Standard Motor Products, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company manufactures and distributes automotive replacement parts, with Engine Management and Temperature Control segments. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $257.0 | $264.2 | $762.3 | $765.0 |
| Gross profit / margin | $77.2 / 30.0% | $80.1 / 30.3% | $222.5 / 29.2% | $223.7 / 29.2% |
| Operating income | $28.3 | $27.9 | $66.4 | $71.1 |
| Continuing-operations earnings | $17.8 | $17.7 | $41.4 | $43.7 |
| Net earnings | $9.6 | $17.3 | $31.9 | $42.5 |
| Diluted EPS | $0.41 | $0.74 | $1.38 | $1.83 |
| Operating cash flow | Not separately stated | Not separately stated | $32.7 | $33.7 |
- Revenue and margins: Q3 sales declined 2.7% year over year; nine-month sales declined 0.3%. Q3 Engine Management sales fell 4.5%, while Temperature Control sales fell 3.1%. Temperature Control’s nine-month sales were down 2.2%; its results included $6.0 million of Annex acquisition sales. The company attributed Engine Management margin improvement to sourcing and manufacturing efficiencies; lower Temperature Control production volumes reduced its margin.
- Profit and unusual charges: Q3 operating income rose modestly despite lower sales, helped by lower SG&A and restructuring costs. Nine-month operating income declined 6.7%, including a $10.6 million litigation charge recorded in Q2. Net earnings were also reduced by discontinued-operation losses, including the asbestos provision described below.
- Balance sheet and liquidity: At September 30, cash was $10.6 million, current assets $483.3 million, and current liabilities $269.9 million. Total debt was $59.3 million, up from $21.5 million at December 31, 2013; substantially all debt was variable-rate revolving credit. The company reported $141.8 million of additional borrowing availability under its $250 million facility, which expires in March 2018. The facility’s weighted-average rate was 1.9%. Management expected operating cash flow, cash on hand, and available borrowing to meet liquidity needs for at least 12 months, subject to no material adverse developments.
- Cash deployment: Nine-month investing cash outflow was $47.0 million, mainly for acquisitions and investments ($37.7 million) and capital expenditures ($9.3 million). Financing provided $21.3 million, including $37.8 million of net line-of-credit borrowings. The company paid $8.9 million in dividends and repurchased $9.5 million of stock during the period.
Material changes and management commentary
- In 2014, the company acquired Pensacola Fuel Injection for $12.2 million and Annex Manufacturing for $11.5 million, and invested $14.0 million for a 50% interest in a China-based joint venture. The acquisitions and investment were funded through the revolving credit facility. Management expected the Pensacola acquisition to be accretive excluding one-time integration costs.
- Q3 SG&A declined to $48.8 million from $50.6 million, principally due to lower employee benefit costs and CompressorWorks integration savings. Nine-month SG&A declined to $145.3 million from $150.8 million.
- The company reported a $12.8 million pre-tax increase in its asbestos liability in Q3, following an actuarial review. Discontinued operations recorded losses of $8.2 million in Q3 and $9.5 million for the first nine months.
- The board’s $10 million stock-repurchase authorization was completed in October 2014, after an additional $0.5 million repurchase. The quarterly dividend increased from $0.11 per share in 2013 to $0.13 in 2014.
- No specific earnings or revenue guidance was provided. Management noted normal seasonality, with sales generally strongest in Q2 and Q3, and said Temperature Control demand can vary with summer weather and customer inventories.
Risks, contingencies, and other items
- Asbestos: Approximately 2,200 cases were outstanding. The actuarial estimate of undiscounted settlement payments through 2058 was $36.1–$55.4 million, excluding legal costs; estimated legal costs were $43.0–$76.4 million. Insurance coverage had been exhausted. The recorded liability was $36.1 million, the low end of the settlement range; management cautioned that further provisions may be required.
- Receivables factoring: The company sold $541.1 million of receivables in the first nine months and incurred $10.2 million in related charges. Management warned that termination of these arrangements or financial difficulties at counterparties could adversely affect cash flows and collections.
- Other exposures: The filing cites customer and market concentration, competitive pricing, material costs, acquisition integration, restructuring savings, product warranty and return estimates, product liability, environmental matters, and other litigation. The company accrued $21.8 million for product warranties at September 30.
- The company had no derivative financial instruments at September 30 and reported that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether sales and Temperature Control margins recover, considering weather sensitivity and the decline in underlying sales excluding Annex.
- The eventual asbestos settlement and legal-cost exposure, and whether further reserve increases are needed.
- Revolver borrowing, availability, and liquidity needs as acquisitions, seasonal working capital, dividends, and repurchases affect cash.
- Whether receivables-factoring arrangements remain available and at what cost.
- Acquisition and joint-venture performance, including integration, expected synergies, and the stated potential earnings contribution.