Business context and reporting period
Standard Motor Products, Inc. manufactures and distributes replacement motor-vehicle parts, principally through its Engine Management and Temperature Control segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Results are seasonal, with sales generally strongest in the second and third quarters, particularly for Temperature Control.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $300.8 million | $270.0 million | $828.7 million | $767.0 million |
| Gross profit / margin | $95.6 million / 31.8% | $81.6 million / 30.2% | $255.7 million / 30.9% | $218.2 million / 28.4% |
| Operating income | $33.6 million | $30.0 million | $85.4 million | $66.2 million |
| Net earnings | $20.6 million | $18.5 million | $52.1 million | $40.8 million |
| Diluted EPS | $0.89 | $0.80 | $2.26 | $1.76 |
For the nine months, operating cash flow was $83.0 million, versus $72.8 million; investing cash outflow was $82.3 million, versus $14.6 million, largely reflecting the acquisition. Financing provided $11.5 million, compared with $57.9 million used in the prior-year period. Cash ended at $30.5 million, up from $18.8 million at December 31, 2015. Capital expenditures were $15.2 million and dividends paid were $11.6 million.
At September 30, 2016, current assets were $542.8 million and current liabilities were $314.3 million. Debt totaled $70.2 million, including $70.0 million drawn on the revolving facility, versus $47.5 million at year-end 2015. The company reported $145.1 million of additional borrowing availability and a 1.8% weighted average facility rate. It was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
Material changes versus prior periods
- Q3 sales rose 11.4% and nine-month sales rose 8%. Nine-month net earnings increased about 27.7%; diluted EPS increased from $1.76 to $2.26.
- Q3 gross margin expanded to 31.8% from 30.2%; nine-month margin rose to 30.9% from 28.4%. Management attributed improvement to higher production volumes and overhead absorption, low-cost sourcing, and—in Engine Management—prior-year production-process costs.
- The May 2016 General Cable North American automotive ignition wire acquisition contributed $31.3 million of sales through September 30 and was funded through the revolving credit facility. Purchase price was approximately $67.5 million; acquired intangible assets were $42.4 million. The acquired business had approximately $96 million of 2015 revenue.
- SG&A increased to $61.3 million in Q3 and $169.0 million for nine months, with costs related to higher sales, distribution, factoring, and the acquisition. Restructuring and integration expense was $2.1 million for nine months, compared with $49,000 of income in 2015.
- Receivables and inventory increased to $161.7 million and $302.6 million, respectively, from $123.9 million and $285.8 million at year-end. Management linked working-capital increases partly to the acquisition.
Outlook, risks, contingencies and unusual items
- Management said operating cash flow, cash on hand, and available revolver borrowings should meet liquidity needs for at least 12 months, assuming no material adverse developments. No specific consolidated earnings or revenue guidance was provided; excluding acquisition sales, nine-month Engine Management sales growth was described as consistent with the company’s low-to-mid-single-digit sales forecast.
- The company expects approximately $9 million of total plant-rationalization costs in 2016–2017, including about $5 million of restructuring and integration expense, $2.6 million of capital expenditures, and $1.4 million of temporary operating costs. The program includes facility closures and production relocations and is expected to finish by February 2018. A separate MD&A commitment-table note cites an anticipated total charge of approximately $3.4 million; the filing’s cost descriptions should be reconciled.
- In October 2016, the company decided to close the acquired Nogales, Mexico facility and move production to Reynosa. Estimated one-time costs are approximately $3.3 million in 2016–2017, including $2.8 million of restructuring and integration expense and $0.5 million of capital expenditures; completion is expected within 12–18 months.
- Asbestos exposure remains a significant contingency: approximately 1,560 cases were outstanding. The latest actuarial estimate put undiscounted settlement payments through 2059 at $31.0–$47.7 million, excluding legal costs and potential insurance recoveries; estimated future legal costs were $42.7–$78.6 million. The recorded asbestos liability was $31.9 million. Management said the estimate is uncertain and additional provisions may be required.
- The company sold $596.8 million of receivables during the first nine months and incurred $14.9 million of related charges. It warned that loss or termination of these arrangements, or financial difficulties at counterparties, could adversely affect collections, liquidity, results, and cash flows.
- A customer bankruptcy resulted in an additional $0.8 million pretax charge during the nine months and the write-off of the remaining receivable balance. Other litigation includes commercial, product-liability, employment, and environmental matters; outcomes and potential costs are uncertain.
- The effective tax rate rose to 37% for the nine months from 35%, primarily due to a shift in income mix toward the U.S. and higher state and local rates. Substantially all debt was variable-rate; the company reported no derivative financial instruments at September 30.
Important facts for investors to verify
- Reconcile the plant-rationalization cost estimates, including the approximately $9 million total program cost and the separate $3.4 million charge reference.
- Track acquisition integration, acquired-business contribution and margins, and the Nogales closure’s costs and execution.
- Assess receivables factoring dependence, its rising expense, counterparty exposure, and the impact on cash conversion.
- Monitor borrowing availability, seasonal working-capital requirements, variable-rate exposure, and covenant thresholds.
- Review changes in asbestos claims, actuarial assumptions, insurance recoveries, recorded reserves, and legal costs.
- Evaluate inventory and customer-return reserves, including the $46.4 million accrued customer returns and $28.5 million product-warranty accrual at quarter-end.