though it did not then believe additional provisions were reasonably likely to materially affect liquidity or consolidated financial position.
- Other legal matters include commercial, product-liability, employment and environmental claims. The company stated it did not expect their outcomes to have a material adverse effect, but noted that settlements or updated estimates could be material.
- Other disclosed risks include customer and market demand, competition and pricing, production and material costs, acquisition integration, working-capital seasonality, interest rates, and foreign exchange. Substantially all debt was variable rate; the company had no derivative instruments at September 30.
Important facts for investors to verify
- Reconcile the asbestos liability disclosures: the note says the liability was increased to $52.0m, while the balance sheet lists accrued asbestos liabilities of $49.9m.
- Track asbestos claim experience, appeal developments, future legal costs and any additional provisions.
- Assess whether Engine Management’s growth can be sustained as Pollak contributions and customer pipeline orders normalize, and monitor Temperature Control demand and margins.
- Monitor operating cash conversion, accounts payable and other working-capital movements, factoring availability and costs, and revolving-credit borrowings.
- Evaluate Pollak integration progress, remaining costs and expected operating benefits; also assess the return and risks of the CYJ investment.
- Consider tariff recovery, customer ordering patterns, weather sensitivity, and the company’s stated liquidity assumptions. The filing provides no formal full-year earnings or revenue guidance.