Standard Motor Products, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company manufactures and distributes replacement motor-vehicle parts, primarily through its Engine Management and Temperature Control segments. Unless stated otherwise, figures below are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $269.4 | $272.5 | $497.0 | $505.3 |
| Gross profit / margin | $72.8 / 27.0% | $77.4 / 28.4% | $136.6 / 27.5% | $145.3 / 28.8% |
| Operating income | $21.3 | $17.6 | $36.2 | $38.0 |
| Continuing-operations earnings | $13.8 | $11.2 | $23.1 | $23.6 |
| Net earnings | $13.4 | $10.6 | $22.3 | $22.4 |
| Diluted EPS | $0.58 | $0.46 | $0.96 | $0.96 |
- Q2 sales declined 1.2%; six-month sales declined 1.6%. Management estimated currency effects reduced sales by $2.2 million in Q2 and $4.2 million for the first half.
- Q2 Engine Management sales fell 3.9% to $177.0 million, while Temperature Control sales rose 4.0% to $89.1 million, including $1.7 million of Annex acquisition sales. First-half Engine Management sales declined 2.6%; Temperature Control sales were nearly flat, including $4.7 million of Annex sales.
- Gross margin contracted year over year in both segments. Management cited diesel-process and quality-control costs in Engine Management, and unfavorable manufacturing variances following two cool summers in Temperature Control.
- SG&A was $51.7 million (19.2% of sales) in Q2 and $100.9 million (20.3%) for the first half, up year over year, principally due to employee benefit costs and reduced postretirement benefit amortization.
- Q2 operating income exceeded the prior-year reported figure because Q2 2014 included a $10.6 million litigation charge. Excluding that charge, prior-year Q2 operating income was $28.2 million. On the same basis, first-half 2014 operating income was $48.6 million, versus $36.2 million in 2015.
- Six-month operating cash flow was $26.2 million, compared with $17.6 million; capital expenditures were $10.2 million, compared with $6.4 million. Cash declined by $1.0 million to $12.7 million at period end.
Financial position and capital
- At June 30, 2015, cash was $12.7 million, current assets $499.9 million, and current liabilities $274.7 million. Total debt was $53.1 million, primarily revolving borrowings; debt was down from $56.8 million at December 31, 2014.
- The $250 million secured revolving facility expires in March 2018; reported additional borrowing availability was $161.1 million. The weighted-average borrowing rate was 1.8%. The company was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
- Receivables factoring generated $340.6 million of sales in the first half and incurred $6.9 million of related expense. Management warned that loss or disruption of these arrangements could adversely affect collections, results, and cash flows.
- First-half financing cash use was $17.2 million, including $7.0 million for share repurchases and $6.9 million in dividends. The quarterly dividend increased to $0.15 per share. A July authorization added up to $10 million for repurchases, bringing stated remaining capacity to approximately $13 million.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said operating cash flow, available cash, and revolver availability were expected to meet liquidity needs for at least 12 months, conditional on no material adverse developments.
- Results are seasonal: sales typically peak in the second and third quarters, especially for Temperature Control products. Summer weather and customer inventories can materially affect demand and working-capital needs.
- Management identified risks including customer and program changes, competition and pricing, unrecovered cost increases, market conditions, foreign exchange, acquisition integration, cost-saving execution, product liability, and environmental and asbestos matters.
- Asbestos claims related to a discontinued brake business totaled approximately 2,170 outstanding cases at June 30. The latest actuarial study estimated undiscounted settlement payments of $36.1–$55.4 million through 2058, excluding legal costs and potential insurance recoveries; estimated legal costs were $43–$76.4 million. The company reported an accrued asbestos liability of $33.3 million and said additional provisions could be required.
- Other litigation includes commercial, product-liability, employment, and environmental matters. Management did not expect the known matters to have a material adverse effect, but noted outcomes and potential payments remain uncertain. The company also had $1.2 million of remaining restructuring and integration liabilities, including severance and environmental cleanup costs.
- Management attributed the year-over-year improvement in Q2 net earnings partly to the absence of the 2014 litigation charge; the first-half net earnings were essentially unchanged. Effective tax rates were 35.4% in Q2 and 35.7% for the first half.
Most important facts for investors to verify
- Whether Engine Management sales and margins recover as diesel quality-control work progresses, and whether Temperature Control margins improve despite weather and production-variance exposure.
- How much of reported operating cash flow depends on seasonal collections, working-capital movements, and continued receivables factoring—and the availability and cost of factoring.
- Whether asbestos settlement and legal-cost estimates, recorded reserves, and future claim experience require revisions.
- Whether repurchases and dividend increases remain consistent with liquidity, debt capacity, and the company’s stated twelve-month funding assumptions.
- The effect of currency changes, customer ordering patterns, product returns and warranty costs; warranty accruals were $25.1 million versus $22.8 million a year earlier.