Standard Motor Products, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The company manufactures and distributes automotive aftermarket replacement parts, primarily through its Engine Management and Temperature Control segments. This is an annual report; quarterly data show seasonally stronger sales in the second and third quarters.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $874.6 million | $810.9 million |
| Gross profit / margin | $229.1 million / 26.2% | $207.6 million / 25.6% |
| Operating income | $64.9 million | $46.8 million |
| Continuing-operations earnings | $64.3 million | $24.7 million |
| Net earnings | $62.4 million | $22.0 million |
| Diluted EPS | $2.70 | $0.97 |
| Cash provided by operations | $75.3 million | $28.1 million |
| Capital expenditures | $11.0 million | $10.8 million |
| Cash and working capital at year-end | $10.9 million / $172.1 million | $12.1 million / $169.9 million |
| Total debt at year-end | $73.3 million | $65.6 million |
- Sales rose 7.9%. Engine Management sales increased 8.9% to $628.7 million; Temperature Control sales increased 5.2% to $233.7 million. Segment operating income was $56.3 million and $17.7 million, respectively.
- Operating margin was approximately 7.4%, compared with 5.8% in 2010; net margin was approximately 7.1%, compared with 2.7%.
- Cash flow from operations improved by $47.2 million. Investing used $75.9 million, including $70.5 million for the BLD Products and Forecast acquisitions; financing provided $0.6 million. Cash ended the year $1.3 million lower.
- At year-end, $73.0 million was outstanding on the $200 million secured revolving facility, with approximately $83 million of borrowing availability. The facility matures in March 2015; its year-end weighted-average rate was 2%. Almost all debt was variable-rate.
Changes and notable items
- Gross margin improved 0.6 percentage points, reflecting higher volume and fixed-cost absorption in Engine Management and Mexico compressor production and lower procurement costs in Temperature Control. SG&A increased $4.4 million, but fell to 18.7% of sales from 19.7%.
- FY 2011 earnings included a $21.5 million non-cash tax benefit from reducing the deferred-tax valuation allowance. The $0.1 million tax provision and reported earnings therefore reflect a significant one-time item; the filing does not provide a directly comparable adjusted earnings measure.
- Interest expense declined to $3.8 million from $7.1 million, partly because the $12.3 million 15% convertible debentures matured and were repaid in April 2011 using revolver borrowings.
- The company acquired BLD’s Engine Controls business for approximately $27.0 million and Forecast Trading Corporation for approximately $44.3 million. Together they contributed $11.8 million of post-acquisition sales in 2011.
- In 2011, the company sold its 50% interest in a European joint venture, recognizing a $2.5 million pre-tax gain. It also repurchased 322,250 shares for $4.1 million and paid $6.4 million in dividends. The quarterly dividend was increased to $0.09 per share in January 2012.
Outlook, risks and contingencies
- Management cited continued consumer maintenance of older vehicles and strong customer demand. It expects available operating cash, cash on hand and revolver capacity to meet financing needs for at least the next 12 months, subject to no material adverse developments. No quantified earnings or revenue guidance is provided.
- Management’s strategy includes expanding product lines and OE/OES business, improving efficiency, shifting or sourcing production in lower-cost regions, and using excess cash for debt reduction, dividends, repurchases and potential acquisitions. Savings from restructuring are not assured.
- Customer concentration is significant: the five largest customers represented approximately 63% of 2011 sales; NAPA, Advance Auto Parts and O’Reilly together represented approximately 52%. Pricing demands and customer purchasing changes may pressure margins and working capital.
- Asbestos claims from a former brake business remain a material uncertainty. About 2,080 cases were outstanding; the recorded settlement liability was approximately $27.5 million, while the actuarial settlement estimate ranged from $27.5 million to $66.5 million through 2059. Estimated legal costs over that period ranged from $26.2 million to $63 million and are expensed as incurred.
- An antitrust complaint was dismissed with prejudice in September 2011, but the plaintiff appealed; the appeal was pending. The company also disclosed ordinary-course product liability and other litigation.
- Other risks include seasonal demand and weather sensitivity, warranty and overstock returns, competition and offshore pricing, supplier availability and commodity costs, environmental remediation (a $1.7 million reserve for one site), international operating risks, and variable-rate debt exposure. A 100-basis-point rate increase was estimated to affect earnings or cash flow by approximately $0.8 million.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective as of December 31, 2011.
Investor verification priorities
- Assess earnings and EPS excluding the $21.5 million non-cash tax benefit, and confirm the sustainability of the underlying tax position and deferred-tax asset realizability.
- Review acquisition integration, the contribution and profitability of BLD and Forecast, and the returns expected on the $70.5 million acquisition spending.
- Monitor customer concentration, pricing and allowance assumptions, including $25.1 million of accrued customer returns and warranty costs.
- Track revolver availability, seasonal borrowing needs, variable-rate exposure and the facility’s 2015 maturity.
- Reassess asbestos claim counts, settlement and defense-cost estimates, insurance recoveries, and the pending antitrust appeal.