Standard Motor Products, Inc. — Q2 2017 Form 10-Q
Business context and period. The company manufactures and distributes replacement parts for motor vehicles, primarily through its Engine Management and Temperature Control segments. This unaudited report covers the three and six months ended June 30, 2017; comparisons are with the same periods in 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $312.7 million | $289.0 million | $595.1 million | $527.9 million |
| Gross profit / margin | $90.7 million / 29.0% | $87.1 million / 30.1% | $174.8 million / 29.4% | $160.1 million / 30.3% |
| Operating income | $29.7 million | $31.8 million | $55.2 million | $51.9 million |
| Continuing operations earnings | $18.3 million | $19.9 million | $34.6 million | $32.5 million |
| Net earnings | $17.8 million | $19.2 million | $33.5 million | $31.4 million |
| Diluted EPS | $0.76 | $0.84 | $1.44 | $1.37 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $(6.8) million | $23.7 million |
- Q2 sales rose 8.2%, led by Engine Management, up 12.3%; Temperature Control sales were essentially flat. Six-month sales increased 12.7%, with growth in both segments.
- General Cable wire-business acquisition sales contributed $15.0 million in Q2 and $38.4 million in the first half. Excluding these sales, wire and cable sales declined 7.9% in Q2 and 10.8% for the first half.
- Q2 operating income decreased despite higher sales, as lower consolidated gross margin, higher SG&A and restructuring costs outweighed volume growth. For the first half, operating income increased 6.4%.
- Engine Management gross margin fell to 29.4% in Q2 from 32.1%, reflecting inefficiencies and redundant costs during production moves. Temperature Control margin improved to 26.4% from 23.5%, primarily due to shifting production to Reynosa, Mexico.
Liquidity, debt and cash flows
- At June 30, cash was $16.4 million; current assets were $554.5 million and current liabilities $335.2 million. Notes payable were $78.9 million; total debt was $79.1 million, versus $55.0 million at year-end 2016.
- The company had $162.2 million of additional borrowing availability under its $250 million revolving credit facility, which matures in October 2020. The weighted-average facility rate was 2.5%. The company was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
- First-half operating cash use was $6.8 million, compared with $23.7 million provided in 2016. Management attributed the decline chiefly to larger increases in receivables and inventories, partly reflecting sales growth and safety-stock builds for restructuring programs.
- First-half investing cash use was $8.8 million, mainly capital expenditures. Financing provided $11.8 million, including $24.1 million of net revolving-credit borrowings; the company paid $8.7 million in dividends and spent $5.2 million on treasury-stock purchases. Ending cash declined $3.4 million to $16.4 million.
Outlook, management commentary and risks
- Management expects cash from operations, available cash and borrowing capacity to meet liquidity needs for at least the next 12 months, assuming no material adverse developments. No earnings or sales guidance is provided.
- Management describes the business as seasonal: sales typically peak in the second and third quarters, particularly for Temperature Control, and working-capital needs generally peak near the end of Q2. Weather and customer inventories can materially affect Temperature Control demand.
- Three efficiency and integration programs are underway: the Grapevine plant rationalization is expected to finish by year-end 2017; wire and cable relocations by Q1 2018; and the Orlando plant closure and relocation by Q2 2018. Forecast total costs are approximately $12.5 million, $7.0 million and $3.9 million, respectively, across restructuring, capital and/or temporary operating costs.
- Receivables factoring generated $404.1 million of sales in the first half and incurred $11.6 million of charges. The company warns that loss or termination of these arrangements, or a counterparty’s financial difficulty, could adversely affect collections, liquidity and results.
- Asbestos-related matters remain a contingency. About 1,595 cases were outstanding at June 30. The recorded asbestos liability was $29.4 million; the latest actuarial estimate of undiscounted settlement payments was $31.0–$47.7 million through 2059, excluding estimated future legal costs of $42.7–$78.6 million. The company says additional provisions may be required, though it does not currently expect them to materially harm liquidity or financial position.
- Other risks include customer and market demand, competitive pricing, unrecovered cost increases, execution of restructuring and acquisition integration, product liability, environmental matters, and variable interest rates. The company reported no derivative instruments at June 30 and stated that disclosure controls were effective.
Key investor verification points
- Whether Engine Management margins recover as production moves conclude, and whether projected restructuring savings offset remaining costs and temporary inefficiencies.
- Whether receivables, inventories and operating cash flow improve after the first-half working-capital build, and how factoring volumes and charges evolve.
- How much of sales growth is sustainable apart from the General Cable acquisition, particularly given the decline in acquired wire sales excluding acquisition contribution.
- Progress against restructuring budgets and completion dates, including the remaining cash commitments.
- Updates to asbestos actuarial estimates, recorded reserves, claims and legal costs, and any developments in other litigation or environmental contingencies.
- Revolving-credit availability, borrowings and interest expense, plus the effect of continued dividends and share repurchases on liquidity.