Standard Motor Products, Inc. — Q1 2014 10-Q
Business and period: The company manufactures and distributes replacement motor-vehicle parts, with Engine Management and Temperature Control segments and a growing focus on original equipment service. This unaudited report covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Results are seasonal, with sales typically strongest in the second and third quarters.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $232.8 million | $230.7 million; up 1% |
| Gross profit / margin | $67.9 million / 29.2% | $65.8 million / 28.5% |
| Operating income | $20.4 million | $16.0 million |
| Continuing-operations earnings | $12.4 million; diluted EPS $0.53 | $9.6 million; diluted EPS $0.41 |
| Net earnings | $11.7 million; diluted EPS $0.50 | $9.2 million; diluted EPS $0.40 |
| Operating cash flow | $9.2 million provided | $26.8 million used |
| Cash and cash equivalents | $4.4 million | $5.6 million at Dec. 31, 2013 |
| Total debt | $33.1 million | $21.5 million at Dec. 31, 2013 |
SG&A fell to $47.6 million from $49.6 million (20.4% versus 21.5% of sales); restructuring and integration expense was $0.2 million versus $0.4 million. Interest expense declined to $0.3 million from $0.6 million. The effective tax rate was 37.0%, compared with 37.3%. Discontinued operations recorded a $0.7 million after-tax loss, primarily for asbestos-related legal expenses, versus a $0.4 million loss.
Engine Management sales rose 2.2% to $179.3 million; Temperature Control sales declined 2.4% to $51.5 million. Segment operating profit was $24.4 million for Engine Management and $0.6 million for Temperature Control; “All Other” was a $4.6 million loss. Gross-margin improvement reflected volume and sourcing/manufacturing efficiencies in Engine Management and product mix and CompressorWorks integration in Temperature Control.
Liquidity, capital and material developments
- Operating cash flow improved year over year, chiefly because receivables and inventory uses of cash were smaller. Inventory nevertheless increased $15.0 million from year-end to $284.5 million.
- Investing used $15.0 million, including $12.2 million for the January acquisition of Pensacola Fuel Injection and $2.8 million in capital expenditures. The acquisition’s Q1 revenue contribution was not material; management expects it to be accretive excluding one-time integration costs.
- Financing provided $5.1 million. Revolver borrowings rose $11.6 million; the company also spent $4.5 million repurchasing shares and paid $3.0 million in dividends. The quarterly dividend increased from $0.11 to $0.13 per share.
- The secured revolving facility provides up to $250 million and matures in March 2018. At March 31, borrowings were about $33.0 million, with $162.8 million of additional borrowing availability under the facility’s borrowing formula. The weighted-average borrowing rate was 1.8%; the debt is classified as current under the agreement and accounting rules. The company was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
- Management expects operating cash flow, available cash and revolver availability to meet liquidity needs for at least the next 12 months, subject to assumptions including no material adverse developments.
- Subsequent events: in April, the company invested $14 million for a 50% interest in a China-based joint venture and acquired Annex Manufacturing for approximately $11.5 million, both funded through the revolver. Annex reported approximately $22 million in 2013 revenue; its purchase accounting was incomplete at filing.
Risks, contingencies and outlook
- No specific full-year earnings or revenue guidance was provided. Management highlighted seasonality and weather- and customer-inventory sensitivity in Temperature Control demand.
- Receivables factoring remained significant: $177.4 million of receivables were sold in Q1, at a $3.4 million expense. The filing warns that loss or interruption of these arrangements, or financial difficulties at a purchasing institution, could adversely affect collections, results and cash flows.
- Asbestos exposure remained a material uncertainty. Approximately 2,310 cases were outstanding; insurance coverage was exhausted. The latest actuarial study estimated undiscounted settlement payments of $24.4–$37.4 million through 2058, plus estimated legal costs of $27.4–$48.1 million. The company recorded no adjustment based on that study and said additional provisions cannot be ruled out.
- Other litigation includes divestiture, commercial, product-liability, employment and environmental matters. Management did not expect these matters, individually or in aggregate, to have a material adverse effect, but outcomes are uncertain and settlements could be substantial.
- Other risks cited include customer and program changes, pricing and cost pressures, acquisition integration, restructuring savings, product returns and warranties, indebtedness, and foreign-exchange and interest-rate exposure. Almost all debt was variable-rate; no derivatives were outstanding at quarter-end.
- Restructuring liabilities were $3.1 million at March 31, primarily severance and retiree-benefit enhancements payable through 2017 and environmental cleanup at the Long Island City site.
Most important facts for investors to verify
- Whether improved margins and lower SG&A persist as seasonal demand develops, especially in Temperature Control.
- Inventory growth, working-capital needs, factoring costs and continued access to receivables-sale arrangements.
- Post-quarter borrowing and liquidity effects of the joint venture and Annex acquisition, and the integration and returns of these investments.
- Updates to asbestos claims, actuarial estimates, recorded liabilities and legal costs, as well as other environmental and litigation exposures.
- Progress on restructuring savings and the company’s ability to fund dividends and repurchases while managing debt and seasonal cash requirements.