Standard Motor Products, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. The company manufactures and distributes automotive aftermarket replacement parts through its Engine Management and Temperature Control segments, with additional heavy-duty, industrial and original-equipment business.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1,116.1 million | $1,058.5 million |
| Gross profit / margin | $326.7 million / 29.3% | $322.5 million / 30.5% |
| Operating income | $98.2 million | $98.1 million |
| Continuing-operations earnings | $43.6 million | $62.4 million |
| Net earnings | $38.0 million | $60.4 million |
| Diluted EPS | $1.64 | $2.62 |
| Cash from operating activities | $64.6 million | $97.8 million |
- Sales rose 5.4%, led by Engine Management, up 8.3% to $829.4 million. Temperature Control sales fell 1.6% to $279.1 million.
- Operating margin was approximately 8.8% versus 9.3% in 2016; net margin was approximately 3.4% versus 5.7%. Gross margin declined 1.2 percentage points.
- Capital expenditures were $24.4 million, leaving operating cash flow less capital expenditures of approximately $40.2 million. Cash and cash equivalents were $17.3 million at year-end, versus $19.8 million.
- Total debt was $61.8 million, up from $55.0 million. The company had $57.0 million drawn on its $250 million secured revolving facility and $142.9 million of additional borrowing availability; it was not subject to the facility’s financial covenant at year-end. Working capital was $210.2 million.
- Receivables factoring generated $780.5 million of receivable sales and incurred $22.6 million in fees, included in SG&A.
Material changes and unusual items
- Engine Management’s increase included $38.4 million of incremental General Cable ignition-wire acquisition sales. Excluding these sales, wire-and-cable revenue declined 10.3%; Engine Management organic sales grew 3.3%.
- Temperature Control was affected by a cool 2017 summer after a warm 2016. Its gross margin improved to 26.2% from 25.6%, while Engine Management’s fell to 29.4% from 31.3%, partly due to costs and inefficiencies from production moves.
- The Tax Cuts and Jobs Act added $17.5 million to the 2017 tax provision: $16.1 million from deferred-tax-asset remeasurement and $1.4 million from tax on deemed repatriated earnings. The reported effective tax rate was 54.8%; excluding the Act’s impact, management reported 36.6%. The filing estimates a 2018 effective tax rate of approximately 26%, subject to possible adjustments as guidance develops.
- Fourth-quarter sales were $240.0 million versus $229.8 million a year earlier. The quarter recorded an $8.1 million loss from continuing operations and an $8.6 million net loss; the annual report attributes the elevated tax provision principally to the Tax Act.
- FY 2017 included a $6.0 million pretax asbestos-liability provision in discontinued operations and a $1.8 million noncash impairment of the Orange Electronics investment.
- Restructuring and integration expense was $6.2 million. The Grapevine, Texas relocation was substantially complete; the wire-and-cable and Orlando programs were expected to finish in the second half of 2018.
Outlook, risks and contingencies
- Management expected operating cash flow, cash on hand and revolver availability to meet liquidity needs for at least 12 months, assuming no material adverse developments. The company increased its quarterly dividend from $0.19 to $0.21 per share in February 2018.
- Key exposures include customer concentration (the five largest customers represented approximately 70% of sales; O’Reilly, Advance Auto Parts, NAPA and AutoZone represented 21%, 17%, 16% and 10%, respectively), pricing pressure, seasonality and weather-sensitive Temperature Control demand, and customer returns and warranty claims.
- Asbestos claims remain a significant long-term uncertainty. Approximately 1,530 cases were outstanding at year-end. The actuarial estimate for settlement payments through 2060 was $35.2–$54.0 million, excluding legal costs; projected future legal costs were $44.3–$79.6 million. The company cautioned that additional provisions may be required.
- Other risks include reliance on receivables factoring, variable-rate borrowings, commodity and supplier costs, international operations and trade policy, environmental remediation, product liability, cyber disruption, and the ability to realize restructuring savings. The environmental cleanup reserve at one facility was $0.6 million.
- The company expected adoption of the new revenue standard in 2018 to have no material ongoing net-income effect, though it anticipated balance-sheet and presentation changes. Lease accounting changes were scheduled for adoption in 2019.
Most important facts for investors to verify
- Whether Engine Management can sustain organic growth and recover margins after acquisition-related production and integration disruptions.
- Whether the 2018 tax-rate estimate of approximately 26% holds and whether Tax Act accounting estimates require adjustment.
- Progress, remaining cash costs and realized savings from the wire-and-cable and Orlando relocations.
- Customer concentration, factoring fees and availability, seasonal borrowing needs, and the effect of higher interest rates on liquidity.
- Future asbestos claims, legal costs, reserve adequacy and any additional environmental or product-liability charges.