Standard Motor Products, Inc. — Q1 2016 Form 10-Q
Business and period: The company manufactures and distributes automotive replacement parts, primarily through its Engine Management and Temperature Control segments. This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015. Results are seasonal; sales and working-capital needs generally rise in the second and third quarters, particularly for Temperature Control.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $238.9 million | $227.6 million |
| Gross profit / margin | $73.0 million / 30.6% | $63.9 million / 28.1% |
| Operating income | $20.0 million | $14.9 million |
| Continuing-operations earnings | $12.7 million | $9.3 million |
| Net earnings | $12.2 million | $8.9 million |
| Diluted EPS | $0.53 | $0.39 |
| Operating cash flow | $(1.3) million | $(14.2) million |
Sales rose 5.0%. Engine Management sales increased 2.0% to $180.7 million; Temperature Control sales increased 16.5% to $56.8 million, partly reflecting early pre-season orders. Gross margin improved in both segments: Engine Management to 31.7% from 29.2%, and Temperature Control to 24.8% from 20.2%. Management attributed the gains mainly to higher production volumes and, for Engine Management, the absence of prior-year diesel-process and quality-control costs.
SG&A increased to $53.0 million from $49.2 million and rose to 22.2% of sales from 21.6%, reflecting higher selling and marketing, distribution, and receivables-factoring costs. Factoring charges were $4.0 million, versus $2.9 million. The effective tax rate was 36.8%, compared with 36.2%. Discontinued operations recorded a $0.5 million loss, primarily for asbestos-related legal expenses.
Financial position and liquidity
At March 31, 2016, cash was $13.4 million, total assets $705.3 million, and stockholders’ equity $405.2 million. Inventory was $300.3 million, up from $285.8 million at year-end; accounts receivable was $143.2 million, up from $123.9 million. Net cash used in operations improved year over year but remained negative, as seasonal working-capital investment included a $19.3 million increase in receivables and a $14.6 million increase in inventory. Capital expenditures were $4.1 million.
Total debt was $49.7 million, including $49.5 million outstanding under the revolving facility. The $250 million secured facility, due October 2020, had $151.7 million of additional borrowing availability at quarter-end; the weighted-average borrowing rate was 2.0%. The company was not subject to the facility’s fixed-charge coverage covenant at quarter-end. Dividends paid were $3.8 million; the quarterly dividend was raised to $0.17 per share from $0.15. Management expects operating cash flow, available cash, and borrowing capacity to meet liquidity needs for at least 12 months, subject to no material adverse developments.
Material changes, outlook, and risks
- Plant rationalization: The company plans to close its Grapevine, Texas facility, shift production to Greenville, South Carolina, Reynosa, Mexico, and Bialystok, Poland, and move certain service functions to Lewisville, Texas. Completion is expected within 24 months. Management estimates about $9 million of one-time costs in 2016–2017, comprising approximately $5 million of restructuring and integration expense, $2.6 million of capital expenditures, and $1.4 million of temporary operating costs. Q1 restructuring expense was about $0.2 million.
- Customer credit exposure: Following a customer’s January 2016 bankruptcy filing, the company recorded an additional $0.8 million pre-tax charge in Q1 and wrote off its remaining receivable from that customer. The filing says the 2015 charge was $3.5 million.
- Receivables factoring: Receivables sold totaled $165.9 million in Q1, versus $144.0 million a year earlier. The company warns that disruption or termination of these arrangements, or financial difficulties at counterparties, could adversely affect collections, results, and cash flows.
- Asbestos and other contingencies: Approximately 1,620 asbestos cases were outstanding. The latest actuarial study estimated undiscounted settlement payments of $33.3–$51.1 million through 2058, excluding legal costs; estimated future legal costs were $40–$75.5 million. The recorded asbestos liability was $31.8 million. Management said it could not assure that additional provisions would not be required. Other litigation includes commercial, product-liability, employment, and environmental matters; outcomes remain uncertain.
- Other operating risks: Temperature Control demand depends on summer weather and customer inventories. The company also cites customer and market conditions, competitive pricing, production and material costs, product mix, integration and cost-savings execution, and product returns and warranties. Accrued product warranties were $26.4 million, up from $20.0 million a year earlier.
- Guidance: No company-wide earnings or revenue guidance is provided. Management reported Engine Management sales growth within its low-to-mid-single-digit forecast; it cautioned that Temperature Control demand varies with weather and inventories.
Key facts for investors to verify
- Whether sales growth and gross-margin gains persist after Q1 production-volume and prior-year comparison effects.
- Whether working-capital growth converts to positive operating cash flow as seasonal inventory is sold and receivables collected.
- The realized costs, timing, savings, and operational effects of the plant rationalization.
- Ongoing factoring costs, availability, and counterparty exposure, alongside the customer bankruptcy recovery and write-off.
- Updated asbestos actuarial estimates, recorded reserves, and any developments in other legal or environmental matters.
- Revolver availability and borrowing costs as seasonal financing needs increase; management’s liquidity outlook depends on assumptions about the absence of material adverse developments.