Standard Motor Products, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. The company manufactures and distributes replacement automotive parts, principally through its Engine Management and Temperature Control segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $281.1 | $300.8 | $876.2 | $828.7 |
| Gross profit / margin | $82.5 / 29.4% | $95.6 / 31.8% | $257.3 / 29.4% | $255.7 / 30.9% |
| Operating income | $26.9 | $33.6 | $82.1 | $85.4 |
| Continuing-operations earnings | $17.1 | $21.1 | $51.7 | $53.6 |
| Net earnings | $13.1 | $20.6 | $46.6 | $52.1 |
| Diluted EPS | $0.57 | $0.89 | $2.00 | $2.26 |
- Q3 sales fell 6.5% year over year, as Engine Management sales declined 2.0% and Temperature Control sales declined 16.2%. The nine-month sales increase of 5.7% was driven by Engine Management.
- Q3 gross margin fell 2.4 percentage points. Engine Management margin declined 3.9 points, reflecting inefficiencies and redundant costs during production moves; Temperature Control margin was broadly flat. For the nine months, Engine Management margin fell 2.7 points while Temperature Control margin rose 1.1 points, aided by production transfers to lower-cost Reynosa, Mexico.
- Q3 SG&A declined to $54.8 million from $61.3 million, reflecting lower sales-related costs, General Cable integration benefits, and lower incentive compensation. Nine-month SG&A increased to $172.2 million from $169.0 million, including higher distribution and receivables-factoring costs and acquisition-related expenses.
- Q3 operating income declined by $6.7 million; nine-month operating income declined by $3.3 million despite higher sales. Nine-month interest expense rose to $1.8 million from $1.2 million.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $36.8 million, versus $83.0 million in 2016. Management attributed the decline chiefly to lower earnings and working-capital movements, including an $18.7 million inventory increase and a $27.8 million increase in receivables.
- Investing cash outflow was $17.7 million, primarily capital expenditures, compared with $82.3 million in 2016, which included the General Cable acquisition. Financing cash outflow was $14.2 million, including $20.0 million of share repurchases and $13.0 million of dividends.
- At September 30, cash was $25.4 million; current assets were $533.9 million and current liabilities were $314.6 million. Inventory was $332.6 million, up from $312.5 million at year-end 2016.
- Total debt was $73.1 million, principally revolving borrowings, up from $55.0 million at December 31, 2016. The revolving facility had a $250 million commitment, with $170.2 million of additional borrowing availability under its borrowing formula. Its weighted-average rate was 2.5%. The company was not subject to the facility’s financial covenant at quarter-end.
- The company sold $614.6 million of receivables during the first nine months and incurred $17.6 million of related charges. It warns that loss or termination of these arrangements could materially affect collections, results and cash flows.
Material changes, outlook and notable items
- The warm summer of 2016 followed by a cool summer in 2017, together with customers reducing Temperature Control inventories, weighed on Q3 demand. Management anticipated a possible further decline in customer purchases in Q4 as customers adjusted inventories; no numerical earnings or revenue guidance was provided.
- Wire and cable sales benefited from $38.4 million of incremental General Cable acquisition sales in the first nine months. Excluding those sales, wire and cable revenue declined 8.6%; management said Engine Management organic sales growth was in line with expectations of low single digits.
- Discontinued operations recorded a Q3 loss of $4.0 million, including a $6.0 million pretax asbestos-related provision following an actuarial review. The recorded asbestos liability was raised to $35.2 million, the low end of an estimated $35.2–$54.0 million undiscounted settlement range through 2060. Estimated future legal costs were $44.3–$79.6 million. About 1,500 cases were outstanding; additional provisions may be required.
- Restructuring and integration expenses were $3.9 million for the first nine months. Programs involve production relocations and facility closures in Texas, Florida, Mexico and other locations. Management expects the Grapevine rationalization to finish by year-end 2017, the wire relocation by Q1 2018, and the Orlando program by Q2 2018.
- Management said operating cash flow, available cash and revolver availability should meet liquidity needs for at least 12 months, assuming no material adverse developments. The filing notes this outlook depends on business conditions and continued access to financing.
- Risks highlighted include customer and program changes, competition and pricing, unrecovered production or material costs, market demand and product mix, integration and restructuring execution, factoring availability, and asbestos, product-liability and environmental exposures. Foreign-exchange exposure was considered immaterial for monetary assets and liabilities; substantially all debt was variable rate.
Important facts for investors to verify
- Whether Temperature Control demand and customer inventory adjustments continued to weaken after quarter-end, and how that affected Q4 sales and margins.
- Whether production relocations deliver expected savings without prolonged inefficiencies, added costs or operational disruption.
- Whether working capital, particularly inventory and receivables, converts to cash as expected; also monitor factoring costs and availability.
- Future asbestos actuarial estimates, claims, legal costs and reserve changes, given the long time horizon and uncertainty.
- Revolver availability, borrowings, interest costs and compliance with facility conditions; confirm liquidity remains adequate.
Controls: Management concluded disclosure controls were effective at September 30, 2017 and reported no material change in internal control over financial reporting during the quarter.