Standard Motor Products, Inc. — 2019 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2019; it also reports unaudited quarterly results, including the quarter ended December 31, 2019. Standard Motor Products manufactures and distributes vehicle replacement parts through its Engine Management and Temperature Control segments, serving aftermarket, original-equipment, heavy-duty and industrial markets. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,137.9 million | $1,092.1 million | +4.2% |
| Gross profit / margin | $331.8 million / 29.2% | $312.8 million / 28.6% | Margin +0.6 percentage points |
| Operating income | $94.5 million | $81.3 million | +16.3% |
| Continuing-operations earnings | $69.1 million; diluted EPS $3.03 | $56.9 million; diluted EPS $2.48 | Earnings +21.5% |
| Net earnings | $57.9 million; diluted EPS $2.54 | $43.0 million; diluted EPS $1.88 | +34.7% |
| Cash from operating activities | $76.9 million | $70.3 million | +$6.7 million |
- SG&A was $234.7 million, or 20.6% of sales, versus $231.3 million, or 21.2%, in 2018. Operating margin was approximately 8.3%, compared with 7.4%.
- Cash used in investing was $54.8 million, including $38.4 million for the Pollak acquisition, $5.1 million for a minority investment in electric-vehicle compressor maker CYJ, and $16.2 million of capital expenditures. Cash used in financing was $23.4 million. Operating cash flow less capital expenditures was approximately $60.7 million, a derived measure.
- Year-end cash was $10.4 million; working capital was $240.0 million. Total debt was $57.0 million, including $52.5 million under the revolving facility and approximately $4.4 million under the Polish overdraft facility. Revolver availability was $194.3 million. The credit facility matures in December 2023.
- Total assets were $912.7 million and stockholders’ equity was $504.2 million. The company paid $20.6 million in dividends and repurchased $10.7 million of stock during 2019.
Material changes versus 2018
- Engine Management sales rose 5.7% to $849.2 million, reflecting $28.2 million of Pollak sales, pipeline orders, pricing and low-single-digit organic growth. Wire and cable sales fell 7.7% to $143.2 million.
- Temperature Control sales were essentially flat at $278.4 million. Compressor sales increased 8.1%, while other climate-control parts declined 9.3%; management cited normalized customer ordering and a product-classification shift from repair kits.
- Operating income increased as sales and gross margin improved and restructuring costs declined. Interest expense rose to $5.3 million from $4.0 million, partly due to higher average borrowings following the acquisition.
- Discontinued-operations losses narrowed to $11.1 million from $13.9 million, primarily reflecting asbestos-related charges and legal costs. Net earnings also benefited from stronger continuing-operations results.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said operating cash flow, available cash and borrowing capacity should meet liquidity needs for at least the next 12 months, assuming no material adverse developments.
- Management said tariffs modestly affected 2019 results and that it does not anticipate a significant future impact, while noting it cannot assure that all tariff-related costs can be passed to customers.
- Customer concentration is substantial: the five largest customers represented 69% of 2019 sales; O’Reilly, Advance, NAPA and AutoZone accounted for 22%, 16%, 15% and 11%, respectively. Customer pricing pressure and dependence on these accounts are important risks.
- Asbestos claims remain a significant contingency. About 1,550 cases were outstanding at year-end; the company recorded a $9.7 million pre-tax provision in 2019. Its actuarial estimate of undiscounted indemnity payments through 2064 ranged from $52.0 million to $90.6 million, excluding estimated future legal costs of $50.6 million to $85.2 million. The filing reports $49.7 million of accrued asbestos liabilities on the balance sheet; reconcile this with the narrative estimate.
- Other risks include seasonality and weather-sensitive Temperature Control demand, warranty and overstock returns, supply-chain disruption, tariffs and international operations, variable-rate borrowing and dependence on receivables-sale financing. The company sold $719 million of receivables under these arrangements in 2019 and recorded $22.0 million of related charges.
- The Pollak acquisition cost $38.4 million and added customer-relationship intangibles and goodwill; relocation and integration expenses were $2.2 million. A 2018 California asbestos judgment of $7.6 million was under appeal. The auditor issued unqualified opinions on the financial statements and internal controls, and identified asbestos liability estimation and Pollak customer-relationship valuation as critical audit matters.
Important facts for investors to verify
- Reconcile the $52.0 million actuarial asbestos reserve disclosure with the $49.7 million balance-sheet accrual, and monitor claims, legal costs and appeal outcomes.
- Assess whether Engine Management growth excluding Pollak is sustainable and whether the wire-and-cable decline or Temperature Control softness continues.
- Review customer concentration, pricing and the company’s ability to pass through tariffs and other cost increases.
- Evaluate the cost, availability and continuity of receivables-sale financing, alongside revolving-credit availability, rates and covenant headroom.
- Track warranty and overstock-return experience, inventory growth and seasonal working-capital needs against cash generation.