Standard Motor Products, Inc. — Q2 2012 Form 10-Q
Business context and period. The company manufactures and distributes automotive aftermarket and original-equipment-service parts through Engine Management and Temperature Control segments. This unaudited filing covers the quarter and six months ended June 30, 2012; results are seasonal, with sales and working-capital needs generally highest in the second and third quarters.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $268.9 million | $244.0 million | $480.6 million | $464.2 million |
| Gross profit / margin | $69.3 million / 25.8% | $63.2 million / 25.9% | $123.9 million / 25.8% | $116.3 million / 25.1% |
| Operating income | $22.7 million | $23.3 million | $32.4 million | $35.7 million |
| Continuing-operations earnings | $13.7 million | $13.7 million | $19.2 million | $20.7 million |
| Net earnings, including discontinued operations | $13.4 million | $13.3 million | $18.6 million | $20.0 million |
| Diluted EPS | $0.58 | $0.58 | $0.80 | $0.87 |
| Operating cash flow | Not separately stated | Not separately stated | $21.2 million | $21.0 million |
Liquidity and debt at June 30, 2012: Cash was $9.2 million; current assets were $472.0 million and current liabilities $300.5 million. Revolver borrowings were $97.0 million, up from $73.0 million at December 31, 2011; total debt was $97.2 million. The company reported $97.4 million of additional formula-based borrowing availability and a 1.99% weighted-average revolver rate. The secured facility has a $200 million maximum commitment and matures in March 2015. Nearly all debt was variable-rate. The company was not subject to the facility’s specified financial covenants at quarter-end.
Six-month investing cash outflow was $43.9 million, including $38.6 million for the CompressorWorks acquisition and $5.3 million in capital expenditures. Financing provided $20.9 million, including $24.0 million of net line-of-credit borrowings; cash declined $1.6 million to $9.2 million. The company paid $4.1 million of dividends and repurchased approximately $5.0 million of shares.
Material changes versus prior periods
- Q2 sales rose 10.2%; six-month sales rose 3.5%. Growth included acquired sales: $10.2 million in Q2 and $21.5 million for the six months from BLD Products and Forecast Trading, plus $13.6 million from CompressorWorks.
- Excluding acquisitions, Engine Management sales rose $2.6 million in Q2 but fell $10.0 million for the six-month period. Temperature Control sales excluding CompressorWorks fell $0.3 million in Q2 and $9.1 million for six months. Management cited first-quarter customer pipeline orders returning to more historical levels and a major customer shifting certain air-conditioning purchases to China.
- Q2 gross margin was nearly unchanged overall: Engine Management improved to 26.8%, while Temperature Control declined to 21.4%. For six months, consolidated margin increased to 25.8%, with the same contrasting segment trend.
- Operating income fell $0.6 million in Q2 and $3.3 million for six months, despite sales growth. Higher acquisition-related costs and amortization, increased receivables-sale charges, and the prior-year $3.6 million postretirement curtailment gain contributed to the comparison.
- Interest expense declined to $0.8 million for Q2 and $1.6 million for six months, reflecting lower borrowing rates and the 2011 maturity of 15% convertible debentures.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expects current funding sources, including operating cash flow and additional borrowing, to meet financing needs over the next 12 months, while continuing to assess alternative financing; availability is not assured.
- Receivables factoring generated $310.3 million of sales in the first half of 2012 and incurred $6.3 million in charges, recorded in SG&A. The company warned that termination of these arrangements or financial difficulties at participating institutions could materially harm liquidity, results and cash flows.
- Management identified seasonality, summer weather and customer inventories as drivers of Temperature Control demand and peak working-capital needs. Other stated risks include indebtedness, customer and market changes, pricing and input-cost pressures, acquisition integration, restructuring savings, and product-liability and environmental matters.
- CompressorWorks was acquired in April for $38.6 million, funded with revolver borrowings. The acquisition contributed $13.6 million of reported sales through June 30; its purchase-price allocation was preliminary and included $9.7 million of goodwill.
- Asbestos exposure remained a significant contingency: approximately 2,135 cases were outstanding. The latest actuarial study estimated settlement payments of $27.5–$66.5 million and legal costs of $26.2–$63 million through 2059. The company recorded the low end of the settlement range; the June 30 balance sheet reported $26.0 million of accrued asbestos liabilities. Management said further provisions cannot be ruled out.
- Other notable items: product warranty accruals were $18.8 million, up from $15.5 million a year earlier; the antitrust suit was settled in April 2012 for a nominal amount. Management concluded disclosure controls were effective and reported no material quarter-period change in internal control over financial reporting.
Most important facts for investors to verify
- How much reported sales growth and earnings contribution is attributable to acquisitions versus underlying demand, especially in each segment.
- Whether Temperature Control margins recover from acquisition-related inventory fair-value mark-up and weaker manufacturing absorption, and whether the major customer shift persists.
- Receivables-factoring availability, cost and dependence, alongside seasonal receivables and inventory needs and revolver borrowing headroom.
- Updated asbestos actuarial estimates, the relationship between the recorded balance and projected settlement/legal-cost ranges, and any reserve changes.
- Integration results from CompressorWorks and other acquisitions, including final purchase-price allocation and goodwill/intangible-asset implications.