Standard Motor Products, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
The company manufactures and distributes replacement automotive parts, primarily through its Engine Management and Temperature Control segments. Sales are concentrated in large aftermarket distributors and retailers, and results are seasonal, with demand typically strongest in the second and third quarters.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $1,058.5 | $972.0 |
| Gross profit / gross margin | $322.5 / 30.5% | $281.0 / 28.9% |
| Operating income | $98.1 | $75.9 |
| Earnings from continuing operations | $62.4 | $48.1 |
| Net earnings | $60.4 | $46.0 |
| Diluted EPS | $2.62 | $1.99 |
| Cash from operating activities | $97.8 | $65.2 |
- Sales increased 8.9%; net earnings rose 31.3%. Engine Management sales were $765.5 million, up 9.7%; Temperature Control sales were $283.7 million, up 7.3%.
- Engine Management and Temperature Control gross margins improved to 31.3% and 25.6%, respectively. Operating income was $101.5 million and $17.6 million, respectively.
- Fourth-quarter sales were $229.8 million versus $205.0 million; net earnings were $8.4 million versus $5.2 million. Fourth-quarter diluted EPS was $0.36 versus $0.23.
- Year-end cash was $19.8 million; working capital was $231.0 million. Total debt was $55.0 million, including $54.8 million drawn on the revolving facility; additional borrowing availability was $139.8 million.
- Investing cash outflow was $88.0 million, including $67.3 million for the General Cable ignition-wire business and $20.9 million of capital expenditures. Dividends paid were $15.4 million.
Material changes and unusual items
- In May 2016, the company acquired General Cable’s North American automotive ignition-wire business for approximately $67.5 million. It contributed $52.9 million of sales from acquisition through year-end. Excluding those incremental sales, Engine Management sales increased 2.1%.
- Restructuring and integration expense was $4.0 million in 2016, principally for the Grapevine, Texas plant rationalization and wire-business relocation. Management forecast total costs of approximately $9.0 million and $3.9 million, respectively, for those programs.
- Receivables factoring charges included in SG&A rose to $19.3 million from $14.3 million. The company sold $759.2 million of receivables during 2016.
- A customer bankruptcy resulted in an additional $0.8 million pretax charge in 2016 and write-off of the remaining receivable balance. The filing reports a $3.5 million charge in 2015 related to the same customer.
- Asbestos-related discontinued-operations loss was $2.0 million, net of tax, compared with $2.1 million in 2015. The company recorded no material adjustment to its asbestos liability following its latest actuarial study.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expected operating cash flow, available cash and revolving-credit availability to meet liquidity needs for at least 12 months, subject to no material adverse developments.
- In January 2017, the company announced an Orlando plant closure and production move to Kansas, forecasting approximately $3.7 million of costs in 2017–2018. The quarterly dividend was raised from $0.17 to $0.19 per share, and a new $20 million share-repurchase authorization was approved in February 2017.
- Customer concentration is significant: the five largest customers represented approximately 70% of 2016 sales; O’Reilly, NAPA, Advance Auto Parts and AutoZone represented 20%, 18%, 17% and 11%, respectively.
- Asbestos settlement payments are estimated at $31.0–$47.7 million through 2059, excluding legal costs and potential insurance recoveries; future legal costs are estimated at $42.7–$78.6 million. The recorded asbestos liability was $31.3 million, and approximately 1,565 cases were outstanding.
- Other key exposures include competitive pricing, seasonal demand and working-capital needs, product warranty and inventory returns, reliance on factoring, variable-rate debt, supplier and foreign-operating risks, and environmental obligations. The environmental remediation reserve was $0.5 million.
- Goodwill impairment testing identified no impairment, though management noted that continued business and brand improvement is needed to sustain carrying values. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of sales and profit growth is sustainable after separating the General Cable acquisition contribution from organic performance.
- Whether the planned plant closures and relocations deliver expected savings, and whether forecast restructuring costs or timing change.
- Customer concentration, receivables-factoring costs and availability, and the effects of customer credit or purchasing changes.
- Inventory growth, return and warranty reserves, and cash conversion as seasonal working-capital needs evolve.
- Future asbestos claims, settlement and legal costs, insurance recoveries, and environmental remediation requirements.
- Liquidity and covenant headroom under the secured revolving facility, especially during seasonal borrowing peaks.