Business context and reporting period
Standard Motor Products, Inc. manufactures and distributes automotive replacement parts, principally through its Engine Management and Temperature Control segments, with additional heavy-duty, industrial and original-equipment exposure. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; amounts below are in millions of dollars except per-share data.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $305.2 | $286.6 | $588.9 | $548.5 |
| Gross profit / margin | $88.9 / 29.1% | $81.3 / 28.4% | $166.9 / 28.3% | $153.9 / 28.1% |
| Operating income | $27.7 | $23.4 | $45.7 | $35.7 |
| Continuing-operations earnings | $20.6 | $16.8 | $33.7 | $25.4 |
| Net earnings, including discontinued operations | $19.4 | $15.9 | $31.6 | $23.9 |
| Diluted EPS | $0.85 | $0.69 | $1.38 | $1.04 |
| Interest expense | $1.7 | $1.3 | $2.8 | $1.9 |
Q2 segment sales were $218.0 million in Engine Management and $84.4 million in Temperature Control. For the first half, segment sales were $431.2 million and $153.3 million, respectively. First-half operating cash flow was negative $19.5 million, versus positive $4.2 million in 2018; investing cash flow was negative $41.2 million and financing cash flow was positive $66.6 million. Cash ended the period at $17.4 million.
At June 30, 2019, total assets were $969.5 million, current assets $605.7 million and current liabilities $393.9 million. Total debt was $135.2 million, including $130.0 million outstanding on the revolving facility and $5.2 million of other debt. The company reported $116.8 million of additional borrowing availability under its borrowing-base formula. Operating lease liabilities were $36.7 million; the company adopted lease accounting in January 2019, recognizing $35.6 million of operating lease right-of-use assets at June 30.
Material changes versus the prior comparable period
- Q2 sales increased 6.5%; first-half sales increased 7.4%. Growth reflected both segments, Pollak acquisition revenue, pricing and tariff-related pass-throughs. Pollak contributed $10.7 million of sales from acquisition through June 30.
- Q2 gross margin rose 0.7 percentage points and first-half margin rose 0.2 points. Management cited improved Reynosa wire-plant productivity, pricing and production-volume effects, partly offset by tariffs passed to customers without markup.
- Operating income increased by $4.4 million in Q2 and $10.0 million in the first half. First-half restructuring and integration expense declined to $0.6 million from $3.1 million, while SG&A increased to $120.5 million from $115.5 million.
- Net earnings include losses from discontinued operations of $1.1 million in Q2 and $2.0 million in the first half, primarily related to asbestos legal costs and interest.
- Debt and interest expense increased, reflecting higher average borrowings. First-half operating cash flow turned negative, chiefly amid inventory investment, lower accounts payable and increased prepaid expenses.
Outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects cash from operations, cash on hand and revolving-credit availability to meet liquidity needs for at least the next 12 months, subject to no material adverse developments.
- Pollak was acquired for $38.4 million in April, funded with revolver borrowings. It adds engine-management products and exposure to OE/OES, heavy-duty and commercial-vehicle markets. Integration, including relocation of production to existing facilities, is expected within 12 months; approximately $1.6 million of integration costs are expected in total.
- Management says tariff effects have been limited to date and does not anticipate a significant future impact, but cautions that full recovery of increased costs through customer pricing is not assured. Seasonal temperature-control demand and customer inventories can vary with summer weather.
- The company factors receivables to support cash flow: $361 million were sold in the first half, with related charges of $12.1 million. Management warns that termination of these arrangements or financial difficulty at a factoring institution could adversely affect collections, liquidity and results.
- Asbestos liabilities are a significant contingency. The balance sheet records $41.1 million at June 30. The latest revised actuarial range disclosed was $46.7 million to $83.9 million for undiscounted settlement payments and awards through 2061, excluding legal costs and insurance recoveries. A California verdict assigns approximately $7.6 million of responsibility to the company; it is appealing, and interest accrues at 10% annually. Additional provisions may be required.
- Other risks include customer and program changes, competitive and cost pressures, acquired-business integration, product liability, environmental and other litigation, and variable-rate debt. The company reported no derivative instruments at June 30 and said it was not subject to its revolving-facility financial covenant then.
Most important facts an investor should verify
- Whether seasonal sales convert into cash and inventory normalizes after the first-half working-capital build.
- Pollak’s ongoing sales contribution, integration progress, expected costs and ability to deliver anticipated growth or synergies.
- Revolver borrowing availability, debt levels, interest costs and compliance with facility terms as seasonal working-capital needs change.
- Receivables-factoring continuity, pricing and counterparty exposure, including its effect on reported SG&A and cash flow.
- Updated asbestos actuarial estimates, the appeal outcome and potential additional liability or legal costs.
- Whether tariffs can be passed through without margin erosion and how weather and customer inventory affect Temperature Control demand.