Standard Motor Products, Inc. — Q3 2013 Form 10-Q
Business and period: The company manufactures and distributes automotive replacement parts, principally through its Engine Management and Temperature Control segments, with an increasing focus on original equipment service. This unaudited filing covers the three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $264.2 | $276.0 | $765.0 | $756.6 |
| Gross profit / margin | $80.1 / 30.3% | $77.8 / 28.2% | $223.7 / 29.2% | $201.7 / 26.7% |
| Operating income | $27.9 | $26.7 | $71.1 | $59.1 |
| Continuing operations earnings | $17.7 | $17.4 | $43.7 | $36.7 |
| Net earnings | $17.3 | $16.8 | $42.5 | $35.4 |
| Diluted EPS | $0.74 | $0.74 | $1.83 | $1.54 |
| Interest expense | $0.4 | $0.7 | $1.6 | $2.3 |
- Cash flow: Nine-month operating cash flow was $33.7, down from $62.9. Investing used $21.8 (including $6.3 for a minority investment, $6.5 for the SMP Europe OE business, and $8.5 in capital expenditures); financing used $14.2. Cash declined $3.0 to $10.1.
- Liquidity and debt: At September 30, cash was $10.1 and total debt was $32.3, including $32.2 under revolving facilities, down from $40.6 at year-end 2012. Additional borrowing availability under the facility was $144.6. The amended $250 facility matures in March 2018; its weighted-average interest rate was 1.9%. The company was not subject to its fixed-charge coverage covenant at quarter-end.
- Balance sheet: Current assets were $467.8 and current liabilities $242.6. Inventories were $269.2; accounts receivable were $142.0. Accrued customer returns were $46.7 and accrued rebates $32.6.
Changes and management commentary
- Q3 sales fell 4.3% year over year, while operating income rose 4.6% and net earnings rose 2.7%. Higher consolidated gross margin and slightly lower SG&A supported operating income despite lower sales. Diluted EPS was unchanged at $0.74.
- For the first nine months, sales increased 1.1%, operating income increased about 20%, and net earnings increased about 20%. Gross margin improved 2.5 percentage points.
- Engine Management sales increased 1.2% in Q3 and 4.7% year to date; its operating income rose to $26.5 in Q3 and $72.0 year to date. Temperature Control sales declined 10.9% in Q3 and 4.0% year to date, with segment operating income also lower. Management attributed the declines to a cool, wet spring and milder summer weather. Year-to-date Temperature Control sales included $16.6 of incremental CompressorWorks sales; excluding that contribution, sales decreased $25.9.
- Management linked Engine Management margin improvement to volume, global sourcing, and manufacturing efficiencies. Temperature Control benefited year to date from lower-cost manufacturing and CompressorWorks integration.
- SG&A for the first nine months increased to $150.8 from $142.3, reflecting acquisition-related costs, sales, marketing and distribution expense, and higher receivables-factoring expense. Receivables-sale charges were $11.0 for the nine months. Management warned that losing these factoring arrangements, or a participating institution’s financial difficulties, could adversely affect collections, financial condition, results, and cash flow.
- The company recorded $2.5 of restructuring and integration costs year to date, including a $1.8 Q3 charge for a voluntary separation program. Remaining liabilities include severance and retiree benefit enhancements payable through 2017 and environmental cleanup costs at its Long Island City site.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expects current funding sources, including operating cash flow and additional borrowings, to meet financing needs over the next 12 months, while continuing to evaluate alternative liquidity sources.
- Management identified risks including major-customer relationships and program timing, customer demand and product mix, competitive pricing, unrecovered production or material-cost increases, market conditions, acquisition integration, restructuring savings, indebtedness, and product, environmental, and asbestos matters. Results are seasonal, with sales typically highest in Q2 and Q3; Temperature Control demand varies with weather and customer inventories.
- Asbestos claims: approximately 2,250 cases were outstanding. The latest actuarial study estimated undiscounted settlement payments of $24.4–$37.4 through 2058, excluding legal costs; estimated legal costs were $27.4–$48.1. Insurance coverage had been exhausted. The recorded asbestos liability was $24.2; no adjustment was recorded because the difference from the study’s low end was considered immaterial. The company stated that additional provisions may be required, though it did not then believe they were reasonably likely to materially harm liquidity or consolidated financial position.
- Other litigation and product-liability matters were described as ordinary-course matters not expected by management to have a material adverse effect. Accrued product warranty costs were $20.7, compared with $19.1 a year earlier.
- Nearly all debt was variable-rate (99.7%). The filing reported no derivative financial instruments at September 30, 2013. Management said a hypothetical 10% currency-rate move was not expected to materially affect earnings or cash flows based on monetary assets and liabilities.
Important facts for investors to verify
- Reconcile the Q3 receivables-factoring volume: the notes report $193.8 of receivables sold, while MD&A reports $198.3; both sections report $528.1 for the nine-month period.
- Monitor Temperature Control demand and margins, particularly the effect of weather and the year-over-year comparison excluding CompressorWorks sales.
- Assess working-capital conversion: receivables used $44.0 of operating cash and inventories used $5.3 in the first nine months; operating cash flow fell substantially from 2012.
- Track factoring availability and costs, borrowing availability and facility conditions, and the company’s ability to fund dividends, repurchases, and investment while managing variable-rate debt.
- Review developments in asbestos claims, future actuarial estimates, environmental cleanup, warranty accruals, and restructuring payments.