Standard Motor Products, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012. The company manufactures and distributes automotive replacement parts, primarily through its Engine Management and Temperature Control segments.
Financial performance
Dollar amounts are in millions except per-share data. Financial statements are unaudited.
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Net sales | $230.7 | $211.7 | Up 9.0% |
| Gross profit | $65.8 | $54.6 | Gross margin 28.5%, up from 25.8% |
| Operating income | $16.0 | $9.7 | Operating margin 6.9%, versus 4.6% |
| Continuing-operations earnings | $9.6 | $5.5 | Diluted continuing EPS $0.41, versus $0.24 |
| Net earnings | $9.2 | $5.2 | Diluted EPS $0.40, versus $0.22 |
| Cash from operations | $(26.8) | $(9.0) | Greater cash use, mainly from receivables and inventory growth |
| Cash from investing | $(15.9) | $(2.4) | Included two acquisitions/investments and $2.6 million capital expenditures |
| Cash from financing | $40.1 | $9.1 | Included $35.1 million net line-of-credit borrowings |
Engine Management sales rose 7.7% to $175.5 million, with segment gross margin increasing to 29.5% from 26.4%. Temperature Control sales rose 16.4% to $52.7 million, including $11.7 million from CompressorWorks; excluding that acquisition, sales declined $4.3 million year over year. Segment gross margin increased to 20.8% from 18.9%.
SG&A increased to $49.6 million from $44.8 million and to 21.5% of sales from 21.1%, reflecting acquisition-related costs, higher distribution expense, and higher receivables-factoring costs. The income tax provision was $5.7 million at a 37.3% effective rate, versus $3.5 million and 38.6%. Discontinued operations recorded a $0.4 million after-tax loss, principally for asbestos-related legal expenses.
Liquidity, debt, and balance sheet
At March 31, 2013, cash was $9.7 million, total current assets were $474.9 million, and current liabilities were $277.4 million. Total debt was $75.7 million, compared with $40.6 million at December 31, 2012; nearly all was revolving credit borrowing classified as current. The company reported $115.8 million of additional borrowing availability under its secured $200 million facility, which matures in March 2015. Its weighted-average facility rate was 2.1%; 99.8% of total debt was variable-rate.
Management said current funding sources, including operating funds and additional borrowings, should meet financing needs for the next 12 months. The company was not subject to the facility’s specified financial covenants at quarter-end. It paid $2.5 million in dividends and declared $0.11 per share, increased from $0.09 in 2012.
Material changes and notable items
- Revenue and earnings improved year over year, with higher sales and gross margins; management cited higher Engine Management pipeline orders, sourcing improvements, and manufacturing efficiencies.
- The April 2012 CompressorWorks acquisition contributed $11.7 million of Q1 2013 revenue. In February 2013, the company acquired SMP Europe’s original equipment business for $6.5 million and acquired a roughly 25% interest in Taiwan-based Orange Electronic for $6.3 million. Management anticipated $1 million to $2 million in annual incremental revenue from the SMP Europe business; its Q1 contribution was not material.
- Operating cash outflow worsened as receivables and inventories rose seasonally and during integration of CompressorWorks. Management anticipated receivable and inventory levels would decline from Q1 increases by year-end.
- The company sold $150.4 million of receivables in Q1, versus $132.1 million a year earlier; associated expense rose to $3.2 million from $2.4 million. It cautioned that losing these arrangements or a participating institution could materially adversely affect collections, financial condition, results, and cash flows.
- Restructuring and integration charges were $0.4 million. Remaining liabilities of $3.7 million relate mainly to severance and retiree benefit enhancements payable through 2016 and environmental cleanup at the Long Island City site.
Outlook, risks, and contingencies
No quantified consolidated revenue or earnings guidance was provided. Results are seasonal: sales typically peak in the second and third quarters, particularly for Temperature Control, and demand may vary with summer weather and customer inventory levels. The company expects seasonal working-capital needs to be funded partly through its revolving facility.
Asbestos exposure remains a significant contingency. Approximately 2,160 cases were outstanding at March 31, 2013, and the company’s insurance coverage for these claims was exhausted. An actuarial study estimated undiscounted settlement payments of $27.1 million to $41.5 million through 2058, excluding legal costs; legal costs were estimated at $32.3 million to $57 million over the same period. The company recorded the low end of the settlement range and stated additional provisions may be needed, though it did not then expect them to materially affect liquidity or consolidated financial position.
Other stated risks include customer and program changes, pricing and cost pressures, market conditions, indebtedness, acquisition integration, restructuring savings, product liability, environmental matters, and changes to receivables factoring. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q1’s margin gains and higher Engine Management orders persist, and whether Temperature Control improves excluding CompressorWorks.
- How quickly receivables and inventory unwind, and the effect of factoring costs and continued reliance on receivables sales.
- Post-acquisition performance and integration of CompressorWorks and SMP Europe, including the expected SMP Europe revenue contribution.
- Revolver availability, debt levels and variable-rate exposure as seasonal working-capital needs rise.
- Updates to asbestos claim counts, actuarial estimates, recorded reserves, and related legal costs.
- Whether management’s expectation of adequate liquidity over the next 12 months remains valid.