Business context and reporting period
Standard Motor Products, Inc. manufactures and distributes replacement vehicle parts, primarily through its Engine Management and Temperature Control segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Results are seasonal, with sales and working-capital needs typically higher in the second and third quarters.
Key financial results
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Net sales | $289.0 million; up 7.3% | $527.9 million; up 6.2% |
| Gross profit / margin | $87.1 million / 30.1%, versus 27.0% | $160.1 million / 30.3%, versus 27.5% |
| Operating income | $31.8 million, versus $21.3 million | $51.9 million, versus $36.2 million |
| Net earnings | $19.2 million, versus $13.4 million | $31.4 million, versus $22.3 million |
| Diluted EPS | $0.84, versus $0.58 | $1.37, versus $0.96 |
| Operating cash flow | Not provided separately for the quarter | $23.7 million, versus $26.2 million |
For the six-month period, investing cash outflow was $77.4 million, including $67.3 million net cash paid for the General Cable ignition-wire acquisition and $10.1 million of capital expenditures. Financing provided $47.2 million, principally reflecting $52.6 million of net revolver borrowings. Cash declined by $6.4 million to $12.4 million.
At June 30, 2016, current assets were $547.9 million and current liabilities were $337.8 million. Total debt was $100.2 million, almost all revolving borrowings, compared with $47.5 million at December 31, 2015. The company reported $114.4 million of additional borrowing availability under its $250 million revolving facility. The facility matures in October 2020; its weighted-average rate was 1.9%. Borrowings are classified as current liabilities under the agreement and applicable accounting rules.
Material changes versus the prior comparable period
- Second-quarter Engine Management sales rose 12.3%; Temperature Control sales declined 1.8%. The first-half increases were 7.2% and 4.7%, respectively.
- May’s acquisition of General Cable’s North American automotive ignition-wire business cost approximately $67.5 million and contributed $8.5 million of reported sales through June 30. The acquired business generated approximately $96 million of revenue in 2015. Goodwill recorded was $12.5 million, and acquired intangible assets were $42.4 million.
- Gross-margin improvement reflected higher production volumes and prior-year costs and unabsorbed manufacturing overhead. SG&A increased, including higher selling, distribution and receivables-factoring costs and acquisition-related expenses.
- Receivables and inventories increased substantially during the first half, contributing to lower operating cash flow. The company attributed this in part to seasonal demand and working-capital requirements.
Outlook, risks and unusual items
- Management said first-half Engine Management sales, excluding acquisition sales, grew 4.8%, in line with its low-to-mid-single-digit sales forecast. No consolidated full-year revenue or earnings guidance is provided in the filing.
- Management expects operating cash flow, available cash and revolver availability to meet liquidity needs for at least the next 12 months, subject to no material adverse developments. The company was not subject to the facility’s fixed-charge-coverage covenant at June 30.
- A plant-rationalization program will close the Grapevine, Texas facility and relocate production and service functions. Completion is anticipated by February 2018. Estimated one-time costs are approximately $9 million across 2016 and 2017, including about $5 million of restructuring and integration expenses, $2.6 million of capital expenditures and $1.4 million of temporary operating costs; $1.0 million of restructuring expense was recorded in the first half.
- The company sold $367.6 million of receivables in the first half and incurred $8.9 million of related charges. It warns that termination of these arrangements, or financial difficulties at counterparties, could materially affect collections, results and cash flows.
- Asbestos-related liabilities remain uncertain. The recorded liability was $31.7 million; an actuarial study estimated undiscounted settlement payments of $33.3 million to $51.1 million through 2058, excluding legal costs and possible insurance recoveries. Estimated future legal costs were $40 million to $75.5 million. The filing says additional provisions may be required, though management did not believe them reasonably likely to materially affect liquidity or financial position at that time.
- Discontinued-operations losses, primarily asbestos-related legal expenses, were $0.6 million in the quarter and $1.1 million in the first half. Other litigation includes commercial, product-liability, employment and environmental matters; outcomes and potential costs are uncertain.
- The effective tax rate increased to 37.4% for the quarter and 37.2% for the first half, mainly due to a shift in pretax income toward the U.S. The company also recorded an additional $0.8 million pretax charge in the first half related to a customer bankruptcy, writing off its remaining receivable balance.
Most important facts for investors to verify
- Whether acquired-business integration and the plant rationalization deliver expected benefits, and how their costs and results develop.
- Whether seasonal receivables and inventory convert to cash as expected, and whether factoring remains available on acceptable terms.
- Revolver borrowing availability, debt levels and interest-rate exposure; substantially all debt is variable-rate.
- Changes in warranty, customer-return and doubtful-account estimates, including the effects of the customer bankruptcy.
- Updates to asbestos actuarial estimates, legal costs and other litigation or environmental contingencies.
- Temperature Control demand, which management says can vary materially with summer weather and customer inventories.